Universal Biosensors Annual Report Universal Biosensors, Inc. Annual Report for the Year Ended December 31, 2012 For personal use only Contents 1 Chairman’s Letter 2 CEO Report 4 Form 10-K 86 ASX Additional Information IBC Corporate Directory For personal use only Chairman’s Letter 2012 was an important year in the development of UBI as a leader in the field of point-of-care diagnostics. With global roll-out driving growth in UBI revenues from LifeScan’s OneTouch Verio product, and important progress in developing our coagulation testing business with Siemens Healthcare, UBI has been laying important foundations for future growth, while the end-of-year capital raising provides the financial strength to execute the plan that will see the new products under development with Siemens Healthcare ready for market introduction in the next two years. Revenues more than doubled in 2012 driven largely by growing sales of the OneTouch Verio product. At the same time, good operating discipline saw manufacturing margins improve substantially and overhead costs reduced. As a result, the Company has been able to invest in the development of three new point-of-care coagulation tests with Siemens while at the same time delivering a significantly improved bottom line. It is pleasing to see the prior efforts of the Company bear fruit with the growing acceptance of the blood glucose product. UBI continues to make progress towards the goal of being a leading Company in point-of-care diagnostics. UBI is committed to seeing the value created in the point-of- care testing flowing through to our shareholders. However, in the short term we will continue to see high expenses associated with the planned product launches. We have seen these patterns in the past but we are committed to moderate expenditures in line with bringing improved financial returns to shareholders. Towards the end of the year we saw some recognition of the excellent progress made by the company reflected in the share price and I know that the Company and its management will continue their passionate efforts to maximise shareholder value for our long standing investors and those shareholders that have put their faith in us more recently. I would like to thank the Board and the UBI team for their hard work and dedication during 2012 and thank you, our shareholders, for your continued support of our company. In particular, I would also like to thank Dr Colin Adam, who will retire at the 2013 general meeting of the company, for his significant contribution to our company over the last 11 years. Yours faithfully Andrew Denver Chairman Universal Biosensors, Inc. 1 For personal use only CEO Report 2012 was a rewarding year for UBI as the OneTouch Verio product began to show signs of traction in the worldwide glucose testing market and as we took important steps towards diversifying our point- of-care diagnostics business. Revenues for the year doubled to almost $30 million; while our R&D investment focused on delivering three new point- of-care coagulation tests for Siemens, the first of which will enter the market in 2013. We ended the year well placed to invest in future growth with a strong cash balance, growing revenues, and a pipeline of exciting product opportunities ahead. 2012 was a year of significant progress in the development of the UBI business as we continued to deliver against important elements of our strategy. The glucose testing business showed signs of strong early growth with quarterly service fees, earned by UBI on sales of the OneTouch Verio, almost 300% higher than in 2011 and manufacturing revenues up by 60%. LifeScan continued to roll-out the OneTouch Verio around the world with launch in the key US market at the start of the year. As a result, over 85% of the world’s self-monitored blood glucose market now has access to UBI technology. And with innovation a key competitive weapon in the glucose testing industry, UBI completed a further R&D program with LifeScan aimed at determining the feasibility of developing a novel glucose testing system for the future. Completing this challenging program on time and on budget, UBI again demonstrated its capability as an innovator in point-of-care diagnostics. UBI continues to drive towards a more diversified point-of- care diagnostics business while validating its technology and capabilities with world leading partners. 2012 saw solid progress in the development of UBI’s point-of-care coagulation testing business with three tests now under development with Siemens Healthcare Diagnostics following the successful delivery of key technical milestones during the year. The first of these tests, a Prothrombin Time (or ‘PT-INR’) test used to monitor the anticoagulant drug warfarin, is expected to be launched in 2013. In order to fully address the large and growing PT-INR market, UBI also commenced development of a patient self-test system aimed at customers that are able to monitor their warfarin therapy from home. Our financial performance in 2012 showed encouraging signs. In addition to the growth in revenues from manufacturing and quarterly service fees, UBI’s R&D capabilities generated significant R&D Services revenues with two milestone payments from Siemens and the successful completion of the R&D program with LifeScan. With manufacturing operating at higher volumes, and a focus on improving the efficiency of our production process, the company was able to generate a modest profit of around 7% from these operations after losses in prior years and generate a positive 2 Universal Biosensors, Inc. For personal use only 2012 was an excellent year for UBI, in which the company began to see early signs of success in its glucose business, while taking significant strides towards diversifying the business. I believe 2013 will be another exciting year for the team at UBI as we continue our journey towards leadership in point-of-care diagnostics. Yours faithfully Paul Wright Chief Executive Officer contribution from the glucose business as a whole. In our efforts to manage overhead costs, we were able to reduce General & Administrative expenses by 7% over the prior year. As a result, despite an increase in R&D expenditure from the development of coagulation products with Siemens, UBI was able to post a significantly reduced loss and cash burn for the year. Importantly, following a modest capital raising at the end of the year, UBI ends the year with a strong cash balance, and an exciting pipeline of new products on the way. As we look to the future, we continue to see exciting opportunities in the point-of-care diagnostics field. There are two primary customer needs that are satisfied by point- of-care diagnostics. Firstly, the need for rapid diagnosis to support a timely medical intervention and, secondly, the improved convenience required to conduct frequent testing to monitor or manage a chronic disease or an ongoing therapy. The emergence of new, cost-effective technologies that support these needs is fuelling the growth of the point- of-care market which is projected to grow at double digit rates for the foreseeable future. We believe that UBI has an important role to play in this field. Against this backdrop, it is important that UBI continues to invest its limited resources in development of commercially attractive and clinically relevant products that broaden our business and build a series of long term revenue streams for the company. UBI will pursue new initiatives in patient self-testing for PT-INR, while expanding the reach of our electro-chemical sensing technology into immunoassay and molecular diagnostics at the point-of-care. In summary, we expect 2013 will see: • continued growth in quarterly service fees from accelerating OneTouch Verio sales • launch by Siemens of our first point-of-care coagulation testing product • progress in the development of further coagulation test systems for Siemens and the patient self-test market • achievement of important technical milestones in broadening our immunoassay and molecular diagnostics capabilities. Universal Biosensors, Inc. 3 For personal use only Form 10-K 4 Universal Biosensors, Inc. For personal use only UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2012 ‘ Transition Report Pursuant To Section 13 or 15(d) OR of the Securities Exchange Act of 1934 Commission File Number: 000-52607 Universal Biosensors, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Universal Biosensors, Inc. 1 Corporate Avenue, Rowville, 3178, Victoria Australia (Address of principal executive offices) Telephone: +61 3 9213 9000 (Registrant’s telephone number, including area code) 98-0424072 (I.R.S. Employer Identification Number) Not Applicable (Zip Code) Title of each class None Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered Not applicable Securities registered pursuant to Section 12(g) of the Act: Title of each class Shares of common stock, par value US$0.0001 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È 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 È 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 È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: Large accelerated filer ‘ Accelerated filer È Smaller reporting company ‘ Non-accelerated filer ‘ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was A$64,961,385 (equivalent to US$66,202,148) as of June 30, 2012. The number of shares outstanding of each of the registrant’s classes of common stock as of March 6, 2013: Title of Class Common Stock, US$.0001 par value Number of Shares 173,959,863 Documents incorporated by reference: Certain information contained in the registrant’s definitive Proxy Statement for the 2012 annual meetings of stockholders, to be filed not later than 120 days after the end of the fiscal year covered by this report, is incorporated by reference into Part III hereof. Information contained on pages F-2 through F-40 of our Annual Report to Stockholders for the fiscal year ended December 31, 2012 is incorporated by reference in our response to Items 7, 7A, 8 and 9A of Part II. 1 For personal use only FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 TABLE OF CONTENTS Page PART I BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1. ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 2. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 3. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 4. PART II ITEM 5. ITEM 6. ITEM 7. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV 4 11 20 20 20 20 21 27 28 28 29 31 31 34 34 34 34 34 35 35 41 Unless otherwise noted, references on this Form 10-K to “Universal Biosensors” the “Company,” “Group,” “we,” “our” or “us” means Universal Biosensors, Inc. a Delaware corporation and, when applicable, its wholly owned Australian operating subsidiary, Universal Biosensors Pty Ltd. Our principal place of business is located at 1 Corporate Avenue, Rowville, Victoria 3178, Australia. Our telephone number is +61 3 9213 9000. Unless otherwise noted, all references in this Form 10-K to “$”, “A$” or “dollars” and dollar amounts are references to Australian dollars. References to “US$” are references to United States dollars. 2 For personal use only FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause our, our customers and partners’ or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward- looking statements include, but are not limited to, statements about: ‰ our business and product development strategies; ‰ our expectations with respect to collaborative, strategic or distribution arrangements; ‰ our expectations with respect to the timing and amounts of revenues from our customers and partners; ‰ our expectations with respect to the services we provide to, and the development projects we undertake for, our customers and partners; ‰ our expectations with respect to regulatory submissions, approvals, and market launches of products we develop or are involved in developing; ‰ our expectations with respect to sales of products we develop or are involved in developing and the quantities of such products to be manufactured by us; ‰ our expectations with respect to our research and development programs, the timing of product development and our associated research and development expenses; ‰ the ability to protect our owned or licensed intellectual property; and ‰ our estimates regarding our capital requirements, the sufficiency of our cash resources and our need for additional financing. The words “anticipates,” believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward- looking statements, although not all forward-looking statements contain these identifying words. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. The forward-looking statements included in this Form 10-K do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in cautionary statements throughout this Form 10-K, particularly those set forth in section “Item 1A — Risk Factors.” However, new factors emerge from time to time and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We do not undertake to update or revise any forward-looking statements. 3 For personal use only ITEM 1. BUSINESS. PART I The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Form 10-K. This discussion and analysis contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the section entitled “Item 1A—Risk Factors” and elsewhere in this Form 10-K. Business overview We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests (“CDIs”) have been quoted on the Australian Securities Exchange (“ASX”) since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, Universal Biosensors Pty Ltd (“UBS”) was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our research, development and manufacturing activities in Melbourne, Australia. Our principal place of business is 1 Corporate Avenue, Rowville, Victoria 3178, Australia. Our principal telephone number in Australia is +61 3 9213 9000. Our agent for service in the United States is Corporation Service Company of 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware, United States. We also maintain a web site at www.universalbiosensors.com. The information contained in, or that can be accessed through, our web site is not part of this Form 10-K. We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS by LifeScan, Inc. and other third party licensees. Unless otherwise noted, references to “LifeScan” in this document are references collectively or individually to LifeScan, Inc., and/or LifeScan Europe, a division of Cilag GmbH International, both affiliates of Johnson and Johnson. We are using our electrochemical cell technology platform to develop tests for a number of different markets. Our current focus is as set out below: ‰ Blood glucose — UBS provides services and acts as a non-exclusive manufacturer of test strips for LifeScan’s “OneTouch® Verio®” blood glucose testing product, 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. LifeScan continues its global rollout of the OneTouch® Verio® product which is now available in countries that represent over 85% of the world self- monitored blood glucose market including North America, major European markets and Australia. ‰ Coagulation testing market — UBS is working with Siemens Healthcare Diagnostics, Inc. (“Siemens”) to develop a range of products for the point-of-care coagulation market pursuant to a collaboration agreement (“Collaboration Agreement”) and will manufacture test strips for these products under a Supply Agreement with Siemens (“Siemens Supply Agreement”). ‰ Other electrochemical-cell based tests — we are working on proving the broader applicability of our technology platform, including tests based on enzymatic, immunoassay and molecular diagnostic methods. We will seek to enter into collaborative arrangements or strategic alliances with respect to any tests arising from this work. Our Strategy We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Key aspects of our strategy include: ‰ extending our electrochemical cell technology and proving the broader applicability of our technology platform for markets with significant commercial potential; 4 For personal use only ‰ 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; ‰ undertaking research and development work for our customers and partners; ‰ manufacturing products (test strips and meters) for our customers and partners as required; ‰ providing post market support services to our customers and partners. Plan of Operations for the Remainder of the Fiscal Year Ending December 2013 Our plan of operations over the remainder of the fiscal year ending December 2013 is to: ‰ continue to undertake research and development work for our customers and partners; ‰ manufacture products to satisfy our customers’ and partners’ requirements; ‰ provide the necessary post-market support for our customers and partners; ‰ prove the broader applicability of our technology platform for markets with significant commercial potential, focusing initially on enzymatic, immunoassay and molecular diagnostic point-of-care tests; ‰ seek to enter into collaborative, strategic or distribution arrangements with other life sciences companies or other industry participants with respect to the development and commercialization of specific tests or specific fields. Financial information about segments We operate in one segment. Our principal activities are the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Although our products are intended for sale worldwide, we operate predominantly in one geographical area, that being Australia. For details of our revenues, profit and loss and total assets for financial years ending December 31, 2012, 2011, 2010, 2009 and 2008 refer to “Item 6. Selected Financial Data”. Description of our business We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. Industry background We operate in the high growth, point-of-care segment of the global in vitro diagnostics (IVD) industry. A large proportion of clinical diagnostics has historically been performed by trained personnel at dedicated or centralized testing sites including hospital laboratories and commercial pathology laboratories. Significant interest has developed in techniques and technologies that allow testing to be performed “on-the-spot” (in real time at the patient’s side). Point-of-care testing can be segmented into consumer self-testing or testing of patients by one of a variety of medical or laboratory professionals in locations such as clinics, physician’s office laboratories and emergency departments. While not all tests are suited to being performed at the point-of-care, we believe our electrochemical cell technology and other technologies could be a suitable platform for adapting a number of relevant central laboratory tests to a point-of-care format. Point-of-care tests in development and partnering strategy Our strategy is to apply the electrochemical cell technology to different fields and biomarkers and then to enter into collaborative arrangements or strategic alliances with third parties to develop and commercialize products for those fields. We have developed a blood glucose test with LifeScan and are working with Siemens to develop a range of test strip and reader products for the point-of-care coagulation market. We are also working to prove the broader applicability of our technology platform for markets with significant commercial potential across on enzymatic, immunoassay and molecular diagnostic point-of-care tests. There may be certain products which we develop which we may wish to market through the use of distributors. 5 For personal use only Principal Products and Services UBS acts as a non-exclusive manufacturer of blood glucose test strips for LifeScan’s OneTouch® Verio® blood glucose testing product. UBS also provides LifeScan with research and development services from time to time. UBS is working with Siemens to develop a range of products for the point-of-care coagulation market and will manufacture test strips for these products. UBS also conducts research and development to prove the broader applicability of our technology platform, including tests based on enzymatic, immunoassay and molecular diagnostic methods. Facilities Universal Biosensors Pty Ltd leases approximately 5,000 square meters of office, research and development and manufacturing facilities at 1 Corporate Avenue, Rowville in Melbourne, Australia. We have had ISO 13485 certification continuously at that site since May 2007. The lease for 1 Corporate Avenue expires on March 31, 2014 with two options to renew the lease for successive five year periods. Raw materials Raw materials essential to our business are purchased worldwide in the ordinary course of business from numerous suppliers. In general, these materials are available from multiple sources. Certain of our products in development may be more reliant on sole sources of supply. We seek to enter into long term contracts of supply with respect to these materials and will develop mitigation strategies, which may include development work to enable substitute materials to be used. Distribution Our strategy is to secure partners who would be responsible for the commercialization and distribution of the products. However, in the future it may be appropriate for us to establish distribution arrangements with respect to certain specific products. Regulatory clearances In all major territories of the world, regulatory clearances are required prior to marketing diagnostic tests. The regulatory clearance requirements vary from country to country and product to product, however, regulatory clearances typically require a satisfactory “technical file”, which provides the regulatory bodies with details of the design and previous testing of the product including safety and efficacy data as well as the details of the conduct of trials which show the suitability for use of the product at the point-of-care. Regulators also require demonstration of continuing compliance with an appropriate quality management system. There is no common international regulatory body and we, or our customer or partner, would be required to submit for clearance to sell in each of the major jurisdictions in which the relevant customers and partners seek to market our products. For example, for Europe, a “Notified Body” assesses the quality system and product technical file, whereas in the United States, the Food and Drug Administration, or “FDA”, is the regulatory body responsible for the examination of the design and performance of the device and for assessment of our quality system. In the case of point-of-care tests, there are often additional requirements that a manufacturer must meet such as an examination of certain aspects affecting test suitability for non-professional users. In Europe, certain codified standards describe the requirements of tests whilst in the United States, tests to be used by non- laboratory professionals must gain waiver status under the United States Clinical Laboratory Improvement Amendments of 1988. Amongst other clearances, we will also require clearance for export of medical devices from the Therapeutics Goods Administration, or “TGA”, in Australia. Our customers and partners are generally responsible for obtaining and maintaining all applicable regulatory approvals and determining the location and timing for submissions for regulatory clearance. We may provide a supporting role in this process. The importance and duration of all our patents, trademarks and licenses We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights which in the aggregate we believe to be of material 6 For personal use only importance to us in the operation of our business. Our continued success depends to a large extent on our ability to protect and maintain our owned and licensed patents and patent applications, copyright, trademark and trade secrets. Our point-of-care tests in development draw upon an extensive portfolio of patents and patent applications as well as know-how either owned by UBS or licensed to UBS. We patent the technology, inventions and improvements that we consider important to the development of our business. We rely on the owned patent applications and the patents and patent applications licensed to us in the manufacture of the point-of-care diagnostic tests being developed by us and to enable us to grant rights to our customers and partners to commercialize products that we may develop. Our owned and licensed patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Based on current product sales and our projects, the owned and licensed patents and patent applications that we consider most significant by virtue of their importance to our platform together with the last of the patents to expire within the patent family are set forth in the table below. Patent Expiration Year Apparatus and Method for Electrochemical Protease Sensor (this patent family relates to a sensor Refer Note 1 to detect cleavage of an electrochemical substrate for use in measuring blood or plasma coagulation in assays such as prothrombin time and thrombin potential) Electrochemical On-Board Control Detection (this patent family relates to an on-board control system of a sensor, wherein the control system can test/verify the viability of the sensor) Refer Note 1 Electrochemical Cell (this patent family relates to a method and an electrochemical biosensor for determining the concentration of an analyte in a carrier) Electrochemical Method (this patent family provides an improved method and biosensor for determination of the concentration of an analyte in a carrier which provides improved accuracy, reliability and speed over prior techniques) Electrochemical Cell (this patent family relates to an electrochemical cell for determining the concentration of an analyte in a carrier) Electrochemical Method for Measuring Chemical Reaction Rates (this patent family relates to the measurement of the progress of a chemical reaction that generates an electroactive reaction product that is subsequently detected at an electrode amperometrically or coulometrically) Electrochemical Cell Connector (this patent family relates to a connector to provide electrical connection between an electrochemical cell of a strip type sensor and meter circuitry) Method and Apparatus for Rapid Electrochemical Analysis (this patent application relates to an improved method and apparatus for electrochemical analysis) Methods and Apparatus for Analyzing a Sample in the Presence of Interferents (this patent application relates to methods and apparatus for determining analyte concentrations in a rapid and accurate manner) 2022 2024 2016 2023 2026 2026 2026 Systems and Methods for Discriminating Control Solution from a Physiological Sample (this Refer Note 1 patent application relates to systems and methods for discriminating between a control solution and blood sample) Systems and Methods of Discriminating Control Solution from a Physiological Sample (this patent Refer Note 1 application relates to systems and methods for discriminating between a control solution and a blood sample based on a summation of current values and comparing reference values to threshold values) 1. The patent application is either pending, allowed, or published We will continue to file and prosecute patent applications when and where appropriate to attempt to protect our rights in our proprietary technologies. Pursuant to our License Agreement with LifeScan, LifeScan is responsible for prosecution and maintenance of the patents and patent applications licensed to us by them. In the event that LifeScan elects not to proceed with 7 For personal use only the prosecution of a patent application licensed to us by them or discontinues the payment of fees, we have the right to assume and continue at our own expense the prosecution of any patent or patent applications. We also license intellectual property from Siemens and SpeeDx Pty Ltd, who are both primarily responsible for the prosecution and maintenance of the patents and patent applications licensed to us by them. Our ability to build and maintain our proprietary position for our technology and products will depend on our success in obtaining effective claims and those claims being enforced once granted and, with respect to intellectual property licensed to us, the licensee’s success in obtaining effective claims and those claims being enforced once granted. The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Some countries in which we or our customers or partners may seek approval to sell point-of-care tests that we have been involved in developing, may fail to protect our owned and licensed intellectual property rights to the same extent as the protection that may be afforded in the United States or Australia. Some legal principles remain unresolved and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, the United Kingdom, the European Union, Australia or elsewhere. In addition, the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or in interpretations of patent laws in the United States, the United Kingdom, the European Union, Australia or elsewhere may diminish the value of our intellectual property or narrow the scope of our patent protection. Seasonality We do not expect sales of the diagnostic tests we develop to be materially impacted by seasonality. The practices of the registrant and the industry (respective industries) relating to working capital items. We deal with our accounts receivables, inventory, trade payables and the supply of products in accordance with our contractual obligations to our customers, partners and suppliers. Dependence on single customer As shown in the table below, we currently receive a significant portion of our revenue from LifeScan. All revenue from products is currently for the manufacture of strips for LifeScan and the majority of our revenue from services is also derived from LifeScan. Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 19,368,745 10,277,698 437,171 A$ 12,063,582 2,632,870 683,323 A$ 11,760,009 6,420,027 1,192,889 Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,083,614 15,379,775 19,372,925 Revenue from LifeScan as a % of total income . . . . . . . . . . . . . . . . . . . . 82% 96% 94% Our dependence on LifeScan for a significant proportion of our revenue is likely to continue until we start to receive meaningful revenues from other collaborative arrangements or strategic alliances with third parties. We started generating revenues from Siemens during 2012 and 16% of our total income in fiscal year 2012 was derived from our arrangement with Siemens. We did not have any backlog orders as of December 31, 2012 and 2011. Competitive conditions of our business Our revenue is currently highly dependent on the success of the OneTouch® Verio® blood glucose product we have developed with LifeScan. OneTouch® Verio® was first launched in the Netherlands in January 2010 by 8 For personal use only LifeScan and has subsequently been launched in countries that represent over 85% of the world self-monitoring blood glucose market including North America, major European markets and Australia. LifeScan is responsible for all sales and marketing decisions and any decision to introduce the product to new territories and the timing of those decisions. The global diabetes market place is intensely competitive and dominated by multinationals such as LifeScan, Roche, Abbott and Bayer. Although OneTouch® Verio® has been well received in the jurisdictions in which it has been launched, we do not yet know if the product will be successful, the extent to which LifeScan will promote OneTouch® Verio® when compared to its existing diabetes products, whether customers will prefer it over competitive offerings, nor the rate at which it might be adopted. During 2013, we expect to continue to manufacture blood glucose test strips for LifeScan as a non-exclusive manufacturer under the Master Services and Supply Agreement. We anticipate that in the future LifeScan may manufacture all or a large proportion of its own requirements of any blood glucose test strip. If we are unable to compete effectively with LifeScan’s own manufacturing capacity, we may not be able to win a manufacturing commitment from LifeScan and therefore be faced with surplus capacity in our manufacturing operations. Our research and development expenditure during the last three fiscal years were as follows: Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 13,482,459 A$ 9,812,396 A$ 6,482,150 We undertake research and development for our self and on behalf of our customers and partners. Research and development activities undertaken on behalf of our customers and partners were A$9,985,591, A$851,436 and A$192,729 for the fiscal years ended 2012, 2011 and 2010, respectively. Siemens is responsible for all sales and marketing decisions with respect to the products we develop for them and for any decision to introduce the product to new territories and the timing of those decisions. We expect that the range of test products for the point-of-care coagulation market that we are developing with Siemens will compete with existing point-of-care technologies from competitors such as Roche Diagnostics, Alere Inc. and Abbott Point of Care. The test will also have to compete with the central laboratory which includes systems marketed by Siemens AG, Diagnostica Stago, Abbott Laboratories, Sysmex and Beckman Coulter, Inc. All of these companies have well established brand recognition, sales and marketing forces, and have significant resources available to support their product. Core to our business strategy is to extend our intellectual property platform to enable other tests currently done in the central laboratory to be migrated to the point-of-care settings. Our belief is that much testing done in the central lab can more efficiently and profitably be performed at the point-of-care. With the exception of blood glucose testing, most point-of-care testing is currently conducted in professional settings. The health care professional has a choice and can request tests from a central laboratory, or services provider, or choose to have the test performed at the point-of-care. Thus we face competition not just from other companies active in the point-of-care space, but also the providers of testing who operate in centralized settings. Employees At March 6, 2013, we had 102 full time employees in our Melbourne facility, spanning production, engineering, quality and regulatory, research and development and administration. 9 For personal use only Financial information about geographic areas We operate in one segment. Our principal activities are research and development, commercial manufacture of approved medical or testing devices and the provision of services including contract research work. We operate predominantly in one geographical area, being Australia. Our total income has been derived from the following countries: Years ended December 31, Home country - Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,171 683,323 2012 A$ 2011 A$ 2010 A$ 1,192,889 Foreign countries - Scotland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - U.S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,454,227 4,955,965 2,236,251 14,143,270 8,919 544,263 12,634,464 0 5,545,572 Total - foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,646,443 14,696,452 18,180,036 Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,083,614 15,379,775 19,372,925 Our material long-lived assets are all based in Australia. Available Information We file annual and quarterly reports, proxy statements and other information with the SEC. Stockholders may read and copy any reports, statements or other information that we file at the SEC’s public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our public filings are also available from commercial document retrieval services and at the Internet Web site maintained by us at http://universalbiosensors.com and the SEC at http://www.sec.gov. We provide without charge to each person solicited by the Proxy Statement a copy of our Annual Report on Form 10-K, including our financial statements but excluding the exhibits to Form 10-K other than Exhibit 13. The Annual Report includes a list of the exhibits that were filed with the Form 10-K, and we will furnish a copy of any such exhibit to any person who requests it upon the payment of our reasonable expenses in providing the requested exhibit. For further information, please contact our Company Secretary, Cameron Billingsley at +612 8115 9801 or write us at 1 Corporate Avenue, Rowville VIC 3178. You may also send an email to us at companysecretary@universalbiosensors.com. Our Annual Report on Form 10-K and our other filings with the SEC, including the exhibits, are also available for free on our Internet site (http://universalbiosensors.com) and the SEC’s Internet site (http://www.sec.gov). 10 For personal use only ITEM 1A. RISK FACTORS. Investing in our shares or CDIs involves a high degree of risk. Before you invest in our shares or CDIs, you should understand the high degree of risk involved. You should carefully consider the following risks and other information in this Form 10-K, including our financial statements and related notes appearing elsewhere in this Form 10-K, before you decide to invest in our shares or CDIs. If any of the events described below actually occurs, our business, financial condition and operating results could be harmed. In such an event, the market price of our CDIs would likely decline and you could lose part or all of your investment. Our products may not be successful in the marketplace. Our success and the success of products that we are involved in developing is ultimately dependent on the level of market acceptance and sales of those products. Market acceptance will depend on, amongst other things, the ability to provide and maintain evidence of safety, efficacy and cost effectiveness of the products, the advantages and profile over competing products, the level of support from clinicians, the relative convenience and ease of use, cost-effectiveness compared to other products, the availability of reimbursement from national health authorities, the timing of market introduction and the success of marketing and sales efforts by our customers and partners. Additionally, it is difficult to determine the market opportunity for new technologies and our estimates may not accurately reflect the actual demand in the target markets. Our commercial opportunity will be reduced or eliminated if the size of the market opportunity is less than we expect or if our competitors develop and commercialize products that are safer, more effective, more convenient, less expensive, or reach markets sooner or are marketed better than products that we are involved in developing. The blood glucose test strips for the One Touch® Verio® product which we developed with LifeScan were first launched in the Netherlands in January 2010 and are now available in much of the world’s self-monitored blood glucose market including North America, major European markets and Australia. While initial market acceptance for One Touch® Verio® has been positive, there is no guarantee that the product will secure and maintain adequate market share. Likewise, we cannot be sure that any other products we are involved in developing with our customers and partners, such as the test strip and reader products for the point-of-care coagulation market that we are developing with Siemens, will be successful in the marketplace or will secure and maintain adequate market share. Our ability to be profitable or maintain profitability in the future will be adversely affected if any of the products that we are involved in developing fail to achieve or maintain market acceptance or compete effectively in the market place. It would reduce or eliminate our revenues from product sales and manufacturing and have a material adverse effect on our business and financial position. We are currently dependent on revenue from LifeScan. The majority of our income is currently derived from LifeScan and our business is therefore dependent on the number of test strips we manufacture for LifeScan and the sales of the blood glucose test strips for the One Touch® Verio® product. Any changes in LifeScan’s requirements and the level of test strip sales will directly affect our business. We do not currently have, and may never have, any products other than the blood glucose test strips for the One Touch® Verio® product that generate substantial revenues. We act as a non-exclusive manufacturer of the blood glucose test strips we developed with LifeScan. In the future we expect that LifeScan may manufacture all or a large proportion of its own requirements. If this occurs, our manufacturing capacity will not be fully utilized or may not be utilized at all. If we are unable to transfer capacity to the manufacture of other products, we will be faced with surplus capacity in our manufacturing operations and our revenues will decline. If the Master Services and Supply Agreement with LifeScan is terminated as a result of either party defaulting on its material obligations, becoming insolvent, or as a result of 11 For personal use only other factors detailed in the Master Services and Supply Agreement we would cease to have the potential to receive service fee revenues from the sale of blood glucose strips. In addition, LifeScan has the ability to terminate the obligation to pay service fees to us by paying us a lump sum amount, but may only do so once it has paid us a certain level of service fees (which we do not expect will occur until worldwide sales volumes have increased significantly). The service fee revenue is an ongoing amount LifeScan is obligated to pay to us based on the number of strips sold by LifeScan regardless of who manufactures the strips. If LifeScan did terminate its obligation to pay the service fees, although we would receive a large lump sum payment, we would cease to receive ongoing service fee revenue and our ongoing future business would be adversely affected. An important part of our strategy is to seek to enter into other collaborative arrangements or strategic alliances with respect to the development and commercialization of specific tests or in specific fields. Our dependence on LifeScan for a significant proportion of our revenue is likely to continue until we start to receive meaningful revenues from other collaborative arrangements or strategic alliances with third parties, such as our arrangement with Siemens. Our current and future customers and partners may choose to utilize less of our research and development services. If the development and research work we undertake was materially reduced or ceased, we would lose an ongoing source of income which would have a material adverse effect on our business and financial position. Our business strategy and revenue rely on our ability to enter collaborative arrangements with other companies and there is a risk that we will not be able to enter into collaborative arrangements with respect to our products. Our business strategy involves proving the broader applicability of our technology platform for a number of different products/technologies and then entering into collaborative arrangements, licensing agreements, strategic alliances or distribution arrangements for these products/ technologies. We have not established any internal product sales and marketing capacity and to achieve commercial success we must enter into and maintain successful arrangements with others to sell, market and distribute products that we are involved in developing. We may not be able to enter into such collaborative arrangements or strategic alliances in a timely fashion and on acceptable terms, if at all. An inability to enter such arrangements would be detrimental to our strategy, business and financial position. Our ability to enter into collaborative or strategic arrangements will suffer if the technologies developed by us are not perceived as being comparable or superior to established laboratory methods or other products. Other competitive factors may also act as obstacles to our ability to enter into such collaborative or strategic arrangements for certain opportunities. If we are unable to enter collaborative arrangements with respect to certain of our products/technologies, we may have to change strategy, delay, reduce the scope of or eliminate some or all of our development programs or liquidate some or all of our assets or seek to raise additional capital. As a result, we may not be able to pursue what we consider to be worthwhile commercial opportunities and significant monies and management time invested may be rendered unproductive and worthless. An inability to enter collaborative or strategic arrangements would thus have a material adverse effect on our business and financial position. Entering collaborative arrangements with respect to our products will expose us to risks and uncertainties related to those collaborations and alliances. To the extent we are able to enter into collaborative or strategic arrangements with respect to our products, we will be exposed to risks and uncertainties related to those arrangements. The customer or partner will generally make the key decisions on product choice, regulatory approvals, product launch, product manufacture and marketing and promotion. Decisions made by our partner with respect to the commercialization of the products we develop with them will significantly affect the extent and timing of revenues to us. For example, our partner may choose not to launch new products we develop, may choose to launch the products in a limited number of jurisdictions, may delay the launch of products, or may undertake only limited sales and marketing efforts to commercialize the products, all of which would have a material adverse effect on our business and 12 For personal use only financial position. Collaborative arrangements, licensing agreements or strategic alliances will subject us to a number of risks, including the risk that: ‰ we do not control the amount and timing of resources that our strategic partners may devote to our products; ‰ we do not control the decision to pursue a product, the timing of product launches and extent of marketing and sales activities; ‰ our customer or partners may experience financial difficulties; ‰ we may be required to relinquish important rights such as marketing and distribution rights; ‰ business combinations or significant changes in a partner’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement; ‰ a collaborator could independently move forward with a competing product developed either independently or in collaboration with others, including our competitors; and ‰ collaborative arrangements are often terminated or allowed to expire, which would delay the development and may increase the cost of developing our products. Allegedly defective design or the manufacture of allegedly defective products could potentially expose us to substantial costs, write-offs and reputational damage. Allegedly defective designs or manufacture of allegedly defective products exposes us to the risk of product liability claims and product recalls, resulting in substantial costs, write-offs and potential delays in our shipment of product to customers, decreased demand for products, loss of revenue and cash flow, reputational damage, costs of related litigation, increases in our insurance premiums and increased scrutiny by regulatory agencies, and claims by our customers and may trigger the dissolution of partnerships or collaborative relationships. While we will seek to mitigate our loss by obtaining appropriate insurances and appropriate contractual protections, if we are unable to maintain our insurance at an acceptable cost or on acceptable terms with adequate coverage, or negotiate appropriate contractual protections or otherwise protect against potential product liability claims, we will be exposed to significant liabilities. Recalls would harm our business and compromise the performance of our obligations to our customers and would have a material adverse effect on our business and financial results and may result in claims by our customers or partners and may trigger the dissolution of partnerships or collaborative relationships. Any claim for damages by our customers or other claim against us could be substantial. There are many elements to manufacturing products that can cause variability beyond acceptable limits. We may be required to discard defective products after we have incurred significant material and labor costs, resulting in manufacturing delays and delayed shipment to customers. Further, if our suppliers are unable to provide materials in conformance with specifications, we may be required to discard materials, which may also cause delays in the manufacture and shipment of products. Reduced margins would have a material adverse effect on our business and financial position. Our margins may be reduced and costs increased which would have a material adverse effect on our business and financial position. The two primary factors that pose this risk include increased manufacturing costs and currency fluctuations. Increases in our costs to manufacture products or conduct development work may decrease our margins or cause us to suffer a loss on the manufacture of products. Additionally, we may suffer decreased margins due to the global reach of our business exposing us to market risk from changes in foreign currency exchange rates. While the majority of our cash reserves and expenses are in Australian dollars, we continue to deal in other currencies, particularly in the United States and Europe, which may increase costs and decrease revenues incurred in foreign currencies. Additionally, we use, from time to time, financial instruments, primarily foreign currency forward contracts, to hedge certain forecasted foreign currency commitments arising from trade 13 For personal use only accounts receivable, trade accounts payable and fixed purchase obligations. These hedging activities are largely dependent upon the accuracy of our forecasts and as such, our foreign currency forward contracts may not cover our full exposure to exchange rate fluctuations. Although we believe our foreign exchange policies are reasonable and prudent under the circumstances, we may experience losses from un-hedged currency fluctuations, which could be significant. If our costs increase or our margins decrease, it would have an adverse effect on our business and financial position. New product design and development and clinical testing is costly, labor intensive and the outcomes uncertain. The design and development of different tests on our platform takes a number of years to complete, is costly and the outcomes are uncertain. Although development risk generally decreases the further a test is developed, the tests we develop have a significant degree of technical risk, and irrespective of the stage of development, design and development work and product validation, the development of the test may be unsuccessful or not warrant product commercialization. If development activities are unsuccessful, we may need to delay, reduce the scope of or eliminate some or all of our development programs and significant monies and management time invested may be rendered unproductive and worthless. Our agreements with our customers to date have contained milestone-based payments, many of which are payable upon the achievement of technical development milestones. Such milestone payments may not cover the cost of our research and development activities. In the event we are not successful in achieving the relevant development milestone, we will not receive the milestone payments associated with the milestone which would have an adverse effect on our revenue and financial position. Furthermore, if we are unable to develop a product for a customer, it may eliminate an important revenue stream for us which may result in us not being profitable, or trigger dissolution of partnerships or collaborative relationships. Diagnostic devices must be tested for safety and performance in laboratory and clinical trials before regulatory clearance for marketing is achieved. Such studies are costly, time consuming and unpredictable. Clinical trials may not be successful and marketing authorization may not be granted which may result in us not being profitable, or trigger dissolution of partnerships or collaborative relationships. The outcome of early clinical trials may not be predictive of the success of later clinical trials. Failed clinical trials may result in considerable investments of time and money being rendered unproductive and worthless. Additionally, unanticipated trial costs or delays could cause substantial additional expenditure that is not reimbursed by a partner, cause us to miss milestones which trigger a financial payment or cause us or a partner to delay or modify our plans significantly. This would harm our business, financial condition and results of operations. If we cannot maintain our intellectual property rights, our ability to make or develop point-of-care tests would be restricted or eliminated, and the value of our technology and diagnostic tests may be adversely affected. Our ability to obtain proprietary rights, maintain trade secret protection and operate without infringing the proprietary rights of third parties is an integral part of our business. A number of companies, universities and research institutions have or may be granted patents that cover technologies that we need to complete development of a particular product. We may choose or be required to seek licenses under third party patents which would be costly or may not be available on commercially acceptable terms, or at all. Further, we may be unaware of other third party patents or proprietary rights that are infringed by our point-of-care tests. Much of our platform intellectual property rights are licensed to us from LifeScan. If we were to breach the License Agreement and LifeScan were to validly terminate the agreement in response, it would seriously restrict or eliminate our ability to develop and commercialize our existing and future tests which would have a material adverse effect on us as it would restrict or eliminate our existing commercialization opportunities. We also license other intellectual property from third parties as part of our other development efforts. 14 For personal use only LifeScan and our other licensors have a considerable degree of control over the manner that the intellectual property licensed to us is maintained and protected and, as a result, we have reduced control with respect to the maintenance and protection of our licensed patent portfolio. LifeScan is responsible for the prosecution and maintenance of the intellectual property it licenses to us and we are largely dependent on them to defend proceedings or prosecute infringers. The same applies to our other licensors. Our business would be harmed if the licensed patents were infringed or misappropriated. Prosecuting third parties and defending ourselves against third-party claims would be costly, time consuming and divert management’s attention from our business, potentially leading to delays in our development or commercialization efforts. Additionally, if third parties made successful claims, we may be liable for substantial damages or license fees, be required to stop marketing the infringing product or take other actions that are adverse to our business. There are risks associated with regulatory clearance and changes to regulation. The products we are involved in developing are medical devices and therefore subject to extensive regulation in all major markets. The process of obtaining regulatory clearance is costly and time consuming and there can be no assurance that the required regulatory clearances will be obtained. Products cannot be commercially sold without regulatory clearance. Our customers and partners may be unable to obtain the necessary clearances to sell or if the clearances are delayed, revoked or subject to unacceptable conditions, the product may not be able to be commercialized which would have a material adverse effect on us. If we were required and able to change suppliers and third party contract manufacturers, applicable regulatory bodies may require new testing and compliance inspections and require that we demonstrate structural and functional comparability between the same products manufactured by different organizations, resulting in additional costs and potential delays which could be detrimental to our business. Furthermore, regulation is ongoing and manufacturers and marketers of products are subject to continuous review and periodic inspections. Potentially costly responses may be required to be given by us and our customers including product modification or post-marketing clinical trials as a condition of approval to further substantiate safety and efficacy or investigate issues of interest. If we or our customers fail to comply with applicable regulatory requirements it may result in fines, delays, suspensions of clearances, seizures, recalls of products, operating restrictions or criminal prosecutions and could have a material adverse effect on our operations. Additionally, changes in existing regulations or the adoption of new regulations could make regulatory compliance by us more difficult in the future and could hamper our ability to produce our products when we require. We have risks associated with suppliers. Similar to most major manufacturers in our industry, we are dependent upon our suppliers for certain raw materials and components. We have preferred suppliers, making us vulnerable to supply disruption, which could harm our business and delay manufacturing operations. We seek to enter into long term contractual arrangements with certain of our suppliers, however we may not always be able to do so on acceptable terms. If our manufacturing requirements change, such long term contractual arrangements may cause us to have excess or obsolete inventory. We may not be able to guarantee the supply of certain of our materials which may in turn affect our ability to supply product to our customers. We may have difficulty locating alternative suppliers in a timely manner or on commercially acceptable terms, and switching components may require product redesign and further regulatory clearance which could significantly delay production. Likewise, our customers and partners are subject to supply risks which may delay their ability to supply customers with product which would impact our revenue and have a consequential adverse effect on our business and results of operations. To the extent we agree to be responsible for manufacturing meters for any of our customers and partners, we anticipate that we will outsource the manufacture of these meters. There is no guarantee that we will be able to enter into any such arrangement on acceptable terms, if at all, and as a result there is a risk of lengthy and costly delays of bringing our products to market. Further, if our contract manufacturers fail to achieve and maintain required production yields or manufacturing standards, it could result in product withdrawals, delays, recalls, product liability claims and other problems that could seriously harm our business. Any meter shortages or 15 For personal use only manufacturing delays could result in delays or reduction in our revenues, with consequential adverse effect on our business and results of operations. The success of our business is heavily dependent upon market factors such as growth of the point-of-care testing market and our ability to compete effectively within the highly competitive in vitro diagnostics market. Our business success relies on the growth of both the existing and emerging point-of-care testing market. We cannot be sure that this market will grow as we anticipate. Such growth will require continued support and demand from payers, patients and health care professionals and the endorsement by professional bodies that influence the practice of medicine. Research and clinical data may not sufficiently support point-of-care testing, nor may the health economic benefits sufficiently support point-of-care testing as an alternative to current practice. Even if the data is compelling, significant resources may be required to educate users and change in practice may be slower and more costly than we anticipate. If point-of-care testing fails to be adopted at the rate we expect, the sector may remain unattractive to the size of partner we seek to attract and as a consequence, we may need to change our business model. This may require us to incur more cost and/or our anticipated growth will be adversely affected and our results will suffer. We may face intense competition in development, marketing and selling point-of-care tests. The market for in vitro diagnostics is intensely competitive, price sensitive and subject to rapid change. We and our customers and partners may be unable to accurately anticipate changes in the markets and the direction of technological innovation and the demands of end users, competitors may develop improved technologies and the market place may conclude that our products are obsolete. Our larger competitors enjoy several competitive advantages including significantly greater financial resources, greater brand recognition, greater expertise in conducting clinical trials, obtaining regulatory approvals and managing manufacturing operations, and greater experience in product sales and marketing. Early-stage companies may also prove to be significant competitors. Competition will be faced from existing products as well as products in development. Point-of-care tests are likely to experience significant and continuing competition from traditional pathology laboratory based testing as well as other point-of-care tests. Our and our customers’ and partners’ commercial opportunity will be reduced or eliminated if competitors develop and commercialize safer, more effective, more convenient, or cheaper products, or reach the market sooner than we do. Any such developments adversely affecting the market for products developed by us may force us and our partners to reduce production or discontinue manufacturing which would cause our operating results to suffer. There can be no assurances given with respect to our or any partner’s ability to compete effectively in the competitive markets in which we operate. We face risks manufacturing product for partners. There are technical challenges establishing and maintaining commercial manufacturing for products, including maintaining the consistency of our incoming raw materials, equipment design and automation, material procurement, production yields and quality control and assurance. We may fail to achieve and maintain required production yields or manufacturing standards which could result in financial loss, patient injury or death, product recalls or withdrawals, product shortages, delays or failures in product testing or delivery, breach of our agreements with any partner and other problems that could seriously harm our business. Adverse economic conditions may harm our business. Market and economic conditions have been challenging worldwide. Continuing concerns have led to increased market volatility and diminished expectations for world economies. These factors may include fluctuations in foreign exchange rates, inflation, interest rates, rate of economic growth, taxation laws, consumer spending, unemployment rates, government fiscal, monetary and regulatory policies and consumer and business sentiment. Any of these factors have the potential to cause costs to increase or revenues to decline. Continued turbulence in the US and international markets and economies may adversely affect our ability to enter into collaborative arrangements, the behavior and financial condition of our current and any future customers and 16 For personal use only partners and the spending patterns of users of the products we are developing. This may adversely impact demand for our services and for products developed by us. In addition, economic conditions could also impact our suppliers, which may impact on their ability to provide us with materials and components which in turn may negatively impact our business. Our operations are not currently profitable. Our operations are not currently, and may never be profitable. To date, we have funded our operations and capital expenditures from revenue from the sale of products and provision of services and with proceeds from the sale of our securities, government grants and interest on investments. We may require additional capital to fund our business operations, which may not be available on acceptable commercial terms, or at all. We may not be able to raise capital or secure credit if and when required. We may not be able to raise capital or secure credit if and when required. If we are unable to raise capital or secure credit when required, we may have to delay, reduce the scope of or eliminate some or all of our development programs or commercialization efforts or liquidate some or all of our assets. The loss of a key employee or the inability to recruit and retain high caliber staff to manage future anticipated growth could have a material adverse effect on our business. As with most growth companies, our future success is substantially dependent on our key personnel. Certain key personnel would be difficult to replace and the loss of any such key personnel may adversely impact the achievement of our objectives. Our ability to operate successfully and manage the business depends significantly on attracting and retaining additional highly qualified personnel. The loss of any key personnel may be disruptive or have a material adverse effect on the future of our business. The competition for qualified employees in scientific research and medical diagnostic industries is particularly intense and there are a limited number of persons with the necessary skills and experience. Our primary operations are conducted at a single location. Any disruption at our facility could adversely affect our operations and increase our expenses. Our primary operations are conducted at our Corporate Avenue facility in Melbourne, Australia. We take precautions to safeguard our facility, including security, health and safety protocols, and maintain applicable insurance. However, we may be impacted by industrial action or operating equipment and facilities may not operate as intended or be unavailable as a result of unanticipated failures or other events outside of our control such as a natural disaster, fire, flood or earthquake or catastrophic breakdowns or deliberate acts of destruction. The occurrence of any of these event may restrict our ability to supply product, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case. Investors may be subject to Australian and/or US taxation. The receipt of dividends by Australian tax resident security holders and any subsequent disposal of our securities by Australian tax resident may have both United States and Australian tax consequences depending upon their individual circumstances. This may result in a security holder being subject to tax in both jurisdictions and a tax credit may or may not be available in one jurisdiction to offset the tax paid in the other jurisdiction depending upon the security holder’s individual circumstances. The price of our shares is highly volatile and could decline significantly. Our shares of common stock in the form of CDIs were quoted on the ASX and began trading on December 13, 2006. The price of our shares is highly volatile and could decline significantly. The market price of our shares historically has been, and we expect will continue to be, subject to significant fluctuations over short periods of time. These fluctuations may be due to factors specific to us, to changes in analysts’ recommendations 17 For personal use only and earnings estimates, or to factors affecting the life sciences industry or the securities markets in general. For example, from the initial quotation of our shares in the form of CDIs on the Australian Securities Exchange on December 13, 2006 until March 6, 2013, the closing price per share of our shares ranged from a low of A$0.41 during February 2009 to a high of A$2.02 during the first quarter of the 2010 fiscal year and was A$0.80 on March 6, 2013. We may experience a material decline in the market price of our CDIs, regardless of our operating performance and therefore, a holder of our shares may not be able to sell those shares at or above the price paid by such holder for such shares. Sales by our larger shareholders may create volatility or impact how the value of our shares is perceived. Class action litigation has been brought in the past against companies which have experienced volatility in the market price of their securities. We may become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts management’s attention and our resources. Our securities are not currently traded on any United States public markets and there are currently restrictions on the ability of United States persons to acquire our securities on the ASX. There is no public market for our shares in the United States or in any other jurisdiction other than Australia. We have not determined whether we will seek the quotation of our shares on any United States public trading market. Even if our shares are in the future listed on a United States public market, the liquidity of our shares may not improve, and the United States market price may not accurately reflect the price or prices at which purchasers or sellers would be willing to purchase or sell our common stock. In addition, our securities are “restricted securities” as that term is defined in Rule 144 under the United States Securities Act of 1933, as amended (“Securities Act”). Restricted securities may be resold in the public market to United States persons as defined in Regulation S only if registered for resale or if they qualify for an exemption from registration under the Securities Act. We have not agreed to register any of our common stock for resale by security holders. We may be involved in litigation. There has been substantial litigation and other proceedings in the medical diagnostic industries. Defending against litigation and other third party claims would be costly and time consuming and would divert management’s attention from our business, which could lead to delays in our development or commercialization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business. Changes in laws may adversely affect our business. Our business and the business of our customers and partners are subject to the laws and regulations in a number of jurisdictions. Unforeseen changes in laws and government policy both in Australia, the EU, the US and elsewhere, could materially impact our’ operations, assets, contracts and profitability. We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) and related regulations implemented by the SEC, have substantially increased legal and financial compliance costs. We expect that our ongoing compliance with applicable laws and regulations, including the Securities Exchange Act of 1934 as amended (“Exchange Act”) and the Sarbanes-Oxley Act, will involve significant and potentially increasing costs. In particular, we must annually evaluate our internal controls systems to allow management to report on our internal controls. Additionally, as an “accelerated” filer with the SEC, our independent auditors must attest to our internal controls. We must perform the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and, when applicable, auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. If we are not able to continue to satisfy the requirements of Section 404 adequately, we may be subject to sanctions or investigation by regulatory authorities, including the SEC. Any action of this type could adversely affect our financial results, investors’ confidence in our company and our ability to access capital markets, and could cause our stock price to decline. 18 For personal use only A significant amount of our shares are controlled by individuals or voting blocks, and the interests of such individuals or voting blocks could conflict with those of the other stockholders. Single stockholders with significant holdings or relatively small groups of stockholders have the power to influence matters requiring the approval of stockholders. Approximately 10.4% of our outstanding shares of common stock are owned by The Principals Cornerstone Fund Pty Ltd, an Australian company, which holds shares on trust for our directors, Messrs Denver, Hanley and Dr. Adam. These directors also hold shares directly and through other vehicles. In addition, a company called PFM Cornerstone Limited, an Australian company, of which Messrs Denver, Hanley and Dr. Adam are directors, holds approximately 6.5% of our shares. Mr. Andrew Jane is one of our directors and a director of CM Capital Investments Pty Ltd which holds approximately 10.2% of our shares. As directors, these individuals have the power to influence significantly all matters requiring the approval of our stockholders, including the election of directors and the approval of other significant resolutions, and their interests may conflict with those of the other stockholders. In addition, control of a significant amount of our common stock by insiders could adversely affect the market price of shares. Johnson and Johnson Development Corporation ceased to hold shares in the Company during the course of the year ended December 31, 2012. For details of our substantial stockholders and the interests of our directors, refer to “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”. We have never paid a dividend and we do not intend to pay dividends in the foreseeable future which means that holders of shares of common stock and CDIs may not receive any return on their investment from dividends. To date, we have not declared or paid any cash dividends on our shares or CDIs and currently intend to retain any future earnings, if any, for funding growth. We do not anticipate paying any dividends in the foreseeable future. Our holders of CDIs are not stockholders and do not have stockholder rights. The main difference between holding CDIs and holding our underlying shares is that a CDI holder has beneficial ownership of the equivalent number of shares instead of legal title. CDIs are exchangeable, at the option of the holder, into shares of our common stock at a ratio of 1:1. Legal title is held by CHESS Depositary Nominees Pty Ltd (“CDN”) and the shares are registered in the name of CDN and held by CDN on behalf of and for the benefit of CDI Holders. CDN is a wholly owned subsidiary of ASX Limited. CDI holders will be entitled to all the economic benefits of the shares underlying their CDIs, such as dividends (if any), bonus issues or rights issues. CDN as a stockholder of record will receive notice of stockholder meetings and be entitled to attend and vote at stockholder meetings. CDI holders will likewise be sent notices of stockholder meetings and are entitled to attend stockholder meetings but are not permitted to vote other than by giving directions on how to vote to CDN or as a proxy holder for CDN. Our success is reliant on the accuracy, reliability and proper use of sophisticated information processing systems and management information technology and the interruption in these systems could have a material adverse effect on our business, financial condition and results of operations. Our success is reliant on the accuracy, reliability and proper use of sophisticated information processing systems and management information technology. Our information technology systems are designed and selected in order to facilitate the entering of order entry, customer billing, to maintain customer records, to provide product traceability, to accurately track purchases, to manage accounting, finance, administration and manufacturing, generate reports and provide customer service and technical support. Any interruption in these systems could have a material adverse effect on our business, financial condition and results of operations. 19 For personal use only Provisions in our charter documents and under Delaware law could make the possibility of our acquisition, which may be beneficial for our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove current management. Provisions in our certificate of incorporation and our bylaws may delay or prevent an acquisition of us or a change in our management, and frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult to remove our current directors. Such provisions include: ‰ ‰ ‰ the division of our Board into classes whose terms expire at staggered intervals over a three year period and advance notice requirements for nominations to our Board and proposing matters that can be acted upon at shareholder meetings; the requirement that actions by our stockholders by written consent be unanimous; the ability of our Board to issue preferred stock. There are limitations on our independent registered public accounting firm’s liability. The Australian accounting firm we utilize for audit reports on our financial statements is subject to limitations on liability with respect to claims arising out of their audit reports, in accordance with professional standards legislation. This legislation may limit the liability of our accountant’s for damages with respect to certain civil claims arising directly or vicariously from anything done or omitted in the performance of their professional services to us, including to the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability for audit work of A$75 million or, in relation to matters occurring prior to October 7, 2007, A$20 million. The limit does not apply to claims for breach of trust, fraud or dishonesty. These limitations of liability may limit recovery upon the enforcement in Australian courts of any judgment under US or other foreign laws rendered against our Australian accountants based on or related to their audit report on our financial statements. Substantially all of our accountant’s assets are located in Australia. However, the professional standards legislation has not been subject to judicial consideration and therefore how the limitation will be applied by the courts and the effect of the limitation on the enforcement of foreign judgments are untested. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. Universal Biosensors Pty Ltd leases approximately 5,000 square meters of office, research and development and manufacturing facilities at 1 Corporate Avenue, Rowville in Melbourne, Australia. The lease for the premises at 1 Corporate Avenue Rowville expires on March 31, 2014 with two options to renew the lease for successive five year periods. We manufacture our test strips using custom manufacturing equipment. Depending on the number of strips required to be manufactured, it may become necessary in the future for us to acquire additional large scale equipment to satisfy manufacturing demand. If our existing facilities and equipment are fully utilized for the manufacture of test strips for one of our customers or partners, we will need to secure additional or alternative facilities and establish additional large scale equipment sufficient to future manufacturing requirements. ITEM 3. LEGAL PROCEEDINGS. There are no material legal or arbitration proceedings pending against us or Universal Biosensors Pty Ltd. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 20 For personal use only PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market information Our shares of common stock are not currently traded on any established United States public trading market. We have not determined whether we will seek the quotation of our shares of common stock on any United States public trading market. We cannot assure you that we will seek to be quoted on any United States public trading market or that we would meet any applicable listing requirements. Our shares of common stock are traded on the ASX in the form of CHESS Depositary Interests, or CDIs, under the ASX trading code “UBI”. The Clearing House Electronic Subregister System, or “CHESS”, is an electronic system which manages the settlement of transactions executed on the ASX and facilitates the paperless transfer of legal title to ASX quoted securities. CHESS cannot be used directly for the transfer of securities of U.S. domiciled companies. CDIs are used as a method of holding and transferring the legal title of these securities on the ASX which are not able to be electronically traded in CHESS. CDIs are exchangeable, at the option of the holder, into shares of our common stock at a ratio of 1:1. The main difference between holding CDIs and holding the underlying securities (in this case our shares) is that a holder of CDIs has beneficial ownership of the equivalent number of our shares instead of legal title. Legal title is held by CHESS Depositary Nominees Pty Ltd, or CDN, and the shares are registered in the name of CDN and held by CDN on behalf of and for the benefit of the holders of CDIs. CDN is a wholly owned subsidiary of ASX. Holders of CDIs who do not wish to have their trades settled in CDIs on the ASX may request that their CDIs be converted into shares, in which case legal title to the shares of common stock are transferred to the holder of the CDIs. Likewise, stockholders who wish to be able to trade on the ASX can do so by requesting that their shares be converted into CDIs and by lodging their applicable share certificate with our share registrar and signing a share transfer form with respect to the relevant shares. Our share registrar will then transfer the shares from the stockholder to CDN and establish a CDI holding in the name of the stockholder (now a CDI holder). High and low sale prices of our CDIs on the ASX The sale prices of our shares traded in the form of CDIs are quoted on the ASX in Australian dollars. Our CDIs were first quoted on the ASX on December 13, 2006. Twenty minute delayed trading prices of our CDIs are available through the ASX at www.asx.com.au. The following tables sets forth, for the periods indicated, the highest and lowest market prices in Australian dollars for our CDIs reported on the ASX: Fiscal Year 2012 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year 2011 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High A$ Low A$ A$0.90 A$0.80 A$0.90 A$1.15 A$1.59 A$1.40 A$1.19 A$0.94 A$0.71 A$0.56 A$0.54 A$0.77 A$1.23 A$0.90 A$.083 A$0.72 21 For personal use only Security details As of March 6, 2013, there were 173,959,863 shares of our common stock issued and outstanding and 11,718,464 employee options that are exercisable for an equivalent number of shares of common stock (9,264,906 of which were exercisable or exercisable within 60 days thereafter). All of our issued and outstanding shares of common stock are fully paid. Under applicable U.S. securities laws all of the shares of our common stock are “restricted securities” as that term is defined in Rule 144 under the Securities Act. Restricted securities may be resold to U.S. persons as defined in Regulation S only if registered or if they qualify for an exemption from registration under the Securities Act, each as described in more detail below. We have not agreed to register any of our common stock for resale by security holders. Rule 144(b) Because there is no public trading market for the shares in the United States, no sales in the United States under Rule 144 other than Rule 144(b)(1)(i) are likely to occur. Under Rule 144(b)(1)(i), a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for between six months and one year may sell so long as the public information requirements of Rule 144 are satisfied, and, after one year, such person is entitled to sell the shares without having to comply with the manner of sale or public information provisions of Rule 144. A person who is deemed an affiliate during the 90 days preceding the sale who has beneficially owned the shares proposed to be sold for at least six months may sell so long as the conditions of Rule 144 are met, including the manner of sale, public information, volume limitation and notice filing provisions of Rule 144. Holders Currently, CDN holds the majority of our shares on behalf of and for the benefit of the holders of CDIs. The balance of the shares are held by certain of our employees generally as part of our restricted employee share scheme. Set out below is the aggregate number of our registered holders of CDIs and shares at the specific date below: Date Total Number of Registered Holders Number of Holders that are United States Residents At March 6, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,627 7 Dividends To date, we have not declared or paid any cash dividends on our shares or CDIs and currently intend to retain any future earnings, if any, for funding growth. We do not anticipate paying any dividends in the foreseeable future. Securities authorized for issuance under equity compensation plans Set out below are details of our Employee Option Plan as at December 31, 2012. Equity Compensation Plan Information Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of Securities remaining for future issuance Plan Category Equity compensation plans approved by security holders . . . . . . . . . . . . . . . . Equity compensation plans not approved by security holders (2) . . . . . . . . . . . . . 11,718,464 38,417 Total . . . . . . . . . . . . . . . . . . . . 11,756,881 22 (A$) 1.01 0.00 1.01 (1) (1) For personal use only (1) The number of employee options 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. The Listing Rules of ASX generally prohibit companies whose securities are quoted on the ASX from issuing securities exceeding 15% of issued share capital in any 12 month period, without stockholder approval. (2) The grant of options and the issue of shares to any of our directors require stockholder approval. On November 13, 2012, our Board approved the grant of 37,500 zero exercise price employee options (“ZEPOs”) and 917 restricted shares of common stock to our Executive Director/ Chief Executive Officer, Mr. Paul Wright. Shareholder approval for the grant of the ZEPOs and the issue of restricted shares to Mr. Paul Wright is being sought at the 2013 Annual General Meeting. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities Institutional Placement On November 26, 2012, we placed 13,334,000 shares of common stock at A$0.90 per share to certain existing and new institutional investors based primarily in Australia, and raised an aggregate total of A$12,000,600 (before expenses of the offer) (“Placement”). Wilson HTM Corporate Finance Limited (“Wilson HTM”) acted as Lead Manager and Bookrunner for the Placement. Veritas Securities Limited acted as Co- manager to the Placement. We paid the Wilson HTM a management fee of A$180,009 and a selling fee of A$360,018 in connection with the Placement. In addition, we reimbursed Wilson HTM for certain costs and expenses incurred in connection with the Placement. We raised A$11,460,573 net of management and selling fees paid to the Wilson HTM in the Placement. Dr. Wilson is the spouse of Mr. Steven Wilson who is a substantial stockholder and officer of the parent company of Wilson HTM. Share Purchase Plan On December 17, 2012 we completed a share purchase plan (“Share Purchase Plan”) offer to all holders of our securities with a registered address in Australia or New Zealand on the record date of the Share Purchase Plan and raised an aggregate total of A$1,163,442 (before expenses of the offer) through the issuance of 1,292,713 shares at a price of A$0.90 per share. Wilson HTM acted as Lead Manager for the Share Purchase Plan. We paid Wilson HTM a fee of A$17,452 in connection with managing the Share Purchase Plan. We raised A$1,145,990 net of fees paid to the Lead Manager in our Share Purchase Plan. The offers of shares under the Placement and the Share Purchase Plan were made in offshore transactions in reliance upon the exemption from registration pursuant to Regulation S, as promulgated by the Securities Act of 1933, as amended (the “Securities Act”). In order to comply with the requirements of Regulation S, investors may not re-sell any securities issued in the Placement or Share Purchase Plan into the U.S. or to a U.S. Person (as defined in the Securities Act) for a period of six months after the date of issue of the securities unless the re-sale of the securities is registered under the Securities Act or an exemption is available. Accordingly, in order to enforce the above transfer restrictions whilst ensuring that stockholders can still trade their CDIs on ASX, certificates representing the shares will bear a restrictive legend and the CDIs will for a period of time (of not less than 6 months) have a Foreign Ownership Restriction (FOR) designation which will inform the market of the prohibition on U.S. Persons acquiring the shares or CDIs. The proceeds from the Placement and the Share Purchase Plan will be used to take advantage of opportunities for the Company’s existing point-of-care initiatives by accelerating new product development in patient self-test PT-INR, immunoassay testing and molecular diagnostic testing and to provide working capital to support new product launches and growth in manufacturing. 23 For personal use only Exercise of Employee Stock Options The table below sets forth the number of employee stock options exercised and the number of shares of common stock issued within the past three financial years. We issued these shares in reliance upon exemptions from registration under Regulation S under the Securities Act of 1933, as amended. Period Ending 2010 February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . February, 2010 . . . . . . . . . . . . . . . . . . . . . . . March, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . March, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . March, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . May, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . June, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . June, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . August, 2010 . . . . . . . . . . . . . . . . . . . . . . . . August, 2010 . . . . . . . . . . . . . . . . . . . . . . . . August, 2010 . . . . . . . . . . . . . . . . . . . . . . . . August, 2010 . . . . . . . . . . . . . . . . . . . . . . . . September, 2010 . . . . . . . . . . . . . . . . . . . . . . September, 2010 . . . . . . . . . . . . . . . . . . . . . . September, 2010 . . . . . . . . . . . . . . . . . . . . . . September, 2010 . . . . . . . . . . . . . . . . . . . . . . October, 2010 . . . . . . . . . . . . . . . . . . . . . . . . October, 2010 . . . . . . . . . . . . . . . . . . . . . . . . October, 2010 . . . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . Number of Options Exercised and Corresponding Number of Shares Issued Option Exercise Price Proceeds Received A$ 0.89 A$ 0.94 A$ 0.50 US$0.26 A$ 1.18 US$0.22 Nil A$ 0.89 A$ 0.70 A$ 0.94 Nil A$ 0.94 US$0.22 US$0.26 A$ 1.18 A$ 0.89 A$ 0.94 A$ 0.94 A$ 0.70 A$ 1.20 A$ 0.94 US$0.26 A$ 1.18 A$ 0.89 US$0.26 A$ 1.18 A$ 0.89 A$ 0.94 (A$) 20,766 18,800 2,000 5,104 15,732 4,489 0 5,933 4,666 1,880 0 6,267 4,040 8,381 23,600 11,865 6,267 12,533 5,600 19,999 3,133 256,018 53,100 89,000 47,430 33,040 35,600 20,053 715,296 23,333 20,000 4,000 18,124 13,332 18,124 33,333 6,666 6,666 2,000 12,500 6,667 20,000 25,374 20,000 13,332 6,667 13,333 8,000 16,666 3,333 960,560 45,000 100,000 181,238 28,000 40,000 21,333 1,667,581 24 For personal use only Period Ending 2011 January, 2011 . . . . . . . . . . . . . . . . . . . . . . . . January, 2011 . . . . . . . . . . . . . . . . . . . . . . . . January, 2011 . . . . . . . . . . . . . . . . . . . . . . . . January, 2011 . . . . . . . . . . . . . . . . . . . . . . . . March, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . May, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . May, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . August, 2011 . . . . . . . . . . . . . . . . . . . . . . . . November, 2011 . . . . . . . . . . . . . . . . . . . . . . November, 2011 . . . . . . . . . . . . . . . . . . . . . . 2012 February, 2012 . . . . . . . . . . . . . . . . . . . . . . . June, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . August, 2012 . . . . . . . . . . . . . . . . . . . . . . . . October, 2012 . . . . . . . . . . . . . . . . . . . . . . . . November, 2012 . . . . . . . . . . . . . . . . . . . . . . Number of Options Exercised and Corresponding Number of Shares Issued Option Exercise Price Proceeds Received 50,000 13,333 26,667 6,666 40,000 6,667 2,333 8,000 10,000 18,333 181,999 6,248 55,993 38,332 8,000 6,667 115,240 A$ 0.89 A$ 0.50 Nil A$ 0.94 US$0.22 A$ 0.70 A$ 0.94 A$ 0.50 US$0.26 Nil US$0.26 US$0.22 Nil A$ 0.70 A$ 0.70 (A$) 44,500 6,667 0 6,266 8,694 4,667 2,193 4,000 2,518 0 79,504 1,518 12,300 0 5,600 4,668 24,086 The funds raised have been and will be used for working capital requirements including the continued development of our existing pipeline of point-of-care tests and to identify and develop additional tests. Restricted Employee Shares Issued to Employees Our Employee Share Plan was adopted by the Board of Directors in 2009. The Employee Share Plan permits our Board to grant shares of our common stock to our employees and directors. The number of shares able to be granted is limited to the amount permitted to be granted at law, the ASX Listing Rules and by the limits on our authorized share capital in our certificate of incorporation. All our employees are eligible for shares under the Employee Plan. The Company currently proposes to issue A$1,000 worth of restricted shares of common stock to employees of the Company on a recurring basis, but no more frequently than annually. The restricted shares have the same terms of issue as our existing shares of common stock but are not able to be traded until the earlier of three years from the date on which the shares are issued or the date the relevant employee ceases to be an employee of the Company or any of its associated group of companies. We issue these shares in reliance upon exemptions from registration under Regulation S under the Securities Act. The table below sets forth the restricted shares issued by the Company within the past three financial years: Number of Restricted Shares Issued Market Value of Restricted Shares Issued May, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581 47,400 86,471 77,945 A$ 999 A$74,892 A$76,959 A$84,960 25 For personal use only Restricted stock awards activity during the current period is as follows: Number of shares Weighted average issue price A$ Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,763 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Release of restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,945 (39,619) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,089 1.23 1.09 1.59 1.10 Purchases of Equity Securities by the Issuer and Affiliated Purchasers There were no repurchases of equity securities in 2012. Total Return Stock Performance Graph The following line graph compares the cumulative total stockholder return on our common stock from December 31, 2007 through December 31, 2012 with the cumulative total return of a major market index and a published industry index. The graph below assumes an investment of A$100.00 on December 31, 2007 in our common stock, and compares its performance with the Standard and Poor’s/Australian Securities Exchange 200 Index and the Standard and Poor’s/Australian Securities Exchange Health Care 200 Index. For the 2011 fiscal year, the indexes used were Standard and Poor’s 500 Index and the Standard and Poor’s 500 Health Care Index. These two indexes have also been included in the graph. We changed our indexes this financial year as the Company trades on the Australian Securities Exchange to provide a better peer comparison. We paid no dividends on our common stock during the period covered by the graph. The Indices included in the graph reflect a cumulative total return based upon the reinvestment of dividends of the stocks included in those indices. Measurement points are December 31, 2007 and the last trading day of each subsequent year end through December 31, 2012. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2012 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 2007 2008 2009 2010 2011 2012 Universal Biosensors, Inc. S&P 500 Index - Total Returns S&P/ASX 200 Index - Total Returns S&P/ASX 200 Healthcare Index S&P 500 Health Care Index The comparisons shown in the graph above are based upon historical data. The stock price performance shown in the graph is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. This graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and will not be deemed incorporated by reference into any filing under the Securities Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing. 26 For personal use only ITEM 6. SELECTED FINANCIAL DATA. The following table represents our selected financial data for the dates and periods indicated. Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ 2009 A$ 2008 A$ Revenue Revenue from products . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . Research and development income . . . . . . . . . . . . Milestone payment . . . . . . . . . . . . . . . . . . . . . . . . . 19,368,745 10,277,698 0 0 12,063,582 2,632,870 0 0 11,760,009 6,420,027 0 0 132,733 2,850,071 1,337,125 17,722,641 0 3,121,754 1,170,190 0 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,646,443 14,696,452 18,180,036 22,042,570 4,291,944 Operating costs & expenses Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development General and administrative . . . . . . . . . . . . . . . . . . 17,987,049 669,042 13,482,459 6,790,524 12,310,302 708,149 9,812,396 7,271,488 10,801,062 1,481,674 6,482,150 7,185,550 458,162 169,241 14,898,072 5,635,569 0 3,121,754 11,585,258 5,510,127 Total operating costs & expenses . . . . . . . . . . . . . . . 38,929,074 30,102,335 25,950,436 21,161,044 20,217,139 Profit/(loss) from operations . . . . . . . . . . . . . . . . . . . Other income/(expense) (9,282,631) (15,405,883) (7,770,400) 881,526 (15,925,195) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 437,171 (29,263) 0 (256,499) 683,323 0 0 30,443 1,192,889 0 0 (33,014) 809,459 (9,636) 0 (250,886) 2,542,060 (9,489) 1,131,222 265,310 Total other income/(expense) . . . . . . . . . . . . . . . . . . Net profit/(loss) before tax . . . . . . . . . . . . . . . . . . . . . Income tax benefit/(expense) . . . . . . . . . . . . . . . . . . . 151,409 (9,131,222) 0 713,766 (14,692,117) 0 1,159,875 (6,610,525) 0 548,937 1,430,463 0 3,929,103 (11,996,092) 206 Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,131,222) (14,692,117) (6,610,525) 1,430,463 (11,995,886) Earnings per share Basic and diluted net loss per share . . . . . . . . . . . . . . Average weighted number of shares — basic & (0.06) (0.09) (0.04) 0.01 (0.08) diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,417,411 159,017,777 157,584,044 157,013,578 156,970,679 Other comprehensive loss, net of tax: Unrealized (loss)/gain on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 83,339 0 (47,412) Reclassification for losses/(gains) realized in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,339) 0 Other comprehensive (loss)/gain . . . . . . . . . . . . . . . . (83,339) 83,339 47,412 47,412 0 (47,412) 0 0 0 Comprehensive (loss)/gain . . . . . . . . . . . . . . . . . . . . (9,214,561) (14,608,778) (6,563,113) 1,383,051 (11,995,886) Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ 2009 A$ 2008 A$ Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . 23,649,417 49,066,850 39,372,139 15,089,209 45,216,467 35,022,606 23,271,766 53,837,949 47,219,079 31,291,011 56,083,468 51,314,002 28,334,864 52,505,321 48,703,230 27 For personal use only ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to our 2012 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages F-2 to F-12. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference to our 2012 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” on page F-12. 28 For personal use only ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA We refer you to the “Consolidated Balance Sheets”, “Consolidated Statements of Comprehensive Income”, “Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income”, “Consolidated Statements of Cash Flows”, and “Notes to Consolidated Financial Statements”, on pages F-15 through F-39, and “Report of Independent Registered Public Accounting Firm” on pages F-13 through F-14 of our Annual Report to Stockholders for the fiscal year ended December 31, 2012, which sections are incorporated by reference herein. Supplementary Financial Information The following is a summary of the unaudited quarterly results of operations: Year ended December 31, 2012 Quarter Ended March 31 A$ Quarter Ended June 30 A$ Quarter Ended September 30 Quarter Ended December 31 A$ A$ Revenue Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,724,221 1,677,510 4,734,628 3,583,018 5,156,432 3,502,207 4,753,464 1,514,963 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,401,731 8,317,646 8,658,639 6,268,427 Operating costs & expenses Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . 4,868,577 225,802 2,264,898 1,484,876 4,447,610 204,177 3,118,746 1,583,980 4,295,066 223,760 3,771,140 1,605,838 4,375,796 15,303 4,327,675 2,115,830 Total operating costs & expenses . . . . . . . . . . . . . . . . 8,844,153 9,354,513 9,895,804 10,834,604 Profit/(loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . Other income/(expense) (2,442,422) (1,036,867) (1,237,165) (4,566,177) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 124,168 (9,754) (74,167) 120,512 (7,316) (85,112) 90,377 (7,316) (172,011) 102,114 (4,877) 74,791 Total other income/(expense) . . . . . . . . . . . . . . . . . . . Net profit/(loss) before tax . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit/(expense) . . . . . . . . . . . . . . . . . . . . . . . . 40,247 (2,402,175) 0 28,084 (1,008,783) 0 (88,950) (1,326,115) 0 172,028 (4,394,149) 0 Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,402,175) (1,008,783) (1,326,115) (4,394,149) Earnings per share Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Unrealised loss on derivative instruments . . . . . . . . . . . . Reclassification for (losses)/gains realised in net (0.02) (0.01) (0.01) (0.03) (35,001) 0 0 0 0 0 0 0 income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83,339) Other comprehensive (loss)/gain . . . . . . . . . . . . . . . . . . . . . (118,340) 35,001 35,001 Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,520,515) (973,782) (1,326,115) (4,394,149) 29 For personal use only Year ended December 31, 2011 Quarter Ended March 31 A$ Quarter Ended June 30 A$ Quarter Ended September 30 Quarter Ended December 31 A$ A$ Revenue Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,319,401 245,920 2,267,766 476,129 2,153,518 318,869 4,322,897 1,591,952 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565,321 2,743,895 2,472,387 5,914,849 Operating costs & expenses Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development General and administrative . . . . . . . . . . . . . . . . . . . . . . . 3,492,052 63,519 1,747,507 1,405,358 2,694,792 140,987 2,969,982 1,800,900 2,314,082 61,257 2,317,556 2,029,467 3,809,376 442,386 2,777,351 2,035,763 Total operating costs & expenses . . . . . . . . . . . . . . . . 6,708,436 7,606,661 6,722,362 9,064,876 Profit/(loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . Other income/(expense) (3,143,115) (4,862,766) (4,249,975) (3,150,027) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,875 (128,992) 179,444 (226,486) 145,228 749,727 133,776 (363,806) Total other income/(expense) . . . . . . . . . . . . . . . . . . . Net profit/(loss) before tax . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit/(expense) . . . . . . . . . . . . . . . . . . . . . . . . 95,883 (3,047,232) 0 (47,042) (4,909,808) 0 894,955 (3,355,020) 0 (230,030) (3,380,057) 0 Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,047,232) (4,909,808) (3,355,020) (3,380,057) Earnings per share Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Unrealized (loss)/gain on derivative instruments . . . . . . Reclassification for losses/(gains) realized in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive gain . . . . . . . . . . . . . . . . . . . . . . . . . . (0.02) (0.03) (0.02) (0.02) 0 0 0 0 0 0 0 0 0 83,339 0 83,339 Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,047,232) (4,909,808) (3,355,020) (3,296,718) 30 For personal use only ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. At the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Paul Wright, Chief Executive Officer, and Salesh Balak, Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Wright and Balak concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting. During the fiscal quarter ended December 31, 2012, 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. 31 For personal use only MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: ‰ Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and the dispositions of the assets of the Company; ‰ Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and ‰ Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with the policies or procedures. Our management, with the participation of the Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this evaluation, our management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that, as of December 31, 2012, our internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, and PricewaterhouseCoopers has issued an attestation report on the Company’s internal control over financial reporting, which appears in the “Report of Independent Registered Public Accounting Firm” on pages F-13 to F- 14 of the Annual Report, which is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K. /s/ Paul Wright Paul Wright Principal Executive Officer March 12, 2013 /s/ Salesh Balak Salesh Balak Principal Financial Officer 32 For personal use only REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING We refer you to “Report of Independent Registered Public Accounting Firm” on pages F-13 to F-14 of our Annual Report to Stockholders for the fiscal year ended December 31, 2012, which are incorporated by reference herein, for the Independent Registered Public Accounting Firm’s report with respect to the effectiveness of internal control over financial reporting. 33 For personal use only ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this item regarding our directors and executive officers is incorporated by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our Annual Meeting of Stockholders in 2013 (the “2013 Proxy Statement”) under the caption “Management of the Company.” The information required by this item regarding “Compliance with Section 16(a) of the Exchange Act” is incorporated by reference to the 2013 Proxy Statement under the caption “Other Matters — Section 16(a) Beneficial Ownership Reporting Compliance.” We have adopted our Code of Ethics for Senior Financial Officers, a code of ethics that applies to our Principal Executive Officer and Principal Financial Officer. This code of ethics may be accessed and reviewed through our website at www.universalbiosensors.com. We intend to satisfy any disclosure requirement under item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics for our Principal Executive Officer and Principal Financial Officer, by posting such information on our website at www.universalbiosensors.com The information regarding the procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference to the 2013 Proxy Statement under the caption “Management of the Company — Board Committees — Remuneration and Nomination Committee.” There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors. The information required by this item regarding our Audit Committee is incorporated by reference to the 2013 Proxy Statement under the caption “Management of the Company — Board Committees — Audit and Compliance Committee.” ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to the 2013 Proxy Statement under the captions “Management of the Company — Compensation of Directors”, “Executive Compensation” and “Management of the Company — Board Committees — Compensation Committee Interlocks and Insider Participation.” Discussions on the frequency of the shareholder advisory votes on executive compensation are incorporated by reference to the 2013 Proxy Statement under the caption “Executive Compensation”. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information regarding the security ownership of certain beneficial owners and management is incorporated by reference to the 2013 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.” The information regarding “Securities Authorized for Issuance under Equity Compensation Plans” is incorporated by reference to our 2013 Proxy Statement under the caption “Executive Compensation — Equity Compensation Plan Information.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this item is incorporated by reference to the 2013 Proxy Statement under the caption “Certain Relationships and Related Transactions,” and “Management of the Company.” 34 For personal use only ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this item is incorporated by reference to the 2013 Proxy Statement under the caption “Independent Public Accountants — Audit Fees.” ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES. (a)(1) Financial Statements PART IV The following financial statements are incorporated by reference from pages F-13 through F-39 of our Annual Report to Stockholders for the fiscal year ended December 31, 2012, as provided in Item 8 hereof: Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income . . . . . F-17 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19 (a)(2) Financial Statement Schedules — Schedule II—Valuation and Qualifying Accounts. All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements. (a)(3) and (b) Exhibits — Refer below. Exhibit Number Description Location 3.1 Amended and restated articles of incorporation dated December 5, 2006. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 3.1. 3.2 Amended and restated by-laws dated December 5, 2006. Incorporated by reference to our Amendment No. 5 to Form 10 filed on April 29, 2008 as Exhibit 3.2. 10.1 License Agreement between LifeScan and Universal Biosensors, Inc. effective April 1, 2002, as amended on October 25, 2007, December 5, 2005. 10.2 Amended and Restated License Agreement between LifeScan, Inc. and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011. 10.3 Development and Research Agreement by and between Universal Biosensors, Inc. and LifeScan, Inc. dated April 1, 2002 as amended on October 29, 2007, June 1, 2007, December 7, 2005, December 21, 2004 and March 31, 2004. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.1. October 2007 amendment incorporated by reference to our Form 10-Q filed on November 14, 2007 as Exhibit 10.2. Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.1. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.2. June 2007 amendment incorporated by reference to our Amendment No. 2 to Form 10 filed on June 12, 2007 as Exhibit 10.2. October 2007 amendment incorporated by reference to our Form 10-Q filed on November 14, 2007 as Exhibit 10.3. 35 For personal use only Incorporated by reference to our Current Report on Form 8-K filed on August 30, 2011 as Exhibit 10.2. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.3. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.5. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.6. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.7. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.8. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.9. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.10. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 10.11. Incorporated by reference to our Form 10-K filed on March 16, 2010 as Exhibit 10.12. Incorporated by reference to our Annual Report on Form 10-K filed on March 30, 2009 as Exhibit 10.14. 10.4 Amended and Restated Development and Research Agreement between Cilag GmbH International and Universal Biosensors Pty Ltd dated on August 29, 2011 and effective as of August 19, 2011. Form of indemnity agreement entered into with directors of us, our chief financial officer and company secretary. Lease of premises 1 Corporate Avenue, Rowville, Victoria, Australia by and between Universal Biosensors Pty Ltd and Heyram Properties Pty Ltd. 10.5 10.6 10.7 AusIndustry, R&D Start Program Agreement, effective February 25, 2005 (particular and general conditions). Employee Option Plan. 10.8 10.9 Employment agreement between Universal Biosensors Pty Ltd and Mr. Salesh Balak effective November 27, 2006. 10.10 Employment agreement between Universal Biosensors Pty Ltd and Mr. Garry Chambers effective April 1, 2006. 10.11 Employment agreement between Universal Biosensors Pty Ltd and Dr Ronald Chatelier dated April 1, 2006. 10.12 Employment agreement between Universal Biosensors Pty Ltd and Dr Alastair Hodges effective April 1, 2006. 10.13 Employment agreement between Universal Biosensors Pty Ltd and Mr. Adrian Oates dated August 15, 2007. 10.14 First Amendment to the Master services and Supply Agreement dated December 11, 2008 (which amends the Master Services and Supply Agreement by and between Universal Biosensors Pty Ltd, Universal Biosensors, Inc. and LifeScan, Inc. dated October 29, 2007 and filed on November 14, 2007 as Exhibit 10.1 to our Quarterly Report on Form 10-Q). 36 For personal use only Incorporated by reference to our Annual Report on Form 10-K filed on March 30, 2009 as Exhibit 10.15. Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.1. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.2. Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. 10.15 Second Services Addendum — Manufacturing Process Support (which amends the Master Services and Supply Agreement by and between Universal Biosensors Pty Ltd, Universal Biosensors, Inc. and LifeScan, Inc. dated October 29, 2007 incorporated by reference to our Quarterly Report on Form 10-Q filed on November 14, 2007 as Exhibit 10.1.). 10.16 Advanced Care Enhanced Product Agreement (which is an addendum to the Amended and Restated Master Services and Supply Agreement filed on August 7, 2009 as Exhibit 10.3 to our Quarterly Report on Form 10-Q). 10.17 Fifth Amendment to Development and Research Agreement (which amends the Development and Research Agreement by and between Universal Biosensors, Inc. and LifeScan, Inc. dated April 1, 2002 and filed on April 30, 2007 as Exhibit 10.2 to our Form 10, the Amendment to the Development and Research Agreement filed on June 12 as Exhibit 10.2 to Amendment No. 2 to our Form 10 and the Amendment to Development and Research Agreement filed on November 14, 2007 as Exhibit 10.3 to our Quarterly Report on Form 10-Q). 10.18 Amended and Restated Master Services and Supply Agreement (which amends and restates the Master Services and Supply Agreement by and between Universal Biosensors Pty. Ltd., Universal Biosensors, Inc., and LifeScan, Inc. dated October 29, 2007 filed on November 14, 2007 as Exhibit 10.1 to our Quarterly Report on Form 10-Q and the First Amendment to the Master Services and Supply Agreement filed on March 30, 2009 as Exhibit 10.14 to our Annual Report on Form 10-K). 37 For personal use only 10.19 Manufacturing Initiation Payment Addendum to Master Services and Supply Agreement (which is an addendum to the Amended and Restated Master Services and Supply Agreement filed on August 7, 2009 as Exhibit 10.3 to our Quarterly Report on Form 10-Q). 10.20 Employment agreement between Universal Biosensors Pty Ltd and Mr. Andrew Denver dated September 9, 2010. 10.21 Collaboration Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics Inc. dated September 9, 2011. 10.22 Statement of Work for MAP Feasibility Project between Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011. 10.23 Novation Agreement and First Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011. 10.24 Second Amendment to the Amended and Restated Master Services and Supply Agreement between Universal Biosensors, Inc., Universal Biosensors Pty Ltd, LifeScan, Inc. and Cilag GmbH International dated October 11, 2011. 10.25 Employment agreement between Universal Biosensors Pty Ltd and Mr. Paul Wright effective March 1, 2011. 10.26 Employment agreement between Universal Biosensors Pty Ltd and Mr. Fred Davis effective November 2, 2011. 10.27 Amendment to Collaboration Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012. Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 7, 2009 as Exhibit 10.4. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Current Report on Form 8-K/A filed on December 22, 2010 as Exhibit 10.1. Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.20. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.21. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.22. Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 3, 2011 as Exhibit 10.23. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Current Report on Form 8-K filed on February 25, 2011 as Exhibit 10.1. Incorporated by reference to our Annual Report on Form 10-K filed on March 13, 2012 as Exhibit 10.27. Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.1. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. 38 For personal use only 10.28 Supply Agreement between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012. 10.29 Supplemental Agreement — Reader Product Support Obligations and Responsibilities between Universal Biosensors Pty Ltd and Siemens Healthcare Diagnostics, Inc. dated September 20, 2012. 13.0 Annual Report. 14.0 Code of Ethics. 21.0 List of Subsidiaries. Power of Attorney. 24.0 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.2. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Incorporated by reference to our Quarterly Report on Form 10-Q/A filed on February 4, 2013 as Exhibit 10.3. Confidentiality treatment has been granted for portions of this exhibit. These confidential portions have been omitted and were filed separately with the SEC. Filed herewith. Incorporated by reference to our Annual Report on Form 10-K filed on March 28, 2008 as Exhibit 14.0. Incorporated by reference to our General Form for Registration of Securities on Form 10 filed on April 30, 2007 as Exhibit 21.0. Included on signature page. Filed herewith. 31.2 Certification of Principal Financial Filed herewith. Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.0 Certification of Principal Executive Filed herewith. Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 39 For personal use only As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. 101 The following materials from the Universal Biosensors, Inc. Annual Report on Form 10-K for the financial year ended December 31, 2012 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. 40 For personal use only Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: March 12, 2013 Universal Biosensors, Inc. (Registrant) By: /s/ Paul Wright Paul Wright Principal Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Paul Wright and Salesh Balak and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys in-fact and agents or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Paul Wright Paul Wright /s/ Salesh Balak Salesh Balak /s/ Andrew Denver Andrew Denver /s/ Denis Hanley Denis Hanley /s/ Andrew Jane Andrew Jane /s/ Elizabeth Wilson Elizabeth Wilson /s/ Colin Adam Colin Adam /s/ Marshall Heinberg Marshall Heinberg Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer) March 12, 2013 March 12, 2013 Director and Chairman March 12, 2013 Director Director Director Director Director 41 March 12, 2013 March 12, 2013 March 12, 2013 March 12, 2013 March 12, 2013 For personal use only Universal Biosensors, Inc. 2012 Annual Report Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . F-2 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income . . . . . F-17 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19 Schedule ii — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40 Unless otherwise noted, references on this Annual Report to “Universal Biosensors” the “Company,” “Group,” “we,” “our” or “us” means Universal Biosensors, Inc. a Delaware corporation and, when applicable, its wholly owned Australian operating subsidiary, Universal Biosensors Pty Ltd. F-1 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those discussed in the forward-looking statements in our Form 10-K. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our Form 10-K, particularly in “Risk Factors.” Our Business We are a specialist medical diagnostics company focused on the research, development and manufacture of in vitro diagnostic test devices for consumer and professional point-of-care use. We were incorporated in the State of Delaware on September 14, 2001 and our shares of common stock in the form of CHESS Depositary Interests (“CDIs”) have been quoted on the Australian Securities Exchange (“ASX”) since December 13, 2006. Our securities are not currently traded on any other public market. Our wholly owned subsidiary and primary operating vehicle, Universal Biosensors Pty Ltd (“UBS”) was incorporated as a proprietary limited company in Australia on September 21, 2001. UBS conducts our research, development and manufacturing activities in Melbourne, Australia. We have rights to an extensive patent portfolio, with certain patents owned by UBS and a number licensed to UBS under a license agreement between LifeScan, Inc. (“LifeScan”) and UBS. Unless otherwise noted, references to “LifeScan” in this document are references collectively or individually to LifeScan, Inc., and/or LifeScan Europe, a division of Cilag GmbH International, both affiliates of Johnson and Johnson. We are using our electrochemical cell technology platform to develop tests for a number of different markets. Our current focus is as set out below: ‰ Blood glucose — UBS provides services and acts as a non-exclusive manufacturer of test strips for LifeScan’s “OneTouch® VerioTM” blood glucose testing product, pursuant to a Master Services and Supply Agreement with LifeScan (“Master Services and Supply Agreement”). LifeScan continues its global rollout of the OneTouch® VerioTM product which is now available in countries that represent over 85% of the world self-monitoring blood glucose market including North America, major European markets and Australia. We also undertake research and development work for LifeScan pursuant to a development and research agreement (“Development and Research Agreement”). ‰ Coagulation testing market — UBS is working with Siemens Healthcare Diagnostics, Inc. (“Siemens”) to develop a range of products for the point-of-care coagulation market, pursuant to a collaboration agreement (“Collaboration Agreement”) and will manufacture test strips for these products under a Supply Agreement with Siemens (“Supply Agreement”). ‰ Other electrochemical-cell based tests — we are working on proving the broader applicability of our technology platform, including tests based on enzymatic, immunoassay and molecular diagnostic methods. We may seek to enter into collaborative arrangements or strategic alliances with respect to any tests arising from this work. F-2 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. Results of Operations Revenue from Products OneTouch® VerioTM was first launched in the Netherlands in January 2010 and is now available in countries that represent over 85% of the world self-monitoring blood glucose market. The manufacturing results of the blood glucose test strips during the respective periods are as follows: Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 19,368,745 (17,987,049) A$ 12,063,582 (12,310,302) A$ 11,760,009 (10,801,062) 1,381,696 (246,720) 958,947 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7% -2% 8% Pursuant to the agreement we have with LifeScan, one of two pricing methodologies will apply depending on whether we are manufacturing above or below a specified quantity of blood glucose test strips in a quarter. If purchase orders for less than the specified quantity of test strips are received within a quarter, we are considered to be in the “interim costing period”. In the interim costing period, the Company is not expected to generate any profit from the manufacture of test strips, but is expected to recover most of its glucose manufacturing costs. If purchase orders increase beyond the specified quantity of blood glucose test strips per quarter, the interim costing period will cease to apply and a different pricing methodology will apply, at which time we expect our blood glucose manufacturing operations to be profitable. Revenue from product sales may vary every quarter and is dependent on LifeScan’s requirements. We act as a non-exclusive manufacturer of the blood glucose test strips we developed with LifeScan. In the future we expect that LifeScan may manufacture all or a large proportion of its own requirements. We remained within the interim costing period during the first three quarters of each of 2010 and 2011. During 2012, we remained outside the interim costing period which explains the increase in margins from (2%) in 2011 to 7% in 2012. During 2009, LifeScan chose not to proceed with the registration of the then current product but to proceed with an enhanced product, called OneTouch® VerioTM, and acknowledged that there would be a delay as a result. As a result of this change, LifeScan agreed to pay us an additional amount per strip manufactured by us up to a certain volume in 2010. In 2011, as long as we remained in the interim costing period, LifeScan agreed to pay us an additional amount per strip equivalent to 50% of the additional amount per strip paid to us by LifeScan in 2010. These additional payments ceased during the third quarter of 2011. The higher margin in 2010 when compared to 2011 is primarily due to the additional amount per strip received by us from LifeScan during that year. 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 our customers and partners 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 — ad-hoc services provided on an agreed basis based on our customers and partners requirements. F-3 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. There are different arrangements for each service being provided. The net margin during the respective periods in relation to the provision of services is as follows: Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 10,277,698 (669,042) A$ 2,632,870 (708,149) A$ 6,420,027 (1,481,674) 9,608,656 1,924,721 4,938,353 Contract research and development and the product enhancement service fee makes up the major portion of revenue from services. The quarterly service fee for the respective periods is as follows: Quarterly service fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 2,236,251 A$ 544,263 A$ 19,143 Quarterly service fee — The quarterly service fee increased by 311% during the 2012 financial year compared to the 2011 financial year and by 2,743% during the 2011 financial year when compared to the 2010 financial year. The increase reflects growing sales by LifeScan from the OneTouch® VerioTM System. The OneTouch® VerioTM is now sold in over 85% of the world self-monitored blood glucose market. LifeScan launched the product initially in the Netherlands in January 2010 before making it available for sale in Australia in September 2010. During 2011, there were further launches of the product in Europe including France, Italy, Germany, the United Kingdom, Ireland and Spain. LifeScan launched the OneTouch® VerioTM IQ System in the United States in January 2012. LifeScan has the ability to terminate the obligation to pay quarterly service fees to us by either: i) paying us a lump sum amount, but may only do so once it has paid us a certain level of quarterly service fees (we do not expect this level of quarterly service fees will be achieved until worldwide sales volumes have increased significantly); or ii) as a result of other factors detailed in the Master Services and Supply Agreement. 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. This is reflected in our past three year’s results wherein the margin during the 2012 financial year increased by A$5,991,947 compared to the 2011 financial year while the margin during the 2011 financial year has decreased by A$3,538,752 compared to the 2010 financial year. The increase in 2012 reflects the commencement of a new research and development project for LifeScan in September 2011. The project was to determine the feasibility of an innovative blood glucose testing product. The feasibility of the US$4.5 million project awarded to us by LifeScan was completed towards the end of 2012. Revenue was recognized for the feasibility project when services were performed, the amount of the payment could be reliably measured and collectability was reasonably assured. We recognized revenue for accounting purposes ratably over the feasibility period. The increase in research and development revenue during 2012 also reflects revenue recognised pursuant to our Collaboration Agreement with Siemens. On September 9, 2011 the Company entered into a Collaboration Agreement with Siemens to develop coagulation related products for the 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 Company may receive up to six payments from Siemens upon the achievement of certain F-4 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. defined milestones relating to feasibility, regulatory submissions and the launch of the products to be developed. The Company has concluded that the up-front payment is not a separate unit of accounting and recorded the amount as deferred revenue to be recognized as revenue across other deliverables in the arrangement with Siemens based upon the Company’s best estimate of selling price. The deliverables related to each milestone are considered substantive and are not priced at a significant incremental discount to the other deliverables. As the achievement of the milestones is contingent upon a future event, the revenue for each deliverable will be recognized as the contingencies are met and the consideration becomes fixed and determinable. Of the six milestones, the Company has delivered on two as of December 31, 2012: ‰ ‰ In June 2012, the Company delivered on its first milestone by achieving proof of technical feasibility of a new test strip and received a payment of A$1,522,534 (equivalent to US$1.5 million) as consideration. A sum of A$2,175,048 (equivalent to US$2,142,857) has been recognized as revenue from services in June 2012 in this regards. In July 2012, the Company delivered on its second milestone by achieving proof of technical feasibility of another new test strip and received a payment of A$1,438,711 (equivalent to US$1.5 million) as consideration. A sum of A$2,055,301 (equivalent to US$2,142,857) has been recognized as revenue from services in July 2012 in this regards. Of the total amount of A$4,230,349 (equivalent to US$4,285,714) recognized as revenue, A$2,961,245 (equivalent to US$3.0 million) relates to the achievement of the two milestones whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones based upon their relative estimate of selling price. Research and Development Expenses Research and development expenses are related to developing electrochemical cell platform technologies. Research and development expenses consist of costs associated with research activities, as well as costs associated with our product development efforts, including pilot manufacturing costs. Research and development expenses include: ‰ consultant and employee related expenses, which include consulting fees, salary and benefits; ‰ materials and consumables acquired for the research and development activities; ‰ external research and development expenses incurred under agreements with third party organizations and universities; and ‰ facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies. Our principal research and development activities can be described as follows: (a) Blood coagulation We have developed a Prothrombin Time test for monitoring the therapeutic range of the anticoagulant, warfarin, based on measuring activity of the enzyme thrombin. In September 2011 we entered into a Collaboration Agreement with Siemens pursuant to which will develop a range of test strips and reader products for the point-of-care coagulation market. The first test currently being developed is a modified version of our Prothrombin Time International Normalized Ratio (“PT-INR”) test. In 2012, we entered into a Supply Agreement with Siemens under which we will manufacture and supply the test strips for these systems. F-5 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. (b) Immunoassay We are continuing to develop our immunoassay platform. We are developing a D-dimer test for the detection and monitoring of several conditions associated with thrombotic disease, particularly deep venous thrombosis (clots in the leg) and pulmonary embolism (clots in the lung). We are also working on a C-reactive protein test to assist in the diagnosis and management of inflammatory conditions. This work will allow the electrochemical cell platform technology to be expanded to a range of immunoassay tests. (c) DNA/RNA We have undertaken some early stage feasibility work assessing the possibility of using DNA binding chemistries to build a low-cost test for DNA, RNA and as a possible alternative method for improving the sensitivity of protein assays. This concept work is at an early stage and may not yield any positive results. To enable us to access certain molecular diagnostic technology, we entered into a license with SpeeDx Pty Ltd. SpeeDx Pty Ltd 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: Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 13,482,459 A$ 9,812,396 A$ 6,482,150 Depending on the scope of research and development activities we undertake and the stage 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. The closer the idea or the concept to a product, the lower the technical risk but the greater the effort and cost expended. In our research and development program, the first phase is exploratory research. 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 manufacturing processes. This requires a larger group of people and a higher use of materials compared to the research phase, so is typically more expensive, but necessary to be able to commercialize a product. Research and development expenditure increased by 37% during 2012 compared to 2011 and increased by 51% during 2011 compared to 2010. During these three years, our research and development activities were primarily focused around the blood coagulation platform. Whilst we had established feasibility of the first product on this platform, the Prothrombin Time test, in 2010, we were at an advanced stage in 2011 and 2012. Since July 2012, in addition to the Prothrombin Time test project which is in the final stages of the development phase and is anticipated to launch in 2013, we have two other tests which are in their development phase prior to launch. These two additional tests are part of our collaboration with Siemens and are within the point-of-care coagulation market. F-6 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. The non-cash components of depreciation and share based payments expense included in the research and development expenditure are as follows: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 A$ 656,350 404,102 2011 A$ 1,005,304 979,526 2010 A$ 588,878 859,551 1,060,452 1,984,830 1,448,429 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 which will influence our research and development expenditure and these parties may contribute towards all or part of the cost of these activities. General and Administrative Expenses General and administrative expenses currently consist principally of salaries and related costs, including stock option expense, for personnel in executive, business development, finance, accounting, information technology and human resources functions. Other general and administrative expenses include depreciation, repairs and maintenance, insurance, facility costs not otherwise included in research and development expenses, consultancy fees and professional fees for legal, audit and accounting services. General and administrative expenses are generally fixed in nature. General and administrative expenses for the respective periods are as follows: General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 6,790,524 A$ 7,271,488 A$ 7,185,550 General and administrative expenses decreased by 7% during 2012 compared to 2011 and increased by 1% during 2011 compared to 2010. The decrease in expenses during 2012 reflects management’s intent of restricting spending on non-core activities. The non-cash components of depreciation and share based payments expense included in the general and administrative expenditure are as follows: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Years Ended December 31, 2012 2011 2010 A$ 97,252 443,310 A$ 177,999 1,079,937 A$ 199,199 648,940 540,562 1,257,936 848,139 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. Interest Income Interest income decreased to A$437,171 in 2012 from A$683,323 in 2011. Interest income was A$1,192,889 in 2010. The decrease in interest income in 2012 and 2011 is attributable to lower interest rates and the lower amounts of funds available for investment during the course of the year. Critical Accounting Estimates and Judgments Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. (a) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. In addition, the Company enters into arrangements, which contain multiple revenue generating activities. The revenue for these arrangements is recognized as each activity is performed or delivered, based on the relative fair value and the allocation of revenue to all deliverables based on their relative selling price. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocation of revenue to deliverables, vendor-specific objective evidence, third-party evidence of selling price and best estimate of selling price. The Company’s process for determining its best estimate of selling price for deliverables without vendor-specific objective evidence or third-party evidence of selling price involves management’s judgment. The Company’s process considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. (b) Stock-Based Compensation We account for stock-based employee compensation arrangements using the modified prospective method as prescribed in accordance with the provisions of ASC 718 — Compensation — Stock Compensation. Each of the inputs to the Trinomial Lattice model is discussed below. Share Price and Exercise Price at Valuation Date With the exception of Zero Priced Employee Options (“ZEPOs”), the value of all other options granted since 2010 has been determined using the closing price of our common stock trading in the form of CDIs on ASX at the time of grant of the options. ZEPOs have been valued at 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. F-8 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. Time to Expiry All options granted under our share option plan have a maximum 10 year term and are non-transferable. Risk Free Rate The risk free rate which we applied is equivalent to the yield on an Australian government bond with a time to expiry approximately equal to the expected time to expiry on the options being valued. (c) Income Taxes We apply ASC 740 — Income Taxes which establishes financial accounting and reporting standards for the effects of income taxes that result from a company’s activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Where it is more likely than not that some portion or all of the deferred tax assets will not be realized the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. (d) Impairment of Long-Lived Assets We review our capital assets, including patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. In performing the review, we estimate undiscounted cash flows from products under development that are covered by these patents and licenses. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset. If the evaluation indicates that the carrying value of an asset is not recoverable from its undiscounted cash flows, an impairment loss is measured by comparing the carrying value of the asset to its fair value, based on discounted cash flows. Financial Condition, Liquidity and Capital Resources Net Financial Assets Our net financial assets position is shown below: Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ Financial assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,649,417 2,282,888 0 15,089,209 4,889,783 83,339 23,271,766 3,588,798 0 Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,932,305 20,062,331 26,860,564 Debt: Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 Net financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,932,305 20,062,331 26,860,564 F-9 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. We rely largely on our existing cash and cash equivalents and funds from our operations to provide for the working capital needs of our operations. We believe we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. The carrying value of the cash and cash equivalents and the accounts receivables approximates fair value because of their short-term nature. We regularly review all our financial assets for impairment. There were no impairments recognized for the years ended December 31, 2012, 2011 and 2010. Derivative Instruments and Hedging Activities In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. For years ended December 31, 2012, 2011 and 2010, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates, and incorporates non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2. We had no outstanding contracts as at December 31, 2012 and 2010, respectively. We had contracts with a notional amount of US$4.0 million outstanding as at December 31, 2011. The fair value of these contracts at December 31, 2012 and 2010 were nil and an asset of A$83,339 at December 31, 2011 recorded as ‘Financial Instruments’ in the consolidated balance sheets. During the years ended December 31, 2012 and 2010, we recognized gains of nil and gains of A$83,339 recorded in earnings for the year ended December 31, 2011. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the years ended December 31, 2012, 2011 and 2010. For further details, see Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies. Measures of Liquidity and Capital Resources The following table provides certain relevant measures of liquidity and capital resources: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of current assets to current liabilities . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity per common share . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 23,649,417 24,168,714 4.83 : 1 0.23 A$ 15,089,209 17,584,523 3.51 : 1 0.22 A$ 23,271,766 25,940,899 6.82 : 1 0.30 The movement in cash and cash equivalents and working capital during the three years was primarily due to reductions to outflows of cash and to the timing of cash receipts, payments, sales and accruals in the ordinary course of business. In addition to the reductions resulting from operating outflows of cash in 2012, we also had financing inflows of A$12,524,124 (net of related transaction costs) we raised in capital by way of a Placement and Share Purchase Plan. We have not identified any collection issues with respect to receivables. F-10 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. Summary of Cash Flows Cash provided by/(used in): Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,300,757) (687,245) 12,548,210 (7,159,118) (1,102,943) 79,504 (6,414,248) (2,320,293) 715,296 Net increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . 8,560,208 (8,182,557) (8,019,245) Our net cash used in operating activities during the three years was primarily for our research and development projects including efforts involved in establishing our manufacturing operations. The outflows during these three years have been partially offset by receipts from our customers and partners. Our net cash used in investing activities for all years is primarily for the purchase of various plant and equipment and fit out of our facilities based on our needs. With the exception of 2012, our net cash provided by financing activities is primarily proceeds received from employees exercising their options. Our net cash provided by financing activities in 2012 relates primarily to the A$12,524,124 (net of related transaction costs) we raised in capital by way of a Placement and Share Purchase Plan. Off-Balance Sheet Arrangement The future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2012 are: Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A$ 573,211 156,872 9,680 0 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739,763 The above relates to our operating lease obligations in relation to the lease of our premises and certain office equipment. Contractual Obligations Our future contractual obligations at December 31, 2012 were as follows: Asset Retirement Obligations(1) Operating Lease Obligations(2) . . . . . . . . . . . . . . . . . . . . . 573,211 Purchase Obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,955,117 3,955,117 0 Other Long-Term Liabilities on Balance Sheet(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,351,464 739,763 202,192 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,248,536 4,528,328 2,678,540 35,935 F-11 Payments Due By Period Less than 1 year 1 – 3 years 3 –5 years More than 5 years Total A$ A$ A$ A$ 0 0 2,351,464 9,680 156,872 0 0 170,204 26,255 A$ 0 0 0 5,733 5,733 For personal use only Management’s Discussion and Analysis of Financial Condition and Results of Operations Universal Biosensors, Inc. (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) Represents long service leave owing to the employees. Segments We operate in one segment. Our principal activities are research and development, commercial manufacture of approved medical or testing devices and the provision of services including contract research work. We operate predominantly in one geographical area, being Australia. Recent Accounting Pronouncements See Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies. Financial Risk Management The overall objective of our financial risk management program is to seek to minimize the impact of foreign exchange rate movements and interest rate movements on our earnings. We manage these financial exposures through operational means and by using financial instruments. These practices may change as economic conditions change. Foreign Currency Market Risk We transact business in various foreign currencies, including U.S. dollars and Euros. We have established a foreign currency hedging program using forward contracts to hedge the net projected exposure for each currency and the anticipated sales and purchases in U.S. dollars and Euros. The goal of this hedging program is to economically guarantee or lock-in the exchange rates on our foreign exchange exposures. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Although the Company has a hedging program, as at balance sheet date there were no open derivatives that would need to be disclosed. Interest Rate Risk Since the majority of our investments are in cash and cash equivalents in Australian dollars, our interest income is affected by changes in the general level of Australian interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Our investment portfolio is subject to interest rate risk but due to the short duration of our investment portfolio, we believe an immediate 10% change in interest rates would not be material to our financial condition or results of operations. Inflation Our business is subject to the general risks of inflation. Our results of operations depend on our ability to anticipate and react to changes in the price of raw materials and other related costs over which we may have little control. Our inability to anticipate and respond effectively to an adverse change in the price could have a significant adverse effect on our results of operations. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases. F-12 For personal use only Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Universal Biosensors, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, consolidated statements of stockholders’ equity and comprehensive income and consolidated statements of cash flows present fairly, in all material respects, the financial position of Universal Biosensors, Inc. and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the appendix under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2011 and 2010). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171, DX 77 Sydney T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au F-13 For personal use only Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Sydney March 12, 2013 /s/ PricewaterhouseCoopers PricewaterhouseCoopers PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171, DX 77 Sydney T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au F-14 For personal use only Universal Biosensors, Inc. Consolidated Balance Sheets December 31, 2012 December 31, 2011 A$ A$ Current assets: ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,649,417 3,602,237 2,282,888 159,994 0 786,194 30,480,730 15,089,209 3,619,400 4,889,783 92,048 83,339 827,508 24,601,287 Non-current assets: Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,693,036 (15,426,916) 33,151,027 (12,855,847) Property, plant and equipment — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,266,120 20,295,180 Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 320,000 Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,586,120 20,615,180 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,066,850 45,216,467 Current liabilities: LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee entitlements provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,516,303 1,959,869 829,038 1,006,806 620,682 2,061,528 3,509,721 824,833 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,312,016 7,016,764 Non-current liabilities: Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee entitlements provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,351,464 202,192 829,039 2,166,691 181,367 829,039 Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,382,695 3,177,097 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,694,711 10,193,861 Commitments and contingencies (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 Stockholders’ equity: Preferred stock, $0.01 par value. Authorized 1,000,000 shares; issued and outstanding nil in 2012 (2011: nil) Common stock, $0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 173,959,863 shares in 2012 (2011: 159,139,965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current year loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,396 93,009,607 (44,225,330) (9,131,222) (298,312) 15,914 79,446,995 (29,533,213) (14,692,117) (214,973) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,372,139 35,022,606 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,066,850 45,216,467 See accompanying notes to the financial statements F-15 For personal use only Universal Biosensors, Inc. Consolidated Statements of Comprehensive Income Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ Revenue Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,368,745 10,277,698 $ 12,063,582 2,632,870 $11,760,009 6,420,027 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,646,443 14,696,452 18,180,036 Operating costs & expenses Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,987,049 669,042 13,482,459 6,790,524 12,310,302 708,149 9,812,396 7,271,488 10,801,062 1,481,674 6,482,150 7,185,550 Total operating costs & expenses . . . . . . . . . . . . . . . . . . . . . . . . . 38,929,074 30,102,335 25,950,436 Profit/(loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,282,631) (15,405,883) (7,770,400) Other income/(expense) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 437,171 (29,263) (256,499) 683,323 0 30,443 Total other income/(expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net profit/(loss) before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit/(expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,409 (9,131,222) 0 713,766 (14,692,117) 0 1,192,889 0 (33,014) 1,159,875 (6,610,525) 0 Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,131,222) $(14,692,117) $ (6,610,525) Earnings per share Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Unrealized gain on derivative instruments . . . . . . . . . . . . . . . . . . Reclassification for losses/(gains) realized in net income . . . . . . . Other comprehensive (loss)/gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.06) (0.09) (0.04) 0 (83,339) (83,339) 83,339 0 83,339 0 47,412 47,412 Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,214,561) (14,608,778) (6,563,113) See accompanying notes to the financial statements. F-16 For personal use only Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income Universal Biosensors, Inc. Balances at January 1, 2010 . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive gain . . . . . . . . . Exercise of stock options issued to employees . . . . . . . . . . . . . . . . . . . Shares issued to employees . . . . . . . . Stock option expense . . . . . . . . . . . . . Balances at December 31, 2010 . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive gain . . . . . . . . . Exercise of stock options issued to employees . . . . . . . . . . . . . . . . . . . Shares issued to employees . . . . . . . . Stock option expense . . . . . . . . . . . . . Balances at December 31, 2011 . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . Issuance of ordinary shares at A$0.90 per share, net of issuance costs . . . Exercise of stock options issued to employees . . . . . . . . . . . . . . . . . . . Shares issued to employees . . . . . . . . Stock option expense . . . . . . . . . . . . . Ordinary shares Shares Amount 157,155,933 0 0 A$ 15,716 0 0 Additional Paid-in Capital A$ 74,566,698 0 0 Accumulated Deficit A$ (22,922,688) (6,610,525) 0 Accumulated Other Comprehensive Income A$ (345,724) 0 47,412 Total Stockholders’ Equity A$ 51,314,002 (6,610,525) 47,412 1,667,581 47,981 0 167 4 0 715,129 75,887 1,677,003 0 0 0 0 0 0 715,296 75,891 1,677,003 158,871,495 0 0 15,887 0 0 77,034,717 0 0 (29,533,213) (14,692,117) 0 (298,312) 0 83,339 47,219,079 (14,692,117) 83,339 181,999 86,471 0 18 9 0 79,486 76,950 2,255,842 0 0 0 0 0 0 159,139,965 0 0 15,914 0 0 79,446,995 0 0 (44,225,330) (9,131,222) 0 (214,973) 0 (83,339) 14,626,713 1,463 12,522,661 115,240 77,945 0 11 8 0 24,075 84,952 930,924 0 0 0 0 0 0 0 0 79,504 76,959 2,255,842 35,022,606 (9,131,222) (83,339) 12,524,124 24,086 84,960 930,924 Balances at December 31, 2012 . . . . 173,959,863 17,396 93,009,607 (53,356,552) (298,312) 39,372,139 See accompanying notes to the financial statements. F-17 For personal use only Universal Biosensors, Inc. Consolidated Statements of Cash Flows Cash flows from operating activities provided by/(used in): Net profit/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net profit/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based payments expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on fixed assets disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in assets and liabilities: Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ (9,131,222) (14,692,117) (6,610,525) 2,637,141 930,924 9,766 3,298,541 2,255,842 17,715 2,990,858 1,677,003 2,618 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . 17,163 2,606,895 (26,632) (1,437,125) 202,798 889,535 (428,307) (1,300,985) (725,797) 4,492,426 249,231 (325,667) (2,885,969) (3,733,332) (6,079) 118,305 73,493 1,959,380 Net cash provided by/(used in) operating activities . . . . . . . . . . . (3,300,757) (7,159,118) (6,414,248) Cash flows from investing activities: Instalment payments to acquire plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property, plant and equipment 0 (687,245) 0 (1,102,943) (988,334) (1,331,959) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (687,245) (1,102,943) (2,320,293) Cash flows from financing activities: Gross proceeds from share issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction costs on share issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . 13,164,042 (639,918) 921,725 (921,725) 24,086 Net cash provided by/(used in) financing activities . . . . . . . . . . . 12,548,210 0 0 0 0 79,504 79,504 0 0 0 0 715,296 715,296 Net increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . Cash and cash equivalent at beginning of period . . . . . . . . . . . . . . . . . . 8,560,208 15,089,209 (8,182,557) 23,271,766 (8,019,245) 31,291,011 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . 23,649,417 15,089,209 23,271,766 See accompanying notes to the financial statement F-18 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) (1) Basis of Presentation These consolidated financial statements are presented in accordance with “U.S. GAAP”. All amounts are expressed in Australian dollars (“AUD” or “A$”) unless otherwise stated. The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. We rely largely on our existing cash and cash equivalents balance and operating cash flow to provide for the working capital needs of our operations. We believe we have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. However, in the event, our financing needs for the foreseeable future are not able to be met by our existing cash and cash equivalents balance and operating cash flow, we would seek to raise funds through public or private equity offerings, debt financings, and through other means to meet the financing requirements. There is no assurance that funding would be available at acceptable terms, if at all. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary UBS. All intercompany balances and transactions have been eliminated on consolidation. Use of Estimates The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, deferred income taxes, asset retirement obligations and obligations related to employee benefits. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. Cash & Cash Equivalents The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. For cash and cash equivalents, the carrying amount approximates fair value due to the short maturity of those instruments. Short-Term Investments (Held-to-maturity) Short-term investments constitute all highly liquid investments with term to maturity from three months to twelve months. The carrying amount of short-term investments is equivalent to their fair value. Concentration of Credit Risk and Other Risks and Uncertainties Cash and cash equivalents and accounts receivable consists of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the consolidated balance sheets. The Company’s cash and cash equivalents are invested with one of Australia’s largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash or cash equivalents to the extent of the amount recorded on the consolidated balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company has not identified any collectability issues with respect to receivables. F-19 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Derivative Instruments and Hedging Activities Derivative financial instruments The Company uses derivative financial instruments to hedge its exposure to foreign exchange arising from operating, investing and financing activities. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognized immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. Cash flow hedges Exposure to foreign exchange risks arises in the normal course of the Company’s business and it is the Company’s policy to use forward exchange contracts to hedge anticipated sales and purchases in foreign currencies. The amount of forward cover taken is in accordance with approved policy and internal forecasts. Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability, or a highly probable forecast transaction, the effective part of any unrealised gain or loss on the derivative financial instrument is recognized directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. For cash flow hedges, other than those covered by the preceding statement, the associated cumulative gain or loss is removed from equity and recognized in the consolidated statements of comprehensive income in the same period or periods during which the hedged forecast transaction affects the consolidated statements of comprehensive income and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognized immediately in the consolidated statements of comprehensive income. When a hedging instrument expires or is sold, terminated or exercised, or the Company revokes designation of the hedge relationship but the hedged forecast transaction is still probable to occur, the cumulative gain or loss at that point remains in equity and is recognized in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealized gain or loss recognized in equity is recognized immediately in the consolidated statements of comprehensive income. Derivative Instruments and Hedging Activities In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. For years ended December 31, 2012, 2011 and 2010, we did not have any assets or liabilities that utilize Level 3 inputs. The valuation of our foreign exchange derivatives are based on the market approach using observable market inputs, such as forward rates and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of the Company when the derivative is in a net liability position). Our derivative assets are categorized as Level 2. 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 F-20 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) 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. Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 2,925,482 120,596 556,159 A$ 3,254,675 102,239 262,486 A$ 2,798,045 188,629 204,419 3,602,237 3,619,400 3,191,093 Receivables Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on a review of individual accounts for collectibility, generally focusing on those accounts that are past due. The current year expense to adjust the allowance for doubtful accounts, if any, is recorded within general and administrative expenses in the consolidated statements of comprehensive income. Account balances are charged against the allowance when it is probable the receivable will not be recovered. Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful debts . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 2,282,888 0 A$ 4,889,783 0 A$ 3,588,798 0 2,282,888 4,889,783 3,588,798 Property, Plant, and Equipment Property, plant, and equipment are recorded at acquisition cost, less accumulated depreciation. Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful life of machinery and equipment is 3 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations as incurred, include normal services, and do not include items of a capital nature. The Company receives Victorian government grant monies under grant agreements to support our development activities, including in connection with the purchase of plant and equipment. Plant and equipment is presented net of the government grant. The grant monies are recognized against the acquisition costs of the related plant and equipment as and when the related assets are purchased. Research and Development Research and development expenses consist of costs incurred to further the Group’s research and development activities and include salaries and related employee benefits, costs associated with clinical trial and F-21 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) preclinical development, regulatory activities, research-related overhead expenses, costs associated with the manufacture of clinical trial material, costs associated with developing a commercial manufacturing process, costs for consultants and related contract research, facility costs and depreciation. Research and development costs are expensed as incurred. Research and development expenses for years ended December 31, 2012, 2011 and 2010 are as follows: Research and development expenses . . . . . . . . . . . . . . . . . . . Income Taxes Years Ended December 31, 2012 2011 2010 A$ 13,482,459 A$ 9,812,396 A$ 6,482,150 The Company applies ASC 740 — Income Taxes which establishes financial accounting and reporting standards for the effects of income taxes that result from a company’s activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Where it is more likely than not that some portion or all of the deferred tax assets will not be realized the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. A reconciliation of the valuation and qualifying accounts is attached as Schedule ii. We are subject to income taxes in the United States and Australia. U.S. federal income tax returns up to the 2011 financial year have been filed. Internationally, consolidated income tax returns up to the 2011 financial year have been filed. Asset Retirement Obligations Asset retirement obligations (“ARO”) are legal obligations associated with the retirement and removal of long- lived assets. ASC 410 — Asset Retirement and Environmental Obligations requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred. When the liability is initially recorded, the Company capitalizes the cost by increasing the carrying amounts of the related property, plant and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful life of the asset. The Company derecognizes ARO liabilities when the related obligations are settled. The ARO is in relation to our premises where in accordance with the terms of the lease, the lessee has to restore part of the building upon vacating the premises. Our overall ARO changed as follows: Opening balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2012 2011 2010 A$ 2,166,691 184,773 A$ 1,998,060 168,631 A$ 1,842,547 155,513 Ending balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . 2,351,464 2,166,691 1,998,060 F-22 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) 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) Revenues, expenses and assets are recognized net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognized as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheets. Revenue Recognition We recognize revenue from all sources based on the provisions of the U.S. SEC’s Staff Accounting Bulletin No. 104 and ASC 605 Revenue Recognition. The Company’s revenue represents revenue from sales of products, provision of services and collaborative research and development agreements. We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership, assuming all other revenue recognition criteria have been met. Generally, this is at the time products are shipped to the customer. F-23 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) 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, either vendor specific objective evidence or third party evidence of the selling price, when available, or the Company’s best estimate of selling price when fair value is not available for a given unit of accounting. Under ASC 605-25, the delivered item(s) are separate units of accounting, provided (i) the delivered item(s) have value to a customer on a stand-alone basis, and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Where the arrangement cannot be divided into separate units, the individual deliverables are combined as a single unit of accounting and the total arrangement consideration is recognized across other deliverables in the arrangement or over the estimated collaboration period. Payments under these arrangements typically include one or more of the following: non-refundable, upfront payments; funding of research and/or development efforts; and milestone payments. We typically generate milestone payments from our customers pursuant to the various agreements we have with them. Non-refundable milestone payments which represent the achievement of a significant technical/ regulatory hurdle in the research and development process pursuant to collaborative agreements, and are deemed to be substantive, are recognized as revenue upon the achievement of the specified milestone. If the non- refundable milestone payment is not substantive or stand-alone value, the non-refundable milestone payment is deferred and recognized as revenue either over the estimated performance period stipulated in the agreement or across other deliverables in the arrangement. Management has concluded that the core operations of the Company are expected to be the research and development activities, commercial manufacture of approved medical or testing devices and the provision of services. The Company’s ultimate goal is to utilize the underlying technology and skill base for the development of a marketable product that the Company will manufacture. The Company considers revenue from the sales of products, revenue from services and the income received from milestone payments indicative of its core operating activities or revenue producing goals of the Company, and as such have accounted for this income as “revenues”. Product and Service Agreements In October 2007, the Company and LifeScan entered into a Master Services and Supply Agreement, under which the Company would provide certain services to LifeScan in the field of blood glucose monitoring and act as a non-exclusive manufacturer of blood glucose test strips. The Master Services and Supply Agreement was subsequently amended and restated in May 2009. The Company has concluded the Master Services and Supply Agreement should be accounted for as three separate units of accounting: 1) research and development to assist LifeScan in receiving regulatory clearance to sell the blood glucose product (milestone payment), 2) contract manufacturing of the blood glucose test strips (contract manufacturing) and 3) ongoing services and efforts to enhance the product (product enhancement). All consideration within the Master Services and Supply agreement is contingent. The Company concluded the undelivered items were not priced at a significant incremental discount to the delivered items and revenue for F-24 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) each deliverable will be recognized as each contingency is met and the consideration becomes fixed and determinable. The milestone payment was considered to be a substantive payment and the entire amount has been recognized as revenue when the regulatory approval was received. Revenues for contract manufacturing and ongoing efforts to enhance the product are recognised as revenue from products or revenue from services, respectively, when the four basic criteria for revenue recognition are met. In October 2011, the Company entered into a Statement of Work pursuant to the Development and Research agreement with LifeScan to provide services for a feasibility study for an innovative blood glucose product. The services relating to this agreement were completed towards the end of 2012. Research and Development Agreement On September 9, 2011 the Company entered into a new Collaboration Agreement with Siemens to develop coagulation related products for hospital point-of-care and ambulatory care coagulation markets. In addition to an up-front, non-refundable payment of A$2,961,245 (equivalent to US$3 million); the Company may receive up to six payments from Siemens upon the achievement of certain defined milestones. These six milestones relate to feasibility, regulatory submissions and the launch of the products to be developed. The Company has concluded that the up-front payment is not a separate unit of accounting and recorded the amount as deferred revenue to be recognized as revenue across other deliverables in the arrangement with Siemens based upon the Company’s best estimate of selling price. The deliverables related to each milestone are considered substantive and are not priced at a significant incremental discount to the other deliverables. As the achievement of the milestones is contingent upon a future event, the revenue for each deliverable will be recognized as the contingencies are met and the consideration becomes fixed and determinable. Of the six milestones, the Company has delivered on two as of December 31, 2012: • • In June 2012, the Company delivered on its first milestone by achieving proof of technical feasibility of a new test strip and received a payment of A$1,522,534 (equivalent to US$1.5 million) as consideration. A sum of A$2,175,048 (equivalent to US$2,142,857) has been recognized as revenue from services in June 2012 in this regards. In July 2012, the Company delivered on its second milestone by achieving proof of technical feasibility of another new test strip and received a payment of A$1,438,711 (equivalent to US$1.5 million) as consideration. A sum of A$2,055,301 (equivalent to US$2,142,857) has been recognized as revenue from services in July 2012 in this regards. Of the total amount of A$4,230,349 (equivalent to US$4,285,714) recognized as revenue, A$2,961,245 (equivalent to US$3.0 million) relates to the achievement of the two milestones whilst the balance relates to a portion of the deferred US$3 million up-front payment allocated to these milestones based upon their relative estimate of selling price. Interest income Interest income is recognized as it accrues, taking into account the effective yield on the cash and cash equivalents. Foreign Currency Functional and reporting currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the Company and UBS is AUD or A$ for all years presented. F-25 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) The consolidated financial statements are presented using a reporting currency of Australian dollars. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of comprehensive income. The Company has recorded foreign currency transaction losses of A$232,458, A$4,442 and A$512,474 in each of the years ended December 31, 2012, 2011 and 2010, 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 are translated at average exchange rates (unless this is not a reasonable approximation of the effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities are taken to the Accumulated Other Comprehensive Income. Commitments and Contingencies Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Our contingent liabilities as at December 31, 2012 are as follows: • we have a potential obligation to pay 50% of the patent fees paid by LifeScan on the licensed patents prior to the date of the first commercial sale of a non-glucose product and 50% of the patent fees incurred by LifeScan thereafter. In the event of the first commercial sale of a non-glucose product, the initial amount that could be paid by us to LifeScan is to be between US$1.3 million to US$1.6 million. We would have the right to make this payment either as a lump sum within 45 days of receipt of the supporting documentation from LifeScan or in equal monthly installment payments during the 24 months subsequent to the date of receipt of the supporting documentation. Currently the non- glucose products continue to be in the research and development phase. • during 2009, LifeScan chose not to proceed with the registration of the then current product but to proceed with an enhanced product, called OneTouch® VerioTM, 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 year in which 1 billion strips are sold by LifeScan in each such year equal to 40% of the total manufacturing initiation payments made. The total amount of marketing support payments expected to be paid to LifeScan is approximately US$2 million. Based on the current volume of strips sold by LifeScan, the likelihood of paying this marketing support payment is remote. F-26 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Patent and License Costs Legal and maintenance fees incurred for patent application costs have been charged to expense and reported in research and development expense. Legal fees incurred for patents relating to commercialized products are capitalized and amortized over the life of the patents. Clinical Trial Expenses Clinical trial costs are a component of research and development expenses. These expenses include fees paid to participating hospitals and other service providers, which conduct certain testing activities on behalf of the Company. Depending on the timing of payments to the service providers and the level of service provided, the Company records prepaid or accrued expenses relating to these costs. These prepaid or accrued expenses are based on estimates of the work performed under service agreements. Leased Assets All of the Company’s leases for the years ended December 31, 2012, 2011 and 2010 are considered operating leases. The costs of operating leases are charged to the statements of comprehensive income on a straight-line basis over the lease term. Stock-based Compensation We measure stock-based compensation at grant date, based on the estimated fair value of the award, and recognize the cost as an expense on a straight-line basis over the vesting period of the award. We estimate the fair value of stock options using the Trinomial Lattice model. We also grant our employees Restricted Stock Units (“RSUs”) and ZEPOs. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests. ZEPOs are stock options granted to employees that entitle the holder to shares of common stock as the award vests. The value of RSUs and ZEPOs are determined and fixed on the grant date based on the Company’s stock price. See note 5 for further details. We record deferred tax assets for awards that will result in deductions on our income tax returns, based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported in our income tax return are recorded in expense or in capital in excess of par value if the tax deduction exceeds the deferred tax assets or to the extent that previously recognized credits to paid-in- capital are still available if the tax deduction is less than the deferred tax asset. Employee Benefit Costs The Company contributes to standard defined contribution superannuation funds on behalf of all employees at nine percent of each such employee’s salary. Superannuation is a compulsory savings program whereby employers are required to pay a portion of an employee’s remuneration to an approved superannuation fund that the employee is typically not able to access until they are retired. The Company permits employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the statements of comprehensive income as they become payable. Net Loss per Share and Anti-dilutive Securities Basic and diluted net loss per share is presented in conformity with ASC 260 – Earnings per Share. Basic and diluted net loss per share has been computed using the weighted-average number of common shares outstanding during the period. Other than in a profit making year, the potentially dilutive options issued under the Universal Biosensors Employee Option Plan were not considered in the computation of diluted net loss per share because they would be anti-dilutive given the Company’s loss making position. F-27 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Total Comprehensive Income The Company follows ASC 220 – Comprehensive Income. Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders, and for the Company, includes net income and cumulative translation adjustments. The tax effect allocated to each component of other comprehensive income is as follows: Before-Tax Amount Tax (Expense)/ Benefit Net-of-Tax Amoount A$ A$ A$ 2012 Unrealized loss on derivative instruments . . . . . . . . . . . . . . . Reclassification for gains realised in net income . . . . . . . . . . 0 83,339 Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,339 2011 Unrealized gain on derivative instruments . . . . . . . . . . . . . . . Reclassification for gains realised in net income . . . . . . . . . . 83,339 0 Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,339 2010 Unrealized loss on derivative instruments . . . . . . . . . . . . . . . Reclassification for gains realised in net income . . . . . . . . . . 0 47,412 Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,412 0 0 0 0 0 0 0 0 0 0 83,339 83,339 83,339 0 83,339 0 47,412 47,412 Recent Accounting Pronouncements In December 2011, the FASB issued ASU 2011-11 which amended the disclosure requirements regarding offsetting assets and liabilities of derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The enhanced disclosures will require entities to provide both net and gross information for these assets and liabilities. The amendment is effective for fiscal years beginning on or after January 1, 2013. The Company does not anticipate that this amendment will have a material impact on its financial statements. In July 2012, the FASB issued ASU 2012-02 which intends to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment. After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test. Otherwise, the quantitative test is optional. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the company’s financial results. (3) Commitments and Contingent Liabilities For details on our contingent liabilities, see Notes to Consolidated Financial Statements – Note 2. Summary of Significant Accounting Policies. F-28 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Operating Leases UBS entered into a lease with respect to premises at 1 Corporate Avenue, Rowville Victoria which commenced on November 1, 2006 for an initial period of seven years and five months, with two options to renew the lease for successive five-year periods. The Company’s primary bank has issued a bank guarantee of A$250,000 in relation to a rental bond to secure the payments under the lease. This bank guarantee is secured by a security deposit held at the bank and has been recorded as “Other Assets” in consolidated balance sheets. In accordance with the terms of the lease, the lessee has to restore part of the building upon vacating the premises. The Company has also entered into a lease with respect to certain office equipment. The lease is for a period of 60 months which commenced in November 2012. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2012 are: 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A$ 573,211 151,592 5,280 9,680 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 739,763 Rent expense was A$594,118, A$576,301 and A$556,584 for the fiscal years ended December 31, 2012, 2011 and 2010, respectively. Government research grants On October 28, 2006, Universal Biosensors Pty Ltd was awarded a grant by the State of Victoria to support the establishment of a medical diagnostic manufacturing facility in Victoria, Australia for the manufacture of new technologies for disease monitoring and to increase support of local and export markets. These payments are subject to the achievement of milestones which include capital expenditure by Universal Biosensors Pty Ltd of predetermined minimum amounts. The State of Victoria may require Universal Biosensors Pty Ltd to refund any amounts paid under the grant together with interest should Universal Biosensors Pty Ltd commit a breach of its obligations under the grant agreement. The State of Victoria may also withhold, suspend, cancel or terminate any payment or payments upon a failure to comply with obligations or if Universal Biosensors Pty Ltd chooses not to proceed with these initiatives or it becomes insolvent. The total amount received under the Victorian State Government Grant during 2012 was A$0 (2011: A$55,346, 2010: A$39,875). This grant has been recognized against the acquisition cost of the related plant and equipment. On October 1, 2010, Universal Biosensors Pty Ltd was awarded a grant of A$250,000 by the State of Victoria to assist in the upgrade of the current manufacturing facility to ultimately support the production of strips for a new point of care test. These payments are subject to the achievement of milestones which include capital expenditure by Universal Biosensors Pty Ltd of predetermined minimum amounts. The State of Victoria may require Universal Biosensors Pty Ltd to refund any amounts paid under the grant together with interest should Universal Biosensors Pty Ltd fail to complete the upgrade within a stipulated timeframe or fails to fulfill its commitments towards the upgrade. The State of Victoria may also withhold, suspend, cancel or terminate any payment or payments upon a failure to comply with obligations or if Universal Biosensors Pty Ltd chooses not to proceed with these initiatives or it becomes insolvent. The total amount received under the Victorian State Government Grant during 2012 was A$75,000 (2011: A$175,000, 2010: Nil). This grant has been recognized against the acquisition cost of the related plant and equipment. F-29 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Guarantees There are cross guarantees given by Universal Biosensors, Inc. and Universal Biosensors Pty Ltd as described in note 15. No deficiencies of assets exist in any of these companies. No liability was recognized by the parent entity or the consolidated entity in relation to this guarantee, as the fair value of the guarantees is immaterial. (4) Income Taxes The Company is subject to income tax in Australia and is required to pay taxes on its Australian profits. As provided under the Australian income tax laws, the Company and its wholly owned resident subsidiary have formed a tax-consolidated group. Universal Biosensors, Inc. is required to lodge U.S. federal income tax returns. It currently is in a tax loss situation. A reconciliation of the (benefit)/provision for income taxes with the amount computed by applying the Australian statutory company tax rate of 30% to the profit/(loss) before income taxes is as follows: Profit/(loss) before income taxes . . . . . . . . . . . . . . Computed by applying income tax rate of home jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research & development incentive . . . . . . . . . . . . . Disallowed expenses/(income): Years ended December 31, 2012 2011 2010 A$ (9,131,222) % A$ (14,692,117) % A$ (6,610,525) % (2,739,367) (1,268,040) 30 14 (4,407,635) (635,470) 30 4 (1,983,157) (421,341) 30 6 Share based payment . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . 279,278 8,425 3,719,704 (3) 0 (41) 676,753 8,849 4,357,503 (4) 0 (30) 503,100 4,730 1,896,668 (7) 0 (29) Income tax expense/(benefit) . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 Significant component of the Company’s deferred tax assets are shown below: Deferred tax assets: Operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized capital raising cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2012 A$ 2011 A$ 19,422,875 40,394 617,643 705,439 362,699 888,960 16,794,322 1,000 (378,385) 650,007 301,860 987,644 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . 22,038,010 (22,038,010) 18,356,448 (18,356,448) Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 Significant components of deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance has been established, as realization of such assets is not more likely than not. F-30 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) At December 31, 2012 the Company has A$64,742,918 (A$51,515,176 at December 31, 2011) of accumulated tax losses available for carry forward against future earnings, which under Australian tax laws do not expire but may not be available under certain circumstances. (5) Employee Incentive Schemes (a) Stock Option Plan In 2004, the Company adopted an employee option plan (“Plan”). Options may be granted pursuant to the Plan to any person considered by the board to be employed by the Group on a permanent basis (whether full time, part time or on a long term casual basis). Each option gives the holder the right to subscribe for one share of common stock. The total number of options that may be issued under the Plan is such maximum amount permitted by law and the Listing Rules of the Australian Securities Exchange (“ASX”). The exercise price and any exercise conditions are determined by the board at the time of grant of the options. Any exercise conditions must be satisfied before the options vest and become capable of exercise. The options lapse on such date determined by the board at the time of grant or earlier in accordance with the Plan. Options granted to date have had a term up to 10 years and generally vest in equal tranches over three years. An option holder is not permitted to participate in a bonus issue or new issue of securities in respect of an option held prior to the issue of shares to the option holder pursuant to the exercise of an option. If Universal Biosensors changes the number of issued shares through or as a result of any consolidation, subdivision, or similar reconstruction of the issued capital of the Company, the total number of options and the exercise price of the options (as applicable) will likewise be adjusted. Options granted in 2010, 2011 and 2012 were 914,500, 3,555,500 and 769,500, respectively. In accordance with ASC 718, the fair value of the option grants was estimated on the date of each grant using the Trinomial Lattice model. The assumptions for these grants were: Nov-12 Nov-12 Sep-12 Mar-12 Nov-11 Nov-11 Sep-11 Mar-11 Feb-11 Nov-10 Nov-10 Feb-10 Grant Date Exercise Price (A$) . . . . . . . . . . . . . Nil Share Price at Grant Date (A$) . . . . 1.09 1.09 1.09 0.73 0.73 0.75 0.75 Nil 0.89 0.89 0.89 1.00 1.00 1.37 1.37 1.38 1.38 Nil 1.58 1.58 1.58 1.6 1.6 Volatility . . . . . . . . . . . . . . . . . . . . . 66% 66% 67% 67% 68% 68% 69% 70% 71% 72% 72% 77% Expected Life (years) . . . . . . . . . . . 7 7 7 7 7 7 7 7 7 7 7 7 Risk Free Interest Rate . . . . . . . . . . 2.82% 2.82% 3.00% 3.78% 3.72% 3.72% 3.89% 5.36% 5.45% 5.27% 5.27% 5.34% Fair Value of Option (A$) . . . . . . . . 1.09 0.63 0.42 0.44 0.89 0.52 0.59 0.83 0.83 1.58 0.96 0.99 Each of the inputs to the Trinomial Lattice model is discussed below. Share Price and Exercise Price at Valuation Date With the exception of ZEPOs, the value of all other options granted since 2010 has been determined using the closing price of our common stock trading in the form of CDIs on ASX at the time of grant of the options. ZEPOs have been valued at 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. F-31 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Risk free rate The risk free rate which we applied is equivalent to the yield on an Australian government bond with a time to expiry approximately equal to the expected time to expiry on the options being valued. Stock option activity during the current period is as follows: Number of shares Weighted average exercise price Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,417,536 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapsed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769,500 (115,240) (353,332) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,718,464 A$ 1.02 0.79 0.25 1.16 1.01 At December 31, 2012, the number of options exercisable was 9,264,906 (2011: 8,011,691 and 2010: 5,908,214). At December 31, 2012, total stock compensation expense recognized in income statement was A$930,924 (2011: A$2,255,842 and 2010: A$1,677,003). The following table represents information relating to stock options outstanding under the plans as of December 31, 2012: Exercise Price A$ $0.30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.60 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.58 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32 Options Outstanding Weighted average remaining life in years Options Exercisable Shares 1 3 4 5 0 5 6 6 6 6 6 7 4 5 5 5 5 6 6 6 6 7 7 7 1,460,777 436,851 605,000 565,000 0 799,000 198,000 48,000 50,001 1,094,334 234,998 1,485,000 50,000 233,974 58,332 236,660 1,433,332 28,666 161,652 33,332 51,997 0 0 0 9,264,906 Shares 1,460,777 436,851 605,000 565,000 0 799,000 198,000 48,000 50,001 1,094,334 388,334 1,485,000 50,000 351,000 91,667 355,000 2,300,000 86,000 485,000 100,000 156,000 106,000 382,500 125,000 11,718,464 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) The table below sets forth the number of employee stock options exercised and the number of shares issued in the period from December 31, 2010. We issued these shares in reliance upon exemptions from registration under Regulation S under the Securities Act of 1933, as amended. Period Ending Number of Options Exercised and Corresponding Number of Shares Issued 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,667,581 181,999 115,240 Weighted Average Exercise Price A$ 0.49 0.46 0.25 Proceeds Received A$ 715,296 79,504 24,086 As of December 31, 2012, there was A$972,219 of unrecognized compensation expense related to unvested share-based compensation arrangements under the Employee Option Plan. This expense is expected to be recognized as follows: Fiscal Year 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A$ 709,092 218,462 44,665 972,219 The aggregate intrinsic value for all options outstanding as at December 31, 2012 was zero. (b) Restricted Share Plan Our Employee Share Plan was adopted by the Board of Directors in 2009. The Employee Share Plan permits our Board to grant shares of our common stock to our employees and directors (although our Board has determined not to issue equity to non-executive directors). The number of shares able to be granted is limited to the amount permitted to be granted at law, the ASX Listing Rules and by the limits on our authorized share capital in our certificate of incorporation. All our employees are eligible for shares under the Employee Share Plan. The Company currently proposes to continue to issue A$1,000 worth of restricted shares of common stock to employees of the Company on a recurring basis, but no more frequently than annually. The restricted shares have the same terms of issue as our existing shares of common stock but are not able to be traded until the earlier of three years from the date on which the shares are issued or the date the relevant employee ceases to be an employee of the Company or any of its associated group of companies. The table below sets forth the restricted shares issued by the Company since 2010: Number of Restricted Shares Issued Market Value of Restricted Shares Issued May, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581 47,400 86,471 77,945 A$ 999 A$74,892 A$76,959 A$84,960 F-33 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Restricted stock awards activity during the current period is as follows: Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,763 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Release of restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,945 (39,619) Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,089 A$ 1.23 1.09 1.59 1.10 Number of shares Weighted average issue price (6) Related Party Transactions Details of related party transactions material to the operations of the Group other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, are set out below: In September 2011, we entered into a license agreement with SpeeDx Pty Ltd (“SpeeDx”) pursuant to which SpeeDx granted us a license in the field of molecular diagnostics. Under the agreement we make milestone payments totaling A$500,000 if certain specified targets are achieved and payments ranging from 5% to 15% of our sales and licensing revenues to SpeeDx. Messrs Denver and Jane are directors of the Company and SpeeDx Pty Ltd. PFM Cornerstone Limited, which holds approximately 7% of our shares and of which Messrs Denver and Hanley and Dr Adam are directors, holds approximately 34% of the issued shares in SpeeDx. Talu Ventures Pty Ltd, of which Mr. Jane is a director, is the fund manager for a fund which holds approximately 34% of the issued shares in SpeeDx. Johnson and Johnson Development Corporation (a venture capital wholly owned subsidiary of Johnson & Johnson) beneficially held 14,915,400 shares in the Company as at December 31, 2011 which represented approximately 9.4% of the Company’s shares then. By way of statement on Schedule 13G dated February 7, 2013, Johnson and Johnson Development Corporation advised that they no longer owned any shares in the Company. As a result of this, they are no longer a related party as of September 30, 2012. We have however disclosed the full year transactions with LifeScan as per below to be consistent with prior year disclosure. Current Receivables — Owing by LifeScan Sale of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December, 31 2012 A$ 2011 A$ 2010 A$ 666,390 1,616,498 1,999,764 2,890,019 2,282,888 4,889,783 Current Liabilities — Owing to LifeScan Purchase of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,267 786,708 Revenue from LifeScan Revenue from products . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,368,745 5,321,734 12,063,582 2,632,870 11,760,009 6,420,027 24,690,479 14,696,452 18,180,036 F-34 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) Dr. Wilson is the spouse of Mr. Steven Wilson who is a substantial stockholder and officer of the parent company of Wilson HTM Corporate Finance Limited (“Wilson HTM”). On November 26, 2012, we placed 13,334,000 shares of common stock at A$0.90 per share, and raised an aggregate total of A$12,000,600 (before expenses of the offer) (“Placement”). Wilson HTM acted as Lead Manager and Bookrunner for the Placement. Veritas Securities Limited acted as Co-manager to the Placement. We paid Wilson HTM a management fee of A$180,009 and a selling fee of A$360,018 in connection with the Placement. In addition, we reimbursed Wilson HTM for certain of their outgoing costs and expenses incurred in connection with the Placement. We raised A$11,460,573 net of management and selling fees paid to the Wilson HTM in the Placement. On December 17, 2012 we completed a share purchase plan (“Share Purchase Plan”) offer to holders of our securities with a registered address in Australia or New Zealand and raised an aggregate total of A$1,163,442 (before expenses of the offer) by issuing 1,292,713 shares of common stock. Wilson HTM acted as Lead Manager for the Share Purchase Plan. We paid Wilson HTM a fee of A$17,452 in connection with managing the Share Purchase Plan. We raised A$1,145,990 net of fees paid to the Lead Manager in our Share Purchase Plan. (7) Financial Instruments Financial Assets Years Ended December 31, 2012 A$ 2011 A$ 2010 A$ Financial assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,649,417 2,282,888 0 15,089,209 4,889,783 83,339 23,271,766 3,588,798 0 Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . 25,932,305 20,062,331 26,860,564 Debt: Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 Net financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,932,305 20,062,331 26,860,564 The carrying value of the cash and cash equivalents and the accounts receivable approximates fair value because of their short-term nature. We regularly review all our financial assets for impairment. There were no impairments recognized in 2012, 2011 and 2010. Derivative Instruments and Hedging Activities We had no outstanding contracts as at December 31, 2012 and 2010, respectively. We had contracts with a notional amount of US$4.0 million outstanding as at December 31, 2011. The fair value of these contracts at December 31, 2012 and 2010 were nil and an asset of A$83,339 at December 31, 2011 recorded as ‘Financial Instruments’ in the consolidated balance sheets. During the years ended December 31, 2012 and 2010, we recognized gains of nil and gains of A$83,339 recorded in earnings for the year ended December 31, 2011. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges for the years ended December 31, 2012, 2011 and 2010. For further details, see Notes to Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies. F-35 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) (8) Property, Plant and Equipment Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December, 31 2012 2011 A$ 19,369,533 8,789,005 5,534,498 A$ 18,893,890 8,722,639 5,534,498 33,693,036 (15,426,916) 33,151,027 (12,855,847) Property, plant & equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,266,120 20,295,180 Capital work in process relates to assets under construction and comprises primarily specialized manufacturing equipment. Legal right to the assets under construction rests with the Company. The amounts capitalized for capital work in process represent the percentage of expenditure that has been completed, and once the assets are placed into service, the Company begins depreciating the respective assets. The accumulated amortisation of capitalised leasehold improvements for the fiscal years ended December 31, 2012, 2011 and 2010 was A$6,001,351, A$5,376,432 and A$4,090,724, respectively. The Company receives Victorian government grants under certain research agreements to purchase plant and equipment. Plant and equipment is presented net of the government grant of A$755,221 for the year ended December 31, 2012 (2011: A$680,221). The grants are recognized against the acquisition costs of the related plant and equipment as and when the related assets are purchased. Grants received in advance of the relevant expenditure are treated as deferred income and included in Current Liabilities on the consolidated balance sheets as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the Company under research agreements are recorded as Currents Assets on the consolidated balance sheets. Depreciation expense was A$2,637,141, A$3,298,541 and A$2,990,858 for the fiscal years ended December 31, 2012, 2011 and 2010, respectively. (9) Accrued Expenses Accrued expenses consist of the following: Legal, tax and accounting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Production materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December, 31 2012 A$ 341,681 921,186 598,701 26,301 72,000 2011 A$ 511,121 706,053 35,050 786,708 22,596 1,959,869 2,061,528 (10) Stockholders’ Equity — Common Stock Holders of common stock are generally entitled to one vote per share held on all matters submitted to a vote of the holders of common stock. At any meeting of the shareholders, the presence, in person or by proxy, of the F-36 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) majority of the outstanding stock entitled to vote shall constitute a quorum. Except where a greater percentage is required by the Company’s Amended and Restated Certificate of Incorporation or By-laws, the affirmative vote of the holders of a majority of the shares of common stock then represented at the meeting and entitled to vote at the meeting shall be sufficient to pass a resolution. Holders of common stock are not entitled to cumulative voting rights with respect to the election of directors, and the common stock does not have pre-emptive rights. Trading in our shares of common stock on ASX is undertaken using CHESS Depositary Interests (“CDIs”). Each CDI represents beneficial ownership in one underlying share. Legal title to the shares underlying CDIs is held by CHESS Depositary Nominees Pty Ltd (“CDN”), a wholly owned subsidiary of ASX. Holders of CDIs have the same economic benefits of holding the shares, such as dividends (if any), bonus issues or rights issues as though they were holders of the legal title. Holders of CDIs are not permitted to vote but are entitled to direct CDN how to vote. Subject to Delaware General Corporation Law, dividends may be declared by the Board and holders of common stock may be entitled to participate in such dividends from time to time. (11) Retirement Benefits Universal Biosensors Pty Ltd contributes to standard defined contributions superannuation funds on behalf of all employees at an amount up to nine per cent of employee salary. The Company permits employees to choose the superannuation fund into which the contributions are paid, provided the fund is appropriately registered. Universal Biosensors Pty Ltd contributed A$879,552, A$806,158 and A$714,123 for the fiscal years ended December 31, 2012, 2011 and 2010, respectively. (12) Net Loss per Share Basic net loss per ordinary share was computed by dividing the net loss applicable to common stock by the weighted-average number of common stock outstanding during the period. Options granted to employees under the Universal Biosensors Employee Option Plan are considered to be potential ordinary shares for the purpose of calculating diluted net loss per share. However, all these were not included in the calculation of diluted net loss per share in the year when the Group made a net loss as the effect of including them is anti-dilutive. Weighted average shares used as denominator in calculating: Basic & diluted net loss per share . . . . . . . . . . . . . 160,417,411 159,017,777 157,584,044 Years Ended December 31, 2012 2011 2010 (13) Guarantees and Indemnifications The certificate of incorporation and amended and restated by-laws of the Company provide that the Company will indemnify officers and directors and former officers and directors in certain circumstances, including for expenses, judgments, fines and settlement amounts incurred by them in connection with their services as an officer or director of the Company or its subsidiaries, provided that such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company. F-37 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) In addition to the indemnities provided in the certificate of incorporation and amended and restated by-laws, the Company has entered into indemnification agreements with certain of its officers and each of its directors. Subject to the relevant limitations imposed by applicable law, the indemnification agreements, among other things: • • indemnify the relevant officers and directors for certain expenses, judgments, fines and settlement amounts incurred by them in connection with their services as an officer or director of the Company or its subsidiaries; and require the Company to make a good faith determination whether or not it is practicable to maintain liability insurance for officers and directors or to ensure the Company’s performance of its indemnification obligations under the agreements. The Company maintains directors’ and officers’ liability insurance providing for the indemnification of our directors and certain of our officers against certain liabilities incurred as a director or officer, including costs and expenses associated in defending legal proceedings. In accordance with the terms of the insurance policy and commercial practice, the amount of the premium is not disclosed. No liability has arisen under these indemnities as at December 31, 2012. (14) Segments The Company operates in one segment. The principal activities of the Company are research and development, commercial manufacture of approved medical or testing devices and the provision of services including contract research work. The Company operates predominantly in one geographical area, being Australia. The Company’s total income has been derived from the following countries: Years ended December 31, Home country - Australia . . . . . . . . . . . . . . . . . . . . . . . . . Foreign countries - Scotland . . . . . . . . . . . . . . . . . . . . . . - U.S.A. . . . . . . . . . . . . . . . . . . . . . . . . - Switzerland . . . . . . . . . . . . . . . . . . . . 437,171 22,454,227 4,955,965 2,236,251 2012 A$ 2011 A$ 683,323 14,143,270 8,919 544,263 2010 A$ 1,192,889 12,634,464 0 5,545,572 Total - foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . 29,646,443 14,696,452 18,180,036 Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,083,614 15,379,775 19,372,925 The Company’s material long-lived assets are all based in Australia. We derive significant revenues from LifeScan. Revenues from LifeScan were 82%, 96% and 94% of the Company’s consolidated revenues for 2012, 2011 and 2010, respectively. We started generating revenues from Siemens during 2012 and 16% of our total income in fiscal year 2012 was derived from our arrangement with Siemens. F-38 For personal use only Universal Biosensors, Inc. Notes to Consolidated Financial Statements (for the years ended December 31, 2010, 2011 and 2012) (15) Deed of Cross Guarantee Universal Biosensors, Inc. and its wholly owned subsidiary, Universal Biosensors Pty Ltd, are parties to a deed of cross guarantee under which each company guarantees the debts of the other. By entering into the deed, the wholly-owned entity has been relieved from the requirements to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a “Closed Group” for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by Universal Biosensors, Inc., they also represent the “Extended Closed Group”. The consolidated financial statements presented within this report comprise that of Universal Biosensors, Inc. and its wholly owned subsidiary, Universal Biosensors Pty Ltd. These two entities also represent the “Closed Group” and the “Extended Closed Group”. (16) Borrowings In January 2012, UBS entered into an arrangement with BMW Australia Finance Pty Ltd to fund the Group’s insurance premium. The total amount financed was A$921,725 at inception. Interest was charged at a fixed rate of 3.2% per annum and the short-term borrowing was fully repaid by November 2012. The short-term borrowing was secured by the insurance premium refund. F-39 For personal use only Universal Biosensors, Inc. Schedule ii — Valuation and Qualifying Accounts (for the years ended December 31, 2010, 2011 and 2012) Additions Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions Balance at end of Period A$ A$ A$ A$ A$ Year ended December 31, 2010 Deferred income tax valuation allowance . . . . . . . . Year ended December 31, 2011 Deferred income tax valuation allowance . . . . . . . . Year ended December 31, 2012 Deferred income tax valuation allowance . . . . . . . . 11,699,811 1,896,668 372,305 13,968,784 4,357,503 30,161 18,356,448 3,719,704 (38,142) 0 0 0 13,968,784 18,356,448 22,038,010 F-40 For personal use only ASX Additional Information Additional information required by Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at March 1, 2013. (a) Distribution of equity securities As at March 1, 2013 there were:– • 173,763,774 fully paid shares of common stock held by CHESS Depositary Nominees Pty Ltd on behalf of 1,634 individual holders of CDIs. All issued shares of common stock carry one vote per share and carry the rights to dividends. • 196,089 unquoted fully paid restricted shares of common stock held by 85 individual employees of the Company. All issued shares of common stock carry one vote per share and carry the rights to dividends. • 11,718,464 options over shares of common stock held by 100 individual option holders. The Company’s shares of common stock are traded on Australian Securities Exchange in the form of CHESS Depositary Interests, or CDIs. CHESS Depositary Nominees Pty Ltd, a wholly owned subsidiary of Australian Securities Exchange Ltd, holds legal title in the Company’s shares of common stock on behalf of holders of CDIs. The following table sets out the beneficial interests in the underlying shares of common stock rather than legal title. Holding ranges common stock traded as CDIs employee shares of common stock of common stock Beneficial interests in shares of Beneficial interests in restricted Options over shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over 190 411 268 644 121 1,634 There are 92 holders of CDIs with a less than marketable parcel. (b) Holders of CDIs holding greater than 5% Name The Principals Cornerstone Fund Pty Limited* CM Capital Investments Pty Ltd National Nominees Limited Aust Executor Trustees SA Ltd PFM Cornerstone Limited BNP Paribas Noms Pty Ltd * Shares held on trust for Messrs Denver, Hanley, and Dr Adam. – 85 – – – 85 – – – 79 21 100 Beneficial interests in shares of common stock Number 18,151,074 17,794,384 14,181,314 12,560,133 11,281,283 9,004,000 Percentage 10.446 10.241 8.161 7.228 6.492 5.182 86 Universal Biosensors, Inc. For personal use only (c) Twenty largest holders of quoted equity securities Name 1 The Principals Cornerstone Fund Pty Limited* 2 CM Capital Investments Pty Ltd 3 National Nominees Limited 4 Aust Executor Trustees SA Ltd 5 PFM Cornerstone Limited 6 BNP Paribas Noms Pty Ltd 7 JP Morgan Nominees Australia Limited 8 Kaasim Pty Ltd 9 Equity Trustees Limited 10 Citicorp Nominees Pty Limited 11 M F Custodians Ltd 12 Dr Alastair Mcindoe Hodges 13 Mr Denis Michael Hanley 14 Garry Chambers 15 Mr Thomas William Beck & Mrs Lynne Carol Beck 16 Warragai Investments Pty Ltd 17 Dr Colin Mclean Adam & Mrs Elizabeth May Adam 18 Mr Andrew Denver & Mrs Linda Denver 19 Armada Trading Pty Ltd 20 Ronald Chatelier Beneficial interests in shares of common stock Number 18,151,074 17,794,384 14,181,314 12,560,133 11,281,283 9,004,000 8,087,655 7,782,636 3,240,398 3,108,110 2,071,123 2,060,002 1,913,230 1,762,341 1,738,387 1,500,000 1,464,183 1,354,528 1,316,666 1,240,338 121,611,785 173,763,774 Percentage 10.446 10.241 8.161 7.228 6.492 5.182 4.654 4.479 1.865 1.789 1.192 1.186 1.101 1.014 1.000 0.863 0.843 0.780 0.758 0.714 69.987 * Shares held on trust for Messrs Denver, Hanley, and Dr Adam. (d) Restricted Securities As at March 1, 2013, there are 196,089 fully paid restricted shares of common stock issued to 85 Company employees pursuant to the terms and conditions of the Universal Biosensor, Inc. employee share plan. The restricted shares are not able to be traded until the earlier of the following: (i) three years from the date on which the shares are issued; or (ii) the date on which an employee ceases to be an employee of Universal Biosensors, Inc. and its associated group of companies. Universal Biosensors, Inc. 87 For personal use only 88 Universal Biosensors, Inc. This page has been left blank intentionally. For personal use only Corporate Directory Board of Directors Auditor PricewaterhouseCoopers LLP Darling Park Tower 2 201 Sussex Street Sydney, New South Wales 2000 Australia Australian Legal Adviser PFM Legal Pty Ltd Level 12 117 York Street Sydney New South Wales 2000 Australia US Legal Adviser Venable LLP 575, 7th Street, NW Washington DC 20004 United States of America Mr Paul Wright (CEO) Mr Andrew Denver (Chairman) Dr Colin Adam Mr Denis Hanley Mr Marshall Heinberg Mr Andrew Jane Dr Elizabeth (Jane) Wilson Registered Office in Australia 1 Corporate Avenue Rowville Victoria 3178 Australia Telephone: +61 3 9213 9000 Facsimile: +61 3 9213 9099 Email: info@universalbiosensors.com Website: www.universalbiosensors.com ASX code: UBI Name and address of Universal Biosensors’ registered agent in the United States Corporation Service Company 2711 Centerville Road, Suite 400, Wilmington, County of New Castle Delaware, Unites States of America Share Registry Boardroom Pty Limited Level 7, 207 Kent Street Sydney New South Wales 2000 Australia Telephone: +61 2 9290 9600 Facsimile: +61 2 9279 0664 Email: enquiries@boardroomlimited.com.au Website: www.boardroomlimited.com.au Design by Transmission. www.transmissiondesign.com.au www.transmissiondesign.com.au transmissiondesign.com.au For personal use only Universal Biosensors For personal use only