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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2017

Commission File Number: 000-52607

 

 

Universal Biosensors, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware     98-0424072

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification Number)

Universal Biosensors, Inc.

1 Corporate Avenue,

Rowville, 3178, Victoria

Australia

    Not Applicable
(Address of principal executive offices)     (Zip Code)
  Telephone: +61 3 9213 9000  
(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

Emerging growth company  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 176,390,216 shares of Common Stock, U.S.$0.0001 par value, outstanding as of August 7, 2017.

 

 

 


Table of Contents

UNIVERSAL BIOSENSORS, INC.

TABLE OF CONTENTS

 

     Page  
PART I   FINANCIAL INFORMATION   
Item 1   Financial Statements   
 

1)      Consolidated condensed balance sheets at June 30, 2017 and December 31, 2016 (unaudited)

     1  
 

2)      Consolidated condensed statements of comprehensive income/(loss) for the three and six months ended June 30, 2017 and 2016 (unaudited)

     2  
 

3)      Consolidated condensed statements of changes in stockholders’ equity and comprehensive income/(loss) for the period ended June 30, 2017 and 2016 (unaudited)

     3  
 

4)      Consolidated condensed statements of cash flows for the six months ended June 30, 2017 and 2016 (unaudited)

     4  
 

5)      Notes to consolidated condensed financial statements (unaudited)

     5  
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26  
Item 3   Quantitative and Qualitative Disclosures About Market Risk      40  
Item 4   Controls and Procedures      41  
PART II   OTHER INFORMATION   
Item 1   Legal Proceedings      42  
Item 1A   Risk Factors      42  
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds      42  
Item 3   Defaults Upon Senior Securities      42  
Item 4   Mine Safety Disclosures      42  
Item 5   Other Information      42  
Item 6   Exhibits      42  
  Exhibit 31.1   
  Exhibit 31.2   
 

Exhibit 32

  
 

Exhibit 101

  
SIGNATURES      43  

Unless otherwise noted, references on this Form 10-Q to “Universal Biosensors”, the “Company,” “Group,” “we,” “our” or “us” means Universal Biosensors, Inc. (“UBI”) a Delaware corporation and, when applicable, its wholly owned Australian operating subsidiary, Universal Biosensors Pty Ltd (“UBS”) and UBS’ wholly owned Canadian operating subsidiary, Hemostasis Reference Laboratory Inc. (“HRL”). Unless otherwise noted, all references in this Form 10-Q to “$”, “A$” or “dollars” and dollar amounts are references to Australian dollars. References to “US$” are references to United States dollars. References to “CAD$” are references to Canadian dollars.


Table of Contents

Universal Biosensors, Inc.

 

Item 1 Financial Statements

Consolidated Condensed Balance Sheets (Unaudited)

 

     June 30,     December 31,  
     2017     2016  
     A$     A$  

ASSETS

    

Current assets:

    

Cash and cash equivalents

     19,957,765       20,402,322  

Inventories, net

     1,191,243       839,250  

Accounts receivable

     6,127,444       4,848,009  

Prepayments

     766,067       1,078,335  

Other current assets

     8,369,486       8,074,384  
  

 

 

   

 

 

 

Total current assets

     36,412,005       35,242,300  

Non-current assets:

    

Property, plant and equipment

     37,347,050       36,809,266  

Less accumulated depreciation

     (26,287,808     (25,282,248
  

 

 

   

 

 

 

Property, plant and equipment - net

     11,059,242       11,527,018  
  

 

 

   

 

 

 

Other non-current assets

     3,220,000       3,220,000  
  

 

 

   

 

 

 

Total non-current assets

     14,279,242       14,747,018  
  

 

 

   

 

 

 

Total assets

     50,691,247       49,989,318  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

     892,904       547,324  

Accrued expenses

     1,565,993       1,785,134  

Borrowings

     104,457       369,630  

Other liability

     2,775,491       1,713,743  

Deferred revenue

     658,675       0  

Employee entitlements provision

     1,715,125       1,523,854  
  

 

 

   

 

 

 

Total current liabilities

     7,712,645       5,939,685  

Non-current liabilities:

    

Asset retirement obligations

     2,600,000       2,600,000  

Employee entitlements provision

     74,223       125,993  

Long term secured loan

     19,189,344       20,286,827  

Other liability

     0       1,415,563  

Deferred revenue

     5,161,646       6,366,975  
  

 

 

   

 

 

 

Total non-current liabilities

     27,025,213       30,795,358  
  

 

 

   

 

 

 

Total liabilities

     34,737,858       36,735,043  
  

 

 

   

 

 

 

Commitments and contingencies

     0       0  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, US$0.01 par value. Authorized 1,000,000 shares; issued and outstanding nil in 2017 (2016: nil)

    

Common stock, US$0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 176,390,216 shares in 2017 (2016: 176,386,884)

     17,639       17,639  

Additional paid-in capital

     93,368,256       93,167,465  

Accumulated deficit

     (79,632,626     (80,882,902

Current year income

     2,499,369       1,250,276  

Accumulated other comprehensive loss

     (299,249     (298,203
  

 

 

   

 

 

 

Total stockholders’ equity

     15,953,389       13,254,275  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

     50,691,247       49,989,318  
  

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

1


Table of Contents

Universal Biosensors, Inc.

Consolidated Condensed Statements of Comprehensive Income/(Loss) (Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2017     2016     2017     2016  
     A$     A$    

 

    A$  

Revenue

        

Revenue from products

     1,425,171       0       2,297,615       183,480  

Revenue from services

     4,968,711       5,401,513       12,029,736       10,315,252  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     6,393,882       5,401,513       14,327,351       10,498,732  

Operating costs & expenses

        

Cost of goods sold

     1,039,244       53,425       1,915,134       240,569  

Cost of services

     192,888       0       482,805       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold & services

     1,232,132       53,425       2,397,939       240,569  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution from products & services

     5,161,750       5,348,088       11,929,412       10,258,163  

Other operating costs & expenses

        

Product support

     270,726       0       335,116       0  

Depreciation

     410,439       659,160       845,591       1,323,797  

Research and development

     2,369,829       2,042,389       4,429,064       6,080,004  

General and administrative

     1,543,633       1,215,050       3,230,162       3,006,520  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs & expenses

     4,594,627       3,916,599       8,839,933       10,410,321  
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(loss) from operations

     567,123       1,431,489       3,089,479       (152,158

Other income/(expense)

        

Interest income

     22,173       25,628       58,853       50,869  

Interest expense

     (2,883     (2,812     (6,727     (5,624

Financing costs

     (709,884     (719,096     (1,403,715     (1,451,433

Other

     258,214       (273,386     761,479       365,229  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income/(expense)

     (432,380     (969,666     (590,110     (1,040,959

Net income/(loss) before tax

     134,743       461,823       2,499,369       (1,193,117

Income tax benefit/(expense)

     0       0       0       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/( loss)

     134,743       461,823       2,499,369       (1,193,117
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic net income/(loss) per share

     0.00       0.00       0.01       (0.01

Average weighted number of shares - basic

     176,389,850       176,205,084       176,388,375       176,168,848  

Diluted net income/(loss) per share

     0.00       0.00       0.01       (0.01

Average weighted number of shares - diluted

     177,688,753       177,350,572       177,650,680       177,367,696  

Other comprehensive gain/(loss), net of tax:

        

Foreign currency translation reserve

     (160     0       (1,046     0  

Reclassification for gain/(loss) realized in net income/(loss)

     0       0       0       0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive gain/(loss)

     (160     0       (1,046     0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive gain/(loss)

     134,583       461,823       2,498,323       (1,193,117
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

2


Table of Contents

Universal Biosensors, Inc.

Consolidated Condensed Statements of Changes in Stockholders’ Equity and Comprehensive Income/(Loss) (Unaudited)

 

     Ordinary shares      Additional Paid-
in Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total
Stockholders’
Equity
 
     Shares      Amount           
            A$      A$     A$     A$     A$  

Balances at January 1, 2016

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

Net loss

     0        0        0       (1,193,117     0       (1,193,117

Exercise of stock options issued to employees

     77,500        8        (8     0       0       0  

Shares issued to employees

     15,000        2        5,998       0       0       6,000  

Stock option expense

     0        0        (1,705,725     0       0       (1,705,725
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2016

     176,205,084        17,621        92,719,573       (82,076,019     (298,312     10,362,863  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at January 1, 2017

     176,386,884        17,639        93,167,465       (79,632,626     (298,203     13,254,275  

Net income

     0        0        0       2,499,369       0       2,499,369  

Exercise of stock options issued to employees

     3,332        0        766       0       0       766  

Other comprehensive income/(loss)

     0        0        0       0       (1,046     (1,046

Stock option expense

     0        0        200,025       0       0       200,025  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2017

     176,390,216        17,639        93,368,256       (77,133,257     (299,249     15,953,389  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

3


Table of Contents

Universal Biosensors, Inc.

Consolidated Condensed Statements of Cash Flows (Unaudited)

 

     Six Months Ended June 30,  
     2017     2016  
     A$     A$  

Cash flows from operating activities:

    

Net income/(loss)

     2,499,369       (1,193,117

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

    

Depreciation and amortization

     1,258,890       1,335,266  

Share based payments expense

     200,025       (1,705,725

Loss on fixed assets disposal

     2,409       0  

Unrealized foreign exchange losses/(gains)

     (159,052     (155,749

Financing costs - amortization of warrants

     106,678       110,464  

Change in assets and liabilities:

    

Inventory

     (351,993     91,185  

Accounts receivables

     (1,279,435     (2,264,089

Prepaid expenses and other current assets

     17,166       (101,828

Deferred revenue

     (546,655     3,347,592  

Employee entitlements

     139,392       145,651  

Accounts payable and accrued expenses

     (295,656     (110,846
  

 

 

   

 

 

 

Net cash provided by/(used in) operating activities

     1,591,138       (501,196
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (725,243     (248,232
  

 

 

   

 

 

 

Net cash used in investing activities

     (725,243     (248,232
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of borrowings

     (265,173     (216,306

Proceeds from stock options exercised

     766       0  
  

 

 

   

 

 

 

Net cash used in financing activities

     (264,407     (216,306
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     601,488       (965,734

Cash and cash equivalents at beginning of period

     20,402,322       14,350,307  

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

     (1,046,045     (166,243
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     19,957,765       13,218,330  
  

 

 

   

 

 

 

See accompanying notes to the financial statements

 

4


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

Organization of the Company

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. Our plan of operations over the remainder of the fiscal year ending December 31, 2017 and key aspects of our strategy for increasing shareholder value include:

 

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

 

    undertaking research and development work for our customers and partners;

 

    providing support services to our customers and partners;

 

    extending our electrochemical cell technology and demonstrating the broader application of our technology platform for markets with significant commercial potential; and

 

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

We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests (“CDIs”) have been quoted on the Australian Securities Exchange (“ASX”) since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, UBS, was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our primary research, development and manufacturing activities in Melbourne, Australia. A subsidiary of UBS, HRL was incorporated in British Columbia, Canada on November 30, 2016. On December 16, 2016, HRL acquired the assets of the Hemostasis Reference Laboratory business from LifeLabs, Inc. HRL conducts coagulation testing and calibration services for products we manufacture as well as for other international customers in Hamilton, Canada.

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

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

 

    Coagulation testing market – we are working with Siemens Healthcare Diagnostics, Inc. (“Siemens”) in relation to a range of products for the point-of-care coagulation testing market, pursuant to a Collaboration Agreement with Siemens (“Collaboration Agreement”). The first such product developed with Siemens, the Xprecia Stride™ Coagulation Analyzer, received CE mark approval on December 9, 2014 and US Food and Drug Administration (“FDA”) approval on October 4, 2016. The Xprecia Stride™ Coagulation Analyzer is now available in U.S., Europe, the Middle East, Africa, Asia Pacific, Latin America and Canada. Under the terms of a supply agreement with Siemens (“Supply Agreement”), UBS is the manufacturer of test strips for this product and two further tests still in development for Siemens.

 

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

 

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

Interim Financial Statements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2017 are not

 

5


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the financial statements and footnotes thereto as of and for the year ended December 31, 2016, included in the Form 10-K of Universal Biosensors, Inc.

The year-end consolidated condensed balance sheets data as at December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain prior year amounts in the consolidated condensed financial statements have been reclassified to conform to the current presentation.

Basis of Presentation

The Company’s consolidated condensed 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, operating cash flow and government grants and rebates 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.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, UBS and HRL. 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 revenue recognition, the carrying amount of property, plant and equipment, deferred income taxes, asset retirement obligations ,obligations related to employee benefits, warrants and research and development tax incentive income. Actual results could differ from those estimates.

Cash & Cash Equivalents

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

Short-Term Investments (Held-to-maturity)

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

Concentration of Credit Risk and Other Risks and Uncertainties

Cash and cash equivalents and accounts receivable consist of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the consolidated condensed balance sheets. The Company’s cash and cash equivalents are primarily invested with one of Australia’s largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash or cash equivalents to the extent of the amount recorded on the consolidated condensed 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.

 

6


Table of Contents

Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Derivative Instruments and Hedging Activities

Derivative financial instruments

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

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

Cash flow hedges

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

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

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

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

Derivative Instruments and Hedging Activities

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. For periods ended June 30, 2017 and December 31, 2016, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives are based on the market approach using observable market inputs, such as forward rates and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2. The fair value methodologies described as Level 2 and 3 inputs are defined elsewhere in these notes to the consolidated condensed financial statements.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Inventory

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

 

     Six Months
Ended June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Raw materials

     314,097        315,970  

Work in progress

     876,864        523,280  

Finished goods

     282        0  
  

 

 

    

 

 

 
     1,191,243        839,250  
  

 

 

    

 

 

 

Receivables

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

 

     Six Months
Ended June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Accounts receivable

     6,127,444        4,848,009  

Allowance for doubtful debts

     0        0  
  

 

 

    

 

 

 
     6,127,444        4,848,009  
  

 

 

    

 

 

 

Property, Plant, and Equipment - net

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

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

The Company receives Commonwealth of Australia grant monies under grant agreements to support its 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.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Research and Development

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

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Research

     94,017        87,896        340,594        369,103  

Development

     2,275,812        1,954,493        4,088,470        5,710,901  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

     2,369,829        2,042,389        4,429,064        6,080,004  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

At December 31, 2016 the Company has A$22,307,475 of accumulated tax losses available for carry forward against future earnings, which under Australian tax laws do not expire but may not be available under certain circumstances. The Company also has A$5,800,672 of non-refundable R&D tax offset as at December 31, 2016. The R&D Tax offset is a non-refundable tax offset, which assists to reduce the Company’s tax liability. Once the liability has been reduced to zero, any excess offset may be carried forward into future income years. UBI has US tax losses available for carry forward against future earnings of US$1,011,321 as of December 31, 2016.

We are subject to income taxes in the United States, Canada and Australia. U.S. federal income tax returns up to and including the 2015 financial year have been filed for UBI. In Australia, consolidated income tax returns of UBI and UBS up to and including the 2016 financial year have been filed. HRL has filed its tax returns in Canada for the 2016 financial year.

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.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Our overall ARO changed as follows:

 

     Six Months
Ended June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Opening balance

     2,600,000        2,600,000  

Accretion expense

     0        0  
  

 

 

    

 

 

 

Ending balance

     2,600,000        2,600,000  
  

 

 

    

 

 

 

Fair Value of Financial Instruments

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

 

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

 

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

 

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

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

 

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

 

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

 

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

Impairment of Long-Lived Assets

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

Australian Goods and Services Tax (GST) and Canadian Harmonized Sales Tax (HST)

Revenues, expenses and assets are recognized net of the amount of associated GST and HST, unless the GST and HST 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 and HST receivable or payable. The net amount of GST and HST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated condensed balance sheets.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Revenue Recognition

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

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

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

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

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

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

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

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

Master Services and Supply Agreement

In October 2007, the Company and LifeScan entered into a Master Services and Supply Agreement, under which the Company would provide certain services to LifeScan in the field of blood glucose monitoring and act as a non-exclusive manufacturer of blood glucose test strips. The Master Services and Supply Agreement was subsequently amended and restated in May 2009. The Company

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

has concluded the Master Services and Supply Agreement should be accounted for as three separate units of accounting: 1) research and development to assist LifeScan in receiving regulatory clearance to sell the blood glucose product (milestone payment), 2) contract manufacturing of the blood glucose test strips (contract manufacturing) which ceased in December 2013, and 3) ongoing services and efforts to enhance the product (product enhancement).

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

Collaboration Agreement

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

Of the seven milestones, the Company has delivered on four as of June 30, 2017. The last milestone delivered was in July 2015.

Interest income

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

Research and development tax incentive income

Research and development tax incentive income is recognized when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured.

The research and development tax incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system and is supported by legislative law primarily in the form of the Australian Income Tax Assessment Act 1997 as long as eligibility criteria are met. Generally speaking, entities which are an R&D entity involved in eligible R&D activities may claim research and development tax incentive income as follows:

 

  (1) as a 43.5% refundable tax offset if aggregate turnover (which generally means an entity’s total income that it derives in the ordinary course of carrying on a business, subject to certain exclusions) of the entity is less than A$20 million (the legislative rate for tax year prior to June 30, 2016 was 45%), or

 

  (2) as a 38,5% non-refundable tax offset if aggregate turnover of the entity is more than A$20 million (the legislative rate for tax year prior to June 30, 2016 was 40%).

Historically, the Company has had aggregate turnover less than A$20 million and in accordance with SEC Regulation

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

S-X Article 5-03, the Company’s research and development tax incentive income has been recognized as non-operating income as it is not indicative of the core operating activities or revenue producing goals of the Company. Management has assessed the Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the tax incentive regime described above. At each period end management estimates the refundable tax offset available to the Company based on available information at the time. This estimate is also reviewed by external tax advisors on an annual basis.

In the six months ended June 30, 2017 there is no reasonable assurance that the aggregate turnover of the Company for the year ending December 31, 2017 will be less than A$20 million and accordingly A$0 has been recorded as research and development tax incentive income. The eligible R&D activities and expenditures are able to be claimed as part of the current year income tax computation and any amounts included as a tax asset will be subject to recognition rules under ASC 740 “Income Taxes”.

For the six months ended June 30, 2016, a similar determination was made and A$0 was recorded as research and development tax incentive income. However, as at December 31, 2016, the Company ascertained that the aggregate turnover for the year ending December 31, 2016 was less than A$20 million and accordingly recorded research and tax development tax incentive income of $7,400,000. As at June 30, 2017, upon finalising its tax returns, the Company has now determined that the research and development tax incentive income for the 2016 financial year is $7,522,341. This amount has been recorded as “Other current assets” in the consolidated condensed balance sheets. An amount of A$122,341, being the difference in research and development tax incentive income recorded as at June 30, 2017 and December 31, 2016 has been recorded as “Other Income” in the consolidated condensed statements of comprehensive income/(loss).

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 UBI and UBS is AUD or A$ for all years presented. The functional currency of HRL is CAD$.

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 condensed statements of comprehensive income.

The Company has recorded foreign currency translation and transaction gains/(losses) of A$138,283 and (A$276,524) for the three months ended June 30, 2017 and 2016, respectively and A$641,547 and A$362,992 for the six months ended June 30, 2017 and 2016, respectively.

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

 

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

 

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

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

    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 June 30, 2017.

Patent and License Costs

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

We have an obligation to pay 50% of the patent fees paid by LifeScan in respect of the patents we license from LifeScan prior to the date of the first commercial sale of a non-glucose product that utilizes the technology licensed from LifeScan and 50% of the patent fees incurred by LifeScan in respect of such patents thereafter. This obligation was triggered with the first commercial sale of the Xprecia StrideTM Coagulation Analyzer by Siemens in December 2014 and an amount of US$517,831 was accrued at inception. The repayment of this amount to LifeScan, which commenced in November 2015, is being made over a 24 month period in equal monthly installments. The patent fees payable to LifeScan as at June 30, 2017 have been recorded as “Current liabilities - Other liability” in consolidated condensed balance sheets.

Marketing Support Payment

During 2009, LifeScan chose not to proceed with the registration of the then current product but to proceed with an enhanced product, called OneTouch® Verio®, and acknowledged that there would be a delay as a result. As a result of this change, LifeScan agreed to pay additional amounts per strip manufactured by us in 2010 and 2011 up to a specified volume limit (“manufacturing initiation payments”). At the same time, we agreed to pay LifeScan a marketing support payment in each of the two years following the first calendar year in which 1 billion strips are sold by LifeScan equal to 40% of the total manufacturing initiation payments made. LifeScan has sold just over 900 million strips in the 2015 financial year. Management has concluded that this loss contingency be accrued in 2015 as “Other liability” in consolidated balance sheets as it is both probable and the amount can be reliably estimated. The total amount of marketing support payments to be paid to LifeScan is US$2,048,602 (equivalent to A$2,663,290) and have been recorded as “Current liabilities - Other liability” in consolidated condensed balance sheets as at June 30, 2017.

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 periods ending June 30, 2017 and December 31, 2016 are considered operating leases. The costs of operating leases are charged to the consolidated condensed statements of comprehensive income on a straight-line basis over the lease term.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

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 are determined and fixed on the grant date based on the Company’s stock price. The exercise price of ZEPOs is nil.

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.

 

(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 ASX. The exercise price and any exercise conditions are determined by the board at the time of grant of the options. Any exercise conditions must be satisfied before the options vest and become capable of exercise. The options lapse on such date determined by the board at the time of grant or earlier in accordance with the Plan. Options granted to date have had a term up to 10 years and generally vest in equal tranches over three years. In addition to time based vesting, options granted may be also subject to the achievement of specified predetermined key performance indicators.

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

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  
     Feb-17     Dec-16     Apr-16  

Exercise Price (A$)

     0.50       0.33       0.50  

Share Price at Grant Date (A$)

     0.39       0.33       0.29  

Volatility

     69     69     70

Expected Life (years)

     7       7       7  

Risk Free Interest Rate

     2.47     2.60     2.23

Fair Value of Option (A$)

     0.13       0.19       0.08  

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Stock option activity during the current period is as follows:

 

     Number of shares      Weighted average
exercise price

A$
 

Balance at December 31, 2016

     16,264,169        0.67  

Granted

     2,629,500        0.50  

Exercised

     (3,332      0.23  

Lapsed

     (949,670      0.92  
  

 

 

    

 

 

 

Balance at June 30, 2017

     17,940,667        0.63  
  

 

 

    

 

 

 

The number of options exercisable as at June 30, 2017 and 2016 was 12,250,294 and 6,216,282, respectively. The total stock compensation expense/(income) recognized in the consolidated condensed statements of comprehensive income was A$123,312 and (A$1,707,683) for the three months ended June 30, 2017 and 2016, respectively and A$200,025 and (A$1,705,725) for the six months ended June 30, 2017 and 2016, respectively.

As of June 30, 2017, there was A$314,976 of unrecognized compensation expense related to unvested share-based compensation arrangements under the Employee Option Plan. This expense is expected to be recognized over the vesting years as follows:

 

Fiscal Year    A$  

2017

     241,481  

2018

     68,264  

2019

     5,231  
  

 

 

 
     314,976  
  

 

 

 

The aggregate intrinsic value for all options outstanding as at June 30, 2017 and 2016 was zero.

(b) Restricted Share Plan

Our Employee Share Plan was adopted by the Board of Directors in 2009. The Employee Share Plan permits our Board to grant shares of our common stock to our employees and directors (although our Board has determined not to issue equity to non-executive directors). The number of shares able to be granted is limited to the amount permitted to be granted at law, the ASX Listing Rules and by the limits on our authorized share capital in our certificate of incorporation. All our employees are eligible for shares under the Employee Share Plan. The Company currently proposes to continue to issue A$1,000 worth of RSUs 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 RSUs issued by the Company since January 1, 2016:

 

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

February, 2016

     15,000        6,000  

December, 2016

     181,800        59,994  

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

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

 

     Number of shares      Weighted average
issue price

A$
 

Balance at December 31, 2016

     575,580        0.31  

Granted

     0        0.00  

Release of restricted shares

     (16,168      0.31  
  

 

 

    

 

 

 

Balance at June 30, 2017

     559,412        0.31  
  

 

 

    

 

 

 

Employee Benefit Costs

The Company contributes 9.5% of each employee’s salary to standard defined contribution superannuation funds on behalf of all UBS employees. 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 have reached the statutory requirement age. Whilst the Company has a third party default superannuation fund, it permits UBS employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the consolidated condensed statements of comprehensive income as they become payable.

Registered Retirement Savings Plan and Deferred Sharing Profit Plan

The Company provides eligible HRL employees a retirement plan through Sun Life Assurance Company of Canada. The retirement plan includes a Registered Retirement Savings Plan (“RRSP”) and Deferred Profit Sharing Plan (“DPSP”). The RRSP is voluntary and the employee contributions are matched by the Company up to a maximum of 5% based on their continuous years of service and placed into the DPSP. The Company contributes 1% to 2% of the employee’s base earnings towards the DPSP. The DPSP contributions are vested immediately and expensed. There are no unfunded liabilities.

Benefit Plan

The Company provides eligible HRL employees through Sun Life Assurance Company of Canada a Benefit Plan to its employees. In general, the Benefit Plan includes extended health care, dental care, basic life insurance, basic accidental death and dismemberment, and disability insurance.

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

Basic and diluted net income/(loss) per share is presented in conformity with ASC 260 – Earnings per Share. Basic and diluted net income/(loss) per share has been computed using the weighted-average number of common shares outstanding during the period. Diluted net income/(loss) per share is calculated by adjusting the basic net income/(loss) per share by assuming all dilutive potential ordinary shares are converted.

Total Comprehensive Income/(Loss)

The Company follows ASC 220 – Comprehensive Income/(Loss). Comprehensive income/(loss) 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/(loss).

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

The tax effect allocated to each component of other comprehensive income/(loss) is as follows:

 

     Before-Tax
Amount
    

Tax
(Expense)/

Benefit

     Net-of-Tax
Amount
 
     A$      A$      A$  

Six Months Ended June 30, 2017

        

Foreign currency translation reserve

     1,046        0        1,046  

Reclassification for gains realised in net income

     0        0        0  
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     1,046        0        1,046  
  

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2016

        

Unrealized loss on derivative instruments

     0        0        0  

Reclassification for gains realised in net income

     0        0        0  
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     0        0        0  
  

 

 

    

 

 

    

 

 

 

Business combinations

Business combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the fair value at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition related costs are expensed as incurred (except for those costs arising on the issue of equity instruments which are recognized directly in equity). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured as the excess of the acquisition cost, the amount of any non-controlling interest and the fair value of any previous UBI equity interest in the acquiree, over the fair value of the identifiable net assets acquired.

Reclassification

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

Revision

In 2016, the Company classified patent application costs (including legal and maintenance fees) within the general and administrative expense line in the Consolidated Statement of Comprehensive Income. The patent application costs of A$203,582 and A$525,754 for the three and six months ended June 30, 2016 have been reclassified from Research and development expenses to General and administrative expenses to conform to current year classification. The Company has concluded that this reclassification was not material to the Consolidated Statements of Comprehensive Income/(Loss) and the reclassification had no impact on the pre-tax income/(loss), net income/(loss) or earnings per share for the year ended December 31, 2016.

Government grants

UBS was awarded a grant from the Commonwealth of Australia under the Next Generation Manufacturing Investment Programme up to a maximum grant amount of A$575,000 payable over a three year period commencing from January 1, 2017. The grants are paid upon achievement of pre-agreed milestones. The milestones generally relate to UBS placing purchase orders, commissioning upgrades and validating the equipment. Amongst other reasons, the Commonwealth of Australia may terminate the grant agreement for breach of the agreement by UBS or for failure to undertake the required programme. Under these circumstances, the Commonwealth of Australia may require UBS to repay some or the entire grant. The Company continues to undertake the project funded by the Commonwealth of Australia.

No amounts have been received under this grant to date. In the event UBS had achieved milestones and received grant payments, it believes that the likelihood of being required to repay grant funding is remote because the Company continues to act in good faith with respect to the grant.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Recent Accounting Pronouncements     

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

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

 

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

 

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

 

    Determine the transaction price (step 3).

 

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

 

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

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

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

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

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

 

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

 

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

On May 9, 2016, the FASB issued ASU 2016-12 which amends certain aspects on the Board’s new revenue standard, ASU 2014-09. The amendments include further clarifications on collectability, presentation of sales tax and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transaction and transition technical correction.

On May 3, 2016, the FASB issued ASU 2016-11 which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC at the EITF’s March 3, 2016 meeting.

On December 21, 2016, the FASB issued ASU 2016-20, which makes certain technical corrections (i.e., minor changes and enhancements) to the Board’s new revenue standard, ASU 2014-09. The amendments clarify, rather than change, the new revenue standard’s core revenue recognition principles.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

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

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

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

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

On February 25, 2016, the FASB issued ASU 2016-02, its new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, the ASU addresses other concerns related to the current leases model. For example, the ASU eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure.

The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company’s financial statements.

On March 17, 2016, the FASB issued ASU 2016-08, which amends the principal-versus agent implementation guidance and illustrations in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle.

Among other things, the ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer.” Therefore, for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods or services and the agent for others.

The ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14). In addition, entities are required to adopt the ASU by using the same transition method they used to adopt the new revenue standard. The Company is currently evaluating the impact the adoption of ASU 2016-08 will have on the Company’s financial statements.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

On March 30, 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and non-public entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. For all other entities, the ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after December 15, 2018. The adoption of this guidance has not had a material impact on the Company’s financial statements.

On August 26, 2016, the FASB issued ASU 2016-15, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues:

 

    Debt prepayment or debt extinguishment costs.

 

    Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing.

 

    Contingent consideration payments made after a business combination.

 

    Proceeds from the settlement of insurance claims.

 

    Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies.

 

    Distributions received from equity method investees.

 

    Beneficial interests in securitization transactions.

 

    Separately identifiable cash flows and application of the predominance principle.

For public business entities, the guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities. The Company has adopted this guidance and it has not had a material impact on the Company’s financial statements.

On November 17, 2016, the FASB issued ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods thereafter. Early adoption is permitted for all entities. The Company is currently evaluating the impact the adoption of ASU 2016-18 will have on the Company’s financial statements.

On October 24, 2016, the FASB issued ASU 2016-16, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. For public business entities, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of a fiscal year for which neither the annual or interim (if applicable) financial statements have been issued. If an entity chooses to early adopt the amendments in the ASU, it must do so in the first interim period of its annual financial statements (if the entity issues interim financial statements). That is, an entity cannot adopt the amendments in the ASU in a later interim period and apply them as if they were in effect as of the beginning of the year. Entities should apply the ASU’s amendments on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. The Company has adopted this guidance and it has not had a material impact on the Company’s financial statements.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

On January 5, 2017, the FASB issued ASU 2017-01 to clarify the definition of a business in ASC 805, which was among the primary issues raised in connection with the FAF’s post-implementation review report on FASB Statement 141(R) (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods therein. For all other entities, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company has adopted this guidance and it has not had a material impact on the Company’s financial statements.

On January 26, 2017, the FASB issued ASU 2017-04, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount [and] should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” The ASU is effective prospectively for fiscal years beginning after December 15, 2019 for public business entities that are SEC filers. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted this guidance and it has not had a material impact on the Company’s financial statements.

On May 10, 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact the adoption of ASU 2017-09 will have on the Company’s financial statements.

On May 16, 2017, the FASB issued ASU 2017-10 in response to a consensus reached by the EITF at its March 2017 meeting. The ASU addresses “diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of ASC 853” by “clarifying that the grantor is the customer of the operation services in all cases for those arrangements.” The amendments also allow for a “more consistent application of other aspects of the revenue guidance, which are affected by this customer determination.” For entities that have not yet adopted ASC 606, the effective date is aligned with that for ASC 606. For public business entities that have adopted ASC 606, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For most other entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2017-10 will have on the Company’s financial statements.

Related Party Transactions

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

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

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

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

Mr. Denver is a director of SpeeDx and up until August 7, 2017 was a director of the Company.

Mr. Coleman is a Non-Executive Chairman of the Company and Executive Chairman of Viburnum Funds Pty Ltd. Viburnum Funds Pty Ltd, as an investment manager for its associated funds holds a beneficial interest and voting power over approximately 15.85% of our shares.

Borrowings

Future maturities, interest and other payments under the Company’s long term secured loan pursuant to the credit agreement (described below) as of June 30, 2017 and December 31, 2016 are as follows:

 

     June 30, 2017      December 31, 2016  
     US$      A$      US$      A$  

2017

     885,500           1,756,563     

2018

     16,694,000           16,694,000     

Thereafter

     0           0     
  

 

 

       

 

 

    

Total minimum payments

     17,579,500           18,450,563     

Less amount representing interest and other fees

     (2,579,500         (3,450,563   
  

 

 

       

 

 

    

Gross balance of long term debt

     15,000,000           15,000,000     

Less fair value of warrants recorded within loan (a)

     (815,655         (815,655   

Plus interest accretion

     576,098           495,203     
  

 

 

       

 

 

    

Total carrying value

     14,760,443        19,189,344        14,679,548        20,286,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

Less current portion

     0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total carrying value, non-current portion

     14,760,443        19,189,344        14,679,548        20,286,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying value of the borrowings approximates its fair value. The fair value is estimated by discounting future cash flows at the currently offered rates for borrowings of similar remaining maturities.

 

  (a) The warrants issued in December 2013 had a fair value of US$815,655 as of June 30, 2017 and December 31, 2016, and are included in equity.

Athyrium Credit Agreement

On December 19, 2013 (“Closing Date”), UBI and its wholly owned subsidiary, UBS (together UBI and UBS, the “Transaction Parties”) entered into a credit agreement with Athyrium Opportunities Fund (A) LP (“Athyrium A”), as administrative agent (the “Administrative Agent”) and as a lender, and Athyrium Opportunities Fund (B) LP (“Athyrium B”) as a lender (Athyrium A and Athyrium B together with any other lenders party thereto from time to time, the “Lenders”) for a secured term loan of up to US$25 million, which was amended on January 30, 2015 (“Credit Agreement”). Of this amount, US$15 million had been drawn at December 31, 2013 and a further US$10 million was available to be drawn down on or before July 31, 2015, however UBS decided not to take up the additional debt funding.

The term loan has a maturity date of December 19, 2018 (“Maturity Date”) and bears interest at 10.5% per annum payable in cash quarterly in arrears over the five year term, and as otherwise described in the Credit Agreement. A default interest rate of 13%

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

per annum shall apply during the existence of a default under the Credit Agreement. Other than as summarized below, UBS is not required to make payments of principal for amounts outstanding under the term loan until maturity, December 19, 2018. The term loan under the Credit Agreement is secured by substantially all of UBI and UBS’ assets. UBI (together with any future subsidiaries) guarantees all of UBS’s obligations under the term loan.

Voluntary prepayments of the term loans are not permitted prior to the second anniversary of the Closing Date, except in the event of a change of control of a Transaction Party. After the second anniversary, UBS can make voluntary repayments in minimum principal amounts of US$2,500,000 together with interest, plus the premium described below. UBS must make mandatory prepayments in certain prescribed circumstances, including in the event of raising additional debt financing, a sale or transfer of assets other than in certain circumstances and in the event of other specified extraordinary receipts. Extraordinary receipts include cash received or paid other than in the ordinary course of business, such as tax refunds (other than GST and R&D tax rebates), LifeScan lump sum fee payments and Siemens termination fees. In such events, UBS must prepay to the Lenders 100% of the net cash proceeds received up to the outstanding principal amount of the loans drawn down, together with all accrued and unpaid interest thereon and all other obligations. In the event of any prepayment on or prior to the second anniversary of the Closing Date with respect to any obligations under the Credit Agreement, UBS must also pay a prepayment premium of 20% of the principal of such prepayment due and payable on the applicable date. In the event of any prepayment after the second anniversary of the Closing Date with respect to any obligations under the Credit Agreement, UBS must pay a prepayment premium commencing at 15% of the principal of such prepayment due and payable on the applicable date and reducing pro-rata on a monthly basis until the Maturity Date.

Unless the facility is otherwise terminated earlier pursuant to the terms of the Credit Agreement, UBS (as the borrower) is required to repay the outstanding principal amount of the loans drawn down, together with all accrued and unpaid interest thereon and all other obligations on Maturity Date.

UBS paid a non-refundable fee of US$625,000 to the Lenders on the Closing Date (being 2.5% of the aggregate credit facility) and a non-refundable fee of US$200,000 to the Lenders in connection with the January 2015 amendment to the Credit Agreement. A 2% commitment fee based on any available unused borrowing commitment was paid by UBS under the Credit Agreement until July 31, 2015. The Lenders are also entitled to receive 30% of the net proceeds of milestone payments paid under the Collaboration Agreement by and among UBS, UBI and Siemens, up to a maximum of US$600,000 in the aggregate, of which US$300,000 was paid in February 2015 and the balance of US$300,000 was paid in August 2015 (upon receipt of two further milestone payments). UBS has also agreed to pay certain taxes arising in connection with the Credit Agreement and other Loan Documents, including withholding taxes. UBS has also agreed to pay certain reasonable out-of-pocket expenses incurred by the Lenders in connection with the loan documents, including the January 2015 amendment, or as may be incurred in connection with the enforcement or protection of their rights.

The Credit Agreement also contains certain covenants, including among other things, covenants: (i) relating to the delivery of financial and other information and certificates, notices of defaults, litigation and other material events; payment of taxes and other obligations; maintenance of insurance; (ii) which limit or restrict the incurrence of liens; the making of investments; the incurrence of certain indebtedness; mergers, dispositions, liquidations, or consolidations and significant asset sales; restricted payments; transactions with affiliates other than on normal and arms-length terms; burdensome agreements; prepayment of other indebtedness; ownership of subsidiaries; and (iii) which require UBS to maintain unrestricted cash of not less than US$2,000,000 in a specified bank account at any time.

As further described below, pursuant to the Credit Agreement, UBI issued to the Lenders warrants entitling the holder to purchase up to an aggregate total of 4.5 million shares of UBI’s common stock in the form of CDIs at a price of A$1.00 per share (the “Exercise Price”), which represents a 117% premium over the closing price of UBI’s common stock on December 19, 2013. The warrants are immediately exercisable and have a term of seven years.

Other

In December 2015, UBS entered into an arrangement with Elantis Premium Funding Ltd to fund the Group’s 2016 insurance premium. The total amount financed was A$360,510 at inception and the short-term borrowing was fully repaid in September 2016.

 

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Universal Biosensors, Inc.

Notes to Consolidated Condensed Financial Statements (Unaudited)

 

Interest was being charged at a fixed rate of 2.60% per annum. In December 2016, UBS entered into an arrangement with Elantis Premium Funding Ltd to fund the Group’s 2017 insurance premium. The total amount financed was A$369,630 at inception and the short-term borrowing will be fully repaid in September 2017. Interest is charged at a fixed rate of 2.60% per annum. The short-term borrowing is secured by the insurance premium refund.

Warrants

Pursuant to the Credit Agreement, UBI issued to the Lenders warrants entitling the holder to purchase up to an aggregate total of 4.5 million shares of UBI’s common stock in the form of CDIs at a price of A$1.00 per share (the “Exercise Price”), which represents a 117% premium over the closing price of UBI’s common stock on December 19, 2013. The warrants are immediately exercisable and have a term of seven years.

The warrants may be exercised at any time until December 19, 2020, in whole or in part in minimum multiples of 500,000 shares of common stock. The holder of the warrants can pay the Exercise Price in cash or it has the right to pay all or a portion of the Exercise Price by making a cashless exercise, therefore reducing the number of shares of common stock the holder would otherwise be issued.

The warrant is subject to adjustments in the event of certain issuances by UBI, such as bonus issues, pro rata (rights) issues and reorganizations (e.g., consolidation, subdivision).

The Company assessed that the warrants are not liabilities within scope of ASC 480-10-25. The warrants are legally detachable from the loan and separately exercisable and as such meet the definition of a freestanding derivative instrument pursuant to ASC 815.

However, the scope exception in accordance with ASC 815-10-15-74 applies to warrants and it meets the requirements of ASC 815 that would be classified in stockholders’ equity. Therefore, the warrants were initially accounted for within stockholders’ equity, and subsequent changes in fair value will not be recorded. The fair value of the warrant was estimated using the Trinomial Lattice model.

The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the loan pursuant to ASC 835-30-35-2.

Restricted Cash

Restricted cash maintained by the Company in the form of term deposits is as follows:

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Financial covenant pursuant to the Credit Agreement

     2,900,000        2,900,000  

Collateral for facilities

     335,000        320,000  
  

 

 

    

 

 

 
     3,235,000        3,220,000  
  

 

 

    

 

 

 

Financial covenant pursuant to the credit agreement is recorded under the caption “Other non-current assets” in the consolidated condensed balance sheets. $320,000 of the collateral for facilities is recorded under the caption “Other non-current assets” whilst the remaining balance is recorded under the caption “Other current assets”.

 

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Universal Biosensors, Inc.

 

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

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Form 10-K filed with the United States Securities and Exchange Commission (“SEC”). This Form 10-Q contains, including this discussion and analysis, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward looking statements, including statements relating to future events and our future financial performance. Those statements in this Form 10-Q containing the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “may”, “assumes”, “illustration”, and similar expressions constitute forward looking statements, although not all forward looking statements contain such identifying words.

The forward looking statements contained in this Form 10-Q are based on our current expectations, assumptions, estimates and projections about the Company and its businesses. All such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those results expressed or implied by these forward-looking statements, including those set forth in this Quarterly Report on Form 10-Q.

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. Our plan of operations over the remainder of the fiscal year ending December 2017 and key aspects of our strategy for increasing shareholder value include:

 

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

 

    undertaking research and development work for our customers and partners;

 

    providing support services to our customers and partners;

 

    extending our electrochemical cell technology and demonstrating the broader application of our technology platform for markets with significant commercial potential; and

 

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

We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests have been quoted on the ASX since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, UBS, was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our primary research, development and manufacturing activities in Melbourne, Australia. A subsidiary of UBS, HRL was incorporated in British Columbia, Canada on November 30, 2016. On December 16, 2016, HRL acquired the assets of the Hemostasis Reference Laboratory business from LifeLabs, Inc. HRL conducts coagulation testing and calibration services for products we manufacture as well as for other international customers in Hamilton, Canada.    

We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS by LifeScan, Inc. and other third party licensors.    

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

 

    Coagulation testing market – we are working with Siemens in relation to a range of products for the point-of-care coagulation testing market pursuant to a Collaboration Agreement. The first such product developed with Siemens, the Xprecia Stride™ Coagulation Analyzer, received CE mark approval on December 9, 2014 and FDA approval on October 4, 2016. The Xprecia Stride™ Coagulation Analyzer is now available in U.S., Europe, the Middle East, Africa, Asia Pacific, Latin America and Canada. Under the terms of a Supply Agreement with Siemens, UBS is the manufacturer of test strips for this product and two further tests still in development for Siemens.

 

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    Blood glucose – we provide services to LifeScan as required from time to time, pursuant to a Master Services and Supply Agreement and a Development and Research Agreement with LifeScan.

 

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

Results of Operations

Analysis of Consolidated Revenue

Our total revenue increased by 18% and 36% to A$6,393,882 and A$14,327,351, respectively during the three and six months ended June 30, 2017 compared to the same period in the previous financial year. Increase in total revenue was as a result of increased sales of the Xprecia StrideTM (refer to the section below on “Revenue from Products” for more details) and OneTouch Verio® strips (refer to the section below on “Revenue from Services” for more details).

Revenue from Products

The financial results of the PT-INR test strips for the Xprecia StrideTM Coagulation Analyzer we manufactured and sold to Siemens during the respective periods are as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Revenue from products

     1,425,171        0        2,297,615        183,480  

Cost of goods sold

     (1,039,244      (53,425      (1,915,134      (240,569
  

 

 

    

 

 

    

 

 

    

 

 

 

Production margin

     385,927        (53,425      382,481        (57,089
  

 

 

    

 

 

    

 

 

    

 

 

 

We commenced manufacture of the PT-INR test strips on behalf of Siemens during the third quarter of 2014. The movement in revenues is primarily volume driven. The revenues from the manufacture and sale of PT-INR strips to Siemens in 2016 were low as Siemens were undertaking a limited marketing release of the product. The increase in revenues in 2017 is as a result of the full commercial launch by Siemens of the Xprecia StrideTM Coagulation Analyzer after successful completion of its limited release including commencement of sales activities in U.S. during the current quarter. The Xprecia Stride™ Coagulation Analyzer is available in U.S., Europe, the Middle East, Africa, Asia Pacific, Latin America and Canada. The production margin from the sale of our PT-INR strips is currently low and volatile, reflecting early stage production. This trend is also representative of a new product entrant within our industry.

Revenue from Services

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

 

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

 

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

 

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

 

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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:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Revenue from services:

           

Quarterly service fee

     4,671,598        5,401,513        11,454,992        10,315,252  

Other services

     297,113        0        574,744        0  
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,968,711        5,401,513        12,029,736        10,315,252  

Cost of services

     (192,888      0        (482,805      0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net margin

     4,775,823        5,401,513        11,546,931        10,315,252  
  

 

 

    

 

 

    

 

 

    

 

 

 

Quarterly service fee – Details of the number of Verio® blood glucose test strips sold by LifeScan and the quarterly service fees generated by us is as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     Millions      Millions      Millions      Millions  

No. of strips sold

     422        402        837        703  

Quarterly service fees - USD

     3.59        4.01        8.78        7.77  

Quarterly service fees - AUD

     4.67        5.40        11.45        10.32  

Overall volume is increasing reflecting ongoing market penetration and growth. The number of Verio® blood glucose test strips sold by LifeScan increased by 5% and 19% during the three and six months ended June 30, 2017 compared to the same period in the previous financial year. Despite increase in volume, quarterly service fees decreased by 8% during the three months ended June 30, 2017 when compared to the same period in the previous financial year. The reason for this is that a larger proportion of the quarterly service fees for the three months ending June 30, 2017 were calculated using the lower pricing of US$0.0075 per strip when compared to the quarterly service fees for the three months ending June 30, 2016.

The quarterly service fee for each quarter in a LifeScan financial year is calculated based on the number of OneTouch Verio® blood glucose test strips sold in such LifeScan financial year as follows: US$0.0125 per strip for the first 500 million strips sold in a financial year and US$0.0075 per strip for sales in excess of 500 million strips in such financial year. Quarterly service fees are reported and paid by LifeScan in USD.

LifeScan has the ability to buy out, or “convert,” its obligation to pay quarterly service fees to us in certain situations set out in the Master Services and Supply Agreement. At any time after the end of the quarter following receipt by us of an aggregate of US$45 million in quarterly service fees, LifeScan has the option to give notice of its election to convert its obligation to continue paying the quarterly service fees. In the event LifeScan delivers notice of conversion, LifeScan will remain obligated to pay the quarterly service fees for the remainder of LifeScan’s financial year (as defined in Johnson & Johnson’s internal accounting policies and procedures, which ends on the last Sunday of any given calendar year) in which the notice was given, and, after the end of that financial year, LifeScan must pay us a one-time lump sum fee to buy out its obligation to pay future quarterly service fees. The amount of this one-time lump sum service fee is calculated by multiplying the sum of all quarterly service fees for the LifeScan financial year in which notice of conversion is given, by the applicable multiplier for such financial year as set forth in the Master Services and Supply Agreement. As of June 30, 2017, we had received aggregate quarterly service fees of US$39.93 million. The amount of the quarterly service fee for the quarter ended June 30, 2017 is US$3.59 million, which amount had not yet been paid as of June 30, 2017. Since we have not received an aggregate of US$45 million as at June 30, 2017, the earliest LifeScan can give notice of conversion is during its 2018 financial year. If LifeScan gives notice of conversion during LifeScan’s 2018 financial year or any subsequent LifeScan financial year, the applicable multiplier is 2.0.

By way of illustration only:

 

    If the aggregate quarterly service fees received by us from LifeScan first exceed US$45 million in the fourth quarter of LifeScan’s 2017 financial year, then the earliest LifeScan could deliver notice of conversion to us is the first quarter of LifeScan’s 2018 financial year, and if LifeScan sells 2 billion strips in LifeScan’s 2018 financial year, then:

 

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    the total 2018 financial year quarterly service fees payable to us would equal US$17.5 million – i.e., 500,000,000*US$0.0125 + 1,500,000,000*US$0.0075; and

 

    the one-time lump sum fee that would be payable to us after the end of LifeScan’s 2018 financial year would equal US$35.0 million – i.e., US$17.5 million multiplied by 2.0.

The above scenarios and calculations are an illustration only intended to provide an example of how the conversion option would operate, and there can be no assurance as to when, if ever, we will have received an aggregate of US$45 million in quarterly service fees from LifeScan, or as to the number of OneTouch Verio® strips that LifeScan may sell in any financial year, or as to when, if ever, LifeScan will exercise its conversion option.

LifeScan’s obligation to pay quarterly service fees will also terminate if LifeScan terminates the Master Services and Supply Agreement for our uncured material breach, in the event of certain change of control events of our company, or for certain regulatory reasons.

Contract research and development – The nature and scope of contract research and development is determined by our customers and partners based upon their requirements and therefore our revenues and margins tend to fluctuate. We did not generate any revenue from contract research and development during the three and six months ended June 30, 2017 and 2016.

Other services - We generated revenues principally from calibration services performed by HRL and from Siemens based on work undertaken for them.

Contribution from Products & Services

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

 

       Three Months Ended June 30,      Six Months Ended June 30,  
       2017      2016      2017      2016  
       A$      A$      A$      A$  

Quarterly service fees

       4,671,598        5,401,513        11,454,992        10,315,252  

Manufacturing contribution

       385,927        (53,425      382,481        (57,089

Other services

       104,225        0        91,939        0  
    

 

 

    

 

 

    

 

 

    

 

 

 

Contribution from products & services

       5,161,750        5,348,088        11,929,412        10,258,163  
    

 

 

    

 

 

    

 

 

    

 

 

 

The increase in year to date total contributions from products and services reflected in the table above is primarily represented by the growth in the quarterly service fee which has a 100% margin.

The manufacturing operation is currently running on one shift with all costs being expensed. The Company is investing in scale up projects which will improve efficiency and yields and lead to a profitable manufacturing operation. The result of this action is currently reflected in the manufacturing contribution whereby the same has been improving steadily. We are targeting a margin of 40% which we believe is typical of device manufacturers with shared investment and research and development risk. The manufacturing operation has the flexibility to expand in order to support volume increases on the Siemens contract.

Contribution from other services fluctuated over the period due to the calibration services performed by HRL and our partners R&D services requirements.

Product Support

Product support relates to post-market technical support provided by us to Siemens for the Xprecia Stride™ Coagulation Analyzer.

 

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Product support for the respective periods are as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$                

Product support

     270,726        0        335,116        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

As revenue from products increases, we expect product support expenditure to increase as well.

Depreciation

Depreciation of certain fixed assets are based on output. As more units are being produced for commercial production, a larger proportion of depreciation is charged to cost of goods sold as opposed to research and development expenses resulting in a decline in depreciation charged to research and development.

Depreciation for the respective periods have been charged as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Research and development expenses

     363,854        632,434        757,185        1,272,400  

General and administrative expenses

     46,585        26,726        88,406        51,397  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation

     410,439        659,160        845,591        1,323,797  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and Development Expenses

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

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

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

 

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

 

    materials and consumables acquired for the research and development activities;

 

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

 

    facilities, and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and other supplies.

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

(a) Blood coagulation testing

In September 2011 we entered into a Collaboration Agreement with Siemens which was amended in September 2012 and March 2016, pursuant to which we will develop a range of test strips and reader products for the hospital point-of-care and alternative site coagulation testing markets. The first such product developed with Siemens, the Xprecia Stride™ Coagulation Analyzer, received CE mark approval on December 9, 2014 and FDA approval on October 4, 2016. The Xprecia Stride™ Coagulation Analyzer is now available for sale in U.S., Europe, the Middle East, Africa, Asia Pacific, Latin America and Canada. In 2012, we entered into a Supply Agreement with Siemens under which we manufacture and supply the test strips for this product and will manufacture and supply the test strips for two further tests still in development with Siemens.

 

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(b) DNA/RNA

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

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Research

     94,017        87,896        340,594        369,103  

Development

     2,275,812        1,954,493        4,088,470        5,710,901  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

     2,369,829        2,042,389        4,429,064        6,080,004  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Research and development expenditure principally reflects the effort required in product development of the tests we are developing. Research and development expenditure increased by 16% for the three months ended June 30, 2017 compared to the same period in the previous financial year and decreased by 27% for the six months ended June 30, 2017 compared to the same period in the previous financial year The first quarter of 2016 includes costs incurred for the development of our own Prothrombin Time International Normalized Ratio self-testing device hence a larger spend on research and development expenditure for the six months ended June 30, 2016 compared to the six months ended June 30, 2017. The Prothrombin Time International Normalized Ratio self-testing device project was put on hold in April 2016. The increase in research and development expenditure in the current quarter principally reflects the effort required to complete the final stages of the development phase of the two tests we are undertaking on behalf of 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 may direct the research and development activities and may contribute towards all or part of the cost of these activities, both of which will influence our research and development expenditure. Research and development activities undertaken on behalf of our customers and partners for the three months ended June 30, 2017 and 2016 were A$1,472,841 and A$1,813,323, respectively and A$2,741,342 and A$3,724,003 for the six months ended June 30, 2017 and 2016, respectively.

 

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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 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 increased by 27% and 7% for the three months and six months ended June 30, 2017 compared to the same period in the previous financial year. The increase in expenditure primarily represents the costs involved in maintaining the HRL business which we acquired in December 2016. The lower expenditure in 2016 also reflects reversal of options expense for departing employees in April 2016.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

General and administrative expenses

     1,543,633        1,215,050        3,230,162        3,006,520  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Income

The movement in interest income is generally attributable to the amount of funds available for investment in Australian currency noting that a large proportion of our funds is held in US denominated currency. As at June 30, 2017 and 2016, 97% and 94%, respectively of our funds were held in US denominated currency which currently does not produce any investment interest.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Interest income

     22,173        25,628        58,853        50,869  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

Interest expense relates to interest being charged on a short-term borrowing initiated by the Company each year. These short-term loans are taken out every year to fund our insurance premiums and are repaid during the financial year. The insurance premiums at inception were A$369,630 and A$360,510 for the financial years 2017 and 2016, respectively. The interest rates were 2.60% for the financial years 2017 and 2016. Increase in interest expense is generally attributable to the higher premium financed and under accrual of interest expense as at December 31, 2016.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Interest expense

     2,883        2,812        6,727        5,624  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Financing Costs

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     A$      A$      A$      A$  

Interest expense

     528,264        535,476        1,044,262        1,081,319  

Warrants expense

     53,965        54,703        106,678        110,464  

Other debt issuance costs

     127,655        128,917        252,775        259,650  
  

 

 

    

 

 

    

 

 

    

 

 

 
     709,884        719,096        1,403,715        1,451,433  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense relates to applicable interest of 10.5% levied on the loan. The debt issuance costs were recorded as deferred issuance costs and are amortized as interest expense, using the effective interest method, over the term of the loan.

Decreases in financing costs is primarily a result of strengthening of the AUD against the USD, noting that our loan is denominated in USD. For the three and six month period ending June 30, 2017, the period-over-period foreign currency movements relative to the AUD dollar would have had a unfavorable impact (exclusive of hedging impact) on our reported results of A$7,933 and A$34,227, respectively.

Other

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

Research and development tax incentive income is recognized when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured.

In the three and six months ended June 30, 2017 there is no reasonable assurance that the aggregate turnover of the Company for the year ending December 31, 2017 will be less than A$20 million and accordingly A$0 has been recorded as research and development tax incentive income. The eligible R&D activities and expenditures are able to be claimed as part of the current year income tax computation and any amounts included as a tax asset will be subject to recognition rules under ASC 740 “Income Taxes”.

For the three and six months ended June 30, 2016, a similar determination was made and A$0 was recorded as research and development tax incentive income. However, as at December 31, 2016, the Company ascertained that the aggregate turnover for the year ending December 31, 2016 was less than A$20 million and accordingly recorded research and tax development tax incentive income of $7,400,000. As at June 30, 2017, upon finalising its tax returns, the Company has now determined that the research and development tax incentive income for the 2016 financial year is $7,522,341. This amount has been recorded as “Other current assets” in the consolidated condensed balance sheets. An amount of A$122,341, being the difference in research and development tax incentive income recorded as at June 30, 2017 and December 31, 2016 has been recorded as “Other Income” in the consolidated condensed statements of comprehensive income/(loss).

Consequently, research and development tax incentive income recorded for the three months ended June 30, 2017 and 2016 were A$122,341 and A$0, respectively and A$122,341 and A$0, respectively for the six months ended June 30, 2017 and 2016. The balance, for all periods, is primarily represented by foreign exchange movements arising from the settlement of foreign denominated transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies.

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.

 

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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 reasonably assured. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred.

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

(b) Stock-Based Compensation

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

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

Share Price and Exercise Price at Valuation Date

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

Volatility

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

Time to Expiry

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

Risk Free Rate

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

(c) Income Taxes

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

 

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

(e) Warrants

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

Exercise Price at Valuation Date

The exercise price of the warrants has been determined as stated in the Credit Agreement. For further details, see Notes to Consolidated Condensed Financial Statements - Summary of Significant Accounting Policies – Borrowings – Athyrium Credit Agreement.

Volatility

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

Time to Expiry

The warrants have a term of seven years.

Risk Free Rate

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

(f) Research and development tax incentive income

Research and development tax incentive income is recognized when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured. The research and development tax incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system and is supported by legislative law primarily in the form of the Australian Income Tax Assessment Act 1997 as long as eligibility criteria are met.

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

 

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Financial Condition, Liquidity and Capital Resources

Net Financial Assets

Our net financial assets position is shown below:

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Financial assets:

     

Cash and cash equivalents

     19,957,765        20,402,322  

Accounts receivables

     6,127,444        4,848,009  
  

 

 

    

 

 

 

Total financial assets

     26,085,209        25,250,331  
  

 

 

    

 

 

 

Debt:

     

Short term borrowings

     104,457        369,630  

Long term secured loan

     19,189,344        20,286,827  
  

 

 

    

 

 

 

Total debt

     19,293,801        20,656,457  
  

 

 

    

 

 

 

Net financial assets

     6,791,408        4,593,874  
  

 

 

    

 

 

 

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

On December 19, 2013 we entered into the Credit Agreement which was subsequently amended in January 2015 with Lenders for a US$25 million secured term loan. The term loan has a maturity date of December 19, 2018 and bears interest at 10.5% per annum. Interest payments are due quarterly over the five-year term of the term loan and, other than as described elsewhere herein, we are not required to make payments of principal for amounts outstanding under the term loan until the Maturity Date. Subject to certain exceptions, the term loan is secured by substantially all of our assets, including our intellectual property. For further details, see Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies – Borrowings – Athyrium Credit Agreement.

To a large extent, the increase in revenue and the strengthening of the AUD against the USD which has resulted in the decline of our US denominated loan has resulted in an improvement to our net financial asset position. Note a major portion of our net financial assets/(liabilities) is denominated in USD, including the long term secured loan hence is subject to variation with movements in exchange rates.

We believe we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. Liquidity risk is the risk that the Company may encounter difficulty meeting obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The purpose of liquidity management is to ensure that there is sufficient cash to meet all the financial commitments and obligations of the Company as they come due. In managing the Company’s capital, management estimates future cash requirements by preparing a budget and a multi-year plan for review and approval by the Board. The budget is reviewed and updated periodically and establishes the approved activities for the next twelve months and estimates the costs associated with those activities. The multi-year plan estimates future activity along with the potential cash requirements and is based upon management’s assessment of current progress along with the expected results from the coming years’ activity. Budget to actual variances are prepared and reviewed by management and are presented on a regular basis to the Board of Directors.

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

We regularly review all our financial assets for impairment. There were no impairments recognized as at June 30, 2017 or for the year ended December 31, 2016.

 

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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 June 30, 2017 and December 31, 2016, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates, and incorporates non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2.

We had no outstanding contracts as at June 30, 2017 and December 31, 2016. We recognized gains of nil for the periods ended June 30, 2017 and December 31, 2016. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the periods ended June 30, 2017 and December 31, 2016. For further details, see Notes to Consolidated Financial Statements – Summary of Significant Accounting Policies.

Measures of Liquidity and Capital Resources

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

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2017      2016  
     A$      A$  

Cash and cash equivalents

     19,957,765        20,402,322  

Working capital

     28,699,360        29,302,615  

Ratio of current assets to current liabilities

     4.72 : 1        5.93 : 1  

Shareholders’ equity per common share

     0.09        0.08  

The movement in cash and cash equivalents and working capital during the above periods was primarily due to cash flows generated from/used in operations including outflows arising from the effort required to complete the products in development, servicing of the secured loan and the timing of payments and accruals in the ordinary course of business.

Decline in cash and cash equivalents between periods occurred primarily as a result of the movement in exchange rates on the balances of cash held in foreign currencies which is a non-cash currency translation adjustment. This has arisen because of the AUD strengthening against the USD during the relevant period. We plan to build our USD cash reserves to enable the repayment of the USD denominated loan in December 2018.

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

Summary of Cash Flows

 

     Six Months Ended June 30,  
     2017      2016  
     A$      A$  

Cash provided by/(used in):

     

Operating activities

     1,591,138        (501,196

Investing activities

     (725,243      (248,232

Financing activities

     (264,407      (216,306
  

 

 

    

 

 

 

Net increase/(decrease) in cash and cash equivalents

     601,488        (965,734
  

 

 

    

 

 

 

Our net cash used in operating activities for all periods represents receipts offset by payments for our research and development projects including efforts involved in establishing and maintaining our manufacturing operations, interest on our long term secured loan and general and administrative expenditure. An improved operating position is reflected for the six month period ended June 30, 2017 due to increased revenue growth and managements effort to contain costs and reduce wastage.

 

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Our net cash used in investing activities for all periods is primarily for the purchase of various plant and equipment and for the various continuous improvement program we are undertaking.

Our net cash used in financing activities principally represents repayment of the short-term borrowing.

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 June 30, 2017 are:

 

     A$  

Less than 1 year

     681,837  

1 – 3 years

     598,623  

3 – 5 years

     0  

More than 5 years

     0  
  

 

 

 

Total minimum lease payments

     1,280,460  
  

 

 

 

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 June 30, 2017 were as follows:

 

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

Asset Retirement Obligations (1)

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

Operating Lease Obligations (2)

     1,280,460        681,837        598,623        0        0  

Purchase Obligations (3)

     2,195,796        2,195,796        0        0        0  

Long term secured loan (4)

     19,189,344        0        19,189,344        0        0  

Financing costs (5)

     3,353,485        2,283,623        1,069,862        0        0  

Other liability (6)

     2,775,491        2,775,491        0        0        0  

Other Long-Term Liabilities on Balance Sheet (7)

     83,851        0        69,798        13,051        1,002  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,478,427        7,936,747        23,527,627        13,051        1,002  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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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 and continue to derive significant revenues from LifeScan.    

The Company’s material long-lived assets are all based in Australia.

 

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Item 3 Quantitative and Qualitative Disclosures About Market Risk

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 US$, CAD$ 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 US$, CAD$ 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 Company is currently using natural hedging to limit currency exposure.

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

The Company has recorded foreign currency translation and transaction gains/(losses) of A$138,283 and (A$276,524) for the three months ended June 30, 2017 and 2016, respectively and A$641,547 and A$362,992 for the six months ended June 30, 2017 and 2016, respectively.

Interest Rate Risk

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

Inflation

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

 

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Item 4. Controls and Procedures

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

Changes in Internal Control over Financial Reporting. During the fiscal quarter ended June 30, 2017, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation referred to above in this Item 9A that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

Item 1 Legal Proceedings

None.

 

Item 1A Risk Factors

In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our 2016 Annual Report on Form 10-K filed with the SEC on March 21, 2017 should be considered as they could materially affect our business, financial condition or future results. There have not been any significant changes with respect to the risks described in our 2016 Form 10-K, but these are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

There has been no sale of equity securities by the Company or purchase of equity securities by the Company, or by an affiliated purchaser on behalf of the Company, since December 31, 2016.

 

Item 3 Defaults Upon Senior Securities

None.

 

Item 4 Mine Safety Disclosures

Not applicable.

 

Item 5 Other Information

None.

 

Item 6 Exhibits

 

Exhibit No

  

Description

  

Location

  31.1    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)    Filed herewith
  31.2    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)    Filed herewith
  32    Section 1350 Certificate    Furnished herewith
101    The following materials from the Universal Biosensors, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Condensed Statements of Cash Flows and (v) the Notes to Consolidated Condensed Financial Statements text    Filed herewith

 

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SIGNATURES

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

 

     

UNIVERSAL BIOSENSORS, INC.

                  (Registrant)

    By:  

/s/ Andrew Denver

Date: August 7, 2017       Andrew Denver
      Principal Executive Officer
    By:  

/s/ Salesh Balak

Date: August 7, 2017       Salesh Balak
      Principal Financial Officer

 

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INDEX TO EXHIBITS

Quarterly Report on Form 10-Q

Dated August 7, 2017

 

Exhibit No

  

Description

  

Location

  31.1    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)    Filed herewith
  31.2    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)    Filed herewith
  32    Section 1350 Certificate    Furnished herewith
101    The following materials from the Universal Biosensors, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Condensed Statements of Cash Flows and (v) the Notes to Consolidated Condensed Financial Statements    Filed herewith

 

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