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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2015

OR

 

¨ Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-52607

 

 

Universal Biosensors, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   98-0424072

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

Universal Biosensors, Inc.

1 Corporate Avenue,

Rowville, 3178, Victoria

Australia

  Telephone: +61 3 9213 9000   Not Applicable
(Address of principal executive offices)  

(Registrant’s telephone number,

including area code)

  (Zip Code)

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

 

Title of each class

 

Name of each exchange on which registered

None   Not applicable

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

Title of each class

Shares of common stock, par value US$0.0001

 

 

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

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

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

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

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

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 definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

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

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

The approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was A$42,844,137 (equivalent to US$32,904,297) as of June 30, 2015.

The number of shares outstanding of each of the registrant’s classes of common stock as of March 9, 2016:

 

Title of Class

 

Number of Shares

Common Stock, US$.0001 par value   176,127,584

Documents incorporated by reference:

Certain information contained in the registrant’s definitive Proxy Statement for the 2016 annual meetings of stockholders, to be filed not later than 120 days after the end of the fiscal year covered by this report, is incorporated by reference into Part III hereof.

Information contained on pages F-2 through F-44 of our Annual Report to Stockholders for the fiscal year ended December 31, 2015 is incorporated by reference in our response to Items 7, 7A, 8 and 9A of Part II.

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

FORWARD-LOOKING STATEMENTS

     3   

PART I

    

ITEM 1.

 

BUSINESS

     4   

ITEM 1A.

 

RISK FACTORS

     11   

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

     21   

ITEM 2.

 

PROPERTIES

     22   

ITEM 3.

 

LEGAL PROCEEDINGS

     23   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     24   

PART II

    

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     25   

ITEM 6.

 

SELECTED FINANCIAL DATA

     29   

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     30   

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     31   

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     32   

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     34   

ITEM 9A.

 

CONTROLS AND PROCEDURES

     35   

ITEM 9B.

 

OTHER INFORMATION

     38   

PART III

    

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     39   

ITEM 11.

 

EXECUTIVE COMPENSATION

     40   

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     41   

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     42   

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

     43   

PART IV

    

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

     44   

SIGNATURES

     48   

Unless otherwise noted, references on this Form 10-K to “Universal Biosensors”, the “Company,” “Group,” “we,” “our” or “us” means Universal Biosensors, Inc. (“UBI”) a Delaware corporation and, when applicable, its wholly owned Australian operating subsidiary, Universal Biosensors Pty Ltd. Our principal place of business is located at 1 Corporate Avenue, Rowville, Victoria 3178, Australia. Our telephone number is +61 3 9213 9000. Unless otherwise noted, all references in this Form 10-K to “$”, “A$” or “dollars” and dollar amounts are references to Australian dollars. References to “US$” are references to United States dollars.

 

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FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause our, our customers and partners’ or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

    our business and product development strategies;

 

    our expectations with respect to collaborative, strategic or distribution arrangements;

 

    our expectations with respect to the timing and amounts of revenues from our customers and partners;

 

    our expectations with respect to the services we provide to, and the development projects we undertake for, our customers and partners;

 

    our expectations with respect to regulatory submissions, approvals, market launches of products we develop or are involved in developing;

 

    our expectations with respect to sales of products we develop or are involved in developing and the quantities of such products to be manufactured by us;

 

    our expectations with respect to our research and development programs, the timing of product development and our associated research and development expenses;

 

    the ability to protect our owned or licensed intellectual property; and

 

    our estimates regarding our capital requirements, the sufficiency of our cash resources, our debt repayment obligations and our need for additional financing.

The words “anticipates,” believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. The forward-looking statements included in this Form 10-K do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in cautionary statements throughout this Form 10-K, particularly those set forth in section “Item 1A - Risk Factors.” However, new factors emerge from time to time and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We do not undertake to update or revise any forward-looking statements.

 

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PART I

ITEM 1. BUSINESS.

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Form 10-K. This discussion and analysis contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the section entitled “Item 1A - Risk Factors” and elsewhere in this Form 10-K.

Business overview

We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use.

We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests (“CDIs”) have been quoted on the Australian Securities Exchange (“ASX”) since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, Universal Biosensors Pty Ltd (“UBS”) was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our research, development and manufacturing activities in Melbourne, Australia.

Our principal place of business is 1 Corporate Avenue, Rowville, Victoria 3178, Australia. Our principal telephone number in Australia is +61 3 9213 9000. Our agent for service in the United States is Corporation Service Company of 2711 Centerville Road, Suite 400, Wilmington, DE 19808, United States. We also maintain a website at www.universalbiosensors.com. The information contained in, or that can be accessed through, our website is not part of this Form 10-K.

We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS by LifeScan, Inc. and other third party licensors. Unless otherwise noted, references to “LifeScan” in this document are references collectively or individually to LifeScan, Inc., and/or LifeScan Europe, a division of Cilag GmbH International, both affiliates of Johnson and Johnson.

We are using our electrochemical cell technology platform to develop point-of-care testing systems for a number of different markets. Our current focus is as set out below:

 

    Coagulation testing market – We are working with Siemens Healthcare Diagnostics Inc. (“Siemens”) in relation to a range of products for the point-of-care coagulation testing market, pursuant to a Collaboration Agreement with Siemens (“Collaboration Agreement”). The first such product developed with Siemens, the Xprecia StrideTM Coagulation Analyzer, received CE mark approval on December 9, 2014 and is now being released by Siemens in Europe. The CE marking is mandatory for any company prior to selling its product within the 31 countries operating in the European Economic Area. The CE marking indicates a product is fully compliant with all relevant EU legislation and can move freely within the European Economic Area. In July 2015, Siemens made a premarket 510(k) submission to the US Food and Drug Administration (“FDA”) for regulatory clearance to sell the Xprecia StrideTM Coagulation Analyzer in the US. Under the terms of a supply agreement with Siemens (“Supply Agreement”), UBS is the manufacturer of test strips for this product and two further tests still in development for Siemens. We are also developing our own Prothrombin Time International Normalized Ratio (“PT-INR”) test for use in decentralized settings including the patient self-test market and are currently negotiating arrangements with distributors in initial target markets with respect to that test.

 

    Blood glucose – We provide services to LifeScan as required from time to time, pursuant to a Master Services and Supply Agreement (“Master Services and Supply Agreement”) and a development and research agreement (“Development and Research Agreement”) with LifeScan.

 

    Other electrochemical-cell based tests – We are working on demonstrating the broader application of our technology platform, including its application to diagnostic tests based on enzymatic, immunoassay and molecular diagnostic methods. We may seek to enter into collaborative arrangements, strategic alliances or distribution agreements with respect to any products or technologies arising from this work.

 

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Our Strategy

We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Key aspects of our strategy include:

 

    manufacturing products (test strips and analyzers) for our customers and partners as required;

 

    extending our electrochemical cell technology and demonstrating the broader application of our technology platform for markets with significant commercial potential. In particular, we are developing our own PT-INR test for use in decentralized settings including the patient self-test market;

 

    seeking to enter into collaborative, strategic or distribution arrangements with other life sciences companies or other industry participants with respect to the development and commercialization of specific tests or specific fields. We are currently negotiating distribution arrangements with respect to initial target markets for our own PT-INR test;

 

    undertaking research and development work for our customers and partners;

 

    providing post market support services to our customers and partners.

Plan of Operations for the Remainder of the Fiscal Year Ending December 2016

Our plan of operations over the remainder of the fiscal year ending December 2016 is to:

 

    manufacture products to satisfy our customers and partners requirements;

 

    continue to undertake research and development work for our customers and partners;

 

    provide the necessary post-market support for our customers and partners;

 

    demonstrate the broader application of our technology platform for markets with significant commercial potential, focusing initially on enzymatic, immunoassay and molecular diagnostic point-of-care tests;

 

    seek to enter into collaborative, strategic or distribution arrangements with other life sciences companies or other industry participants with respect to the development and commercialization of specific tests or specific fields.

Financial information about segments

We operate in one segment. Our principal activities are the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Although our products are intended for sale worldwide, we operate predominantly in one geographical area, that being Australia. For details of our revenues, profit and loss and total assets for financial years ending December 31, 2015, 2014, 2013, 2012 and 2011 refer to “Item 6. Selected Financial Data”.

Description of our business

We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use.

Industry background

We operate in the high growth, point-of-care segment of the global in vitro diagnostics (IVD) industry. A large proportion of clinical diagnostics has historically been performed by trained personnel at dedicated or centralized testing sites including hospital laboratories and commercial pathology laboratories. Significant interest has developed in techniques and technologies that allow testing to be performed “on-the-spot” (in real time at the patient’s side). Point-of-care testing can be further divided into consumer self-testing or testing of patients by one of a variety of medical or laboratory professionals in locations such as clinics, physician’s office laboratories and emergency departments. While not all tests are suited to being performed at the point-of-care, we believe our electrochemical cell technology and other technologies could be a suitable platform for adapting a number of relevant central laboratory tests to a point-of-care format.

Point-of-care tests in development and partnering strategy

We are also working to demonstrate the broader application of our technology platform for markets with significant commercial potential across enzymatic, immunoassay and molecular diagnostic point-of-care tests. Our strategy is to apply the electrochemical cell technology to different fields and biomarkers and then to either enter into collaborative arrangements or strategic alliances with third parties to develop and commercialize products for those fields or, as is the case of our PT-INR test in development for the patient self-testing market, to complete the development of the products and commercialize them using distributors. To date, we have developed a blood glucose test with LifeScan and a coagulation PT-INR test with Siemens, both of which are now sold by LifeScan and Siemens, respectively. We will continue to work with Siemens to develop other test strip and reader products for the point-of-care coagulation market.

 

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Principal Products and Services

UBS is the manufacturer of PT-INR coagulation test strips for Siemens’ Xprecia StrideTM Coagulation Analyzer. We will continue to work with Siemens to develop a range of other products for the point-of-care coagulation testing market which UBS expects to manufacture once approved for sale. UBS also conducts research and development to demonstrate the broader application of our technology platform, including tests based on enzymatic, immunoassay and molecular diagnostic methods.

UBS provides LifeScan with research and development services from time to time. Between 2009 and 2013, UBS acted as a non-exclusive manufacturer of blood glucose test strips for LifeScan’s OneTouch® Verio® blood glucose testing product. While UBS no longer manufactures the OneTouch® Verio® blood glucose test strips for LifeScan, under the Master Services and Supply Agreement, UBS continues to be paid the quarterly service fee based on the number of OneTouch® Verio® strips sold, irrespective of the manufacturer of the strips in consideration of services provided. LifeScan has the option to give notice to convert the quarterly service fees in the manner described below, which it may only do so once it has paid cumulative quarterly service fees of US$45 million. As of December 31, 2015, LifeScan had paid cumulative quarterly service fees of US$21.3 million. In the event notice is given, LifeScan is required to the pay the quarterly service fees for the remainder of that year. In addition, LifeScan must pay a one-time lump sum fee. This one-time lump sum service fee is calculated by multiplying the sum of all quarterly service fees for the relevant year in which notice is given by a multiplier (on a sliding scale from 2.4x if notice is given in 2016 to 2x if notice is given in 2018 and beyond).

Facilities

Universal Biosensors Pty Ltd leases approximately 5,000 square meters of office, research and development and manufacturing facilities at 1 Corporate Avenue, Rowville in Melbourne, Australia. We have had ISO 13485 certification continuously at that site since May 2007. The lease for 1 Corporate Avenue expires on March 31, 2019 with an option to renew the lease for two further terms of five years each.

Raw materials

Raw materials essential to our business are purchased worldwide in the ordinary course of business from numerous suppliers. In general, these materials are available from multiple sources. Certain of our products in development may be more reliant on sole sources of supply. We seek to enter into long term contracts of supply with respect to these materials and will develop mitigation strategies, which may include development work to enable substitute materials to be used.

Distribution

With respect to certain of our products in development, including our PT-INR test, part of our strategy is to establish distribution arrangements in the future.

Regulatory clearances

In all major territories of the world, regulatory clearances are required prior to marketing diagnostic tests. The regulatory clearance requirements vary from country to country and product to product, however, regulatory clearances typically require a satisfactory “technical file”, which provides the regulatory bodies with details of the design and previous testing of the product including safety and efficacy data as well as the details of the conduct of trials which show the suitability for use of the product at the point-of-care. Regulators also require demonstration of continuing compliance with an appropriate quality management system. There is no common international regulatory body and we, or our relevant customer or partner or distributor, would be required to submit for clearance to sell in each of the major jurisdictions in which we or our relevant customers and partners seeks to market products. For example, for Europe, a “Notified Body” assesses the quality system and product technical file, whereas in the United States, the Food and Drug Administration, or “FDA”, is the regulatory body responsible for the examination of the design and performance of the device and for assessment of our quality system.

In the case of point-of-care tests, there are often additional requirements that a manufacturer must meet such as an examination of certain aspects affecting test suitability for non-professional users. In Europe, certain codified standards describe the requirements of tests whilst in the United States, tests to be used by non-laboratory professionals must gain waiver status under the United States Clinical Laboratory Improvement Amendments of 1988. Amongst other clearances, we will also require clearance for export of medical devices from the Therapeutics Goods Administration, or “TGA”, in Australia.

 

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If we are developing a product for a customer or partner, our customers and partners are generally responsible for obtaining and maintaining all applicable regulatory approvals and determining the location and timing for submissions for regulatory clearance. We may provide a supporting role in this process. We will however be responsible for the regulatory approvals of the products which we wish to take to market through distributors.

The importance and duration of all our patents, trademarks and licenses

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights which in the aggregate we believe to be of material importance to us in the operation of our business. Our continued success depends to a large extent on our ability to protect and maintain our owned and licensed patents and patent applications, copyright, trademark and trade secrets.

Our point-of-care tests in development draw upon an extensive portfolio of patents and patent applications as well as know-how either owned by UBS or licensed to UBS. We patent the technology, inventions and improvements that we consider important to the development of our business.

We rely on the owned patent applications and the patents and patent applications licensed to us in the manufacture of the point-of-care diagnostic tests being developed by us and to enable us to grant rights to our customers and partners to commercialize products that we may develop.

Our owned and licensed patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Based on current product sales and our projects, the owned and licensed patents and patent applications that we consider most significant by virtue of their importance to our platform together with the last of the patents to expire within the patent family are set forth in the table below.

 

Patent

  

Expiration
Year

Apparatus and Method for Electrochemical Protease Sensor (this patent family relates to a sensor to detect cleavage of an electrochemical substrate for use in measuring blood or plasma coagulation in assays such as prothrombin time and thrombin potential)    2028
Electrochemical On-Board Control Detection (this patent family relates to an on-board control system of a sensor, wherein the control system can test/verify the viability of the sensor)    2030
Electrochemical Cell (this patent family relates to a method and an electrochemical biosensor for determining the concentration of an analyte in a carrier)    2022
Electrochemical Method (this patent family provides an improved method and biosensor for determination of the concentration of an analyte in a carrier which provides improved accuracy, reliability and speed over prior techniques)    2024
Electrochemical Cell (this patent family relates to an electrochemical cell for determining the concentration of an analyte in a carrier)    2016
Electrochemical Method for Measuring Chemical Reaction Rates (this patent family relates to the measurement of the progress of a chemical reaction that generates an electroactive reaction product that is subsequently detected at an electrode amperometrically or coulometrically)    2023
Electrochemical Cell Connector (this patent family relates to a connector to provide electrical connection between an electrochemical cell of a strip type sensor and meter circuitry)    2026
Method and Apparatus for Rapid Electrochemical Analysis (this patent application relates to an improved method and apparatus for electrochemical analysis)    2026
Methods and Apparatus for Analyzing a Sample in the Presence of Interferents (this patent application relates to methods and apparatus for determining analyte concentrations in a rapid and accurate manner)    2026
System and Method for measuring an Analyte in a Sample (this patent relates to a method for measuring a temperature corrected glucose concentration over a temperature range)    2029
Systems and Methods for Discriminating Control Solution from a Physiological Sample (this patent application relates to systems and methods for discriminating between a control solution and blood sample)    2028
Systems and Methods of Discriminating Control Solution from a Physiological Sample (this patent application relates to systems and methods for discriminating between a control solution and a blood sample based on a summation of current values and comparing reference values to threshold values)    2027

 

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We will continue to file and prosecute patent applications when and where appropriate to attempt to protect our rights in our proprietary technologies.

Pursuant to our License Agreement with LifeScan, LifeScan is responsible for prosecution and maintenance of the patents and patent applications licensed to us by them. In the event that LifeScan elects not to proceed with the prosecution of a patent application licensed to us by them or discontinues the payment of fees, we have the right to assume and continue at our own expense the prosecution of any such patent or patent applications. We also license intellectual property from Siemens and SpeeDx Pty Ltd, who are both primarily responsible for the prosecution and maintenance of the patents and patent applications licensed to us by them.

Our ability to build and maintain our proprietary position for our technology and products will depend on our success in obtaining effective claims and those claims being enforced once granted and, with respect to intellectual property licensed to us, the licensee’s success in obtaining effective claims and those claims being enforced once granted. The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Some countries in which we or our customers or partners may seek approval to sell point-of-care tests that we have been involved in developing, may fail to protect our owned and licensed intellectual property rights to the same extent as the protection that may be afforded in the United States or Australia. Some legal principles remain unresolved and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, the United Kingdom, the European Union, Australia or elsewhere. In addition, the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or in interpretations of patent laws in the United States, the United Kingdom, the European Union, Australia or elsewhere may diminish the value of our intellectual property or narrow the scope of our patent protection.

Seasonality

We do not expect sales of the diagnostic tests we develop to be materially impacted by seasonality.

The practices of the registrant and the industry (respective industries) relating to working capital items.

We deal with our accounts receivables, inventory, trade payables and the supply of products in accordance with our contractual obligations to our customers, partners and suppliers.

 

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Dependence on single customer

While we have commenced manufacturing the test strips for Siemens’ Xprecia StrideTM Coagulation Analyzer, as shown in the table below, we continue to receive a significant portion of our revenue from LifeScan. All revenue from products to December 31, 2013 was paid in connection with the manufacture of strips for LifeScan and the majority of our revenue from services is also derived from LifeScan. All revenue from products in 2014 and 2015 was recognized in connection with the manufacture of the test strips for Siemens’ Xprecia StrideTM Coagulation Analyzer.

 

     Years Ended December 31,  
     2015     2014     2013  
     A$     A$     A$  

Revenue from products

     1,323,564        215,486        10,170,804   

Revenue from services

     15,451,414        9,314,198        4,918,868   

Research and development tax incentive income

     9,224,349        9,935,083        6,279,954   

Interest income

     242,574        260,904        499,970   
  

 

 

   

 

 

   

 

 

 

Total income

     26,241,901        19,725,671        21,869,596   
  

 

 

   

 

 

   

 

 

 

% of total income derived from - LifeScan

     49     34     62

                   - Siemens

     15     14     7

                   - Other

     36     52     31

While we will no longer manufacture OneTouch® Verio® blood glucose test strips for LifeScan, we are paid a quarterly service fee based on the number of such strips sold by LifeScan. Our dependence on the quarterly service fees from LifeScan for a significant proportion of our revenue is likely to continue until we start to receive meaningful revenues from Siemens relating to the Xprecia StrideTM Coagulation Analyzer and other partnering and collaborative arrangements or strategic alliances with third parties and from the sale of our own products.

We did not have any significant backlog orders as of December 31, 2015 and 2014.

Competitive conditions of our business

Despite Siemens having released the Xprecia StrideTM Coagulation Analyzer in Europe, our revenue is currently highly dependent on the success of the OneTouch® Verio® blood glucose product we have developed with LifeScan. OneTouch® Verio® was first launched in the Netherlands in January 2010 by LifeScan and has subsequently been launched in countries that represent over 90% of the world self-monitoring blood glucose market including North America, major European markets and Australia. LifeScan is responsible for all sales and marketing decisions and any decision to introduce the product to new territories and the timing of those decisions.

The global diabetes market place is intensely competitive and dominated by multinationals such as LifeScan, Roche, Abbott and Bayer. Changes to reimbursement of blood glucose monitoring supplies in the US market have further intensified pricing competition and margin pressures over the past 24 months. In addition, during 2013, the International Standards Organization released new guidelines that increase the accuracy and performance requirements for blood glucose monitoring systems. Although OneTouch® Verio® has been well received in the jurisdictions in which it has been launched, LifeScan controls the commercialization of the OneTouch® Verio® product and we do not know whether customers will continue to prefer it over competitive offerings, nor the rate at which it might continue to be adopted.

Siemens is responsible for all sales and marketing decisions with respect to the products we develop for them and for any decision to introduce the products to new territories and the timing of those decisions. In December 2014, Siemens received the CE mark approval for sale of the Xprecia StrideTM Coagulation Analyzer in Europe and initiated the European limited release of its first point-of-care coagulation testing device. In July 2015, Siemens made a premarket 510(k) submission to the FDA for regulatory clearance to sell the Xprecia StrideTM Coagulation Analyzer in the US.

The worldwide point-of-care coagulation testing market was estimated at around US$1.0 billion in 2014 and is forecast to grow by around 10% per annum to US$1.4 billion by 2018. The coagulation testing market is dominated by PT-INR testing, which represents around 70% of this market. Roche and Alere are currently the two largest players in the point-of-care professional PT-INR testing market. These companies have well established brand recognition, sales and marketing forces, and have significant resources available to support their product.

Core to our business strategy is the extension of our intellectual property platform to enable other tests currently done in the central laboratory to be migrated to the point-of-care settings. Our belief is that much testing done in the central lab can more efficiently and profitably be performed at the point-of-care. With the exception of blood glucose testing, most point-of-care testing is currently conducted in professional settings. The healthcare professional has a choice and can request tests from a central laboratory, or services provider, or choose to have the test performed at the point-of-care. Thus we face competition not just from other companies active in the point-of-care space, but also the providers of testing who operate in centralized settings.

 

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Our research and development expenditure during the last three fiscal years were as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Research and development expenses

     19,763,842         17,136,051         15,483,902   

Research and development tax incentive income

     (9,224,349      (9,935,083      (6,279,954
  

 

 

    

 

 

    

 

 

 
     10,539,493         7,200,968         9,203,948   
  

 

 

    

 

 

    

 

 

 

We undertake our own research and development and on behalf of our customers and partners. Research and development activities undertaken on behalf of our customers and partners were A$9,014,377, A$9,971,035 and A$10,401,575 for the fiscal years ended 2015, 2014 and 2013, respectively.

Employees

At March 9, 2016, we had 83 full time employees in our Melbourne facility, spanning production, engineering, quality and regulatory, research and development and administration.

Financial information about geographic areas

We operate in one segment. Our principal activities are research and development, commercial manufacture of approved medical or testing devices and the provision of services including contract research work. We operate predominantly in one geographical area, being Australia. Our total revenue as disclosed below is attributed to countries based on location of customer. Location has been determined generally based on contractual arrangements.

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Home country - Australia

     9,466,923         10,323,745         6,779,924   
  

 

 

    

 

 

    

 

 

 

Foreign countries

        

- Scotland

     0         0         10,170,804   

- U.S.A.

     2,594,570         2,482,288         1,456,833   

- Germany

     1,323,564         215,486         0   

- Switzerland

     12,856,844         6,704,152         3,462,035   
  

 

 

    

 

 

    

 

 

 

Total - foreign countries

     16,774,978         9,401,926         15,089,672   
  

 

 

    

 

 

    

 

 

 

Total income

     26,241,901         19,725,671         21,869,596   
  

 

 

    

 

 

    

 

 

 

Our material long-lived assets are all based in Australia.

Available Information

We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”), copies of which are available on ASX. Stockholders may read and copy any reports, statements or other information that we file at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our public filings (including our Annual Report on Form 10-K and proxy statement) are also available from commercial document retrieval services and at the website maintained by us at http://universalbiosensors.com and the SEC at http://www.sec.gov.

We provide without charge to each person solicited by the Proxy Statement a copy of our Annual Report on Form 10-K, including our financial statements but excluding the exhibits to Form 10-K other than Exhibit 13. The Annual Report includes a list of the exhibits that were filed with the Form 10-K, and we will furnish a copy of any such exhibit to any person who requests it upon the payment of our reasonable expenses in providing the requested exhibit. For further information, please contact our Company Secretary, Cameron Billingsley at +61 2 8115 9801 or write us at 1 Corporate Avenue, Rowville VIC 3178 Australia. You may also send an email to us at companysecretary@universalbiosensors.com.

 

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ITEM 1A. RISK FACTORS.

Investing in our shares or CDIs involves a high degree of risk. Before you invest in our shares or CDIs, you should understand the high degree of risk involved. You should carefully consider the following risks and other information in this Form 10-K, including our financial statements and related notes appearing elsewhere in this Form 10-K, before you decide to invest in our shares or CDIs. If any of the events described below actually occurs, our business, financial condition and operating results could be harmed. In such an event, the market price of our CDIs would likely decline and you could lose part or all of your investment.

Our products may not be successful in the marketplace.

Our success and the success of products that we are involved in developing is ultimately dependent on the level of market acceptance and sales of those products. Market acceptance will depend on, amongst other things, the ability to provide and maintain evidence of safety, efficacy and cost effectiveness of the products, the advantages and profile over competing products, the level of support from clinicians, the relative convenience and ease of use, cost-effectiveness compared to other products, the availability of reimbursement from national health authorities, the timing of market introduction and the success of marketing and sales efforts by our customers and partners. Additionally, it is difficult to determine the market opportunity for new technologies and our estimates may not accurately reflect the actual demand in the target markets.

Our commercial opportunity will be reduced or eliminated if the size of the market opportunity is less than we expect or if our competitors develop and commercialize products that are safer, more effective, more convenient, less expensive, or reach markets sooner or are marketed better than products that we are involved in developing.

The blood glucose test strips for the One Touch® Verio® product which we developed with LifeScan were first launched in the Netherlands in January 2010 and are now available in much of the world’s self-monitored blood glucose market including North America, major European markets and Australia. While market acceptance for One Touch® Verio® has been positive to date, there is no guarantee that the product will secure and maintain adequate market share in a timely fashion.

The coagulation test strips for the Xprecia StrideTM Coagulation Analyzer which we developed with Siemens were first released in Europe in December 2014. This product represents Siemens’ first entry into this point-of-care coagulation testing market and as such, there is no track record of market acceptance for the product. As such, there can be no guarantee this product will gain market share in a timely fashion (or at all) from the market’s two largest players, Roche and Alere. These companies have well established brand recognition, sales and marketing forces, and have significant resources available to support their product.

Likewise, we cannot be sure that any other products we are involved in developing with our customers and partners, such as the other test strip and reader products for the point-of-care coagulation markets that we are developing with Siemens or our own PT-INR test, will be successful in the marketplace or will secure and maintain adequate market share.

Our ability to be or maintain profitability in the future will be adversely affected if any of the products that we are involved in developing fail to achieve or maintain market acceptance or compete effectively in the market place. It would reduce or eliminate our revenues from product sales and/or manufacturing and have a material adverse effect on our business and financial position.

We are currently dependent on revenue from LifeScan.

UBI continues to receive revenue from coagulation test strip manufacturing on behalf of Siemens. Even though we expect this figure to grow significantly over time, the majority of our products and services revenue is currently derived from LifeScan. With effect from December 31, 2013, we no longer manufacture OneTouch® Verio® blood glucose test strips for LifeScan, however, we are paid a quarterly service fee based on the number of strips sold. To date, our business has been dependent on the sales of the blood glucose test strips for the OneTouch® Verio® product to partially fund our operations. Any changes in the level of test strip sales will directly affect the amount of the quarterly service fee paid by LifeScan and, as a result, our business.

LifeScan has the ability to terminate the obligation to pay quarterly service fees to us in certain situations set out in the Master Services and Supply Agreement or with the agreement of Universal Biosensors. LifeScan has the option to give notice to convert the

 

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quarterly service fees in the manner described below, which it may only do once it has paid cumulative quarterly service fees of US$45 million. As of December 31, 2015, LifeScan has paid cumulative quarterly service fees of US$21.3 million. In the event notice is given, LifeScan is required to the pay the quarterly service fees for the remainder of that year. In addition, LifeScan must pay a one-time lump sum fee. This one-time lump sum service fee is calculated by multiplying the sum of all quarterly service fees for the relevant year in which notice is given by a multiplier (on a sliding scale from 2.4x if notice is given in 2016 to 2x if notice is given in 2018 and beyond). LifeScan may also terminate the obligation to pay quarterly service fees if certain other factors detailed in the Master Services and Supply Agreement arise, including LifeScan ceasing to sell the product, termination for breach, insolvency and bankruptcy, change of control and regulatory termination.

Even though we are the manufacturer of the coagulation test strips we developed with Siemens, the market for the Xprecia StrideTM Coagulation Analyzer is currently unknown because the product was released in Europe in December 2014 and Siemens made an application for FDA approval in July 2015. While there is no minimum commitment, if Siemens does not submit purchase orders for a certain amount of product, our manufacturing capacity may not be fully utilized. If this occurs, we will be faced with surplus capacity in our manufacturing operations and our revenues will decline. Further, Siemens may obtain the right to manufacture product or have a third party manufacture product on its behalf if certain events occur (for example, insolvency, failure to supply). The Supply Agreement with Siemens may also be terminated as a result of either party defaulting on its material obligations. If any of these circumstances arise, we would cease to have the potential to receive manufacturing revenues from the sale of product purchased by Siemens.

An important part of our strategy is to seek to enter into other collaborative arrangements or strategic alliances with respect to the development and commercialization of specific tests or in specific fields. Our dependence on LifeScan for a significant proportion of our revenue is likely to continue until we start to receive meaningful revenues from other collaborative arrangements or strategic alliances with third parties, such as our arrangement with Siemens, and/or until we receive meaningful revenues from our own products which we intend to commercialize through distributors, such as our PT-INR product that is in the later stages of development.

Our current and future customers and partners may choose to utilize less of our research and development services. If the development and research work we undertake was materially reduced or ceased, we would lose an ongoing source of income which would have a material adverse effect on our business and financial position.

Inability to maintain compliance with the debt covenants.

On December 19, 2013 UBI and UBS entered into a credit agreement with Athyrium Opportunities Fund (A) LP, as administrative agent (the “Administrative Agent”) and as a lender, and Athyrium Opportunities Fund (B) LP as a lender (Athyrium A and Athyrium B together with any other lenders party thereto from time to time, the “Lenders”), which was amended on January 30, 2015, for a secured term loan of up to US$25,000,000 (the “Credit Agreement”). A first tranche loan of US$15,000,000 was drawn on December 2013 and a further two tranches each of US$5,000,000 were able to be drawn within 30 days of any fiscal quarter ending on or before July 31, 2015 in which UBS satisfied certain conditions. Even though these commercial conditions were satisfied, UBI elected not to draw down the additional US$10,000,000. Unless the facility is otherwise terminated earlier pursuant to the terms of the Credit Agreement, UBS is required to repay the outstanding principal amount of the loans drawn down, together with all accrued and unpaid interest thereon and all other obligations on December 19, 2018 (the “Maturity Date”). The Credit Agreement is secured by substantially all of the assets of UBS and UBI, including the stock in UBS held by UBI. The obligations of UBS under the Credit Agreement are guaranteed by UBI.

UBS’ ability to maintain compliance with the covenants in our Credit Agreement is dependent upon, among other things, our ability to continue to execute our business plans and our ability to generate cash from operations. The debt facility is subject to certain specified events of default, defaults relating to non-payment, breach of covenants or inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and insolvency defaults, material judgment defaults, regulatory defaults, the occurrence of a material adverse effect, or un-remedied material breach by UBS or UBI or termination of a key contract. The occurrence of an event of default could result in the amounts owing under the Credit Agreement, including all unpaid principal and interest being due and payable, and could result in the administrative agent enforcing its security over the assets of UBS and UBI. If the loans are accelerated or commitments terminated, we could face substantial liquidity problems and may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance our indebtedness. Such alternative measures may not be available or successful. Also, our debt covenants may limit our ability to dispose of material assets or operations or to restructure or refinance our indebtedness. Even if we are able to restructure or refinance our indebtedness, the economic

 

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terms may not be favorable to us. In addition, an event of default under our key commercial contracts could result in a cross-default under our Credit Agreement. All of the foregoing could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

Deviations from expected results of operations and/or expected cash requirements could result in a default under our Credit Agreement and/or adversely affect our financial condition and results of operations.

Our principal sources of liquidity are cash flows from operations, cash and cash equivalents and our existing debt facility. Our operating activities generally provide a proportion of cash to fund our working capital requirements and, together with borrowings under our debt facility, are expected to be sufficient to fund our operating needs and capital requirements for at least the next twelve months, based on current assumptions regarding the amount and timing of such expenditures and anticipated cash flows. Although we currently expect to remain in compliance with the Credit Agreement, based on our current expectations, any significant deviation in actual results from our expected results of operations, any significant deviation in the amounts or timing of material expenditures from current estimates, the termination of any of our key commercial contracts with LifeScan or Siemens, or other significant unanticipated expenses could result in a default under our Credit Agreement, have a material adverse effect on our financial condition and/or may result in the need for additional debt or equity financing.

Our debt covenants may affect our liquidity or limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.

The Credit Agreement includes provisions that place limitations on a number of our activities, including but not limited to our ability to: incur additional debt; create liens on our assets or make guarantees; make certain investments or loans; pay dividends; dispose of or sell assets; or enter into acquisitions, mergers or similar transactions. These covenants could restrict our ability to pursue opportunities to expand our business operations. We are required to maintain unrestricted cash of US$2,000,000 in a specified bank account at all times.

Our business strategy and revenue relies on our ability to enter collaborative arrangements with other companies and there is a risk that we will not be able to enter into collaborative arrangements with respect to our products.

Our business strategy involves demonstrating the broader application of our technology platform for a number of different products/technologies and then entering into collaborative arrangements, licensing agreements, strategic alliances or distribution arrangements for these products/technologies. We have not established any internal product sales and marketing capacity and to achieve commercial success we must enter into and maintain successful arrangements with others to sell, market and distribute products that we are involved in developing. We may not be able to enter into such collaborative arrangements, strategic alliances or distributions arrangements in a timely fashion and on acceptable terms, if at all. Our inability to enter such arrangements would be detrimental to our strategy, business and financial position. Our ability to enter into collaborative, strategic or distribution arrangements will suffer if the technologies developed by us are not perceived as being comparable or superior to established laboratory methods or other products.

If we are unable to enter collaborative or distribution arrangements with respect to certain of our products/technologies, we may have to change strategy, delay, reduce the scope of or eliminate some or all of our development programs or liquidate some or all of our assets or seek to raise additional capital. As a result, we may not be able to pursue what we consider to be worthwhile commercial opportunities and significant monies and management time invested may be rendered unproductive and worthless. Our inability to enter collaborative or strategic arrangements would thus have a material adverse effect on our business and financial position.

Entering collaborative arrangements with respect to our products will expose us to risks and uncertainties related to those collaborations and alliances.

To the extent we are able to enter into collaborative or strategic arrangements with respect to our products, we will be exposed to risks and uncertainties related to those arrangements. The customer or partner will generally make the key decisions on product choice, regulatory approvals, product launch, product manufacture and marketing and promotion. Decisions made by our partner with respect to the commercialization of the products we develop with them will significantly affect the extent and timing of revenues to us. For example, our partner may choose not to launch new products we develop, may choose to launch the products in a limited number of jurisdictions, may delay the launch of products, may undertake only limited sales and marketing efforts to commercialize the products, all of which would have a material adverse effect on our business and financial position. Collaborative arrangements, licensing agreements or strategic alliances will subject us to a number of risks, including the risk that:

 

    we do not control the amount and timing of resources that our strategic partners may devote to our products;

 

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    we do not control the decision to pursue a product, the timing of product launches and extent of marketing and sales activities;

 

    our customer or partners may experience financial difficulties;

 

    we may be required to relinquish important rights such as marketing and distribution rights;

 

    business combinations or significant changes in a partner’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;

 

    a collaborator could independently move forward with a competing product developed either independently or in collaboration with others, including our competitors; and

 

    collaborative arrangements are often terminated or allowed to expire, which would delay the development and may increase the cost of developing our products.

Likewise, distribution arrangements will also expose us to a number of additional comparable risks, including that the distributor may not perform as required.

Allegedly defective design or the manufacture of allegedly defective products could potentially expose us to substantial costs, write-offs and reputational damage.

Allegedly defective designs or manufacture of allegedly defective products exposes us to the risk of product liability claims and product recalls, resulting in substantial costs, write-offs and potential delays in our shipment of product to customers, decreased demand for products, loss of revenue and cash flow, reputational damage, costs of related litigation, increases in our insurance premiums and increased scrutiny by regulatory agencies, claims by our customers and may trigger the dissolution of partnerships or collaborative relationships. The occurrence of certain of these events may trigger an event of default under our Credit Agreement. While we will seek to mitigate our loss by obtaining appropriate insurances and appropriate contractual protections, if we are unable to maintain our insurance at an acceptable cost or on acceptable terms with adequate coverage, or negotiate appropriate contractual protections or otherwise protect against potential product liability claims, we will be exposed to significant liabilities. Recalls would harm our business and compromise the performance of our obligations to our customers and would have a material adverse effect on our business and financial results and may result in claims by our customers or partners and may trigger the dissolution of partnerships or collaborative relationships. Any claim for damages by our customers or other claim against us could be substantial.

There are many elements to manufacturing products that can cause variability beyond acceptable limits. We may be required to discard defective products after we have incurred significant material and labor costs, resulting in manufacturing delays and delayed shipment to customers. Further, if our suppliers are unable to provide materials in conformance with specifications, we may be required to discard materials, which may also cause delays in the manufacture and shipment of products.

Reduced margins would have a material adverse effect on our business and financial position.

Our margins may be reduced and costs increased which would have a material adverse effect on our business and financial position. The primary factors that pose this risk include selling prices, increased manufacturing costs or currency fluctuations.

Increases in our costs to manufacturing products or conducting development work may decrease our margins or cause us to suffer a loss on the manufactured products. Additionally, we may suffer decreased margins due to the global reach of our business exposing us to market risk from changes in foreign currency exchange rates. The majority of our cash reserves are in US dollars and expenses are in Australian dollars, and we are exposed to foreign exchange exposure particularly when we have to convert our US dollar cash reserves into Australian dollars to fund our operations. Additionally, we use, from time to time, financial instruments, primarily foreign currency forward contracts to hedge certain forecasted foreign currency commitments arising from trade accounts receivables, trade accounts payable and fixed purchase obligations. These hedging activities are largely dependent upon the accuracy of our forecasts and as such, our foreign currency forward contracts may not cover our full exposure to exchange rate fluctuations. Although we believe our foreign exchange policies are reasonable and prudent under the circumstances, we may experience losses from un-hedged currency fluctuations, which could be significant. If our costs increase or our margins decrease, it would have an adverse effect on our business and financial position.

 

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New product design and development and clinical testing is costly, labor intensive and the outcomes uncertain.

The design and development of different tests on our platform takes a number of years to complete, is costly and the outcomes are uncertain. Although development risk generally reduces the further a test is developed, the tests we develop have a significant degree of technical risk, and irrespective of the stage of development, design and development work and product validation, the development of the test may be unsuccessful or not warrant product commercialization. If development activities are unsuccessful, we may need to delay, reduce the scope of or eliminate some or all of our development programs and significant monies and management time invested may be rendered unproductive and worthless.

Our agreements with our customers to date have contained milestone based payments, many of which are payable upon the achievement of technical development milestones. Such milestone payments may not cover the cost of our research and development activities. In the event we are not successful in achieving the relevant development milestone, we will not receive the milestone payments associated with the milestone which would have an adverse effect on our revenue and financial position. Failure to achieve certain development milestones may have an impact on our covenants under the Credit Agreement. Furthermore, if we are unable to develop a product for a customer, it may eliminate an important revenue stream for us which may result in us not being profitable, or trigger dissolution of partnerships or collaborative relationships.

Diagnostic devices must be tested for safety and performance in laboratory and clinical trials before regulatory clearance for marketing is achieved. Such studies are costly, time consuming and unpredictable. Clinical trials may not be successful and marketing authorization may not be granted which may result in us not being profitable, or trigger dissolution of partnerships or collaborative relationships. The outcome of early clinical trials may not be predictive of the success of later clinical trials. Failed clinical trials may result in considerable investments of time and money being rendered unproductive and worthless.

Additionally, unanticipated trial costs or delays could cause substantial additional expenditure that is not reimbursed by a partner, cause us to miss milestones which trigger a financial payment or cause us or a partner to delay or modify our plans significantly. This would harm our business, financial condition and results of operations.

If we cannot maintain our intellectual property rights, our ability to make or develop point-of-care tests would be restricted or eliminated, and the value of our technology and diagnostic tests may be adversely affected.

Our ability to obtain proprietary rights, maintain trade secret protection and operate without infringing the proprietary rights of third parties is an integral part of our business.

A number of companies, universities and research institutions have or may be granted patents that cover technologies that we need to complete development of a particular product. We may choose or be required to seek licenses under third party patents which would be costly, may not be available on commercially acceptable terms, or at all. Further, we may be unaware of other third party patents or proprietary rights that are infringed by our point-of-care tests.

Much of our platform intellectual property rights are licensed to us from LifeScan. If we were to breach the License Agreement and LifeScan were to validly terminate the agreement in response, it would seriously restrict or eliminate our ability to develop and commercialize our existing and future tests which would have a material adverse effect on us as it would restrict or eliminate our existing commercialization opportunities. We also license other intellectual property from third parties as part of our other development efforts.

LifeScan and our other licensors have a considerable degree of control over the manner that the intellectual property licensed to us is maintained and protected and, as a result, we have reduced control with respect to the maintenance and protection of our licensed patent portfolio. LifeScan is responsible for the prosecution and maintenance of the intellectual property it licenses to us and we are largely dependent on them to defend proceedings or prosecute infringers. The same applies to our other licensors. Our business would be harmed if the licensed patents were infringed or misappropriated. Prosecuting third parties and defending ourselves against third-party claims would be costly, time consuming and divert management’s attention from our business, potentially leading to delays in our development or commercialization efforts. Additionally, if third parties made successful claims, we may be liable for substantial damages or license fees, be required to stop marketing the infringing product or take other actions that are adverse to our business.

 

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Risks associated with regulatory clearance and changes to regulation.

The products we are involved in developing are medical devices and therefore subject to extensive regulation in all major markets. The process of obtaining regulatory clearance is costly and time consuming and there can be no assurance that the required regulatory clearances will be obtained. Products cannot be commercially sold without regulatory clearance. We and our customers and partners may be unable to obtain the necessary clearances to sell or if the clearances are delayed, revoked or subject to unacceptable conditions, the product may not be able to be commercialized which would have a material adverse effect on us.

If we were required and able to change suppliers and third party contract manufacturers, applicable regulatory bodies may require new testing and compliance inspections and require that we demonstrate structural and functional comparability between the same products manufactured by different organizations, resulting in additional costs and potential delays which could be detrimental to our business.

Furthermore, regulation is ongoing and manufacturers and marketers of products are subject to continuous review and periodic inspections. Potentially costly responses may be required to be given by us and our customers including product modification, or post-marketing clinical trials as a condition of approval to further substantiate safety and efficacy or investigate issues of interest. If we or our customers fail to comply with applicable regulatory requirements it may result in fines, delays, suspensions of clearances, seizures, recalls of products, operating restrictions or criminal prosecutions and could have a material adverse effect on our operations. Any such regulatory action may also constitute an event of default under our Credit Agreement. Additionally, changes in existing regulations or the adoption of new regulations could make regulatory compliance by us more difficult in future and could hamper our ability to produce our products when we require.

Risks associated with suppliers.

Similar to most major manufacturers in our industry, we are dependent upon our suppliers for certain raw materials and components. We have preferred suppliers, making us vulnerable to supply disruption, which could harm our business and delay manufacturing operations. We seek to enter into long term contractual arrangements with certain of our suppliers, however we may not always be able to do so on acceptable terms. If our manufacturing requirements change, such long term contractual arrangements may cause us to have excess or obsolete inventory. We may not be able to guarantee the supply of certain of our materials which may in turn affect our ability to supply product to our customers. We may have difficulty locating alternative suppliers in a timely manner or on commercially acceptable terms, and switching components may require product redesign and further regulatory clearance which could significantly delay production. Likewise, our customers and partners are subject to supply risks which may delay their ability to supply customers with product which would impact our revenue and have a consequential adverse effect on our business and results of operations.

To the extent we agree to be responsible for manufacturing meters for any of our customers and partners, we anticipate that we will outsource the manufacture of these meters. There is no guarantee that we will be able to enter into any such arrangement on acceptable terms, if at all, and as a result there is a risk of lengthy and costly delays of bringing our products to market. Further, if our contract manufacturers fail to achieve and maintain required production yields or manufacturing standards, it could result in product withdrawals, delays, recalls, product liability claims and other problems that could seriously harm our business. Any meter shortages or manufacturing delays could result in delays or reduction in our revenues, with consequential adverse effect on our business and results of operations.

We face risks manufacturing product.

There are technical challenges to establishing and maintaining commercial manufacturing for products, including maintaining the consistency of our incoming raw materials, equipment design and automation, material procurement, production yields and quality control and assurance. We may fail to achieve and maintain required production yields or manufacturing standards which could result in financial loss, patient injury or death, product recalls or withdrawals, product shortages, delays or failures in product testing or delivery, breach of our agreements with any partner and other problems that could seriously harm our business.

 

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The success of our business is heavily dependent upon market factors such as growth of the point-of-care testing market and our ability to compete effectively within the highly competitive in vitro diagnostics market.

Our business success relies on the growth of both the existing and emerging point-of-care testing market. We cannot be sure that this market will grow as we anticipate. Such growth will require continued support and demand from payers, patients and healthcare professionals and the endorsement by professional bodies that influence the practice of medicine. Research and clinical data may not sufficiently support point-of-care testing, nor may the health economic benefits sufficiently support point-of-care testing as an alternative to current practice. Even if the data is compelling, significant resources may be required to educate users and change in practice may be slower and more costly than we anticipate. If point-of-care testing fails to be adopted at the rate we expect, the sector may remain unattractive to the size of partner we seek to attract and as a consequence, we may need to change our business model. This may require us to incur more cost and/or our anticipated growth will be adversely affected and our results will suffer.

We may face intense competition in development, marketing and selling point-of-care tests.

The market for in vitro diagnostics is intensely competitive, price sensitive and subject to rapid change. We and our customers and partners may be unable to accurately anticipate changes in the markets and the direction of technological innovation and the demands of end users, competitors may develop improved technologies and the market place may conclude that our products are obsolete. Our larger competitors enjoy several competitive advantages including significantly greater financial resources, greater brand recognition, greater expertise in conducting clinical trials, obtaining regulatory approvals and managing manufacturing operations, and greater experience in product sales and marketing. Early-stage companies may also prove to be significant competitors.

Competition will be faced from existing products as well as products in development. Point-of-care tests are likely to experience significant and continuing competition from traditional pathology laboratory based testing as well as other point-of-care tests. Our and our customers’ and partners’ commercial opportunity will be reduced or eliminated if competitors develop and commercialize safer, more effective, more convenient, or cheaper products, or reach the market sooner than we do. Any such developments adversely affecting the market for products developed by us may force us and our partners to reduce production or discontinue manufacturing which would cause our operating results to suffer. There can be no assurances given with respect to our or any partner’s ability to compete effectively in the competitive markets in which we operate.

Adverse economic conditions may harm our business.

Market and economic conditions have been challenging worldwide. Continuing concerns have led to increased market volatility and diminished expectations for world economies. These factors may include fluctuations in foreign exchange rates, inflation, interest rates, rate of economic growth, taxation laws, consumer spending, unemployment rates, government fiscal, monetary and regulatory policies and consumer and business sentiment. Any of these factors have the potential to cause costs to increase or revenues to decline. Continued turbulence in the US, Australian and other international markets and economies may adversely affect our ability to enter into collaborative arrangements, the behavior and financial condition of our current and any future customers and partners and the spending patterns of users of the products we are developing. This may adversely impact demand for our services and for products developed by us. In addition, economic conditions could also impact our suppliers, which may impact on their ability to provide us with materials and components which in turn may negatively impact our business.

Our operations are not currently profitable.

Our operations are not currently, and may never be profitable. To date, we have funded our operations and capital expenditures from revenue from the sale of products and provision of services and with proceeds from the sale of our securities, government grants and rebates including the research and development tax incentive income and interest on investments. On December 19, 2013 we entered into the Credit Agreement which has provided debt financing for our business. We may, however, require additional capital to fund our business operations, which may not be available on acceptable commercial terms, or at all.

We may not be able to raise capital or secure credit if and when required.

We may not be able to raise capital or secure further credit if and when required. If we are unable to raise capital or secure further credit when required, we may have to delay, reduce the scope of or eliminate some or all of our development programs or commercialization efforts or liquidate some or all of our assets.

 

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We rely on government grants and rebates.

Our principal sources of liquidity are cash flows from operations (revenue from services and product sales) and our existing debt facility. We have also financed our business operations through government grants and rebates, including the tax incentive income. The research and development tax incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system and if eligible, provides the recipient with a tax offset for research and development activities. For the year ended December 31, 2015 we recorded research and development tax incentive income of $9,224,349. There have been recent proposals to change the structure of the innovation and research and development funding landscape in Australia which may or may not impact the research and development tax incentive income receivable for the 2015 financial year. There can be no assurance that Universal Biosensors will continue to qualify and be eligible for such incentives or that the Australian Government will continue to provide incentives, offsets, grants and rebates on similar terms or at all.

The loss of a key employee or the inability to recruit and retain high caliber staff to manage future anticipated growth could have a material adverse effect on our business.

As with most growth companies, our future success is substantially dependent on our key personnel. Certain key personnel would be difficult to replace and the loss of any such key personnel may adversely impact the achievement of our objectives. Our ability to operate successfully and manage the business depends significantly on attracting and retaining additional highly qualified personnel. The loss of any key personnel may be disruptive or have a material adverse effect on the future of our business. The competition for qualified employees in scientific research and medical diagnostic industries is particularly intense and there are a limited number of persons with the necessary skills and experience.

Our primary operations are conducted at a single location. Any disruption at our facility could adversely affect our operations and increase our expenses.

Our primary operations are conducted at our Corporate Avenue facility in Melbourne, Australia. We take precautions to safeguard our facility, including security, health and safety protocols and maintain applicable insurance. However, we may be impacted by industrial action or operating equipment and facilities may not operate as intended or be unavailable as a result of unanticipated failures or other events outside of our control such as a natural disaster, fire, flood or earthquake or catastrophic breakdowns or deliberate acts of destruction. The occurrence of any of these events may restrict our ability to supply product, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

Investors may be subject to Australian and/or US taxation.

The receipt of dividends by Australian tax resident security holders and any subsequent disposal of our securities by any such Australian tax resident may have both United States and Australian tax consequences depending upon their individual circumstances. This may result in a security holder being subject to tax in both jurisdictions and a tax credit may or may not be available in one jurisdiction to offset the tax paid in the other jurisdiction depending upon the security holder’s individual circumstances.

The price of our shares is highly volatile and could decline significantly.

Our shares of common stock in the form of CDIs were quoted on the ASX and began trading on December 13, 2006. The price of our shares is highly volatile and could decline significantly. The market price of our shares historically has been, and we expect will continue to be, subject to significant fluctuations over short periods of time. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

    the entry into, or termination of, key agreements, including collaboration and supply agreements and licensing agreements;

 

    any inability to obtain additional financing on favorable terms to fund our operations and pursue our business plan if additional financing becomes necessary;

 

    future sales of our common stock or debt or convertible debt securities or other capital-raising activities, and the terms of those issuances of securities;

 

    future revenue streams from product sales, if any, by our collaborative partners, and the extent of demand for, and sales of, our products;

 

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    the initiation of material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or otherwise;

 

    our results of operations and financial condition, including our cash reserves, cash burn and cost level;

 

    general and industry-specific economic and regulatory conditions that may affect our ability to successfully develop and commercialize products;

 

    the loss of key employees;

 

    the introduction of technological innovations or other products by our competitors;

 

    sales of a substantial number of CDIs by our large stockholders;

 

    changes in estimates or recommendations by securities analysts, if any, who cover our common stock;

 

    issuance of shares by us, and sales in the public market of the shares issued, upon exercise of our outstanding warrants; and

 

    period-to-period fluctuations in our financial results.

For example, from the initial quotation of our shares in the form of CDIs on the Australian Securities Exchange on December 13, 2006 until March 9, 2016, the closing price per share of our shares ranged from a low of A$0.14 during May 2014 to a high of A$2.02 during the first quarter of the 2010 fiscal year and was A$0.36 on March 9, 2016. We may experience a material decline in the market price of our CDIs, regardless of our operating performance and therefore, a holder of our shares may not be able to sell those shares at or above the price paid by such holder for such shares. Sales by our larger shareholders may create volatility or impact how the value of our shares is perceived.

Class action litigation has been brought in the past against companies which have experienced volatility in the market price of their securities. We may become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts management’s attention and our resources.

Our securities are not currently traded on any United States public markets and there are currently restrictions on the ability of United States persons to acquire our securities on the ASX.

There is no public market for our shares in the United States or in any other jurisdiction other than Australia. We have not determined whether we will seek the quotation of our shares on any United States public trading market. Even if our shares are in the future listed on a United States public market, the liquidity of our shares may not improve, and the United States market price may not accurately reflect the price or prices at which purchasers or sellers would be willing to purchase or sell our common stock.

In addition, our securities are “restricted securities” as that term is defined in Rule 144 under the United States Securities Act of 1933, as amended (“Securities Act”). Restricted securities may be resold in the public market to United States persons as defined in Regulation S only if registered for resale or if they qualify for an exemption from registration under the Securities Act. We have not agreed to register any of our common stock for resale by security holders.

We may be involved in litigation.

There has been substantial litigation and other proceedings in the medical diagnostic industries. Defending against litigation and other third party claims would be costly and time consuming and would divert management’s attention from our business, which could lead to delays in our development or commercialization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business.

Changes in laws may adversely affect our business.

Our business and the business of our customers and partners are subject to the laws and regulations in a number of jurisdictions. Unforeseen changes in laws and government policy both in Australia, the EU, the US and elsewhere, could materially impact our’ operations, assets, contracts and profitability.

We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) and related regulations implemented by the SEC, have substantially increased legal and financial compliance costs. We expect that our ongoing compliance with applicable laws and regulations, including the Securities Exchange Act of 1934 as amended (“Exchange Act”) and the Sarbanes-Oxley Act, will involve significant and potentially increasing costs. In particular, we must annually evaluate our internal controls systems to allow management to report on our internal controls. We must perform the system and

 

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process evaluation and testing (and any necessary remediation) required to comply with the management certification and, when applicable, auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. If we are not able to continue to satisfy the requirements of Section 404 adequately, we may be subject to sanctions or investigation by regulatory authorities, including the SEC. Any action of this type could adversely affect our financial results, investors’ confidence in our company and our ability to access capital markets, and could cause our stock price to decline.

A significant amount of our shares are controlled by individuals or voting blocks, and the interests of such individuals or voting blocks could conflict with those of the other stockholders.

Single stockholders with significant holdings or relatively small groups of stockholders have the power to influence matters requiring the approval of stockholders. Viburnum Funds Pty Ltd, together with its associated funds and entities holds approximately 10.78% of our shares. For details of our substantial stockholders and the interests of our directors, refer to “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

We have never paid a dividend and we do not intend to pay dividends in the foreseeable future which means that holders of shares of common stock and CDIs may not receive any return on their investment from dividends.

To date, we have not declared or paid any cash dividends on our shares or CDIs and currently intend to retain any future earnings, if any, for funding growth. We do not anticipate paying any dividends in the foreseeable future.

Even if we were to declare or pay any cash dividends, we do not have any franking credits that will allow us to pass on tax paid at the company level to shareholders which can be used to reduce income tax paid on dividends by our shareholders.

Our holders of CDIs are not stockholders and do not have stockholder rights.

The main difference between holding CDIs and holding our underlying shares is that a CDI holder has beneficial ownership of the equivalent number of shares instead of legal title. CDIs are exchangeable, at the option of the holder, into shares of our common stock at a ratio of 1:1. Legal title is held by CHESS Depositary Nominees Pty Ltd (“CDN”) and the shares are registered in the name of CDN and held by CDN on behalf of and for the benefit of CDI Holders. CDN is a wholly owned subsidiary of ASX Limited. CDI holders will be entitled to all the economic benefits of the shares underlying their CDIs, such as dividends (if any), bonus issues or rights issues. CDN as a stockholder of record will receive notice of stockholder meetings and be entitled to attend and vote at stockholder meetings. CDI holders will likewise be sent notices of stockholder meetings and are entitled to attend stockholder meetings but are not permitted to vote other than by giving directions on how to vote to CDN or as a proxy holder for CDN.

Our success is reliant on the accuracy, reliability and proper use of sophisticated information processing systems and management information technology and the interruption in these systems could have a material adverse effect on our business, financial condition and results of operations.

Our success is reliant on the accuracy, reliability and proper use of sophisticated information processing systems and management information technology. Our information technology systems are designed and selected in order to facilitate the entering of order entry, customer billing, to maintain customer records, to provide product traceability, to accurately track purchases, to manage accounting, finance, administration and manufacturing, generate reports and provide customer service and technical support. Any interruption in these systems could have a material adverse effect on our business, financial condition and results of operations.

Provisions in our charter documents and under Delaware law could make the possibility of our acquisition, which may be beneficial for our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove current management.

Provisions in our certificate of incorporation and our bylaws may delay or prevent an acquisition of us or a change in our management, and frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult to remove our current directors. Such provisions include:

 

    the division of our Board into classes whose terms expire at staggered intervals over a three year period and advance notice requirements for nominations to our Board and proposing matters that can be acted upon at shareholder meetings;

 

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    the requirement that actions by our stockholders by written consent be unanimous; and

 

    the ability of our Board to issue preferred stock.

Limitation on Independent Registered Public Accounting Firm’s Liability.

The Australian accounting firm we utilize for audit reports on our financial statements is subject to limitations on liability with respect to claims arising out of their audit reports, in accordance with professional standards legislation. This legislation may limit the liability of our accountant’s for damages with respect to certain civil claims arising directly or vicariously from anything done or omitted in the performance of their professional services to us, including to the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability for audit work of A$75 million or, in relation to matters occurring prior to October 7, 2007, A$20 million. The limit does not apply to claims for breach of trust, fraud or dishonesty.

These limitations of liability may limit recovery upon the enforcement in Australian courts of any judgment under US or other foreign laws rendered against our Australian accountants based on or related to their audit report on our financial statements. Substantially all of our accountant’s assets are located in Australia. However, the professional standards legislation has not been subject to judicial consideration and therefore how the limitation will be applied by the courts and the effect of the limitation on the enforcement of foreign judgments are untested.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

 

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ITEM 2. PROPERTIES.

Universal Biosensors Pty Ltd leases approximately 5,000 square meters of office, research and development and manufacturing facilities at 1 Corporate Avenue, Rowville in Melbourne, Australia. The lease for the premises at 1 Corporate Avenue Rowville expires on March 31, 2019 with an option to renew the lease for two further terms of five years each.

We will manufacture our test strips using custom manufacturing equipment.

Depending on the number of strips required to be manufactured, it may become necessary in the future for us to acquire additional large scale equipment to satisfy manufacturing demand. If our existing facilities and equipment are fully utilized for the manufacture of test strips for one of our customers or our own products, we will need to secure additional or alternative facilities and establish additional large scale equipment sufficient to future manufacturing requirements.

 

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ITEM 3. LEGAL PROCEEDINGS.

There are no material legal or arbitration proceedings pending against us or Universal Biosensors Pty Ltd.

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market information

Our shares of common stock are not currently traded on any established United States public trading market. We have not determined whether we will seek the quotation of our shares of common stock on any United States public trading market. We cannot assure you that we will seek to be quoted on any United States public trading market or that we would meet any applicable listing requirements.

Our shares of common stock are traded on the ASX in the form of CHESS Depositary Interests, or CDIs, under the ASX trading code “UBI”. The Clearing House Electronic Subregister System, or “CHESS”, is an electronic system which manages the settlement of transactions executed on the ASX and facilitates the paperless transfer of legal title to ASX quoted securities. CHESS cannot be used directly for the transfer of securities of U.S. domiciled companies. CDIs are used as a method of holding and transferring the legal title of these securities on the ASX which are not able to be electronically traded in CHESS. CDIs are exchangeable, at the option of the holder, into shares of our common stock at a ratio of 1:1. The main difference between holding CDIs and holding the underlying securities (in this case our shares) is that a holder of CDIs has beneficial ownership of the equivalent number of our shares instead of legal title. Legal title is held by CHESS Depositary Nominees Pty Ltd, or CDN, and the shares are registered in the name of CDN and held by CDN on behalf of and for the benefit of the holders of CDIs. CDN is a wholly owned subsidiary of ASX.

Holders of CDIs who do not wish to have their trades settled in CDIs on the ASX may request that their CDIs be converted into shares, in which case legal title to the shares of common stock are transferred to the holder of the CDIs. Likewise, stockholders who wish to be able to trade on the ASX can do so by requesting that their shares be converted into CDIs and by lodging their applicable share certificate with our share registrar and signing a share transfer form with respect to the relevant shares. Our share registrar will then transfer the shares from the stockholder to CDN and establish a CDI holding in the name of the stockholder (now a CDI holder).

High and low sale prices of our CDIs on the ASX

The sale prices of our shares traded in the form of CDIs are quoted on the ASX in Australian dollars. Our CDIs were first quoted on the ASX on December 13, 2006. Twenty minute delayed trading prices of our CDIs are available through the ASX at www.asx.com.au.

The following tables sets forth, for the periods indicated, the highest and lowest market prices in Australian dollars for our CDIs reported on the ASX:

 

          High A$      Low A$  

Fiscal Year 2015

   First Quarter      0.37         0.17   
   Second Quarter      0.37         0.22   
   Third Quarter      0.43         0.30   
   Fourth Quarter      0.49         0.35   

Fiscal Year 2014

   First Quarter      0.53         0.32   
   Second Quarter      0.41         0.14   
   Third Quarter      0.20         0.15   
   Fourth Quarter      0.19         0.14   

Security details

As of March 9, 2016, there were 176,127,584 shares of our common stock issued and outstanding and 9,709,661 employee options that are exercisable for an equivalent number of shares of common stock (8,662,448 of which were exercisable or exercisable within 60 days thereafter). All of our issued and outstanding shares of common stock are fully paid.

 

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Under applicable U.S. securities laws all of the shares of our common stock are “restricted securities” as that term is defined in Rule 144 under the Securities Act. Restricted securities may be resold to U.S. persons as defined in Regulation S only if registered or if they qualify for an exemption from registration under the Securities Act, each as described in more detail below. We have not agreed to register any of our common stock for resale by security holders.

Rule 144(b)

Because there is no public trading market for the shares in the United States, no sales in the United States under Rule 144 other than Rule 144(b)(1)(i) are likely to occur. Under Rule 144(b)(1)(i), a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for between six months and one year may sell so long as the public information requirements of Rule 144 are satisfied, and, after one year, such person is entitled to sell the shares without having to comply with the public information or other provisions of Rule 144. A person who is deemed an affiliate during the 90 days preceding the sale who has beneficially owned the shares proposed to be sold for at least six months may sell so long as the conditions of Rule 144 are met, including the manner of sale, public information, volume limitation and notice filing provisions of Rule 144.

Holders

Currently, CDN holds the majority of our shares on behalf of and for the benefit of the holders of CDIs. The balance of the shares are held by certain of our employees generally as part of our restricted employee share scheme. Set out below is the aggregate number of our registered holders of CDIs and shares at the specific date below:

 

Date    Total Number of
Registered Holders
     Number of Holders that
are United States
Residents
 

At March 9, 2016

     1,834         13   

Dividends

To date, we have not declared or paid any cash dividends on our shares or CDIs and currently intend to retain any future earnings, if any, for funding growth. We do not anticipate paying any dividends in the foreseeable future.

Recent Sales of Unregistered Securities

 

    Warrants

In connection with the Credit Agreement, we granted to the lenders warrants entitling the holders to purchase an aggregate total of 4,500,000 shares of our common stock at an exercise price of A$1.00 per share, exercisable at any time until December 19, 2020 (“Warrants”). The holder of a Warrant has the option to pay the exercise price in cash or by making a cashless exercise. The number of shares of common stock to be issued on exercise of the Warrants and/or the exercise price of the Warrants will be adjusted in certain circumstances including bonus issues, pro-rata issues and reorganizations of share capital.

The issue of the Warrants was made in reliance upon the exemption from registration pursuant to Regulation D, as promulgated by the Securities Act. The holders of the Warrants may not re-sell any Warrants or shares issued upon exercise of the Warrants into the U.S. or to a U.S. Person (as defined in the Securities Act) or within Australia for a period of one year after the date of issue of the relevant security unless the re-sale of the securities is registered under the Securities Act or an exemption is available.

 

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Exercise of Employee Stock Options

The table below sets forth the number of employee stock options exercised and the number of shares of common stock issued within the past three financial years. We issued these shares in reliance upon exemptions from registration under Regulation S under the Securities Act of 1933, as amended.

 

Period Ending

   Number of
Options
Exercised and
Corresponding
Number of
Shares Issued
     Option
Exercise
Price
     Proceeds
Received

(A$)
 

2013

        

May, 2013

     40,000       US$ 0.22         9,020   

June, 2013

     708,640       US$ 0.22         167,051   

September, 2013

     75,993       US$ 0.22         18,690   

December, 2013

     672,392       US$ 0.22         165,837   
  

 

 

       

 

 

 
     1,497,025            360,598   
  

 

 

       

 

 

 

2014

        

March, 2014

     8,333       A$ 0.00         0   
  

 

 

       

 

 

 

2015

        

December, 2015

     72,496       US$ 0.26         26,127   
  

 

 

       

 

 

 

The funds raised have been and will be used for working capital requirements including the continued development of

our existing pipeline of point-of-care tests and to identify and develop additional tests.

Restricted Employee Shares Issued to Employees

Our Employee Share Plan was adopted by the Board of Directors in 2009. The Employee Share Plan permits our Board to grant shares of our common stock to our employees and directors. The number of shares able to be granted is limited to the amount permitted to be granted at law, the ASX Listing Rules and by the limits on our authorized share capital in our certificate of incorporation. All our employees are eligible for shares under the Employee Share Plan. The Company currently proposes to issue A$1,000 worth of restricted shares of common stock to employees of the Company on a recurring basis, but no more frequently than annually. The restricted shares have the same terms of issue as our existing shares of common stock but are not able to be traded until the earlier of three years from the date on which the shares are issued or the date the relevant employee ceases to be an employee of the Company or any of its associated group of companies. We issue these shares in reliance upon exemptions from registration under Regulation S under the Securities Act.

The table below sets forth the restricted shares issued by the Company within the past three financial years:

 

     Number of
Restricted Shares
Issued
     Market Value of
Restricted Shares
Issued (A$)
 

May, 2013

     917         1,000   

December, 2013

     142,800         69,972   

June, 2014

     2,040         1,000   

January, 2015

     282,555         64,988   

July, 2015

     4,347         1,000   

December, 2015

     142,208         63,994   

 

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Restricted stock awards activity during the current period is as follows:

 

     Number of shares      Weighted average
issue price

A$
 

Balance at December 31, 2014

     234,487         0.72   

Granted

     429,110         0.30   

Release of restricted shares

     (120,781      0.94   
  

 

 

    

 

 

 

Balance at December 31, 2015

     542,816         0.35   
  

 

 

    

 

 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no repurchases of equity securities in 2015.

Total Return Stock Performance Graph

The following line graph compares the cumulative total stockholder return on our common stock from December 31, 2010 through December 31, 2015 with the cumulative total return of a major market index and a published industry index. The graph below assumes an investment of A$100.00 on December 31, 2010 in our common stock, and compares its performance with the Standard and Poor’s/Australian Securities Exchange 200 Index and the Standard and Poor’s/Australian Securities Exchange Health Care 200 Index. We paid no dividends on our common stock during the period covered by the graph. The Indices included in the graph reflect a cumulative total return based upon the reinvestment of dividends of the stocks included in those indices. Measurement points are December 31, 2010 and the last trading day of each subsequent year end through December 31, 2015.

 

LOGO

The comparisons shown in the graph above are based upon historical data. The stock price performance shown in the graph is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. This graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and will not be deemed incorporated by reference into any filing under the Securities Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.

The following table represents our selected financial data for the dates and periods indicated.

 

     Years Ended December 31,  
     2015     2014     2013     2012     2011  
     A$     A$     A$     A$     A$  

Revenue

          

Revenue from products

     1,323,564        215,486        10,170,804        19,368,745        12,063,582   

Revenue from services

     15,451,414        9,314,198        4,918,868        10,277,698        2,632,870   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     16,774,978        9,529,684        15,089,672        29,646,443        14,696,452   

Operating costs & expenses

          

Cost of goods sold

     1,136,143        313,374        10,455,567        17,987,049        12,310,302   

Cost of services

     244,073        242,453        1,187,244        669,042        708,149   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold & services

     1,380,216        555,827        11,642,811        18,656,091        13,018,451   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution from products & services

     15,394,762        8,973,857        3,446,861        10,990,352        1,678,001   

Other operating costs & expenses

          

Research and development

     19,763,842        17,136,051        15,483,902        13,482,459        9,812,396   

General and administrative

     6,027,768        5,623,748        6,200,786        6,790,524        7,271,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs & expenses

     25,791,610        22,759,799        21,684,688        20,272,983        17,083,884   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,396,848     (13,785,942     (18,237,827     (9,282,631     (15,405,883

Other income/(expense)

          

Interest income

     242,574        260,904        499,970        437,171        683,323   

Interest expense

     (15,106     (15,905     (22,640     (29,263     0   

Financing costs

     (3,308,068     (2,646,092     (797,126     0        0   

Patent fees

     1,404,184        (2,133,626     0        0        0   

Marketing support payment

     (2,804,000        

Other

     8,300,848        9,004,534        6,923,816        (256,499     30,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income/(expense)

     3,820,432        4,469,815        6,604,020        151,409        713,766   

Net loss before tax

     (6,576,416     (9,316,127     (11,633,807     (9,131,222     (14,692,117

Income tax benefit/(expense)

     0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (6,576,416     (9,316,127     (11,633,807     (9,131,222     (14,692,117
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

          

Basic and diluted net loss per share

     (0.04     (0.05     (0.07     (0.06     (0.09

Average weighted number of shares - basic & diluted

     175,881,165        175,608,634        174,428,259        160,417,411        159,017,777   

Other comprehensive loss, net of tax:

          

Unrealized (loss)/gain on derivative instruments

     0        0        0        0        83,339   

Reclassification for losses/(gains) realized in net income

     0        0        0        (83,339     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)/gain

     0        0        0        (83,339     83,339   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/gain

     (6,576,416     (9,316,127     (11,633,807     (9,214,561     (14,608,778
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                                        
     Years Ended December 31,  
     2015     2014     2013     2012     2011  
     A$     A$     A$     A$     A$  

Balance Sheet Data:

          

Cash and cash equivalents

     14,350,307        16,329,829        23,742,422        23,649,417        15,089,209   

Total assets

     44,951,745        47,532,638        54,619,699        49,066,850        45,216,467   

Short term borrowings

     324,459        498,890        0        0        0   

Other liability

     3,453,710        2,133,626        0        0        0   

Long term secured loan

     19,868,560        17,499,194        15,857,966        0        0   

Total stockholders’ equity

     13,255,705        19,740,945        29,683,940        39,372,139        35,022,606   

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is incorporated by reference to our 2015 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages F2 to F16.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated by reference to our 2015 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Risk Management” on pages F15 to F16.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We refer you to the “Consolidated Balance Sheets”, “Consolidated Statements of Comprehensive Income”, “Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income”, “Consolidated Statements of Cash Flows”, and “Notes to Consolidated Financial Statements”, on pages F18 through F44, and “Report of Independent Registered Public Accounting Firm” on page F17 of our Annual Report to Stockholders for the fiscal year ended December 31, 2015, included herein.

Supplementary Financial Information

The following is a summary of the unaudited quarterly results of operations:

 

     Year ended December 31, 2015  
     Quarter Ended
March 31
     Quarter Ended
June 30
     Quarter Ended
September 30
     Quarter Ended
December 31
 
     A$      A$      A$      A$  

Revenue

           

Revenue from products

     72,117         344,289         552,617         354,541   

Revenue from services

     3,037,820         4,006,580         5,445,093         2,961,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     3,109,937         4,350,869         5,997,710         3,316,462   

Operating costs & expenses

           

Cost of goods sold

     67,140         273,026         458,644         337,333   

Cost of services

     10,960         179,993         48,751         4,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of goods sold & services

     78,100         453,019         507,395         341,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contribution from products & services

     3,031,837         3,897,850         5,490,315         2,974,760   

Other operating costs & expenses

           

Research and development

     4,941,983         4,952,733         4,987,015         4,882,111   

General and administrative

     1,624,131         1,502,167         1,529,799         1,371,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs & expenses

     6,566,114         6,454,900         6,516,814         6,253,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Profit/(loss) from operations

     (3,534,277      (2,557,050      (1,026,499      (3,279,022

Other income/(expense)

           

Interest income

     56,741         43,233         104,885         37,715   

Interest expense

     (2,834      (7,084      (4,250      (938

Financing costs

     (1,027,568      (752,544      (778,102      (749,854

Patent fees

     0         0         0         1,404,184   

Marketing support payment

     0         0         0         (2,804,000

Other

     1,640,196         2,013,594         1,541,108         3,105,950   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income/(expense)

     666,535         1,297,199         863,641         993,057   

Net loss before tax

     (2,867,742      (1,259,851      (162,858      (2,285,965

Income tax benefit/(expense)

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (2,867,742      (1,259,851      (162,858      (2,285,965
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic and diluted net loss per share

     (0.02      (0.01      0.00         (0.01

Other comprehensive loss, net of tax:

           

Unrealised gain/(loss) on derivative instruments

     0         0         0         0   

Reclassification for gain/(loss) realized in net income

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive (loss)/gain

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive loss

     (2,867,742      (1,259,851      (162,858      (2,285,965
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Year ended December 31, 2014  
     Quarter Ended
March 31
     Quarter Ended
June 30
     Quarter Ended
September 30
     Quarter Ended
December 31
 
     A$      A$      A$      A$  

Revenue

           

Revenue from products

     0         0         137,294         78,192   

Revenue from services

     1,351,951         1,513,981         1,949,297         4,498,969   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     1,351,951         1,513,981         2,086,591         4,577,161   

Operating costs & expenses

           

Cost of goods sold

     0         0         218,298         95,076   

Cost of services

     16,145         6,777         127,084         92,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of goods sold & services

     16,145         6,777         345,382         187,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contribution from products & services

     1,335,806         1,507,204         1,741,209         4,389,638   

Other operating costs & expenses

           

Research and development

     4,915,187         4,270,368         4,715,444         3,235,052   

General and administrative

     1,383,406         1,683,105         1,522,175         1,035,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs & expenses

     6,298,593         5,953,473         6,237,619         4,270,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Profit/(loss) from operations

     (4,962,787      (4,446,269      (4,496,410      119,524   

Other income/(expense)

           

Interest income

     54,348         29,501         103,398         73,657   

Interest expense

     (6,362      (4,771      (4,772      0   

Financing costs

     (657,271      (633,629      (654,095      (701,097

Patent fees

     0         0         0         (2,133,626

Other

     1,974,354         1,700,239         3,157,820         2,172,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income/(expense)

     1,365,069         1,091,340         2,602,351         (588,945

Net loss before tax

     (3,597,718      (3,354,929      (1,894,059      (469,421

Income tax benefit/(expense)

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (3,597,718      (3,354,929      (1,894,059      (469,421
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic and diluted net loss per share

     (0.02      (0.02      (0.01      (0.00

Other comprehensive loss, net of tax:

           

Reclassification for gain/(loss) realized in net income

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive (loss)/gain

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive loss

     (3,597,718      (3,354,929      (1,894,059      (469,421
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Andrew Denver, Interim Chief Executive Officer, and Salesh Balak, Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Denver and Balak concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. During the fiscal quarter ended December 31, 2015, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation referred to above in this Item 9A that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

    Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and the dispositions of the assets of the Company;

 

    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and

 

    Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

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

Our management, with the participation of the Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).

Based on this evaluation, our management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that, as of December 31, 2015, our internal control over financial reporting was effective.

 

/s/ Andrew Denver

   

/s/ Salesh Balak

Andrew Denver     Salesh Balak
Principal Executive Officer     Principal Financial Officer

March 15, 2016

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We refer you to “Report of Independent Registered Public Accounting Firm” on page F17 of our Annual Report to Stockholders for the fiscal year ended December 31, 2015, which are included herein, for the Independent Registered Public Accounting Firm’s report with respect to the effectiveness of internal control over financial reporting.

 

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ITEM 9B. OTHER INFORMATION

None.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item regarding our directors and executive officers is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC in connection with our Annual Meeting of Stockholders in 2016 (the “2016 Proxy Statement”) under the caption “Management of the Company.”

The information required by this item regarding “Compliance with Section 16(a) of the Exchange Act” is incorporated by reference to the 2016 Proxy Statement under the caption “Other Matters – Section 16(a) Beneficial Ownership Reporting Compliance.”

We have adopted our Code of Ethics for Senior Financial Officers, a code of ethics that applies to our Principal Executive Officer and Principal Financial Officer. This code of ethics may be accessed and reviewed through our website at www.universalbiosensors.com. We intend to satisfy any disclosure requirement under item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics for our Principal Executive Officer and Principal Financial Officer, by posting such information on our website at www.universalbiosensors.com

The information regarding the procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference to the 2016 Proxy Statement under the caption “Management of the Company – Board Committees – Remuneration and Nomination Committee.” There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

The information required by this item regarding our Audit and Compliance Committee is incorporated by reference to the 2016 Proxy Statement under the caption “Management of the Company – Board Committees – Audit and Compliance Committee.”

 

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ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to the 2016 Proxy Statement under the captions “Management of the Company – Compensation of Directors”, “Executive Compensation” and “Management of the Company – Board Committees – Compensation Committee Interlocks and Insider Participation.”

Discussions on the frequency of the shareholder advisory votes on executive compensation are incorporated by reference to the 2016 Proxy Statement under the caption “Executive Compensation”.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information regarding the security ownership of certain beneficial owners and management is incorporated by reference to the 2016 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”

The information regarding “Securities Authorized for Issuance under Equity Compensation Plans” is incorporated by reference to our 2016 Proxy Statement under the caption “Executive Compensation – Equity Compensation Plan Information.”

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item is incorporated by reference to the 2016 Proxy Statement under the caption “Certain Relationships and Related Transactions,” and “Management of the Company.”

 

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item is incorporated by reference to the 2016 Proxy Statement under the caption “Independent Public Accountants – Audit Fees.”

 

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.

 

(a)(1) Financial Statements

The following financial statements are incorporated by reference from pages F-17 through F-44 of our Annual Report to Stockholders for the fiscal year ended December 31, 2015, as provided in Item 8 hereof:

 

Report of Independent Registered Public Accounting Firm

     F-17   

Consolidated Balance Sheets

     F-18   

Consolidated Statements of Comprehensive Income

     F-19   

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

     F-20   

Consolidated Statements of Cash Flows

     F-21   

Notes to Consolidated Financial Statements

     F-22   

 

(a)(2) Financial Statement Schedules – Schedule II—Valuation and Qualifying Accounts. All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements.

(a)(3) and (b) Exhibits – Refer below.

 

Exhibit
Number
   Description    Location
    3.1    Amended and restated articles of incorporation dated December 5, 2006.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 3.1.
    3.2    Amended and restated by-laws dated December 5, 2006.    Incorporated by reference to our Amendment No. 5 to Form 10 filed on April 29, 2008 as Exhibit 3.2.
  10.1    Amended and Restated License Agreement, between LifeScan, Inc. and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011.    Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.1.
  10.2    Amended and Restated Development and Research Agreement between Cilag GmbH International and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011.    Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.2.
  10.3    Form of indemnity agreement entered into with directors of us, our chief financial officer and company secretary    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.3.
  10.4    Lease of premises 1 Corporate Avenue, Rowville, Victoria, Australia by and between Universal Biosensors Pty Ltd and Heyram Properties Pty Ltd.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.5.
  10.5    Employee Option Plan.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.7.
  10.6    Employment agreement between Universal Biosensors Pty Ltd and Mr. Salesh Balak effective November 27, 2006.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.8.
  10.7    Employment agreement between Universal Biosensors Pty Ltd and Mr. Garry Chambers effective April 1, 2006.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.9.
  10.8    Employment agreement between Universal Biosensors Pty Ltd and Dr Ronald Chatelier dated April 1, 2006.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.10.

 

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  10.9    Employment agreement between Universal Biosensors Pty Ltd and Dr Alastair Hodges effective April 1, 2006.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.11.
  10.10    Employment agreement between Universal Biosensors Pty Ltd and Mr. Adrian Oates dated August 15, 2007.    Incorporated by reference to our Form 10-K filed on March 16, 2010 as Exhibit 10.12.
  10.11    Amended and Restated Master Services and Supply Agreement (which amends and restates the Master Services and Supply Agreement by and between Universal Biosensors Pty. Ltd., Universal Biosensors, Inc., and LifeScan, Inc. dated October 29, 2007 filed on November 14, 2007 as Exhibit 10.1 to our Quarterly Report on Form 10-Q and the First Amendment to the Master Services and Supply Agreement filed on March 30, 2009 as Exhibit 10.14 to our Annual Report on Form 10-K).    Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.12    Manufacturing Initiation Payment Addendum to Master Services and Supply Agreement (which is an addendum to the Amended and Restated Master Services and Supply Agreement filed on August 7, 2009 as Exhibit 10.3 to our Quarterly Report on Form 10-Q).    Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.4. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.13    Collaboration Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics Inc. dated September 9, 2011.    Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.20. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.14    Statement of Work for MAP Feasibility Project between Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.    Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.21. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.15    Novation Agreement and First Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.    Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.22.
  10.16    Second Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.    Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.23. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.17    Employment agreement between Universal Biosensors Pty Ltd and Mr. Paul Wright effective March 1, 2011.    Incorporated by reference to our Current Report on Form 8-K filed on February 25, 2011 as Exhibit 10.1.

 

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  10.18    Amendment to Collaboration Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.    Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.1. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.19    Supply Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.    Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.2. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.20    Supplemental Agreement – Reader Product Support Obligations and Responsibilities between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.    Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.21    Credit Agreement dated December 19, 2013 by and among Athyrium Opportunities Fund (A) LP as Administrative Agent and a Lender, Universal Biosensors Pty Ltd as borrower, Universal Biosensors, Inc. as a Guarantor, and the other Lenders and Guarantors as party thereto from time to time.    Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.1.
  10.22    Third Amendment to Amended and Restated Master Services and Supply Agreement by and among Universal Biosensors, Inc., Universal Biosensors Pty Ltd, and Cilag GmbH International    Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.2.
  10.23    Common Stock Purchase Warrant by and among Athyrium Opportunities Fund (A) LP and Universal Biosensors, Inc.    Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.3.
  10.24    Common Stock Purchase Warrant by and among Athyrium Opportunities Fund (B) LP and Universal Biosensors, Inc.    Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.4.
  10.25   

Deed of Extension of Lease between Universal Biosensors Pty Ltd and

Bowmayne Pty Ltd dated March 24, 2014

   Incorporated by reference to our Quarterly Report on Form 10-Q filed on April 25, 2014 as Exhibit 10.34.
  10.26    Amendment dated January 30, 2015 to Credit Agreement by and among Athyrium Opportunities Fund (A) LP as Administrative Agent and a Lender, Universal Biosensors Pty Ltd as borrower, Universal Biosensors, Inc. as a Guarantor, and the other Lenders and Guarantors as party thereto from time to time    Incorporated by reference to our Current Report on Form 8-K filed on February 2, 2015 as Exhibit 10.1.
  13.0    Annual Report.    Filed herewith.
  14.0    Code of Ethics.    Incorporated by reference to our Annual Report on Form 10-K filed on March 28, 2008 as Exhibit 14.0.
  21.0    List of Subsidiaries.    Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 21.0.
  24.0    Power of Attorney.    Included on signature page.

 

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  31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.    Filed herewith.
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.    Filed herewith.
  32.0    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.    Filed herewith.
101    The following materials from the Universal Biosensors, Inc. Annual Report on Form 10-K for the financial year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Condensed Statements of Cash Flows and (v) the Notes to Consolidated Condensed Financial Statements.    As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      Universal Biosensors, Inc.
      (Registrant)
Date: March 15, 2016     By:  

/s/ Andrew Denver

      Andrew Denver
      Principal Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Andrew Denver and Salesh Balak and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys in-fact and agents or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/    Andrew Denver        

   Executive Chairman and Interim Chief Executive Officer   March 15, 2016
Andrew Denver    (Principal Executive Officer)  

/s/    Salesh Balak        

   Chief Financial Officer   March 15, 2016
Salesh Balak    (Principal Financial Officer and Principal Accounting Officer)  

/s/    David Hoey        

   Director   March 15, 2016
David Hoey     

/s/    Denis Hanley        

   Director   March 15, 2016
Denis Hanley     

/s/    Judith Smith        

   Director   March 15, 2016
Judith Smith     

/s/    Marshall Heinberg        

   Director   March 15, 2016
Marshall Heinberg     

 

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INDEX TO EXHIBITS

 

Exhibit
Number
   Description        Location
    3.1    Amended and restated articles of incorporation dated December 5, 2006.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 3.1.
    3.2    Amended and restated by-laws dated December 5, 2006.      Incorporated by reference to our Amendment No. 5 to Form 10 filed on April 29, 2008 as Exhibit 3.2.
  10.1    Amended and Restated License Agreement, between LifeScan, Inc. and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011.      Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.1.
  10.2    Amended and Restated Development and Research Agreement between Cilag GmbH International and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011.      Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.2.
  10.3    Form of indemnity agreement entered into with directors of us, our chief financial officer and company secretary      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.3.
  10.4    Lease of premises 1 Corporate Avenue, Rowville, Victoria, Australia by and between Universal Biosensors Pty Ltd and Heyram Properties Pty Ltd.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.5.
  10.5    Employee Option Plan.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.7.
  10.6    Employment agreement between Universal Biosensors Pty Ltd and Mr. Salesh Balak effective November 27, 2006.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.8.
  10.7    Employment agreement between Universal Biosensors Pty Ltd and Mr. Garry Chambers effective April 1, 2006.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.9.
  10.8    Employment agreement between Universal Biosensors Pty Ltd and Dr Ronald Chatelier dated April 1, 2006.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.10.
  10.9    Employment agreement between Universal Biosensors Pty Ltd and Dr Alastair Hodges effective April 1, 2006.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.11.
  10.10    Employment agreement between Universal Biosensors Pty Ltd and Mr. Adrian Oates dated August 15, 2007.      Incorporated by reference to our Form 10-K filed on March 16, 2010 as Exhibit 10.12.
  10.11    Amended and Restated Master Services and Supply Agreement (which amends and restates the Master Services and Supply Agreement by and between Universal Biosensors Pty. Ltd., Universal Biosensors, Inc., and LifeScan, Inc. dated October 29, 2007 filed on November 14, 2007 as Exhibit 10.1 to our Quarterly Report on Form 10-Q and the First Amendment to the Master Services and Supply Agreement filed on March 30, 2009 as Exhibit 10.14 to our Annual Report on Form 10-K).      Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.

 

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  10.12    Manufacturing Initiation Payment Addendum to Master Services and Supply Agreement (which is an addendum to the Amended and Restated Master Services and Supply Agreement filed on August 7, 2009 as Exhibit 10.3 to our Quarterly Report on Form 10-Q).      Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.4. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.13   

Collaboration Agreement between

Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics Inc. dated September 9, 2011.

     Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.20. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.14    Statement of Work for MAP Feasibility Project between Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.      Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.21. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.15    Novation Agreement and First Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.      Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.22.
  10.16    Second Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011.      Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.23. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.17    Employment agreement between Universal Biosensors Pty Ltd and Mr. Paul Wright effective March 1, 2011.      Incorporated by reference to our Current Report on Form 8-K filed on February 25, 2011 as Exhibit 10.1.
  10.18    Amendment to Collaboration Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.      Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.1. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.19    Supply Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.      Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.2. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.20    Supplemental Agreement – Reader Product Support Obligations and Responsibilities between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012.      Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC.
  10.21    Credit Agreement dated December 19, 2013 by and among Athyrium Opportunities Fund (A) LP as Administrative Agent and a Lender, Universal Biosensors Pty Ltd as borrower, Universal Biosensors, Inc. as a Guarantor, and the other Lenders and Guarantors as party thereto from time to time.      Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.1.

 

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  10.22    Third Amendment to Amended and Restated Master Services and Supply Agreement by and among Universal Biosensors, Inc., Universal Biosensors Pty Ltd, and Cilag GmbH International      Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.2.
  10.23    Common Stock Purchase Warrant by and among Athyrium Opportunities Fund (A) LP and Universal Biosensors, Inc.      Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.3.
  10.24    Common Stock Purchase Warrant by and among Athyrium Opportunities Fund (B) LP and Universal Biosensors, Inc.      Incorporated by reference to our Current Report on Form 8-K filed on December 20, 2013 as Exhibit 10.4.
  10.25    Deed of Extension of Lease between Universal Biosensors Pty Ltd and Bowmayne Pty Ltd dated March 24, 2014      Incorporated by reference to our Quarterly Report on Form 10-Q filed on April 25, 2014 as Exhibit 10.34.
  10.26    Amendment dated January 30, 2015 to Credit Agreement by and among Athyrium Opportunities Fund (A) LP as Administrative Agent and a Lender, Universal Biosensors Pty Ltd as borrower, Universal Biosensors, Inc. as a Guarantor, and the other Lenders and Guarantors as party thereto from time to time      Incorporated by reference to our Current Report on Form 8-K filed on February 2, 2015 as Exhibit 10.1.
  13.0    Annual Report.      Filed herewith.
  14.0    Code of Ethics.      Incorporated by reference to our Annual Report on Form 10-K filed on March 28, 2008 as Exhibit 14.0.
  21.0    List of Subsidiaries.      Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 21.0.
  24.0    Power of Attorney.      Included on signature page.
  31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.      Filed herewith.
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.      Filed herewith.
  32.0    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.      Filed herewith.
101    The following materials from the Universal Biosensors, Inc. Annual Report on Form 10-K for the financial year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Condensed Statements of Cash Flows and (v) the Notes to Consolidated Condensed Financial Statements.      As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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Universal Biosensors, Inc.

2015 Annual Report

 

 

Contents

 

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

     F-2   

Report of Independent Registered Public Accounting Firm

     F-17   

Consolidated Balance Sheets

     F-18   

Consolidated Statements of Comprehensive Income

     F-19   

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

     F-20   

Consolidated Statements of Cash Flows

     F-21   

Notes to Consolidated Financial Statements

     F-22   

Schedule ii – Valuation and Qualifying Accounts

     F-44   

Unless otherwise noted, references on this Annual Report to “Universal Biosensors”, the “Company,” “Group,” “we,” “our” or “us” means Universal Biosensors, Inc. (“UBI”) a Delaware corporation and, when applicable, its wholly owned Australian operating subsidiary, Universal Biosensors Pty Ltd (“UBS”).

 

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

Universal Biosensors, Inc.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and other forward-looking information, including the types of forward looking statements described in our Form 10-K. Our (and our customer’s, partners’ and industry’s) actual results, levels of activity, performance or achievements may differ materially from those discussed in the forward-looking statements below and elsewhere in our Form 10-K. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our Form 10-K, particularly in “Risk Factors.”

Our Business

We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Key aspects of our strategy include:

 

    manufacturing products (test strips and analyzers) for our customers and partners as required;

 

    extending our electrochemical cell technology and demonstrating the broader application of our technology platform for markets with significant commercial potential. In particular, we are developing our own PT-INR test for use in decentralized settings including the patient self-test market;

 

    seeking to enter into collaborative, strategic or distribution arrangements with other life sciences companies or other industry participants with respect to the development and commercialization of specific tests or specific fields. We are currently negotiating distribution arrangements with respect to initial target markets for our own PT-INR test;

 

    undertaking research and development work for our customers and partners;

 

    providing post market support services to our customers and partners.

Our plan of operations over the remainder of the fiscal year ending December 2016 is to:

 

    manufacture products to satisfy our customers and partners requirements;

 

    continue to undertake research and development work for our customers and partners;

 

    provide the necessary post-market support for our customers and partners;

 

    demonstrate the broader application of our technology platform for markets with significant commercial potential, focusing initially on enzymatic, immunoassay and molecular diagnostic point-of-care tests;

 

    seek to enter into collaborative, strategic or distribution arrangements with other life sciences companies or other industry participants with respect to the development and commercialization of specific tests or specific fields.

We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests (“CDIs”) have been quoted on the Australian Securities Exchange (“ASX”) since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, UBS was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our research, development and manufacturing activities in Melbourne, Australia.

We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS by LifeScan and other third party licensors. Unless otherwise noted, references to “LifeScan” in this document are references collectively or individually to LifeScan, Inc., and/or LifeScan Europe, a division of Cilag GmbH International, both affiliates of Johnson and Johnson.

We are using our electrochemical cell technology platform to develop point-of-care testing systems for a number of different markets. Our current focus is as set out below:

 

   

Coagulation testing market – we are working with Siemens Healthcare Diagnostics, Inc. (“Siemens”) in relation to a range of products for the point-of-care coagulation testing market, pursuant to a Collaboration Agreement with Siemens (“Collaboration Agreement”). The first such product developed with Siemens, the Xprecia Stride™ Coagulation Analyzer, received CE mark approval on December 9, 2014 and is now being released by Siemens in Europe. In July 2015, Siemens made a premarket 510(k) submission to the US Food and Drug Administration (“FDA”) for regulatory clearance to sell the

 

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

Universal Biosensors, Inc.

 

 

Xprecia Stride™ Coagulation Analyzer in the US. Under the terms of a supply agreement with Siemens (“Supply Agreement”), UBS is the manufacturer of test strips for this product and two further tests still in development for Siemens. We are also developing our own Prothrombin Time International Normalized Ratio (“PT-INR”) test for use in decentralized settings including the patient self-test market and are currently negotiating arrangements with distributors in initial markets with respect to that test.

 

    Blood glucose – we provide services to LifeScan as required from time to time, pursuant to a Master Services and Supply Agreement (“Master Services and Supply Agreement”) and a development and research agreement (“Development and Research Agreement”) with LifeScan.

 

    Other electrochemical-cell based tests – we are working on demonstrating the broader application of our technology platform, including its application to diagnostic tests based on enzymatic, immunoassay and molecular diagnostic methods. We may seek to enter into collaborative arrangements, strategic alliances or distribution agreements with respect to any products or technologies arising from this work.

Results of Operations

Analysis of Consolidated Revenue

Our total revenue during the 2015 financial year increased by 76% to A$16,774,978 compared to 2014.Our 2014 total revenues were 37% below 2013 levels.

The major driver of the decline in revenues from 2013 to 2014 was due to the decline and eventual exit from low margin blood glucose strip manufacturing at our Rowville facility. However, underlying these major factors has been a significant increase of quarterly service fees revenues over this three year period resulting from the increased sales of the OneTouch® Verio® blood glucose test strips by LifeScan.

Revenue from Products

Between 2009 and 2013, we acted as a non-exclusive manufacturer of blood glucose test strips for LifeScan’s OneTouch® Verio® blood glucose testing product. With effect from December 31, 2013, we ceased the manufacture of the OneTouch® Verio® blood glucose test strips for LifeScan. Manufacture of the OneTouch® Verio® strips has been transitioned to LifeScan’s existing facility in Inverness, Scotland. We commenced manufacture of the PT-INR test strips on behalf of Siemens during the third quarter of 2014.

The financial results of the test strips we manufactured during the respective periods are as follows:

 

     Years Ended December 31,  
     2015     2014     2013  
     A$     A$     A$  

Revenue from products

     1,323,564        215,486        10,170,804   

Cost of goods sold

     (1,136,143     (313,374     (10,455,567
  

 

 

   

 

 

   

 

 

 
     187,421        (97,888     (284,763
  

 

 

   

 

 

   

 

 

 

Gross margin

     14     -45     -3

 

(i) PT-INR test strips (2015 and 2014)

The revenues from the manufacture and sale of PT-INR strips to Siemens were initially low as Siemens were undertaking a limited marketing release of the product in Europe. The revenues have increased since the second quarter of 2015 following the full commercial launch by Siemens of the Xprecia StrideTM Coagulation Analyzer after successful completion of its limited European release. The production margin from the sale of our PT-INR strips is low, reflecting early stage production.

Revenue from Services

We provide various services to our customers and partners. The revenue is grouped into the following categories:

 

    Product enhancement – a quarterly service fee based on the number of strips sold by LifeScan is payable to us as an ongoing reward for our services and efforts to enhance the product;

 

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

Universal Biosensors, Inc.

 

    Contract research and development – we undertake contract research and development on behalf of our customers and partners;

 

    Other services – ad-hoc services provided on an agreed basis according to our customers and partners requirements.

There are different arrangements for each service being provided. The net margin during the respective periods in relation to the provision of services is as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Revenue from services:

        

Quarterly service fee

     12,828,861         6,448,033         3,405,881   

Contract research and development

     1,955,340         1,750,486         479,893   

Other services

     667,213         1,115,679         1,033,094   
  

 

 

    

 

 

    

 

 

 
     15,451,414         9,314,198         4,918,868   

Cost of services

     (244,073      (242,453      (1,187,244
  

 

 

    

 

 

    

 

 

 

Net margin

     15,207,341         9,071,745         3,731,624   
  

 

 

    

 

 

    

 

 

 

Quarterly service fee - The quarterly service fee paid by LifeScan increased by 99% during the 2015 financial year compared to the 2014 financial year and by 89% during the 2014 financial year when compared to the 2013 financial year, reflecting ongoing market penetration and growth. In March 2013, LifeScan initiated a voluntary recall and replacement for a majority of its OneTouch® Verio® blood glucose meters worldwide, which impacted sales in 2013. The issue giving rise to the meter recall has been addressed. The recall did not relate to the blood glucose testing strips manufactured by us.

2015 was the first year wherein the volume of OneTouch® Verio® blood glucose test strips sold exceeded 500 million strips. When the cumulative strip sales exceed 500 million in a calendar year, the quarterly service fees per strip falls from US$0.0125 per strip for the first 500 million strips to US$0.0075 per strip for sales in excess of 500 million within that calendar year. The price per strip resets to US$0.0125 at the beginning of every calendar year.

LifeScan has the ability to terminate the obligation to pay quarterly service fees to us in certain situations set out in the Master Services and Supply Agreement or with the agreement of Universal Biosensors. LifeScan has the option to give notice to convert the quarterly service fees, which it may only do so once it has paid cumulative quarterly service fees of US$45 million. As of December 31, 2015, LifeScan had paid cumulative quarterly service fees of US$21.3 million. Where it gives such notice, LifeScan is required to continue to pay the quarterly service fees for the remainder of the year in which notice is given and at the end of that year, LifeScan must pay a one-time lump sum fee. This fee is calculated by multiplying the sum of all quarterly service fees for the relevant year in which notice is given by a multiplier (on a sliding scale from 2.4x if notice is given in 2016 to 2x if notice is given in 2018 and beyond). Following the payment of this one-time fee, LifeScan would have no further obligation to pay quarterly service fees to Universal Biosensors.

By way of illustration only, if the growth trend in quarterly service fees continues, there is a scenario in which cumulative quarterly service fees reach US$45 million at September 30, 2017. Assume under this scenario, LifeScan gives notice to Universal Biosensors on October 1, 2017 that it is exercising its option to convert the quarterly service fees. If quarterly service fees for the financial year 2017 total US$16 million, (with US$4 million from October 1 to December 31, 2017) and LifeScan elects to pay the one-time lump sum fee at the earliest possible date being January 1, 2018, the Company would receive US$63.2 million (equivalent to A$86.5 million) in payments under the Master Services and Supply Agreement from January 1, 2016. These payments would be calculated as follows:

 

    US$24.0 million (equivalent to A$32.8 million) quarterly service fees from January, 2016 to September 30, 2017, (being quarterly service fees remaining which would paid by LifeScan from January 1, 2016 until cumulative quarterly service fees reaches US$45 million); plus

 

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

Universal Biosensors, Inc.

 

    US$4.0 million (equivalent to A$5.5 million) in quarterly service fees from October 1, 2017 to December 31, 2017, (being the remainder of the year in which notice is given); plus

 

    US$35.2 million (equivalent to A$48.2 million) in one-time lump sum fee, equal to 2.2 multiplier (which is the applicable multiplier for 2017) by 2017 total quarterly service fees of US$16 million.

The above scenario and calculation is an illustration only and there can be no assurance that sales of OneTouch® Verio® strips by LifeScan will be achieved (in the manner described in the illustration above or otherwise) or such quarterly service fees will be paid to Universal Biosensors or that LifeScan will exercise its option to make the one-time lump sum fee when it is entitled to do so.

LifeScan may also terminate the obligation to pay quarterly service fees if certain other factors detailed in the Master Services and Supply Agreement arise, including LifeScan ceasing to sell the product, termination for breach, insolvency and bankruptcy, change of control and regulatory termination.

Contract research and development - The nature and scope of contract research and development is determined by our customers and partners based upon their requirements and therefore our revenues and margins tend to fluctuate. Revenue from contract research and development related to services provided to Siemens as follows:

 

    We generated revenues of A$479,893 during 2013 as reimbursement of costs for additional meter development work we undertook on behalf of Siemens.

 

    In December 2014, the Company delivered on its third milestone under the Collaboration Agreement with Siemens when it completed the development work of the Xprecia Stride™ Coagulation Analyzer and the same was launched by Siemens in Europe. Of the total amount of A$1,750,486 (equivalent to US$1,428,571) recognized as revenue from services in 2014 for this milestone, A$1,225,340 (equivalent to US$1.0 million) relates to the achievement of the milestone whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones.

 

    In July 2015, the Company delivered on its fourth milestone when Siemens made a premarket 510(k) submission to the FDA for regulatory clearance to sell the Xprecia Stride™ Coagulation System in the US. Of the total amount of A$1,955,340 (equivalent to US$1,428,571) recognized as revenue from services in 2015 for this milestone, A$1,368,738 (equivalent to US$1,000,000) relates to the achievement of the milestone whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones.

Other services - We generated revenues principally from Siemens based on work undertaken for them.

Contribution from Products & Services

The net contribution from our products and services is as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Quarterly service fees

     12,828,861         6,448,033         3,405,881   

Manufacturing contribution

     187,421         (97,888      (284,763

Milestone payments

     1,955,340         1,750,486         0   

Other services

     423,140         873,226         325,743   
  

 

 

    

 

 

    

 

 

 

Contribution from products & services

     15,394,762         8,973,857         3,446,861   
  

 

 

    

 

 

    

 

 

 

The increase in period-to-period total contributions from products and services reflected in the table above is primarily represented by the growth in the quarterly service fee which has a 100% margin and the receipt of the third and fourth milestone payments pursuant to the Collaboration Agreement.

The manufacturing contribution for financial years 2015 and 2014 represents sale of our PT-INR strips which is low, reflecting early stage production. Contribution from other services fluctuated over the period due to our partners R&D services requirements.

 

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

Universal Biosensors, Inc.

 

Research and Development Expenses

Research and development expenses are related to the development of new technologies and products based on the electrochemical cell platform.

The Company conducts research and development activities to build an expanding portfolio of product-based revenues and cash flows and increase the value of UBI’s core technology assets. Research is focused on demonstrating technical feasibility of new technology applications. Development activity is focused on turning these technology platforms into commercial-ready product and represents the majority of the Company’s research and development expenses.

Research and development expenses consist of costs associated with research activities, as well as costs associated with our product development efforts, including pilot manufacturing costs. Research and development expenses include:

 

  consultant and employee related expenses, which include consulting fees, salary and benefits;

 

  materials and consumables acquired for the research and development activities;

 

  external research and development expenses incurred under agreements with third party organizations and universities; and

 

  facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

Our principal research and development activities can be described as follows:

(a) Blood coagulation testing

In September 2011 we entered into a Collaboration Agreement with Siemens which was amended in September 2012 and March 2016, pursuant to which we will develop a range of test strips and reader products for the hospital point-of-care and alternative site coagulation testing markets. The first such product developed with Siemens, the Xprecia Stride™ Coagulation Analyzer, received CE mark approval on December 9, 2014 and was released by Siemens in Europe. In July 2015, Siemens made a premarket 510(k) submission to the FDA for regulatory clearance to sell the Xprecia Stride™ Coagulation Analyzer in the US. In 2012, we entered into a Supply Agreement with Siemens under which we manufacture and supply the test strips for this product and will manufacture and supply the test strips for two further tests still in development with Siemens. We are also developing our own PT-INR test for use in decentralized settings including the patient self-test market.

(b) Immunoassay

We are continuing to develop our immunoassay platform targeting a broad range of potential assays. Our vision is to target a single analyzer and consumable design that can detect analytes across a wide range of sensitivities creating a broad-based multi-test solution while minimizing the incremental research and development effort required for each new test. As well as a wide range of immunoassay based tests, it is intended that this platform will incorporate the ability to perform D-Dimer and C Reactive Protein tests and leverage past research work on these assays.

This work is currently in the feasibility phase.

(c) DNA/RNA

We have undertaken some early stage feasibility work assessing the possibility of using DNA binding chemistries to build a low-cost test for DNA, RNA and as a possible alternative method for improving the sensitivity of protein assays. This concept work is at an early stage and may not yield any positive results. To enable us to access certain molecular diagnostic technology, we entered into a license with SpeeDx Pty Ltd (“SpeeDx”). SpeeDx is an Australian technology company focused on the development of catalytic nucleic acid enzymes for medical diagnostics and other applications.

 

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

Universal Biosensors, Inc.

 

Research and development expenses for the respective periods are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Research

     1,296,396         1,194,323         1,829,411   

Development

     18,467,446         15,941,728         13,654,491   
  

 

 

    

 

 

    

 

 

 

Research and development expenses

     19,763,842         17,136,051         15,483,902   
  

 

 

    

 

 

    

 

 

 

Depending on the scope of research and development activities we undertake and the stages of development of each of these activities, our research and development expenditure will fluctuate.

In converting an idea or a concept into a commercial product, a number of development stages are required. As an idea or concept is developed into a commercial-ready product, technical risk reduces, but the effort and cost expended increases. In our research and development program, the first phase is conducting exploratory research and feasibility studies. In this phase the idea is investigated by a small focused team to establish the viability of the concept as the base for a product. Once this hurdle has been passed, the project enters the development phases, which include building prototype strips and instruments, finalizing the product design, carrying out extensive testing, creating the required documentation and developing or validating the product manufacturing processes. This requires a larger group of people and a higher use of materials compared to the research phase, so is typically more expensive, but necessary to be able to commercialize a product.

Research and development expenditure increased by 15% during 2015 compared to 2014 and increased by 11% during 2014 compared to 2013. During these three years, our research and development activities were primarily focused around the blood coagulation platform. The increase principally reflects the effort required to complete the latter stages of the development phase prior to launch of the various tests we are developing. The first of the tests, the Xprecia Stride™ Coagulation Analyzer, was launched by Siemens in December 2014.

Research and development expenses, net of the research and development tax incentive income for the respective periods are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Research and development expenses

     19,763,842         17,136,051         15,483,902   

Research and development tax incentive income

     (9,224,349      (9,935,083      (6,279,954
  

 

 

    

 

 

    

 

 

 
     10,539,493         7,200,968         9,203,948   
  

 

 

    

 

 

    

 

 

 

Included in the research and development tax incentive income for the 2014 financial year is an amount of A$1,735,083 which relates to research and development tax incentive income the Company received from the Australian Government for the year ended December 31, 2013 following a change in the original estimate. We expect to receive A$9.2 million as research and development tax incentive income for the 2015 financial year.

The non-cash components of depreciation and share based payments expense included in the research and development expenditure are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Depreciation

     2,349,502         2,296,374         610,111   

Share based payments

     (48,750      (461,824      256,870   
  

 

 

    

 

 

    

 

 

 
     2,300,752         1,834,550         866,981   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

Universal Biosensors, Inc.

 

While we have a degree of control as to how much we spend on research and development activities in the future, we cannot predict what it will cost to complete our individual research and development programs successfully or when or if they will be commercialized. The timing and cost of any program is dependent upon achieving technical objectives, which are inherently uncertain.

In addition, our business strategy contemplates that we may enter into collaborative arrangements with third parties for one or more of our non-blood glucose programs. In the event that we are successful in securing such third party collaborative arrangements, the third party may direct the research and development activities and may contribute towards all or part of the cost of these activities, both of which will influence our research and development expenditure. Research and development activities undertaken on behalf of our customers and partners were A$9,014,377, A$9,971,035 and A$10,401,575, respectively for 2015, 2014 and 2013.

General and Administrative Expenses

General and administrative expenses currently consist principally of salaries and related costs, including stock option expense, for personnel in executive, business development, finance, accounting, information technology and human resources functions. Other general and administrative expenses include depreciation, repairs and maintenance, insurance, facility costs not otherwise included in research and development expenses, consultancy fees and professional fees for legal, audit and accounting services. General and administrative expenses are generally fixed in nature.

General and administrative expenses for the respective periods are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

General and administrative expenses

     6,027,768         5,623,748         6,200,786   
  

 

 

    

 

 

    

 

 

 

General and administrative expenses increased by 7% during 2015 compared to 2014 and decreased by 9% during 2014 compared to 2013. Although management strives to restrict or minimize spending on non-core activities, as reflected during the 2014 financial year when compared to 2013, the increases in this expenditure during 2015 was primarily driven by increase in employee emoluments noting that shares and options, being non-cash costs, were issued to employees twice during the 2015 financial year. Shares and options issued in the first quarter of 2015 were however for the 2014 financial year.

The non-cash components of depreciation and share based payments expense included in the general and administrative expenditure are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Depreciation

     126,438         124,093         72,165   

Share based payments

     (16,182      (166,044      280,830   
  

 

 

    

 

 

    

 

 

 
     110,256         (41,951      352,995   
  

 

 

    

 

 

    

 

 

 

Interest Income

Interest income decreased by 7% during 2015 compared to 2014 and decreased by 48% during 2014 compared to 2013. The decrease in interest income is generally attributable to the lower amount of funds available for investment in Australian currency and lower interest rates on offer. A large portion of our funds is held in US denominated currency which currently does not produce any investment interest.

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Interest income

     242,574         260,904         499,970   
  

 

 

    

 

 

    

 

 

 

 

F-8


Table of Contents

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

Universal Biosensors, Inc.

 

Interest Expense

Interest expense predominantly relates to interest being charged on a short-term borrowing initiated by the Company each year. These short-term loans are taken out every year to fund our insurance premiums and are repaid during the financial year. Decrease in interest is in line with the interest rate charged to us every year. The interest rates were 2.84%, 2.88% and 2.95% for the financial years 2015, 2014 and 2013, respectively.

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Interest expense

     15,106         15,905         22,640   
  

 

 

    

 

 

    

 

 

 

Financing Costs

In December 2013, UBS accessed new capital via a US$25,000,000 loan facility of which US$15,000,000 was drawn in December 2013. The breakdown of the financing costs is as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Interest expense

     2,358,016         1,962,740         64,666   

Other debt issuance costs

     950,052         683,352         732,460   
  

 

 

    

 

 

    

 

 

 
     3,308,068         2,646,092         797,126   
  

 

 

    

 

 

    

 

 

 

Interest expense relates to applicable interest of 10.5% levied on the loan. The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the loan. Increase in financing costs in 2015 when compared to 2014 is attributable to the weakening of the AUD (as defined below) against the United States dollar (“USD”), noting that our loan facility and all associated repayments are made in USD. There was also a one-off cost of US$200,000 incurred in 2015 in extending the Company’s option to draw down a further US$10 million until July 31, 2015. The 2013 charges relates to costs incurred since the inception of the loan in December 2013. A$710,101 of the debt issuance costs is attributable to attending to the preparation, review and finalization of the loan documentation in 2013.

Patent Fees

We have an obligation to pay 50% of the patent fees paid by LifeScan in respect of the patents we license from LifeScan prior to the date of the first commercial sale of a non-glucose product that utilizes the technology licensed from LifeScan and 50% of the patent fees incurred by LifeScan in respect of such patents thereafter. This obligation was triggered with the first commercial sale of the Xprecia StrideTM Coagulation Analyzer by Siemens in December 2014. An amount of US$1.75 million was initially accrued in December 2014. However, subsequent to LifeScan providing all the supporting documentation and our due diligence, the Company and LifeScan agreed to revise this amount to US$517,831 (equivalent to A$708,775) during the fourth quarter of 2015. The repayment of this amount to LifeScan, which commenced in November 2015, is being made over a 24 month period in equal monthly installments. The patent fees payable to LifeScan have been recorded as “Other liability” in consolidated balance sheets. As a result of the revision of the amount due to LifeScan, this resulted in reversal of the patent fees in 2014. This amount has been recorded as “Patent Fees” in the consolidated statements of comprehensive income.

Marketing Support Payment

During 2009, LifeScan chose not to proceed with the registration of the then current product but to proceed with an enhanced product, called OneTouch® Verio®, and acknowledged that there would be a delay as a result. As a result of this change, LifeScan agreed to pay additional amounts per strip manufactured by us in 2010 and 2011 up to a specified volume limit (“manufacturing initiation payments”). At the same time, we agreed to pay LifeScan a marketing support payment in each of the two years following

 

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Table of Contents

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

Universal Biosensors, Inc.

 

the first year in which 1 billion strips are sold by LifeScan equal to 40% of the total manufacturing initiation payments made. LifeScan has sold just over 900 million strips in the 2015 financial year. Management has concluded that this loss contingency be accrued in 2015 as “Other liability” in consolidated balance sheets as it is both probable and the amount can be reliably estimated. The total amount of marketing support payments to be paid to LifeScan is US$2,048,602 (equivalent to A$2,804,000).

Other

Recorded under this caption are research and development tax incentive income and foreign exchange movements.

The Company has recorded research and development tax incentive income of A$6,279,954 for 2013 but received an amount of $8,015,037 as research and tax development incentive income in September 2014. Of the A$9,935,083 research and development tax incentive recorded for the year ended December 31, 2014, A$1,735,083 relate to research and development tax incentive income the Company received from the Australian Government for the year ended December 31, 2013 following a change in original estimate. The change in estimate was due to the fact the research and development tax incentives were introduced in 2011 and were dependent on the level of qualifying research and development expenditure. The research and development tax incentive recorded was based on the estimated amount which was probable of collection in the year ended December 31, 2013, the first year in which the Company became eligible for this incentive. The Company expects to receive and has recorded research and development tax incentive income of A$9,224,349 for 2015. The remaining balance after the research and development tax incentive income for all years under this caption is primarily represented by foreign exchange movements arising from the settlement of foreign denominated transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies.

The research and development tax incentive receivable has been recorded as “Other current assets” in the consolidated balance sheets.

The research and development tax incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system. It was developed to assist businesses recover some of the costs of undertaking research and development. The research and development tax incentive provides a tax offset to eligible companies that engage in research and development activities.

Companies engaged in research and development may be eligible for either:

 

    a 45% refundable tax offset for entities with an aggregated turnover of less than A$20 million per annum, (note the current legislative rate is 45% but the Australian Government has announced that it intends on proceeding with the reduction in rate to 43.5%), or

 

    a 40% non-refundable tax offset for all other entities (note the current legislative rate is 40% but the Australian Government has announced that it intends on proceeding with the reduction in rate to 38.5%).

Critical Accounting Estimates and Judgments

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.

We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

(a) Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred.

In addition, the Company enters into arrangements, which contain multiple revenue generating activities. The revenue for these arrangements is recognized as each activity is performed or delivered, based on the relative fair value and the allocation of revenue to all deliverables based on their relative selling price. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocation of revenue to deliverables, vendor-specific objective evidence, third-party evidence of selling price and the Company’s best estimate of selling price. The Company’s process for determining its best estimate of selling price for deliverables without vendor-specific objective evidence or third-party evidence of selling price involves management’s judgment. The Company’s process considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable.

(b) Stock-Based Compensation

We account for stock-based employee compensation arrangements using the modified prospective method as prescribed in accordance with the provisions of ASC 718 – Compensation – Stock Compensation.

Each of the inputs to the Trinomial Lattice model is discussed below.

Share Price and Exercise Price at Valuation Date

With the exception of Zero Exercise Price Employee Options (“ZEPOs”), the exercise price of the options granted has been determined using the closing price of our common stock trading in the form of CDIs on ASX at the time of grant of the options. The exercise price of ZEPOs is nil. The ASX is the only exchange upon which our securities are quoted.

Volatility

We applied volatility having regard to the historical price change of our shares in the form of CDIs available from the ASX.

Time to Expiry

All options granted under our share option plan have a maximum 10 year term and are non-transferable.

Risk Free Rate

The risk free rate which we applied is equivalent to the yield on an Australian government bond with a time to expiry approximately equal to the expected time to expiry on the options being valued.

(c) Income Taxes

We apply ASC 740 – Income Taxes which establishes financial accounting and reporting standards for the effects of income taxes that result from a company’s activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Where it is more likely than not that some portion or all of the deferred tax assets will not be realized the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

(d) Impairment of Long-Lived Assets

We review our capital assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. In performing the review, we estimate undiscounted cash flows from products under development that are covered by these patents and licenses. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset. If the evaluation indicates that the carrying value of an asset is not recoverable from its undiscounted cash flows, an impairment loss is measured by comparing the carrying value of the asset to its fair value, based on discounted cash flows.

(e) Warrants

In connection with our US$15 million loan facility, we issued to the Lenders warrants entitling the holder to purchase up to an aggregate total of 4.5 million shares of UBI’s common stock in the form of CDIs at a price of A$1.00 per share. The fair value of the warrants to purchase common stock is estimated using the Trinomial Lattice model. Each of the inputs to the Trinomial Lattice model is discussed below.

Share Price and Exercise Price at Valuation Date

The share price of the warrants granted has been determined using the closing price of our common stock trading in the form of CDIs on ASX at the time of entering in to the loan facility. The ASX is the only exchange upon which our securities are quoted. The exercise price has been determined as stated in the Credit Agreement. For further details, see Notes to Consolidated Financial Statements – Note 16, Summary of Significant Accounting Policies – Borrowings – Athyrium Credit Agreement.

Volatility

We applied volatility having regard to the historical price change of our shares in the form of CDIs available from the ASX.

Time to Expiry

The warrants have a term of seven years.

Risk Free Rate

The risk free rate which we applied is equivalent to the yield on an Australian government bond with a time to expiry approximately equal to the expected time to expiry on the warrants to purchase common stock being valued.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

Financial Condition, Liquidity and Capital Resources

Net Financial Assets/(Liabilities)

Our net financial assets/(liabilities) position is shown below:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Financial assets:

        

Cash and cash equivalents

     14,350,307         16,329,829         23,742,422   

Accounts receivables

     3,153,584         3,799,705         2,167,867   
  

 

 

    

 

 

    

 

 

 

Total financial assets

     17,503,891         20,129,534         25,910,289   
  

 

 

    

 

 

    

 

 

 

Debt:

        

Short term borrowings

     324,459         498,890         0   

Long term secured loan

     19,868,560         17,499,194         15,857,966   
  

 

 

    

 

 

    

 

 

 

Total debt

     20,193,019         17,998,084         15,857,966   
  

 

 

    

 

 

    

 

 

 

Net financial assets/(liabilities)

     (2,689,128      2,131,450         10,052,323   
  

 

 

    

 

 

    

 

 

 

Since inception, we have financed our business primarily through the issuance of equity securities, funding from strategic partners, government grants and rebates (including the research and development tax incentive income), revenue from services and product sales, and the loan discussed below.

On December 19, 2013 we entered into a Credit Agreement which was subsequently amended in January 2015 with Lenders for a US$25 million secured term loan. The term loan has a maturity date of December 19, 2018 and bears interest at 10.5% per annum. Interest payments are due quarterly over the five-year term of the term loan and, other than as described elsewhere herein, we are not required to make payments of principal for amounts outstanding under the term loan until the Maturity Date (as defined below). Subject to certain exceptions, the term loan is secured by substantially all of our assets, including our intellectual property. As a major portion of our net financial assets/(liabilities) is denominated in USD, including the long term secured loan, the weakening of the AUD against the USD has resulted in a decline in our net financial assets.

We believe we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months.

The carrying value of the cash and cash equivalents and the accounts receivables approximates fair value because of their short-term nature.

We regularly review all our financial assets for impairment. There were no impairments recognized for the years ended December 31, 2015, 2014 and 2013.

Derivative Instruments and Hedging Activities

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. For years ended December 31, 2015, 2014 and 2013, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates, and incorporates non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2.

We had no outstanding contracts as at December 31, 2015, 2014 and 2013, respectively. The fair value of these contracts at December 31, 2015, 2014 and 2013 were nil. During the years ended December 31, 2015, 2014 and 2013, we recognized gains of nil. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the years ended December 31, 2015, 2014 and 2013. For further details, see Notes to Consolidated Financial Statements – Note 2, Summary of Significant Accounting Policies.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

Measures of Liquidity and Capital Resources

The following table provides certain relevant measures of liquidity and capital resources:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Cash and cash equivalents

     14,350,307         16,329,829         23,742,422   

Working capital

     24,041,164         23,779,492         30,367,292   

Ratio of current assets to current liabilities

     6.03 : 1         4.66 : 1         6.60 : 1   

Shareholders’ equity per common share

     0.08         0.11         0.17   

The movement in cash and cash equivalents and working capital during the above periods was primarily due to outflows arising from the effort required to complete the development of the new products, servicing of the secured loan and the timing of payments and accruals in the ordinary course of business. The outflows in the above periods have been more than offset by the increased quarterly service fees from LifeScan, receipt of a milestone each in the years 2015 and 2014 from Siemens and the research and development tax incentive income in each of the above periods. In addition to the reductions resulting from operating outflows of cash, a loan of US$15,000,000 (equivalent to A$16,909,029) was drawn in December 2013 by UBS pursuant to the Credit Agreement.

We have not identified any collection issues with respect to receivables.

Summary of Cash Flows

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Cash provided by/(used in):

        

Operating activities

     (527,840      (7,468,062      (16,628,576

Investing activities

     (1,270,392      (947,386      (159,437

Financing activities

     (1,378,658      261,742         16,339,630   
  

 

 

    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (3,176,890      (8,153,706      (448,383
  

 

 

    

 

 

    

 

 

 

Our net cash provided by or used in operating activities for all periods represents receipts offset by payments for our research and development projects including efforts involved in establishing and maintaining our manufacturing operations, interest on our long term secured loan and general and administrative expenditure. The improvement in operating cash flows during the 2015 financial year is primarily due to the increased receipts from quarterly service fees from LifeScan, receipt of two milestone payments from Siemens, receipt of the research and development tax incentive income and the weakening of the AUD against the USD.

Our net cash used in investing activities for all periods is primarily for the purchase of various plant and equipment in preparation for anticipated growth in coagulation strip manufacturing volumes.

Our net cash used in financing activities principally represents financing charges made to the Lenders pursuant to the Credit Agreement. We drew down on the initial loan of US$15,000,000 (equivalent to A$16,909,029) pursuant to the Credit Agreement in December 2013.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

Off-Balance Sheet Arrangement

The future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2015 are:

 

     A$  

Less than 1 year

     568,229   

1 – 3 years

     1,190,538   

3 – 5 years

     152,047   

More than 5 years

     0   
  

 

 

 

Total minimum lease payments

     1,910,814   
  

 

 

 

The above relates to our operating lease obligations in relation to the lease of our premises and certain office equipment.

Contractual Obligations

Our future contractual obligations at December 31, 2015 were as follows:

 

     Payments Due By Period  
     Total      Less than 1
year
     1 – 3 years      3 – 5 years      More than 5
years
 
     A$      A$      A$      A$      A$  

Asset Retirement Obligations (1)

     2,600,000         0         0         2,600,000         0   

Operating Lease Obligations (2)

     1,910,814         568,229         1,190,538         152,047         0   

Purchase Obligations (3)

     950,764         950,764         0         0         0   

Long term secured loan (4)

     19,868,560         0         19,868,560         0         0   

Financing costs (5)

     7,133,777         2,410,861         4,722,916         0         0   

Other liability (6)

     3,453,710         354,387         3,099,323         0         0   

Other Long-Term Liabilities on Balance Sheet (7)

     172,574         0         140,490         29,535         2,549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     36,090,199         4,284,241         29,021,827         2,781,582         2,549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents legal obligations associated with the retirement and removal of long-lived assets.
(2) Our operating lease obligations relate primarily to the lease of our premises.
(3) Represents outstanding purchase orders
(4) US$15 million payable to the lenders on maturity date pursuant to the Credit Agreement.
(5) Interest and other debt issuance costs payable to the lenders pursuant to the Credit Agreement
(6) Represents patent fees and marketing support fees payable to LifeScan
(7) Represents long service leave owing to the employees.

Segments

We operate in one segment. Our principal activities are research and development, commercial manufacture of approved medical or testing devices and the provision of services including contract research work.

We operate predominantly in one geographical area, being Australia.

Recent Accounting Pronouncements

See Notes to Consolidated Financial Statements – Note 2, Summary of Significant Accounting Policies.

Financial Risk Management

The overall objective of our financial risk management program is to seek to minimize the impact of foreign exchange rate movements and interest rate movements on our earnings. We manage these financial exposures through operational means and by using financial instruments. These practices may change as economic conditions change.

 

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Table of Contents

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

Universal Biosensors, Inc.

 

Foreign Currency Market Risk

We transact business in various foreign currencies, including U.S. dollars and Euros. We have established a foreign currency hedging program using forward contracts to hedge the net projected exposure for each currency and the anticipated sales and purchases in U.S. dollars and Euros. The goal of this hedging program is to economically guarantee or lock-in the exchange rates on our foreign exchange exposures. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Although the Company has a hedging program, as at balance sheet date there were no open derivatives that would need to be disclosed.

Specifically, in relation to the secured term loan, we have established a program to reduce or even eliminate the impact of any foreign exchange exposure. The secured term loan is denominated in USD and the bullet repayment of US$15 million in December 2018 is to be made in USD as well. The goal is to build our USD cash reserves which will reduce our foreign exchange exposure until the cash reserves reach US$15 million at which time the foreign exchange exposure will be eliminated. We expect to build our USD cash reserves from our US receipts to US$15 million before the secured term loan is repaid. On this basis, during the interim period, our foreign exchange exposure will only be to translation losses and there should not be any realised losses when the secured term loan is repaid.

Interest Rate Risk

Since the majority of our investments are in cash and cash equivalents in U.S. or Australian dollars, our interest income is affected by changes in the general level of U.S. and Australian interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Our investment portfolio is subject to interest rate risk but due to the short duration of our investment portfolio, we believe an immediate 10% change in interest rates would not be material to our financial condition or results of operations.

Inflation

Our business is subject to the general risks of inflation. Our results of operations depend on our ability to anticipate and react to changes in the price of raw materials and other related costs over which we may have little control. Our inability to anticipate and respond effectively to an adverse change in the price could have a significant adverse effect on our results of operations. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.

 

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Table of Contents

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Universal Biosensors, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Universal Biosensors, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers

Sydney, Australia

March 15, 2016

 

 

PricewaterhouseCoopers, ABN 52 780 433 757

Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171

T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au

 

F-17


Table of Contents

Universal Biosensors, Inc.

Consolidated Balance Sheets

 

     December 31,
2015
    December 31,
2014
 
     A$     A$  

ASSETS

    

Current assets:

    

Cash and cash equivalents

     14,350,307        16,329,829   

Inventories, net

     355,268        397,450   

Accounts receivable

     3,153,584        3,799,705   

Prepayments

     1,408,943        1,132,634   

Other current assets

     9,555,441        8,616,354   
  

 

 

   

 

 

 

Total current assets

     28,823,543        30,275,972   

Non-current assets:

    

Property, plant and equipment

     35,563,364        34,304,365   

Less accumulated depreciation

     (22,655,162     (19,967,699
  

 

 

   

 

 

 

Property, plant and equipment - net

     12,908,202        14,336,666   
  

 

 

   

 

 

 

Other non-current assets

     3,220,000        2,920,000   
  

 

 

   

 

 

 

Total non-current assets

     16,128,202        17,256,666   
  

 

 

   

 

 

 

Total assets

     44,951,745        47,532,638   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

     894,677        480,523   

Accrued expenses

     1,905,724        1,640,982   

Borrowings

     324,459        498,890   

Other liability

     354,387        1,066,813   

Deferred revenue

     0        1,567,562   

Employee entitlements provision

     1,303,132        1,241,710   
  

 

 

   

 

 

 

Total current liabilities

     4,782,379        6,496,480   

Non-current liabilities:

    

Asset retirement obligations

     2,600,000        2,600,000   

Employee entitlements provision

     172,574        129,206   

Long term secured loan

     19,868,560        17,499,194   

Other liability

     3,099,323        1,066,813   

Deferred revenue

     1,173,204        0   
  

 

 

   

 

 

 

Total non-current liabilities

     26,913,661        21,295,213   
  

 

 

   

 

 

 

Total liabilities

     31,696,040        27,791,693   
  

 

 

   

 

 

 

Commitments and contingencies

     0        0   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, US$0.01 par value. Authorized 1,000,000 shares; issued and outstanding nil in 2015 (2014: nil)

     0     

Common stock, US$0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 176,112,584 shares in 2015 (2014: 175,610,978)

     17,611        17,561   

Additional paid-in capital

     94,419,308        94,328,182   

Accumulated deficit

     (74,306,486     (64,990,359

Current year loss

     (6,576,416     (9,316,127

Accumulated other comprehensive income

     (298,312     (298,312
  

 

 

   

 

 

 

Total stockholders’ equity

     13,255,705        19,740,945   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

     44,951,745        47,532,638   
  

 

 

   

 

 

 

See accompanying notes to the financial statements

 

F-18


Table of Contents

Universal Biosensors, Inc.

 

Consolidated Statements of Comprehensive Income

 

     Years Ended December 31,  
     2015     2014     2013  
     A$     A$     A$  

Revenue

      

Revenue from products

     1,323,564        215,486        10,170,804   

Revenue from services

     15,451,414        9,314,198        4,918,868   
  

 

 

   

 

 

   

 

 

 

Total revenue

     16,774,978        9,529,684        15,089,672   

Operating costs & expenses

      

Cost of goods sold

     1,136,143        313,374        10,455,567   

Cost of services

     244,073        242,453        1,187,244   
  

 

 

   

 

 

   

 

 

 

Total cost of goods sold & services

     1,380,216        555,827        11,642,811   

Contribution from products & services

     15,394,762        8,973,857        3,446,861   

Other operating costs & expenses

      

Research and development

     19,763,842        17,136,051        15,483,902   

General and administrative

     6,027,768        5,623,748        6,200,786   
  

 

 

   

 

 

   

 

 

 

Total operating costs & expenses

     25,791,610        22,759,799        21,684,688   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,396,848     (13,785,942     (18,237,827

Other income/(expense)

      

Interest income

     242,574        260,904        499,970   

Interest expense

     (15,106     (15,905     (22,640

Financing costs

     (3,308,068     (2,646,092     (797,126

Patent fees

     1,404,184        (2,133,626     0   

Marketing support payment

     (2,804,000     0        0   

Other

     8,300,848        9,004,534        6,923,816   
  

 

 

   

 

 

   

 

 

 

Total other income

     3,820,432        4,469,815        6,604,020   

Net loss before tax

     (6,576,416     (9,316,127     (11,633,807

Income tax benefit/(expense)

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (6,576,416   $ (9,316,127   $ (11,633,807
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic and diluted net loss per share

     (0.04     (0.05     (0.07

Other comprehensive loss, net of tax:

      

Unrealized gain on derivative instruments

     0        0        0   

Reclassification for gains realized in net income

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)/gain

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (6,576,416     (9,316,127     (11,633,807
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

F-19


Table of Contents

Universal Biosensors, Inc.

 

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

 

    

 

Ordinary shares

     Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 
     Shares      Amount           
            A$      A$     A$     A$     A$  

Balances at January 1, 2013

     173,959,863         17,396         93,009,607        (53,356,552     (298,312     39,372,139   

Net loss

     0         0         0        (11,633,807     0        (11,633,807

Issuance of warrants

     0         0         923,104        0        0        923,104   

Exercise of stock options issued to employees

     1,497,025         150         360,448        0        0        360,598   

Shares issued to employees

     143,717         14         70,958        0        0        70,972   

Stock option expense

     0         0         590,934        0        0        590,934   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013

     175,600,605         17,560         94,955,051        (64,990,359     (298,312     29,683,940   

Net loss

     0         0         0        (9,316,127     0        (9,316,127

Exercise of stock options issued to employees

     8,333         0         0        0        0        0   

Shares issued to employees

     2,040         1         999        0        0        1,000   

Stock option expense

     0         0         (627,868     0        0        (627,868
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

     175,610,978         17,561         94,328,182        (74,306,486     (298,312     19,740,945   

Net loss

     0         0         0        (6,576,416     0        (6,576,416

Exercise of stock options issued to employees

     72,496         7         26,120        0        0        26,127   

Shares issued to employees

     429,110         43         129,938        0        0        129,981   

Stock option expense

     0         0         (64,932     0        0        (64,932
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2015

     176,112,584         17,611         94,419,308        (80,882,902     (298,312     13,255,705   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

F-20


Table of Contents

Universal Biosensors, Inc.

 

Consolidated Statements of Cash Flows

 

     Years Ended December 31,  
     2015     2014     2013  
     A$     A$     A$  

Cash flows from operating activities provided by/(used in):

      

Net loss

     (6,576,416     (9,316,127     (11,633,807

Adjustments to reconcile net profit/(loss) to net cash provided by/(used in) operating activities:

      

Depreciation and amortization

     2,697,151        2,512,946        2,497,345   

Share based payments expense

     (64,932     (627,868     590,934   

Loss on fixed assets disposal

     329        16,195        4,544   

Unrealized foreign exchange losses

     953,010        718,336        114,568   

Financing costs - amortization of warrants

     218,988        181,779        5,994   

Change in assets and liabilities:

      

Inventory

     42,182        (393,243     3,598,030   

Accounts receivables

     646,121        (1,631,838     404,418   

Prepaid expenses and other assets

     (1,028,500     126,095        (10,824,351

Deferred revenue

     (394,358     (348,270     257,755   

Employee entitlements

     234,770        64,077        98,841   

Accounts payable and accrued expenses

     2,743,815        1,229,856        (1,742,847
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (527,840     (7,468,062     (16,628,576
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Proceeds from sale of property, plant and equipment

     0        7,941        0   

Purchases of property, plant and equipment

     (1,270,392     (955,327     (159,437
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,270,392     (947,386     (159,437
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from borrowings

     360,510        1,051,662        17,676,500   

Repayment of borrowings

     (534,941     (552,772     (767,471

Borrowing costs

     (1,230,354     (237,148     (929,997

Proceeds from stock options exercised

     26,127        0        360,598   
  

 

 

   

 

 

   

 

 

 

Net cash provided by/(used in) financing activities

     (1,378,658     261,742        16,339,630   
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,176,890     (8,153,706     (448,383

Cash and cash equivalent at beginning of period

     16,329,829        23,742,422        23,649,417   

Effect of exchange rate fluctuations on the balances of cash held in foreign currencies

     1,197,368        741,113        541,388   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     14,350,307        16,329,829        23,742,422   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the financial statement

 

F-21


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

(1) Basis of Presentation

These consolidated financial statements are presented in accordance with “U.S. GAAP”. All amounts are expressed in Australian dollars (“AUD” or “A$”) unless otherwise stated.

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. We rely largely on our existing cash and cash equivalents balance and operating cash flow to provide for the working capital needs of our operations. We believe we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. However, in the event, our financing needs for the foreseeable future are not able to be met by our existing cash and cash equivalents balance and operating cash flow, we would seek to raise funds through public or private equity offerings, debt financings, and through other means to meet the financing requirements. There is no assurance that funding would be available at acceptable terms, if at all.

 

(2) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, UBS. All intercompany balances and transactions have been eliminated on consolidation.

Use of Estimates

The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, deferred income taxes, asset retirement obligations and obligations related to employee benefits. Actual results could differ from those estimates.

Cash & Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. For cash and cash equivalents, the carrying amount approximates fair value due to the short maturity of those instruments.

Short-Term Investments (Held-to-maturity)

Short-term investments constitute all highly liquid investments with term to maturity from three months to twelve months. The carrying amount of short-term investments is equivalent to their fair value.

Concentration of Credit Risk and Other Risks and Uncertainties

Cash and cash equivalents and accounts receivable consist of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the consolidated balance sheets. The Company’s cash and cash equivalents are invested with one of Australia’s largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash or cash equivalents to the extent of the amount recorded on the consolidated balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company has not identified any collectability issues with respect to receivables.

Derivative Instruments and Hedging Activities

Derivative financial instruments

The Company may use derivative financial instruments to hedge its exposure to foreign exchange arising from operating, investing and financing activities. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognized immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged.

 

F-22


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Cash flow hedges

Exposure to foreign exchange risks arises in the normal course of the Company’s business and it is the Company’s policy to use forward exchange contracts to hedge anticipated sales and purchases in foreign currencies. The amount of forward cover taken is in accordance with approved policy and internal forecasts.

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability, or a highly probable forecast transaction, the effective part of any unrealized gain or loss on the derivative financial instrument is recognized directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability.

For cash flow hedges, other than those covered by the preceding statement, the associated cumulative gain or loss is removed from equity and recognized in the consolidated statements of comprehensive income in the same period or periods during which the hedged forecast transaction affects the consolidated statements of comprehensive income and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognized immediately in the consolidated statements of comprehensive income.

When a hedging instrument expires or is sold, terminated or exercised, or the Company revokes designation of the hedge relationship but the hedged forecast transaction is still probable to occur, the cumulative gain or loss at that point remains in equity and is recognized in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealized gain or loss recognized in equity is recognized immediately in the consolidated statements of comprehensive income.

Derivative Instruments and Hedging Activities

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. For years ended December 31, 2013, 2014 and 2015, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives are based on the market approach using observable market inputs, such as forward rates and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2. The fair value methodologies described as Level 2 and 3 inputs are defined elsewhere in these notes to the consolidated financial statements.

Inventory

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to dispose. Inventories are principally determined under the average cost method which approximates cost. Cost comprises direct materials, direct labour and an appropriate portion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost also includes the transfer from equity of any gains/losses on qualifying cash flow hedges relating to purchases of raw material. Costs of purchased inventory are determined after deducting rebates and discounts.

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Raw materials

     270,683         351,007         4,169   

Work in progress

     52,841         46,443         38   

Finished goods

     31,744         0         —     
  

 

 

    

 

 

    

 

 

 
     355,268         397,450         4,207   
  

 

 

    

 

 

    

 

 

 

 

F-23


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Receivables

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on a review of individual accounts for collectability, generally focusing on those accounts that are past due. The current year expense to adjust the allowance for doubtful accounts, if any, is recorded within general and administrative expenses in the consolidated statements of comprehensive income. Account balances are charged against the allowance when it is probable the receivable will not be recovered.

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Accounts receivable

     3,153,584         3,799,705         2,167,867   

Allowance for doubtful debts

     0         0         0   
  

 

 

    

 

 

    

 

 

 
     3,153,584         3,799,705         2,167,867   
  

 

 

    

 

 

    

 

 

 

Property, Plant, and Equipment

Property, plant, and equipment are recorded at acquisition cost, less accumulated depreciation.

Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful life of machinery and equipment is 3 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations as incurred, include normal services, and do not include items of a capital nature.

Research and Development

Research and development expenses consist of costs incurred to further the Group’s research and product development activities and include salaries and related employee benefits, costs associated with clinical trial and preclinical development, regulatory activities, research-related overhead expenses, costs associated with the manufacture of clinical trial material, costs associated with developing a commercial manufacturing process, costs for consultants and related contract research, facility costs and depreciation. Research and development costs are expensed as incurred.

Research and development expenses for the respective periods are as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Research

     1,296,396         1,194,323         1,829,411   

Development

     18,467,446         15,941,728         13,654,491   
  

 

 

    

 

 

    

 

 

 

Research and development expenses

     19,763,842         17,136,051         15,483,902   
  

 

 

    

 

 

    

 

 

 

Income Taxes

The Company applies ASC 740 - Income Taxes which establishes financial accounting and reporting standards for the effects of income taxes that result from a company’s activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Where it is more likely than not that some portion or all of the deferred tax assets will not be realized, the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. A reconciliation of the valuation and qualifying accounts is attached as Schedule ii.

 

F-24


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

We are subject to income taxes in the United States and Australia. U.S. federal income tax returns up to and including the 2014 financial year have been filed. Internationally, consolidated income tax returns up to and including the 2014 financial year have been filed.

Asset Retirement Obligations

Asset retirement obligations (“ARO”) are legal obligations associated with the retirement and removal of long-lived assets. ASC 410 – Asset Retirement and Environmental Obligations requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred. When the liability is initially recorded, the Company capitalizes the cost by increasing the carrying amounts of the related property, plant and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful life of the asset. The Company derecognizes ARO liabilities when the related obligations are settled.

The ARO is in relation to our premises where in accordance with the terms of the lease, the lessee has to restore part of the building upon vacating the premises.

Our overall ARO changed as follows:

 

     Years Ended December 31,  
     2015      2014      2013  
     A$      A$      A$  

Opening balance at January 1

     2,600,000         2,549,928         2,351,464   

Accretion expense

     0         50,072         198,464   
  

 

 

    

 

 

    

 

 

 

Ending balance at December 31

     2,600,000         2,600,000         2,549,928   
  

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. The estimated fair value of all other amounts has been determined, depending on the nature and complexity of the assets or the liability, by using one or all of the following approaches:

 

    Market approach – based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

 

    Cost approach – based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.

 

    Income approach – based on the present value of a future stream of net cash flows

These fair value methodologies depend on the following types of inputs:

 

    Quoted prices for identical assets or liabilities in active markets (Level 1 inputs)

 

    Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs)

 

    Unobservable inputs that reflect estimates and assumptions (Level 3 inputs)

Impairment of Long-Lived Assets

The Company reviews its capital assets, including patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. In performing the review, the Company estimates undiscounted cash flows from products under development that are covered by these patents and licenses. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset. If the evaluation indicates that the carrying value of an asset is not recoverable from its undiscounted cash flows, an impairment loss is measured by comparing the carrying value of the asset to its fair value, based on discounted cash flows.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Australian Goods and Services Tax (GST)

Revenues, expenses and assets are recognized net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognized as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheets.

Revenue Recognition

We recognize revenue from all sources based on the provisions of the U.S. SEC’s Staff Accounting Bulletin No. 104 and ASC 605 Revenue Recognition.

The Company’s revenue represents revenue from sales of products, provision of services and collaborative research and development agreements.

We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership, assuming all other revenue recognition criteria have been met. Generally, this is at the time products are shipped to the customer.

Revenue from services is recognized when a persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue recognition principles are assessed for each new contractual arrangement and the appropriate accounting is determined for each service.

Where our agreements contain multiple elements, or deliverables, such as the manufacture and sale of products, provision of services or research and development activities, they are assessed to determine whether separate delivery of the individual elements of such arrangements comprises more than one unit of accounting. Where an arrangement can be divided into separate units of accounting (each unit constituting a separate earnings process), the arrangement consideration is allocated amongst those varying units based on the relative selling price of the separate units of accounting and the applicable revenue recognition criteria applied to the separate units. Selling prices are determined using fair value as determined by either vendor specific objective evidence or third party evidence of the selling price, when available, or the Company’s best estimate of selling price when fair value is not available for a given unit of accounting.

Under ASC 605-25, the delivered item(s) are separate units of accounting, provided (i) the delivered item(s) have value to a customer on a stand-alone basis, and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Where the arrangement cannot be divided into separate units, the individual deliverables are combined as a single unit of accounting and the total arrangement consideration is recognized across other deliverables in the arrangement or over the estimated collaboration period. Payments under these arrangements typically include one or more of the following: non-refundable, upfront payments; funding of research and/or development efforts; and milestone payments.

We typically generate milestone payments from our customers pursuant to the various agreements we have with them. Non-refundable milestone payments which represent the achievement of a significant technical/regulatory hurdle in the research and development process pursuant to collaborative agreements, and are deemed to be substantive, are recognized as revenue upon the achievement of the specified milestone. If the non-refundable milestone payment is not substantive or stand-alone value, the non-refundable milestone payment is deferred and recognized as revenue either over the estimated performance period stipulated in the agreement or across other deliverables in the arrangement.

Management has concluded that the core operations of the Company are expected to be the research and development activities, commercial manufacture of approved medical or testing devices and the provision of services. The Company’s ultimate goal is to utilize the underlying technology and skill base for the development of marketable products that the Company will manufacture. The Company considers revenue from the sales of products, revenue from services and the income received from milestone payments indicative of its core operating activities or revenue producing goals of the Company, and as such have accounted for this income as “revenues”.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Master Services and Supply Agreement

In October 2007, the Company and LifeScan entered into a Master Services and Supply Agreement, under which the Company would provide certain services to LifeScan in the field of blood glucose monitoring and act as a non-exclusive manufacturer of blood glucose test strips. The Master Services and Supply Agreement was subsequently amended and restated in May 2009. The Company has concluded the Master Services and Supply Agreement should be accounted for as three separate units of accounting: 1) research and development to assist LifeScan in receiving regulatory clearance to sell the blood glucose product (milestone payment), 2) contract manufacturing of the blood glucose test strips (contract manufacturing) which ceased in December 2013, and 3) ongoing services and efforts to enhance the product (product enhancement).

All consideration within the Master Services and Supply Agreement is contingent. The Company concluded the undelivered items were not priced at a significant incremental discount to the delivered items and revenue for each deliverable will be recognized as each contingency is met and the consideration becomes fixed and determinable. The milestone payment was considered to be a substantive payment and the entire amount has been recognized as revenue when the regulatory approval was received. Revenues for contract manufacturing and ongoing efforts to enhance the product are recognized as revenue from products or revenue from services, respectively, when the four basic criteria for revenue recognition are met.

Collaboration Agreement

On September 9, 2011 the Company entered into a Collaboration Agreement with Siemens to develop coagulation related products for hospital point-of-care and ambulatory care coagulation markets. In addition to an up-front, non-refundable payment of A$2,961,245 (equivalent to US$3 million), the Collaboration Agreement (as amended) contains a further seven payments from Siemens upon the achievement of certain defined milestones. These seven milestones to a large extent relate to feasibility, regulatory submissions and the launch of the products to be developed. The Company has concluded that the up-front payment is not a separate unit of accounting and recorded the amount as deferred revenue to be recognized as revenue across other deliverables in the arrangement with Siemens based upon the Company’s best estimate of selling price. The deliverables related to each milestone are considered substantive and are not priced at a significant incremental discount to the other deliverables. As the achievement of the milestones is contingent upon a future event, the revenue for each deliverable will be recognized as the contingencies are met and the consideration becomes fixed and determinable.

Of the seven remaining milestones, the Company has delivered on four as of December 31, 2015. Two milestones were delivered in 2012 and the milestones achieved subsequent to January 1, 2013 are as follows:

 

    In December 2014, the Company delivered on its third milestone when it completed the development of the Xprecia Stride™ Coagulation Analyzer and the same was launched by Siemens. Of the total amount of A$1,750,486 (equivalent to US$1,428,571) recognized as revenue from services in December 2014, A$1,225,340 (equivalent to US$1,000,000) relates to the achievement of the milestone whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones.

 

    In July 2015, the Company delivered on its fourth milestone when Siemens made a premarket 510(k) submission to the FDA for regulatory clearance to sell the Xprecia Stride™ Coagulation System in the US. Of the total amount of A$1,955,340 (equivalent to US$1,428,571) recognized as revenue from services in July 2015, A$1,368,738 (equivalent to US$1,000,000) relates to the achievement of the milestone whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones.

Interest income

Interest income is recognized as it accrues, taking into account the effective yield on the cash and cash equivalents.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Research and development tax incentive income

Research and development tax incentive income is recognized when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured. The research and development tax incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system and is supported by legislative law primarily in the form of the Australian Income Tax Assessment Act 1997 as long as eligibility criteria are met. Generally speaking, entities which are an R&D entity involved in eligible R&D activities with an aggregated turnover (which generally means an entity’s total income that it derives in the ordinary course of carrying on a business, subject to certain exclusions) of less than A$20 million are eligible to claim research and development tax incentive income. In accordance with SEC Regulation S-X Article 5-03, the Company’s research and development incentive income has been recognized as non-operating income as it is not indicative of the core operating activities or revenue producing goals of the Company.

Management has assessed the Company’s research and development activities and expenditures to determine which are likely to be eligible under the tax incentive regime described above. At each period end management estimates the refundable tax offset available to the Company based on available information at the time. This estimate is also reviewed by external tax advisors on an annual basis.

The Company has recorded research and development tax incentive income of A$9,224,349, A$9,935,083 and A$6,279,954, respectively under the caption “Other” in the consolidated statements of comprehensive income in each of the years ended December 31, 2015, 2014 and 2013, respectively.

Of the A$9,935,083 research and development tax incentive recorded in other income for the year ended December 31, 2014, A$1,735,083 relates to research and development tax incentive income the Company received from the Australian Government for the year ended December 31, 2013 following a change in the original estimate. The change in estimate was due to the fact the research and development tax incentives were introduced in 2011 and were dependent on the level of qualifying research and development expenditure. The research and development tax incentive recorded was based on the estimated amount which was probable of collection in the year ended December 31, 2013, the first year in which the Company became eligible for this incentive.

Foreign Currency

Functional and reporting currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the Company and UBS is AUD or A$ for all years presented.

The consolidated financial statements are presented using a reporting currency of Australian dollars.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of comprehensive income.

The Company has recorded foreign currency transaction gains/(losses) of (A$959,343), (A$918,479) and A$643,862 in each of the years ended December 31, 2015, 2014 and 2013, respectively.

The results and financial position of all the Group entities that have a functional currency different from the reporting currency are translated into the reporting currency as follows:

 

  assets and liabilities for each balance sheet item reported are translated at the closing rate at the date of that balance sheet;

 

  income and expenses for each income statement item reported are translated at average exchange rates (unless this is not a reasonable approximation of the effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

 

  all resulting exchange differences are recognized as a separate component of equity.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

On consolidation, exchange differences arising from the translation of any net investment in foreign entities are taken to the Accumulated Other Comprehensive Income.

Commitments and Contingencies

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Our contingent liabilities as at December 31, 2015 are as follows:

 

    we have engaged Planet Innovation Pty Ltd (“Planet Innovation”) to assist us with design and engineering for future analyzers. As part of the agreement, Planet Innovation will receive a milestone payment on the launch sign-off for each of the analyzers. These milestone payments are expected to total A$600,000. The milestones have not been accrued as the analyzers Planet Innovation is currently working on are in the research and development phases and it is uncertain whether these milestones will be achieved.

 

    we have engaged Hydrix Pty Ltd (“Hydrix”) to assist us with design and engineering for a future analyzer. As part of this agreement, Hydrix will receive a milestone payment of A$545,000 upon forwarding us the completed Design History File (50%) and Design Master Records (50%) of the analyzer, at our acceptance. The milestones have not been accrued as the analyzer Hydrix is currently working on is in the research and development phase and it is uncertain whether these milestones will be achieved.

Patent and License Costs

Legal and maintenance fees incurred for patent application costs have been charged to expense and reported in research and development expense.

Clinical Trial Expenses

Clinical trial costs are a component of research and development expenses. These expenses include fees paid to participating hospitals and other service providers, which conduct certain testing activities on behalf of the Company. Depending on the timing of payments to the service providers and the level of service provided, the Company records prepaid or accrued expenses relating to these costs.

These prepaid or accrued expenses are based on estimates of the work performed under service agreements.

Leased Assets

All of the Company’s leases for the years ended December 31, 2015, 2014 and 2013 are considered operating leases. The costs of operating leases are charged to the consolidated statements of comprehensive income on a straight-line basis over the lease term.

Stock-based Compensation

We measure stock-based compensation at grant date, based on the estimated fair value of the award, and recognize the cost as an expense on a straight-line basis over the vesting period of the award. We estimate the fair value of stock options using the Trinomial Lattice model. We also grant our employees Restricted Stock Units (“RSUs”) and ZEPOs. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests. ZEPOs are stock options granted to employees that entitle the holder to shares of common stock as the award vests. The value of RSUs are determined and fixed on the grant date based on the Company’s stock price. The exercise price of ZEPOs is nil. See note 5 for further details.

We record deferred tax assets for awards that will result in deductions on our income tax returns, based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported in our income tax return are recorded in expense or in capital in excess of par value if the tax deduction exceeds the deferred tax assets or to the extent that previously recognized credits to paid-in-capital are still available if the tax deduction is less than the deferred tax asset.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Employee Benefit Costs

The Company contributes to standard defined contribution superannuation funds on behalf of all employees. This contribution amount, formerly equal to 9% of each employee’s salary, was increased by law to 9.25% from July 1, 2013 and 9.50% from July 1, 2014 of each such employee’s salary. Superannuation is a compulsory savings program whereby employers are required to pay a portion of an employee’s remuneration to an approved superannuation fund that the employee is typically not able to access until they are retired. Whilst the Company has a default superannuation fund, it permits employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the consolidated statements of comprehensive income as they become payable.

Net Loss per Share and Anti-dilutive Securities

Basic and diluted net loss per share is presented in conformity with ASC 260 – Earnings per Share. Basic and diluted net loss per share has been computed using the weighted-average number of common shares outstanding during the period. Other than in a profit making year, the potentially dilutive options issued under the Universal Biosensors Employee Option Plan (refer to Note 5(a) for details of options outstanding) were not considered in the computation of diluted net loss per share because they would be anti-dilutive given the Company’s loss making position.

Total Comprehensive Income

The Company follows ASC 220 – Comprehensive Income. Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders, and for the Company, includes net income.

The tax effect allocated to each component of other comprehensive income is as follows:

 

     Before-Tax
Amount
A$
    

Tax (Expense)/

Benefit

A$

     Net-of-Tax
Amount
A$
 

2015

        

Unrealized loss on derivative instruments

     0         0         0   

Reclassification for gains realised in net income

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     0         0         0   
  

 

 

    

 

 

    

 

 

 

2014

        

Unrealized loss on derivative instruments

     0         0         0   

Reclassification for gains realised in net income

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     0         0         0   
  

 

 

    

 

 

    

 

 

 

2013

        

Unrealized loss on derivative instruments

     0         0         0   

Reclassification for gains realised in net income

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Revision

In March 2016, the Company identified an error in the 2014 consolidated financial statements pertaining to the classification of interest payments within the Consolidated Statement of Cash Flows. As a result, the 2014 comparative cash flows have been revised to reclassify interest paid from financing to operating cash flows. This results in a $2,054,193 increase in net cash used in operating activities to $7,468,052 in 2014 and a corresponding change in cash flows from financing activities resulting in net cash provided by financing activities of $261,742 in 2014. The Group concluded that this was not material to the consolidated statements of cash flows for 2014 and there was no revision to the 2013 Consolidated Statement of Cash Flows nor any impact on pre-tax income, net income or earnings per share for the each of the three years ended December 31, 2015.

Recent Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity will:

 

    Identify the contract(s) with a customer (step 1).

 

    Identify the performance obligations in the contract (step 2).

 

    Determine the transaction price (step 3).

 

    Allocate the transaction price to the performance obligations in the contract (step 4).

 

    Recognize revenue when (or as) the entity satisfies a performance obligation (step 5).

The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales of (1) property, plant, and equipment; (2) real estate; or (3) intangible assets). Existing accounting guidance applicable to these transfers (e.g., ASC 360-20) has been amended or superseded.

Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition.

The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application is not permitted (however, early adoption is optional for entities reporting under IFRSs).

Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU:

 

    Full retrospective application — Retrospective application would take into account the requirements in ASC 250 (with certain practical expedients).

 

    Modified retrospective application — Under the modified approach, an entity recognizes “the cumulative effect of initially applying the ASU as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application” (revenue in periods presented in the financial statements before that date is reported under guidance in effect before the change). Using this approach, an entity applies the guidance in the ASU to existing contracts (those for which the entity has remaining performance obligations) as of, and new contracts after, the date of initial application. The ASU is not applied to contracts that were completed before the effective date (i.e., an entity has no remaining performance obligations to fulfil). Entities that elect the modified approach must disclose an explanation of the impact of adopting the ASU, including the financial statement line items and respective amounts directly affected by the standard’s application.

The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial statements.

On August 12, 2015 the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year. For public entities, the standard will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption will be permitted as of the original effective date in ASU 2014-09 (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods).

On January 9, 2015, the FASB issued ASU 2015-01 to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the ASU, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. ASU 2015-01 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Entities may apply the guidance prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The adoption of this guidance has not had a material impact on the Company’s financial statements.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

On April 7, 2015, the FASB issued ASU 2015-03 as part of its simplification initiative. The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities should apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period should be adjusted). The adoption of this guidance has not had a material impact on the Company’s financial statements.

On July 22, 2015, the FASB issued ASU 2015-11, which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The ASU does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For public business entities, the ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The Company has adopted this guidance and it has not had a material impact on the Company’s financial statements.

On November 20, 2015, the FASB issued ASU 2015-17 as part of its simplification initiative (i.e., FASB’s effort to reduce the cost and complexity of certain aspects of U.S. GAAP). The ASU requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as non-current in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current or non-current in a classified balance sheet. Netting of DTAs and DTLs by tax jurisdiction is still required under the new guidance. For public business entities, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

(3) Commitments and Contingent Liabilities

For details on our contingent liabilities, see Notes to Consolidated Financial Statements – Note 2, Summary of Significant Accounting Policies.

Operating Leases

The lease for 1 Corporate Avenue, Rowville Victoria expires on March 31, 2019, with two options to renew the lease each for successive five-year periods. The Company’s primary bank has issued a bank guarantee of A$250,000 in relation to a rental bond to secure the payments under the lease. This bank guarantee is secured by a security deposit held at the bank and has been recorded as “Other non-current assets” in consolidated balance sheets.

In accordance with the terms of the lease, the lessee has to restore part of the building upon vacating the premises.

The Company has also entered into a lease with respect to certain office equipment. The lease is for a period of 60 months which commenced in November 2012.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2015 are:

 

     A$  

Less than 1 year

     568,229   

1 – 3 years

     1,190,538   

3 – 5 years

     152,047   

More than 5 years

     0   
  

 

 

 

Total minimum lease payments

     1,910,814   
  

 

 

 

Rent expense was A$647,104, A$551,119 and A$597,512 for the fiscal years ended December 31, 2015, 2014 and 2013, respectively.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Guarantees

There are cross guarantees given by Universal Biosensors, Inc. and Universal Biosensors Pty Ltd as described in note 15. No deficiencies of assets exist in any of these companies. No liability was recognized by the parent entity or the consolidated entity in relation to this guarantee, as the fair value of the guarantees is immaterial.

 

(4) Income Taxes

The Company is subject to income tax in Australia and is required to pay taxes on its Australian profits. As provided under the Australian income tax laws, the Company and its wholly owned resident subsidiary have formed a tax-consolidated group. Universal Biosensors, Inc. is required to lodge U.S. federal income tax returns. It currently is in a tax loss situation.

A reconciliation of the (benefit)/provision for income taxes with the amount computed by applying the Australian statutory company tax rate of 30% to the profit/(loss) before income taxes is as follows:

 

     Years ended December 31,  
     2015     2014     2013  
     A$     %     A$     %     A$     %  

Profit/(loss) before income taxes

     (6,576,416       (9,316,127       (11,633,807  

Computed by applying income tax rate of home jurisdiction

     (1,972,925     30        (2,794,838     30        (3,490,142     30   

Research & development incentive

     3,560,728        (54     2,502,701        (27     3,613,149        (31

Disallowed expenses/(income):

            

Share based payment

     (19,480     0        (188,360     2        177,280        (2

Other

     120,837        2        3,136        0        6,697        0   

Change in valuation allowance

     (1,689,161     26        477,361        (5     (306,984     3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense/(benefit)

     0        0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The components of our loss before income taxes as either domestic or foreign is as follows:

 

     As of December 31,  
     2015      2014      2013  
     A$      A$      A$  

Foreign

     0         0         3   

Domestic (Australia)

     (6,576,416      (9,316,127      (11,633,810
  

 

 

    

 

 

    

 

 

 
     (6,576,416      (9,316,127      (11,633,807
  

 

 

    

 

 

    

 

 

 

Significant component of the Company’s deferred tax assets are shown below:

 

     As of December 31,  
     2015      2014  
     A$      A$  

Deferred tax assets:

     

Operating loss carry forwards

     9,527,727         12,514,104   

Unamortized capital raising cost

     38,395         (1,366,548

Depreciation and amortization

     1,270,986         1,652,825   

Asset retirement obligations

     780,000         345,519   

Employee entitlements

     442,712         401,074   

Other

     3,083,055         3,489,477   
  

 

 

    

 

 

 

Total deferred tax assets

     15,142,874         17,036,451   

Valuation allowance for deferred tax assets

     (15,142,874      (17,036,451
  

 

 

    

 

 

 

Net deferred tax asset

     0         0   
  

 

 

    

 

 

 

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Significant components of deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance has been established, as realization of such assets is not more likely than not.

At December 31, 2015 the Company has A$31,759,093 (A$41,713,681 at December 31, 2014) of accumulated tax losses available for carry forward against future earnings, which under Australian tax laws do not expire but may not be available under certain circumstances. The Company also has A$5,800,672 of non-refundable R&D tax offset as at December 31, 2015 and 2014. The R&D Tax offset is a non-refundable tax offset, which assists to reduce a company’s tax liability. Once the liability has been reduced to zero, any excess offset may be carried forward into future income years. UBI has US tax losses available for carry forward against future earnings of US$1,011,321 as of December 31, 2015 and 2014.

 

(5) Employee Incentive Schemes

 

(a) Stock Option Plan

In 2004, the Company adopted an employee option plan (“Plan”). Options may be granted pursuant to the Plan to any person considered by the board to be employed by the Group on a permanent basis (whether full time, part time or on a long term casual basis). Each option gives the holder the right to subscribe for one share of common stock. The total number of options that may be issued under the Plan is such maximum amount permitted by law and the Listing Rules of the Australian Securities Exchange (“ASX”). The exercise price and any exercise conditions are determined by the board at the time of grant of the options. Any exercise conditions must be satisfied before the options vest and become capable of exercise. The options lapse on such date determined by the board at the time of grant or earlier in accordance with the Plan. Options granted to date have had a term up to 10 years and generally vest in equal tranches over three years.

An option holder is not permitted to participate in a bonus issue or new issue of securities in respect of an option held prior to the issue of shares to the option holder pursuant to the exercise of an option. If the Company changes the number of issued shares through or as a result of any consolidation, subdivision, or similar reconstruction of the issued capital of the Company, the total number of options and the exercise price of the options (as applicable) will likewise be adjusted. Options granted in 2013, 2014 and 2015 were 654,000, 152,000, and 1,015,000 respectively.

In accordance with ASC 718, the fair value of the option grants was estimated on the date of each grant using the Trinomial Lattice model. The assumptions for these grants were:

 

     Dec-15     Jan-15     Jan-15     Aug-14     Dec-13     Dec-13     Aug-13     Mar-13  

Exercise Price (A$)

     0.45        0.00        0.23        0.17        0.00        0.49        0.71        0.79   

Share Price at Grant Date (A$)

     0.45        0.23        0.23        0.17        0.49        0.49        0.71        0.79   

Volatility

     70     72     72     71     63     63     64     65

Expected Life (years)

     7        7        7        7        7        7        7        7   

Risk Free Interest Rate

     2.56     2.27     2.27     3.13     3.82     3.82     3.54     3.37

Fair Value of Option (A$)

     0.26        0.23        0.14        0.10        0.49        0.28        0.41        0.45   

Each of the inputs to the Trinomial Lattice model is discussed below.

Share Price and Exercise Price at Valuation Date

With the exception of ZEPOs, the value of all other options granted has been determined using the closing price of our common stock trading in the form of CDIs on ASX at the time of grant of the options. ZEPOs exercise price are nil. The ASX is the only exchange upon which our securities are quoted.

Volatility

We applied volatility having regard to the historical price change of our shares in the form of CDIs available from the ASX.

 

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Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

Time to Expiry

All options granted under our share option plan have a maximum 10 year term and are non-transferable.

Risk free rate

The risk free rate which we applied is equivalent to the yield on an Australian government bond with a time to expiry approximately equal to the expected time to expiry on the options being valued.

Stock option activity during the current period is as follows:

 

     Number of shares      Weighted average
issue price

A$
 

Balance at December 31, 2014

     9,333,436         1.06   

Granted

     1,015,000         0.27   

Exercised

     (72,496      0.35   

Lapsed

     (566,279      0.93   
  

 

 

    

 

 

 

Balance at December 31, 2015

     9,709,661         0.99   
  

 

 

    

 

 

 

At December 31, 2015, the number of options exercisable was 8,662,448 (2014: 8,611,392 and 2013: 8,904,217). At December 31, 2015, total stock compensation expense recognized in income statement was (A$64,932) (2014: (A$627,868) and 2013: A$590,934).

 

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Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

The following table represents information relating to stock options outstanding under the plans as of December 31, 2015:

 

     Options Outstanding      Options  

Exercise Price A$

   Shares      Weighted average
remaining life in years
     Exercisable
Shares
 

$0.35

     115,992         1         115,992   

$1.18

     529,000         1         529,000   

$1.20

     525,000         2         525,000   

$0.89

     645,000         2         645,000   

$0.70

     146,000         3         146,000   

$0.50

     8,000         3         8,000   

$0.00

     50,001         3         50,001   

$0.00

     388,334         3         388,334   

$0.94

     708,667         3         708,667   

$1.72

     1,105,000         4         1,105,000   

$1.60

     50,000         1         50,000   

$1.58

     216,000         2         216,000   

$0.00

     91,667         2         91,667   

$1.37

     233,000         2         233,000   

$1.38

     2,300,000         2         2,300,000   

$1.00

     66,000         3         66,000   

$0.89

     222,500         3         222,500   

$0.00

     100,000         3         100,000   

$0.75

     50,000         3         50,000   

$0.73

     86,000         4         86,000   

$1.09

     270,000         4         270,000   

$0.00

     137,500         4         137,500   

$0.79

     24,000         4         24,000   

$0.71

     30,000         5         20,000   

$0.49

     290,000         5         193,308   

$0.00

     220,000         5         146,664   

$0.17

     92,000         6         30,666   

$0.23

     392,500         6         130,817   

$0.00

     220,000         6         73,332   

$0.45

     397,500         7         0   
  

 

 

       

 

 

 
     9,709,661            8,662,448   
  

 

 

       

 

 

 

The table below sets forth the number of employee stock options exercised and the number of shares issued in the period from December 31, 2013. We issued these shares in reliance upon exemptions from registration under Regulation S under the Securities Act of 1933, as amended.

 

Period Ending

   Number of
Options
Exercised and
Corresponding
Number of
Shares Issued
     Weighted
Average
Exercise
Price
     Proceeds
Received

(A$)
 

2013

     1,497,025       US$ 0.22         360,598   

2014

     8,333       A$ 0.00         0   

2015

     72,496       US$ 0.26         26,127   

 

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Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

As of December 31, 2015, there was A$167,973 of unrecognized compensation expense related to unvested share-based compensation arrangements under the Employee Option Plan. This expense is expected to be recognized as follows:

 

Fiscal Year

   A$  

2016

     115,622   

2017

     41,052   

2018

     11,299   
  

 

 

 
     167,973   
  

 

 

 

The aggregate intrinsic value for all options outstanding as at December 31, 2015 was zero.

 

(b) Restricted Share Plan

Our Employee Share Plan was adopted by the Board of Directors in 2009. The Employee Share Plan permits our Board to grant shares of our common stock to our employees and directors (although our Board has determined not to issue equity to non-executive directors). The number of shares able to be granted is limited to the amount permitted to be granted at law, the ASX Listing Rules and by the limits on our authorized share capital in our certificate of incorporation. All our employees are eligible for shares under the Employee Share Plan. The Company currently proposes to continue to issue A$1,000 worth of restricted shares of common stock to employees of the Company on a recurring basis, but no more frequently than annually. The restricted shares have the same terms of issue as our existing shares of common stock but are not able to be traded until the earlier of three years from the date on which the shares are issued or the date the relevant employee ceases to be an employee of the Company or any of its associated group of companies.

The table below sets forth the restricted shares issued by the Company since January 1, 2013:

 

     Number of
Restricted Shares
Issued
     Market Value of
Restricted Shares
Issued (A$)
 

May, 2013

     917         1,000   

December, 2013

     142,800         69,972   

June, 2014

     2,040         1,000   

January, 2015

     282,555         64,988   

July, 2015

     4,347         1,000   

December, 2015

     142,208         63,994   

Restricted stock awards activity during the current period is as follows:

 

     Number of shares      Weighted average
issue price

A$
 

Balance at December 31, 2014

     234,487         0.72   

Granted

     429,110         0.30   

Release of restricted shares

     (120,781      0.94   
  

 

 

    

 

 

 

Balance at December 31, 2015

     542,816         0.35   
  

 

 

    

 

 

 

 

(6) Related Party Transactions

Details of related party transactions material to the operations of the Group other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, are set out below:

In September 2011, we entered into a non-exclusive license agreement with SpeeDx Pty Ltd (“SpeeDx”) pursuant to which SpeeDx granted us a license to use its proprietary MNAzyme technology in the field of molecular diagnostics. Under the agreement we make milestone payments totaling A$500,000 to SpeeDx if certain specified targets are achieved, and royalty payments ranging from 5% to 15% of that portion of our sales and licensing revenues arising from SpeeDx technology or products incorporating SpeeDx technology.

 

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Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2013, 2014 and 2015)

 

The license agreement and the obligation to pay royalties continues until SpeeDx’s patent rights have expired, lapsed, are found to be invalid or are rejected. The agreement will terminate by mutual agreement or by one party for breach or insolvency of the other. SpeeDx may also terminate the license agreement if the research and development on a first licensed product is not completed by UBS within 7 years (subject to certain exceptions), and UBS may terminate if it determines that it does not wish to proceed with further commercialization of SpeeDx’s technology.

In August 2013, we entered into a consulting agreement with SpeeDx pursuant to which we provided certain services relating to the establishment and maintenance of a quality management system at SpeeDx. Consulting fees received under this agreement in 2014 were A$77,758. In addition, a success fee of A$50,000 was paid by SpeeDx in 2014 as the criteria for successful completion of the engagement was met.

Mr. Denver is a director of the Company and SpeeDx. Talu Ventures Pty Ltd, of which Mr. Jane is a director, is a fund manager of a fund which holds approximately 33% of the issued shares in SpeeDx. Mr. Jane resigned as a director of the Company in March 2015. Until September 27, 2013, PFM Cornerstone Limited held approximately 6% of our shares (this holding has since decreased to less than 1% of our shares), and PFM Cornerstone Limited also holds approximately 33% of the issued shares in SpeeDx. Messrs Denver and Hanley are directors of the Company and PFM Cornerstone Limited.

 

(7) Financial Instruments

Financial Assets

 

     Years Ended December 31,  
     2015      2014  
     A$      A$  

Financial assets:

     

Cash and cash equivalents

     14,350,307         16,329,829   

Accounts receivables

     3,153,584         3,799,705   

Financial instruments

     0         0   
  

 

 

    

 

 

 

Total financial assets

     17,503,891         20,129,534   
  

 

 

    

 

 

 

Debt:

     

Short term borrowings

     324,459         498,890   

Long term secured loan

     19,868,560         17,499,194   
  

 

 

    

 

 

 

Total debt

     20,193,019         17,998,084   
  

 

 

    

 

 

 

Net financial assets/(liabilities)

     (2,689,128      2,131,450   
  

 

 

    

 

 

 

The carrying value of the cash and cash equivalents and the accounts receivable approximates fair value because of their short-term nature.

We regularly review all our financial assets for impairment. There were no impairments recognized in 2015, 2014 and 2013.

Derivative Instruments and Hedging Activities

We had no outstanding contracts as at December 31, 2015, 2014 and 2013, respectively. During the years ended December 31, 2015, 2014 and 2013, we recognized gains of nil. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the years ended December 31, 2015, 2014 and 2013. For further details, see Notes to Consolidated Financial Statements – Note 2, Summary of Significant Accounting Policies.

 

(8) Property, Plant and Equipment