Exhibit 13

Universal Biosensors, Inc.

2011 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-11
Consolidated Balance Sheets			F-13
Consolidated Statements of Operations			F-14
Consolidated Statements of Stockholders’ Equity and Comprehensive Income			F-15
Consolidated Statements of Cash Flows			F-16
Notes to Consolidated Financial Statements			F-17
Schedule ii — Valuation and Qualifying Accounts			F-36

 

F-1

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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. Our actual results may differ materially from those discussed in the forward-looking statements 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.

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.

We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS under a license agreement between LifeScan, Inc. (“LifeScan”) and UBS (“License Agreement”). 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 tests for a number of different markets. Our current focus is as set out below:

 

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Blood glucose — UBS provides services and acts as a non-exclusive manufacturer of test strips for LifeScan’s “OneTouch® VerioTM”, pursuant to a Master Services and Supply Agreement with LifeScan (“Master Services and Supply Agreement”). LifeScan continues its global rollout of the OneTouch Verio product which is currently available in North America, major European markets and Australia. We also undertake research and development work for LifeScan pursuant to a development and research agreement (“Development and Research Agreement”).

 

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Coagulation testing market — UBS is working with Siemens Healthcare Diagnostics, Inc. (“Siemens”) to develop a range of test strips and reader products for the point-of-care coagulation market, pursuant to a collaboration agreement (“Collaboration Agreement”).

 

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Other electrochemical-cell based tests — we are working on proving the broader applicability of our technology platform for other immunoassay and molecular diagnostic point-of-care tests. We may seek to enter into collaborative arrangements or strategic alliances with respect to any tests arising from this work.

Results of Operations

Revenue from Products

OneTouch^® Verio^TM was first launched in the Netherlands in January 2010 and has subsequently been launched in Australia, in major European markets and North America. The manufacturing results of the blood glucose test strips during the respective periods are as follows:

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Revenue from products			12,063,582				11,760,009				132,733
Cost of goods sold			(12,310,302	)			(10,801,062	)			(458,162	)
			(246,720	)			958,947				(325,429	)

 

F-2

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

Universal Biosensors, Inc.

 

Pursuant to the agreement we have with LifeScan, one of two pricing methodologies will apply depending on whether we are manufacturing above or below a specified quantity of blood glucose test strips in a quarter. If less than the specified quantity of test strips is produced within a quarter, we are considered to be in the “interim costing period”. In the interim costing period, the Company is not expected to generate any profit from the manufacture of test strips, but is expected to recover most of its glucose manufacturing costs. If manufactured volumes increase beyond the specified quantity of blood glucose test strips per quarter, the interim costing period will cease to apply and a different pricing methodology will apply, at which time we expect our blood glucose manufacturing operations to be profitable. We commenced commercial production in 2009 and operated under the interim costing period regime during that year. During 2010 and 2011, we ceased to be in the interim costing period during the fourth quarter of each of 2010 and 2011 at which time we generated profits from our blood glucose manufacturing operations. Our quarterly results from our blood glucose manufacturing operations for the 2011 and 2010 financial year reflect this.

 

		2011 Quarter Ended
		December 31				September 30				June 30				March 31
		A$				A$				A$				A$
Revenue from products			4,322,897				2,153,518				2,267,766				3,319,401
Cost of goods sold			(3,809,376	)			(2,314,082	)			(2,694,792	)			(3,492,052	)
			513,521				(160,564	)			(427,026	)			(172,651	)
		2010 Quarter Ended
		December 31				September 30				June 30				March 31
		A$				A$				A$				A$
Revenue from products			5,672,739				3,202,873				1,359,584				1,524,813
Cost of goods sold			(4,189,520	)			(3,136,390	)			(1,936,716	)			(1,538,436	)
			1,483,219				66,483				(577,132	)			(13,623	)

During 2009, LifeScan chose not to proceed with the registration of the then current product but to proceed with an enhanced product, called One-Touch Verio, and acknowledged that there would be a delay as a result. As a result of this change, LifeScan agreed to pay us an additional amount per strip manufactured by us up to a certain volume in 2010. In 2011, as long as we remained in the interim costing period, LifeScan agreed to pay us an additional amount per strip equivalent to 50% of the amount agreed with LifeScan in 2010. These additional payments ceased during the third quarter of 2011 resulting in the higher margin in the last quarter of 2010 when compared to the same period in 2011 and the small profit in the third quarter of 2010.

Revenue from Services

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

 

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Contract research and development — we undertake contract research and development on behalf of our customers and partners. Contract research and development revenue up to the 2009 financial year has been recorded under the caption “Research and development income”. As we commenced commercial production in 2010, the research and development was seen more as a service we provide which meant presenting it within “Revenue from Services”;

 

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

 

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Other services — ad-hoc services provided on an agreed basis based on our customers and partners requirements.

 

F-3

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

Universal Biosensors, Inc.

 

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,
		2011				2010				2009
		A$				A$				A$
Revenue from services			2,632,870				6,420,027				2,850,071
Cost of services			(708,149	)			(1,481,674	)			(169,241	)
			1,924,721				4,938,353				2,680,830
Income — Research and development income			—				—				1,337,125

Contract research and development makes up the major portion of revenue from services. The nature and scope of contract research and development is determined by our customers and partners based upon their requirements hence our revenues and margins tend to fluctuate. This is reflected in our past three years results wherein the margin during the 2011 financial year has decreased by 61% compared to the 2010 financial year while the margin during the 2010 financial year has increased by 23% compared to the 2009 financial year. In September 2011, we commenced a new research and development project for LifeScan to determine the feasibility of an innovative blood glucose product. The feasibility project is expected to take 12 months. Revenue is recognized for the feasibility project when services have been performed, the amount of the payment can be reliably measured and collectability is reasonably assured. We recognize revenue for accounting purposes ratably over the feasibility period.

We received a non-refundable payment of US$3 million in September 2011 upon entering into a collaboration agreement with Siemens. This deliverable is not a separate unit of accounting and has been recorded as deferred revenue and will be recognized as revenue across the deliverables in the arrangement with Siemens.

Milestone Payment

We received a milestone payment of A$17,722,641 in 2009 triggered by the first grant to LifeScan of regulatory clearance to sell the blood glucose test.

Research and Development Expenses

Research and development expenses are related to developing electrochemical cell platform technologies. 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:

 

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

 

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materials and consumables acquired for the research and development activities;

 

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

 

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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

Since 2005, we have undertaken development work on a prothrombin time test for monitoring the therapeutic range of the anticoagulant, warfarin, based on measuring activity of the enzyme thrombin. In

 

F-4

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

Universal Biosensors, Inc.

 

September 2011 we entered into a collaboration agreement with Siemens pursuant to which will develop a range of test strips and reader products for the point-of-care coagulation market. The first test to be developed will be a modified version of a Prothrombin Time International Normalized Ratio (“PT-INR”) test developed by UBS, followed by other tests in the point-of-care coagulation market.

(b)  Immunoassay

We are continuing to develop our immunoassay platform. We are developing a D-dimer test for the detection and monitoring of several conditions associated with thrombotic disease, particularly deep venous thrombosis (clots in the leg) and pulmonary embolism (clots in the lung). Development work on this project has been undertaken since early 2008.

This work will allow the electrochemical cell platform technology to be expanded to a range of immunoassay tests.

(c)  DNA/RNA

We have undertaken some early stage feasibility work assessing the possibility of using DNA binding chemistries to build a strip 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. We have recently entered into a license to access certain molecular diagnostic technology.

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

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Research and development expenses			9,812,396				6,482,150				14,898,072

Depending on the number of research and development activities we undertake and the development phase of the research and development, our research and development expenditure will fluctuate. Research and development expenditure increased by 51% during 2011 compared to 2010 and decreased by 56% during 2010 compared to 2009. Research and development expenses for 2009 reflect the conclusion of the development phase for the blood glucose product, wherein a significant amount of the work was carried out. All costs pertaining to this project after January 2010 are now captured in cost of goods sold as opposed to being treated as a research and development expenditure as they were prior to January 2010. During 2010 and 2011, our research and development activities were primarily focussed around the blood coagulation platform. Whilst we had established feasibility of the first product on this platform, the prothrombin time test, in 2010, we were at an advanced stage in 2011. During 2011 we had entered the formal development and validation stage of the prothrombin time test. An increased volume of work is required during this development phase of a research and development. During the latter half of 2011, we also commenced work on a range of other test strips and reader products for the point-of-care coagulation market pursuant to our agreement with Siemens.

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 will direct the research and development activities which will influence our research and development expenditure and these parties may contribute towards all or part of the cost of these activities.

 

F-5

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

Universal Biosensors, Inc.

 

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 for the respective periods are as follows:

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
General and administrative expenses			7,271,488				7,185,550				5,635,569

General and administrative expenses increased by 1% during 2011 compared to 2010 and increased by 28% during 2010 compared to 2009. This increase in expenses, particularly during 2010, reflects efforts put into business development to establish collaborative partnerships in the fields outside the area of glucose and diabetes. 2010 was also the first financial year wherein our auditors had to undertake internal controls work in order to furnish an attestation report regarding internal controls over financial reporting as required under the Sarbanes Oxley Act. This resulted in us incurring additional expenditure.

Interest Income

Interest income decreased to A$683,323 in 2011 from A$1,192,889 in 2010. The decrease in interest income is attributable to the lower amounts of funds available for investment. Interest income increased to A$1,192,889 in 2010 from A$809,459 in 2009. The increase in interest income is attributable to increased returns on the funds invested and the higher amounts of funds available for investment.

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.

(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 probable. 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 best estimate of selling price. The Company’s process for determining its best estimate of selling price for deliverables without

 

F-6

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

Universal Biosensors, Inc.

 

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 at Valuation Date

The value of the options granted in 2010 and 2011 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 value of the options granted in 2009 have been determined using the average closing price of the Company’s common stock on the ASX on the five days on which the Company’s common stock has traded prior to the approval of grant. 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.

(d)  Impairment of Long-Lived Assets

We review our 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, 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.

 

F-7

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

Universal Biosensors, Inc.

 

Financial Condition, Liquidity and Capital Resources

Net Financial Assets

Our net financial assets position is shown below:

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Financial assets:
Cash and cash equivalents			15,089,209				23,271,766				31,291,011
Accounts receivables			4,889,783				3,588,798				415,397
Financial instruments			83,339				—				—
Total financial assets			20,062,331				26,860,564				31,706,408
Debt:
Short and long term debt/borrowings			—				—				—
Financial instruments			—				—				47,412
Total debt			—				—				47,412
Net financial assets			20,062,331				26,860,564				31,658,996

We rely largely on our existing cash and cash equivalents and funds from our operations 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.

Measures of Liquidity and Capital Resources

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

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Cash and cash equivalents			15,089,209				23,271,766				31,291,011
Working capital			17,584,523				25,940,899				32,118,842
Ratio of current assets to current liabilities			3.51 : 1				6.82 : 1				13.05 : 1
Shareholders’ equity per common share			0.22				0.30				0.33

The movement in cash and cash equivalents and working capital in each of the years was primarily due to the timing of cash receipts, payments, sales and accruals in the ordinary course of business. 2009 was also impacted by the receipt of a milestone payment of A$17,722,641. We have not identified any collection issues with respect to receivables.

Summary of Cash Flows

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Cash provided by/(used in):
Operating activities			(7,159,118	)			(6,414,248	)			5,867,156
Investing activities			(1,102,943	)			(2,320,293	)			(2,990,007	)
Financing activities			79,504				715,296				78,998
Net increase/(decrease) in cash and cash equivalents			(8,182,557	)			(8,019,245	)			2,956,147

 

F-8

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

Universal Biosensors, Inc.

 

Our net cash used in operating activities in 2011 and 2010 was primarily for our research and development projects including efforts involved in establishing our manufacturing. The outflows during these two years have been partially offset by receipts from our customers and partners. The positive operating activity result in 2009 is predominantly as a result of the receipt of the milestone payment of A$17,722,641 in December 2009.

Our net cash used in investing activities for all years is primarily for the purchase of various plant and equipment and fit out of our facilities based on our needs.

Our net cash provided by financing activities is primarily proceeds received from employees exercising their options.

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, 2011 are:

 

		A$
Less than 1 year			556,082
1 — 3 years			714,244
3 — 5 years			—
More than 5 years			—
Total minimum lease payments			1,270,326

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, 2011 were as follows:

 

		Payments Due By Period
		Total				Less than 1				1 – 3 years				3 – 5 years				More than 5
		A$				A$				A$				A$				A$
Asset Retirement Obligations(1)			2,166,691				—				—				2,166,691				—
Operating Lease Obligations(2)			1,270,326				556,082				714,244				—				—
Purchase Obligations(3)			3,173,761				1,773,761				1,400,000				—				—
Other Long-Term Liabilities on
Balance Sheet(4)			181,367				—				119,237				55,860				6,270
Total			6,792,145				2,329,843				2,233,481				2,222,551				6,270

 

(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 and contractual obligations that are payable on the achievement of certain milestones

 

(4)	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.

 

F-9

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

Universal Biosensors, Inc.

 

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.

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.

The following table sets out the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.

 

		2012 (*)		Fair Value
Anticipated Transactions and Related Derivatives
AUD Functional Currency:
Forward exchange agreements (Sell USD/Buy AUD)
Contract amount		US$4,000,000		A$	4,114,179
Average contractual exchange rate		0.9923

*  Expected maturity or transaction date

Interest Rate Risk

Since the majority of our investments are in cash and cash equivalents in AUD, our exposure to interest income is affected by changes in the general level of 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.

 

F-10

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Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated statements of stockholders’ equity and comprehensive income and consolidated statements of cash flows present fairly, in all material respects, the financial position of Universal Biosensors, Inc. and its subsidiaries at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the appendix under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2011 and 2010). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) 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.

 

F-11

PricewaterhouseCoopers, ABN 52 780 433 757

Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171, DX 77 Sydney     T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au

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

 

Sydney

March 13, 2012

 

F-12

PricewaterhouseCoopers, ABN 52 780 433 757

Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171, DX 77 Sydney     T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au

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Universal Biosensors, Inc.

Consolidated Balance Sheets

 

		December 31, 2011				December 31, 2010
		A$				A$
ASSETS
Current assets:
Cash and cash equivalents			15,089,209				23,271,766
Inventories, net			3,619,400				3,191,093
Accounts receivable			4,889,783				3,588,798
Prepayments			92,048				303,181
Financial instruments			83,339				—
Other current assets			827,508				46,196
Total current assets			24,601,287				30,401,034
Non-current assets:
Property, plant and equipment			33,151,027				32,713,280
Less accumulated depreciation			(12,855,847	)			(9,586,365	)
Property, plant and equipment — net			20,295,180				23,126,915
Other non-current assets			320,000				310,000
Total non-current assets			20,615,180				23,436,915
Total assets			45,216,467				53,837,949
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			620,682				1,764,364
Accrued expenses			2,061,528				2,099,477
Deferred revenue			3,509,721				—
Employee entitlements provision			824,833				596,294
Total current liabilities			7,016,764				4,460,135
Non-current liabilities:
Asset retirement obligations			2,166,691				1,998,060
Employee entitlements provision			181,367				160,675
Deferred revenue			829,039				—
Total non-current liabilities			3,177,097				2,158,735
Total liabilities			10,193,861				6,618,870
Commitments and contingencies (Note 3)			—				—
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares;issued and outstanding nil in 2011 (2010: nil)
Common stock, $0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 159,139,965 shares in 2011 (2010: 158,871,495)			15,914				15,887
Additional paid-in capital			79,446,995				77,034,717
Accumulated deficit			(29,533,213	)			(22,922,688	)
Current year loss			(14,692,117	)			(6,610,525	)
Accumulated other comprehensive income			(214,973	)			(298,312	)
Total stockholders’ equity			35,022,606				47,219,079
Total liabilities and stockholders’ equity			45,216,467				53,837,949

See accompanying notes to the financial statements

 

F-13

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Universal Biosensors, Inc.

Consolidated Statements of Operations

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Revenue
Revenue from products		$	12,063,582			$	11,760,009			$	132,733
Revenue from services			2,632,870				6,420,027				2,850,071
Research and development income			—				—				1,337,125
Milestone payment			—				—				17,722,641
Total revenue			14,696,452				18,180,036				22,042,570
Operating costs & expenses
Cost of goods sold			12,310,302				10,801,062				458,162
Cost of services			708,149				1,481,674				169,241
Research and development			9,812,396				6,482,150				14,898,072
General and administrative			7,271,488				7,185,550				5,635,569
Total operating costs & expenses			30,102,335				25,950,436				21,161,044
Profit/(loss) from operations			(15,405,883	)			(7,770,400	)			881,526
Other income/(expense)
Interest income			683,323				1,192,889				809,459
Interest expense			—				—				(9,636	)
Other			30,443				(33,014	)			(250,886	)
Total other income/(expense)			713,766				1,159,875				548,937
Net profit/(loss) before tax			(14,692,117	)			(6,610,525	)			1,430,463
Income tax benefit/(expense)			—				—				—
Net profit/(loss)		$	(14,692,117	)		$	(6,610,525	)		$	1,430,463
Basic net profit/(loss) per share		$	(0.09	)		$	(0.04	)		$	0.01
Average weighted number of shares — basic			159,017,777				157,584,044				157,013,578
Diluted net profit/(loss) per share		$	(0.09	)		$	(0.04	)		$	0.01
Average weighted number of shares — diluted			159,017,777				157,584,044				161,354,802

See accompanying notes to the financial statements.

 

F-14

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Universal Biosensors, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

 

		Ordinary shares								Additional Paid-in Capital				Accumulated Deficit				Other Comprehensive Income				Total Stockholders’ Equity
		Shares				Amount
						A$				A$				A$				A$				A$
Balances at January 1, 2009			156,976,936				15,698				73,338,995				(24,353,151	)			(298,312	)			48,703,230
Comprehensive Income
Unrealised loss on derivatives and hedges			—				—				—				—				(47,412	)			(47,412	)
Net profit			—				—				—				1,430,463				—				1,430,463
Total Comprehensive income																							1,383,051
Exercise of stock options issued to employees			138,327				14				78,984				—				—				78,998
Shares issued to employees			40,670				4				69,948				—				—				69,952
Stock option expense			—				—				1,078,771				—				—				1,078,771
Balances at December 31, 2009			157,155,933				15,716				74,566,698				(22,922,688	)			(345,724	)			51,314,002
Comprehensive income
Unrealised gain on derivatives and hedges			—				—				—				—				47,412				47,412
Net loss			—				—				—				(6,610,525	)			—				(6,610,525	)
Total Comprehensive income																							(6,563,113	)
Exercise of stock options issued to employees			1,667,581				167				715,129				—				—				715,296
Shares issued to employees			47,981				4				75,887				—				—				75,891
Stock option expense			—				—				1,677,003				—				—				1,677,003
Balances at December 31, 2010			158,871,495				15,887				77,034,717				(29,533,213	)			(298,312	)			47,219,079
Comprehensive income
Unrealised gain on derivatives and hedges			—				—				—				—				83,339				83,339
Net loss			—				—				—				(14,692,117	)			—				(14,692,117	)
Total Comprehensive income																							(14,608,778	)
Exercise of stock options issued to employees			181,999				18				79,486				—				—				79,504
Shares issued to employees			86,471				9				76,950				—				—				76,959
Stock option expense			—				—				2,255,842				—				—				2,255,842
Balances at December 31, 2011			159,139,965				15,914				79,446,995				(44,225,330	)			(214,973	)			35,022,606

See accompanying notes to the financial statements.

 

F-15

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Universal Biosensors, Inc.

Consolidated Statements of Cash Flows

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Cash flows from operating activities provided by/(used in):
Net profit/(loss)			(14,692,117	)			(6,610,525	)			1,430,463
Adjustments to reconcile net profit/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization			3,298,541				2,990,858				2,851,285
Share based payments expense			2,255,842				1,677,003				1,078,771
Loss on fixed assets disposal			17,715				2,618				60,658
Change in assets and liabilities:
Inventory			(428,307	)			(2,885,969	)			(305,124	)
Accounts receivables			(1,300,985	)			(3,733,332	)			(114,713	)
Prepaid expenses and other current assets			(725,797	)			(6,079	)			141,331
Deferred revenue			4,492,426				118,305				290,904
Employee entitlements			249,231				73,493				50,192
Accounts payable and accrued expenses			(325,667	)			1,959,380				383,389
Net cash provided by/(used in) operating activities			(7,159,118	)			(6,414,248	)			5,867,156
Cash flows from investing activities:
Instalment payments to acquire plant and equipment			—				(988,334	)			(2,145,808	)
Purchases of property, plant and equipment			(1,102,943	)			(1,331,959	)			(844,199	)
Net cash used in investing activities			(1,102,943	)			(2,320,293	)			(2,990,007	)
Cash flows from financing activities:
Proceeds from borrowings			—				—				479,673
Repayment of borrowings			—				—				(479,673	)
Proceeds from stock options exercised			79,504				715,296				78,998
Net cash provided by financing activities			79,504				715,296				78,998
Net increase/(decrease) in cash and cash equivalents			(8,182,557	)			(8,019,245	)			2,956,147
Cash and cash equivalent at beginning of period			23,271,766				31,291,011				28,334,864
Cash and cash equivalents at end of period			15,089,209				23,271,766				31,291,011

See accompanying notes to the financial statement

 

F-16

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

(1)  Basis

of Presentation

These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“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.

During 2010, the Group (consisting of Universal Biosensors, Inc. and its wholly owned subsidiary, Universal Biosensors Pty Ltd) ceased to be a development stage enterprise as it has established its commercial scale manufacturing and is generating revenue from its manufacturing operations.

 

(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.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

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 its fair value.

Concentration of Credit Risk and Other Risks and Uncertainties

Cash and cash equivalents and accounts receivables consists of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the balance sheet. The Company’s cash and cash equivalents are invested with two of Australia’s four 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

 

F-17

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

amount recorded on the 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 uses 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.

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 unrealised 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 operations in the same period or periods during which the hedged forecast transaction affects the consolidated statements of operations 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 operations.

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 operations.

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

 

F-18

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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,
		2011				2010				2009
		A$				A$				A$
Raw materials			3,254,675				2,798,045				289,069
Work in progress			102,239				188,629				16,055
Finished goods			262,486				204,419				—
			3,619,400				3,191,093				305,124

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 collectibility, 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 operations. Account balances are charged against the allowance when it is probable the receivable will not be recovered.

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Accounts receivable			4,889,783				3,588,798				415,397
Allowance for doubtful debts			—				—				—
			4,889,783				3,588,798				415,397

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 and include normal services and does not include items of a capital nature.

The Company receives Victorian government grant monies under grant agreements to support our development activities, including in connection with the purchase of plant and equipment. Plant and equipment is presented net of the government grant. The grant monies are recognized against the acquisition costs of the related plant and equipment as and when the related assets are purchased.

Research and Development

Research and development expenses consist of costs incurred to further the Group’s research and 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.

 

F-19

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Research and development expenses for years ended December 31, 2011, 2010 and 2009 are as follows:

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Research and development expenses			9,812,396				6,482,150				14,898,072

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.

We are subject to income taxes in the United States and Australia. U.S. federal income tax returns up to the 2010 financial year have been filed. Internationally, consolidated income tax returns up to the 2010 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,
		2011				2010
		A$				A$
Opening balance at January 1			1,998,060				1,842,547
Accretion expense			168,631				155,513
Ending balance at December 31			2,166,691				1,998,060

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:

 

Ÿ

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

 

F-20

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Ÿ

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

 

Ÿ

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:

 

Ÿ

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

 

Ÿ

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)

 

Ÿ

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.

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 balance sheet.

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 are 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

 

F-21

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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, 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, which the Company adopted on January 1, 2009, 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 a marketable product 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”.

Product and Service Agreements

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) 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 recognised as revenue from products or revenue from services, respectively, when the four basic criteria for revenue recognition are met.

In October 2011, the Company entered into a Statement of Work agreement with LifeScan to provide services for a feasibility study for an innovative blood glucose product. The services relating to this agreement are expected to take 12 months to complete which commenced in September 2011.

 

F-22

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Research and Development Agreement

On September 9, 2011 the Company entered into a new 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 US$3 million; the Company may receive up to six payments from Siemens upon the achievement of certain defined milestones relating 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.

Interest income

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

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 operations.

The Company has recorded foreign currency transaction losses of A$4,442, A$512,474 and A$250,886 in each of the years ended December 31, 2011, 2010 and 2009, 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:

 

Ÿ

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

 

Ÿ

income and expenses for each income statement 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

 

Ÿ

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

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. These were nil as at December 31, 2011 (2010: nil).

 

F-23

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Patent and License Costs

Legal fees incurred for patent application costs have been charged to expense and reported in research and development expense. Legal fees incurred for patents relating to commercialized products are capitalized and amortized over the life of the patents.

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, 2011, 2010 and 2009 are considered operating leases. The costs of operating leases are charged to the statement of operations 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 Zero Priced Employee Options (“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 and ZEPOs are determined and fixed on the grant date based on the Company’s stock price. 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.

Employee Benefit Costs

The Company contributes to standard defined contribution superannuation funds on behalf of all employees at nine percent 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. The Company permits employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the statement of operations as they become payable.

Net Profit/(Loss) per Share and Anti-dilutive Securities

Basic and diluted net profit/(loss) per share is presented in conformity with ASC 260 – Earnings per Share. Basic and diluted net profit/(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 were not considered in the computation of diluted net profit/(loss) per share because they would be anti-dilutive given the Company’s loss making position.

 

F-24

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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 and cumulative translation adjustments.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11 which amended the disclosure requirements regarding offsetting assets and liabilities of derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The enhanced disclosures will require entities to provide both net and gross information for these assets and liabilities. The amendment is effective for fiscal years beginning on or after January 1, 2013. The Company does not anticipate that this amendment will have a material impact on its financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. This guidance will result in a change in the way we present Other Comprehensive Income and its components, but will not have an impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). This ASU is intended to result in convergence between U.S. GAAP and IFRS requirements for measurement of and disclosures about fair value. The guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe the adoption of the new guidance will have a significant impact on the company’s consolidated financial statements.

 

(3)  Commitments

and Contingent Liabilities

Operating Leases

UBS entered into a lease with respect to premises at 1 Corporate Avenue, Rowville Victoria which commenced on November 1, 2006 for an initial period of seven years and five months, with two options to renew the lease 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 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 December 2007.

 

 

F-25

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2011 are:

 

		A$
2012			556,082
2013			567,932
2014			146,312
2015 and thereafter			—
Total minimum lease payments			1,270,326

Rent expense was A$576,301, A$556,584 and A$533,749 for the fiscal years ended December 31, 2011, 2010 and 2009, respectively.

Government research grants

On October 28, 2006, Universal Biosensors Pty Ltd was awarded a grant by the State of Victoria to support the establishment of a medical diagnostic manufacturing facility in Victoria, Australia for the manufacture of new technologies for disease monitoring and to increase support of local and export markets. These payments are subject to the achievement of milestones which include capital expenditure by Universal Biosensors Pty Ltd of predetermined minimum amounts. The State of Victoria may require Universal Biosensors Pty Ltd to refund any amounts paid under the grant together with interest should Universal Biosensors Pty Ltd commit a breach of its obligations under the grant agreement. The State of Victoria may also withhold, suspend, cancel or terminate any payment or payments upon a failure to comply with obligations or if Universal Biosensors Pty Ltd chooses not to proceed with these initiatives or it becomes insolvent. The total amount received under the Victorian State Government Grant during 2011 was A$55,346 (2010: A$39,875, 2009: A$130,000). This grant has been recognized against the acquisition cost of the related plant and equipment.

On October 1, 2010, Universal Biosensors Pty Ltd was awarded a grant of A$250,000 by the State of Victoria to assist in the upgrade of the current manufacturing facility to ultimately support the production of strips for a new point of care test. These payments are subject to the achievement of milestones which include capital expenditure by Universal Biosensors Pty Ltd of predetermined minimum amounts. The State of Victoria may require Universal Biosensors Pty Ltd to refund any amounts paid under the grant together with interest should Universal Biosensors Pty Ltd fail to complete the upgrade within a stipulated timeframe or fails to fulfill its commitments towards the upgrade. The State of Victoria may also withhold, suspend, cancel or terminate any payment or payments upon a failure to comply with obligations or if Universal Biosensors Pty Ltd chooses not to proceed with these initiatives or it becomes insolvent. The total amount received under the Victorian State Government Grant during 2011 was A$175,000 (2010: Nil). This grant has been recognized against the acquisition cost of the related plant and equipment.

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.

 

F-26

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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,
		2011								2010								2009
		A$				%				A$				%				A$				%
Profit/(loss) before income taxes			(14,692,117	)							(6,610,525	)							1,430,463
Computed by applying income tax rate of home jurisdiction			(4,407,635	)			30				(1,983,157	)			30				429,139				30
Research & development incentive			(635,470	)			4				(421,341	)			6				(3,524,333	)			(246	)
Disallowed expenses/(income):
Share based payment			676,753				(4	)			503,100				(7	)			323,631				22
Other			8,849				—				4,730				—				(226,924	)			(16	)
Change in valuation allowance			4,357,503				(30	)			1,896,668				(29	)			2,998,487				210
Income tax expense/(benefit)			—				—				—				—				—				—

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

 

		As of December 31,
		2011 A$				2010 A$
Deferred tax assets:
Operating loss carry forwards			16,794,322				12,923,654
Unamortized capital raising cost			1,000				104,850
Depreciation and amortization			(378,385	)			(663,990	)
Asset retirement obligations			650,007				599,418
Employee entitlements			301,860				227,090
Other			987,644				807,923
Total deferred tax assets			18,356,448				13,998,945
Valuation allowance for deferred tax assets			(18,356,448	)			(13,998,945	)
Net deferred tax asset			—				—

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, 2011 the Company has A$55,981,074 (A$43,078,848 at December 31, 2010) 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.

 

(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

 

F-27

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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 Universal Biosensors 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 2009, 2010 and 2011 were 4,164,200, 914,500 and 3,555,500 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:

 

		Grant Date
		Nov-11				Nov-11				Sep-11				Mar-11				Feb-11				Nov-10				Nov-10				Feb-10				Nov-09				Jun-09				Jun-09				May-09				Feb-09
Exercise Price (A$)			Nil				0.89				1.00				1.37				1.38				Nil				1.58				1.6				1.72				Nil				0.94				Nil				0.5
Share Price at Grant Date (A$)			0.89				0.89				1.00				1.37				1.38				1.58				1.58				1.6				1.73				0.95				0.95				1.18				0.43
Volatility			68	%			68	%			69	%			70	%			71	%			72	%			72	%			77	%			78	%			80	%			80	%			81	%			77	%
Expected Life (years)			7				7				7				7				7				7				7				7				10				10				10				10				10
Risk Free Interest Rate			3.72	%			3.72	%			3.89	%			5.36	%			5.45	%			5.27	%			5.27	%			5.34	%			5.63	%			5.49	%			5.49	%			4.87	%			4.26	%
Fair Value of Option (A$)			0.89				0.52				0.59				0.83				0.83				1.58				0.96				0.99				1.13				0.95				0.62				1.04				0.28

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

Share price at valuation date

The value of the options granted in 2010 and 2011 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 value of the options granted in 2009 have been determined using the average closing price of the Company’s common stock on the ASX on the five days on which the Company’s common stock has traded prior to the approval of grant. 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.

 

F-28

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

Stock option activity during the current period is as follows:

 

		Number of shares				Weighted average exercise price
						A$
Balance at December 31, 2010			8,539,704				0.93
Granted			3,355,500				1.25
Exercised			(181,999	)			0.46
Lapsed			(295,669	)			1.33
Balance at December 31, 2011			11,417,536				1.02

At December 31, 2011, the number of options exercisable was 8,011,691 (2010: 5,908,214 and 2009: 5,808,324). At December 31, 2011, total stock compensation expense recognized in income statement was A$2,255,842 (2010: A$1,677,003 and 2009: A$1,078,771).

The following table represents information relating to stock options outstanding under the plans as of December 31, 2011:

 

		Options Outstanding
Exercise Price		Shares				Weighted average remaining life in years				Options Exercisable Shares
A$
$0.30			1,516,770				2.00				1,516,770
$0.35			443,099				4.00				443,099
$1.18			623,000				5.20				623,000
$1.20			590,000				5.70				590,000
$1.13			—				—				—
$0.89			824,000				6.20				824,000
$0.70			224,667				6.60				224,667
$0.50			81,333				7.10				81,333
Nil			58,334				7.40				58,334
$0.94			1,201,000				7.50				1,201,000
Nil			410,000				7.50				116,663
$1.72			1,568,333				7.90				1,053,345
$1.60			50,000				5.10				33,332
$1.58			383,500				5.90				127,819
Nil			100,000				5.90				33,333
$1.37			355,000				6.20				118,330
$1.38			2,300,000				6.10				966,666
$1.00			86,000				6.70				—
$0.89			502,500				6.90				—
Nil			100,000				6.90				—
			11,417,536								8,011,691

 

F-29

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

The table below sets forth the number of employee stock options exercised and the number of shares issued in the period from December 31, 2009. 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$				A$
2009			138,327				0.60				78,998
2010			1,667,581				0.49				715,296
2011			181,999				0.46				79,504
Total			1,987,907								873,798

As of December 31, 2011, there was A$1,673,079 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$
2012			1,208,797
2013			412,575
2014			51,707
			1,673,079

The aggregate intrinsic value for all options outstanding as at December 31, 2011 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. 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 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:

 

		Number of Restricted Shares Issued				Market Value of Restricted Shares Issued
November, 2009			40,670			A$	69,952
May, 2010			581			A$	999
November, 2010			47,400			A$	74,892
November, 2011			86,471			A$	76,959

 

F-30

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

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

 

		Number of shares				Weighted average issue price
						A$
Balance at December 31, 2010			82,841				1.64
Granted			86,471				0.89
Release of restricted shares			(11,549	)			1.64
Balance at December 31, 2011			157,763				1.23

 

(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 license agreement with SpeeDx Pty Ltd (“SpeeDx”) pursuant to which SpeeDx granted us a license in the field of molecular diagnostics. Under the agreement we make milestone payments totaling A$500,000 if certain specified targets are achieved and payments ranging from 5% to 15% of our sales and licensing revenues to SpeeDx. Messrs Denver and Jane are directors of the Company and SpeeDx Pty Ltd. Certain of our substantial shareholders also hold substantial shareholdings in SpeeDx. CM Capital Pty Ltd, which holds approximately 11% of our shares and of which Mr Jane is a director, holds approximately 34% of the issued shares in SpeeDx. PFM Cornerstone Limited, which holds approximately 8% of our shares and of which Messrs Denver and Hanley and Dr Adam are directors, holds approximately 34% of the issued shares in SpeeDx. Johnson & Johnson Development Corporation has a beneficial interest in approximately 9% of our shares. An affiliate of Johnson & Johnson, Johnson and Johnson Research Pty Ltd owns approximately 13% of issued shares in SpeeDx.

Based on the latest Amendment to Schedule 13G filed on January 25, 2012, Johnson and Johnson Development Corporation (a venture capital wholly owned subsidiary of Johnson & Johnson) beneficially held 14,915,400 shares in the Company as at December 31, 2011 which represents approximately 9.4% of the Company’s shares.

The following transactions occurred with LifeScan:

 

		As of December, 31
		2011				2010				2009
		A$				A$				A$
Current Receivables — Owing by LifeScan
Sale of goods			1,999,764				3,588,798
Sale of services			2,890,019				—
			4,889,783				3,588,798
Current Liabilities — Owing to LifeScan
Purchase of goods			786,708				—
Revenue from LifeScan
Revenue from products			12,063,582				11,760,009				132,733
Revenue from services			2,632,870				6,420,027				2,850,071
Research and develoment income			—				—				1,337,125
Milestone payment			—				—				17,722,641
			14,696,452				18,180,036				22,042,570

 

F-31

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

(7)  Financial

Instruments

Financial Assets

 

		Years Ended December 31,
		2011				2010				2009
		A$				A$				A$
Financial assets:
Cash and cash equivalents			15,089,209				23,271,766				31,291,011
Accounts receivables			4,889,783				3,588,798				415,397
Financial instruments			83,339				—				—
Total financial assets			20,062,331				26,860,564				31,706,408
Debt:
Short and long term debt/borrowings			—				—				—
Financial instruments			—				—				47,412
Total debt			—				—				47,412
Net financial assets			20,062,331				26,860,564				31,658,996

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 in 2011, 2010 and 2009.

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. At December 31, 2011 and 2010 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.

At December 31, 2011 (2010: nil) we had outstanding contracts with a notional amount of US$4.0 million. The fair value of these contracts at December 31, 2011 (2010: nil) was an asset of A$83,339 recorded as ‘Financial Instruments’ in consolidated balance sheet. As of December 31, 2011, substantially all of the derivative gain recognized in accumulated other comprehensive income (AOCI) will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the year ended December 31, 2011 (2010: nil). For further details, see Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies.

 

F-32

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

(8)  Property,

Plant and Equipment

 

		As of December, 31
		2011				2010
		A$				A$
Plant and equipment			18,893,890				15,110,554
Leasehold improvements			8,722,639				8,810,036
Capital work in process			5,534,498				8,792,690
			33,151,027				32,713,280
Accumulated depreciation			(12,855,847	)			(9,586,365	)
Property, plant & equipment, net			20,295,180				23,126,915

Capital work in process relates to assets under construction and comprises primarily of specialized manufacturing equipment. Legal right to the assets under construction rests with the Company. The amounts capitalized for capital work in process represents the percentage of expenditure that has been completed, and once the assets are placed into service the Company begins depreciating the respective assets. The accumulated amortisation of capitalised leasehold improvements for the fiscal years ended December 31, 2011, 2010 and 2009 was A$5,376,432, A$4,090,724 and A$2,770,434, respectively.

The Company receives Victorian government grants under certain research agreements to purchase plant and equipment. Plant and equipment is presented net of the government grant of A$680,221 for the year ended December 31, 2011 (2010: A$449,875). The grants are recognized against the acquisition costs of the related plant and equipment as and when the related assets are purchased. Grants received in advance of the relevant expenditure are treated as deferred income and included in Current Liabilities on the balance sheet as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the Company under research agreements are recorded as Currents Assets on the consolidated balance sheets.

Depreciation expense was A$3,298,541, A$2,990,858 and A$2,851,285 for the fiscal years ended December 31, 2011, 2010 and 2009, respectively.

 

(9)  Accrued

Expenses

Accrued expenses consist of the following:

 

		As of December, 31
		2011				2010
		A$				A$
Legal, tax and accounting fees			511,121				591,184
Salary and related costs			706,053				587,695
Research and development materials			35,050				120,000
Production materials			786,708				657,142
Other			22,596				143,456
			2,061,528				2,099,477

 

(10)  Stockholders’

Equity — Common Stock

Holders of common stock are generally entitled to one vote per share held on all matters submitted to a vote of the holders of common stock. At any meeting of the shareholders, the presence, in person or by proxy, of the

 

F-33

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

majority of the outstanding stock entitled to vote shall constitute a quorum. Except where a greater percentage is required by the Company’s Amended and Restated Certificate of Incorporation or By-laws, the affirmative vote of the holders of a majority of the shares of common stock then represented at the meeting and entitled to vote at the meeting shall be sufficient to pass a resolution. Holders of common stock are not entitled to cumulative voting rights with respect to the election of directors, and the common stock does not have pre-emptive rights.

Trading in our shares of common stock on ASX is undertaken using CHESS Depositary Interests (“CDIs”). Each CDI represents beneficial ownership in one underlying share. Legal title to the shares underlying CDIs is held by CHESS Depositary Nominees Pty Ltd (“CDN”), a wholly owned subsidiary of ASX.

Holders of CDIs have the same economic benefits of holding the shares, such as dividends (if any), bonus issues or rights issues as though they were holders of the legal title. Holders of CDIs are not permitted to vote but are entitled to direct CDN how to vote. Subject to Delaware General Corporation Law, dividends may be declared by the Board and holders of common stock may be entitled to participate in such dividends from time to time.

 

(11)  Retirement

Benefits

Universal Biosensors Pty Ltd contributes to standard defined contributions superannuation funds on behalf of all employees at an amount up to nine per cent of employee salary. The Company permits employees to choose the superannuation fund into which the contributions are paid, provided the fund is appropriately registered.

Universal Biosensors Pty Ltd contributed A$806,158, A$714,123 and A$698,919 for the fiscal years ended December 31, 2011, 2010 and 2009, respectively.

 

(12)  Net

Profit/(Loss) per Share

Basic net profit/(loss) per ordinary share was computed by dividing the net profit/(loss) applicable to common stock by the weighted-average number of common stock outstanding during the period. Options granted to employees under the Universal Biosensors Employee Option Plan are considered to be potential ordinary shares for the purpose of calculating diluted net profit/(loss) per share. However, all these were not included in the calculation of diluted net profit/(loss) per share in the year when the Group made a net loss as the effect of including them is anti-dilutive.

 

		Years Ended December 31,
		2011				2010				2009
Weighted average shares used as denominator in calculating:
Basic net profit/(loss) per share			159,017,777				157,584,044				157,013,578
Diluted net profit/(loss) per share			159,017,777				157,584,044				161,354,802

 

(13)	Guarantees and Indemnifications

The certificate of incorporation and amended and restated by-laws of the Company provide that the Company will indemnify officers and directors and former officers and directors in certain circumstances, including for expenses, judgments, fines and settlement amounts incurred by them in connection with their services as an officer or director of the Company or its subsidiaries, provided that such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company.

 

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Universal Biosensors, Inc.

Notes to Consolidated Financial Statements

(for the years ended December 31, 2009, 2010 and 2011)

 

In addition to the indemnities provided in the certificate of incorporation and amended and restated by-laws, the Company has entered into indemnification agreements with certain of its officers and each of its directors. Subject to the relevant limitations imposed by applicable law, the indemnification agreements, among other things:

 

Ÿ

indemnify the relevant officers and directors for certain expenses, judgments, fines and settlement amounts incurred by them in connection with their services as an officer or director of the Company or its subsidiaries; and

 

Ÿ

require the Company to make a good faith determination whether or not it is practicable to maintain liability insurance for officers and directors or to ensure the Company’s performance of its indemnification obligations under the agreements.

The Company maintains directors’ and officers’ liability insurance providing for the indemnification of our directors and certain of our officers against certain liabilities incurred as a director or officer, including costs and expenses associated in defending legal proceedings. In accordance with the terms of the insurance policy and commercial practice, the amount of the premium is not disclosed.

No liability has arisen under these indemnities as at December 31, 2011.

 

(14)  Segments

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

The Company operates predominantly in one geographical area, being Australia.

 

(15)  Deed

of Cross Guarantee

Universal Biosensors, Inc. and its wholly owned subsidiary, Universal Biosensors Pty Ltd, are parties to a deed of cross guarantee under which each company guarantees the debts of the other. By entering into the deed, the wholly-owned entity has been relieved from the requirements to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission.

The above companies represent a “Closed Group” for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by Universal Biosensors, Inc., they also represent the “Extended Closed Group”.

The consolidated financial statements presented within this report comprise that of Universal Biosensors, Inc. and its wholly owned subsidiary, Universal Biosensors Pty Ltd. These two entities also represent the “Closed Group” and the “Extended Closed Group”.

 

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Schedule Valuation and Qualifying Accounts

Universal Biosensors, Inc.

Schedule ii — Valuation and Qualifying Accounts

(for the years ended December 31, 2009, 2010 and 2011)

 

						Additions
		Balance at Beginning  of Period				Charged to Costs  and Expenses				Charged to Other Accounts				Deductions				Balance at end of  Period
		A$				A$				A$				A$				A$
Year ended December 31, 2009
Deferred income tax valuation allowance			10,601,120				2,998,487				—				(1,899,796	)			11,699,811
Year ended December 31, 2010
Deferred income tax valuation allowance			11,699,811				1,896,668				372,305				—				13,968,784
Year ended December 31, 2011
Deferred income tax valuation allowance			13,968,784				4,357,503				30,161				—				18,356,448

 

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