10-Q 1 w56621e10vq.htm FORM 10-Q e10vq
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Universal Biosensors, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   98-0424072
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification Number)
     
Universal Biosensors, Inc.
1 Corporate Avenue,
Rowville, 3178, Victoria
Australia
  Not Applicable
(Address of principal executive offices)   (Zip Code)
Telephone: +61 3 9213 9000
(Registrant’s telephone number, including
area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer o   Smaller reporting company þ
    (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 o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 156,958,812 shares of Common Stock, $0.0001 par value, outstanding as of April 30, 2008.
 
 

 


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
TABLE OF CONTENTS
             
        Page  
 
           
PART I
  FINANCIAL INFORMATION        
 
           
Item 1
  Financial Statements        
 
           
   
1) Consolidated condensed balance sheets at March 31, 2008 and December 31, 2007 (unaudited)
    3  
 
           
 
 
2) Consolidated condensed statements of operations for the three months ended March 31, 2008 and 2007 (unaudited),
    4  
 
           
 
 
3) Consolidated condensed statements of cash flows for the three months ended March 31, 2008 and 2007 (unaudited)
    5  
 
           
 
 
4) Consolidated condensed statements of changes in stockholder’s equity and comprehensive income for the period ended March 31, 2008 (unaudited)
    6  
 
           
 
  5) Notes to consolidated condensed financial statements (unaudited)     7  
 
           
Item 2
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
 
           
Item 3
  Quantitative and Qualitative Disclosures About Market Risk     24  
 
           
Item 4
  Controls and Procedures     25  
 
           
PART II
  OTHER INFORMATION        
 
           
Item 1
  Legal Proceedings   Not Applicable  
 
           
Item 1A
  Risk Factors   Not Applicable  
 
           
Item 2
  Unregistered Sales of Equity Securities and Use of Proceeds   Not Applicable  
 
           
Item 3
  Defaults Upon Senior Securities   Not Applicable
 
           
Item 4
  Submission of Matters to a Vote of Security Holders   Not Applicable
 
           
Item 5
  Other Information   Not Applicable
 
           
Item 6
  Exhibits     26  
 
           
 
  Exhibit 3.1        
 
  Exhibit 3.2        
 
  Exhibit 31.1        
 
  Exhibit 31.2        
 
  Exhibit 32.0        
 
           
SIGNATURES     27  

2


 

PART I
Item 1 Financial Statements
UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
    2008     2007  
    US$     US$  
ASSETS
               
Current assets:
               
Cash
  $ 34,000,937     $ 36,990,423  
Short-term investments (held-to-maturity)
    2,867,374       2,753,679  
Inventory — Raw materials
    789,723       429,016  
Accrued income
    157,962       70,361  
Receivables
    478,116       485,902  
Financial instruments
    156,286        
Other current assets
    2,808,644       796,782  
 
           
Total current assets
    41,259,042       41,526,163  
 
               
Property, plant and equipment
    18,165,426       15,828,321  
Less accumulated depreciation
    (1,794,321 )     (1,386,070 )
 
           
Property, plant and equipment — net
    16,371,105       14,442,251  
Spare parts
    84,956       23,907  
 
           
Total assets
  $ 57,715,103     $ 55,992,321  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 968,972     $ 786,296  
Income taxes payable
          15,869  
Accrued expenses
    754,096       808,210  
Deferred income
           
Employee entitlements provision
    319,288       236,070  
 
           
Total current liabilities
    2,042,356       1,846,445  
 
               
Non-current liabilities:
               
Asset retirement obligations
    1,468,757       1,381,372  
Employee entitlements provision
    116,829       89,239  
 
           
Total non-current liabilities
    1,585,586       1,470,611  
 
           
Total liabilities
    3,627,942       3,317,056  
 
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; issued and outstanding nil in 2008 (2007: nil)
               
Common stock, $0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 156,958,812 shares in 2008 (2007: 156,958,812)
    15,696       15,696  
Additional paid-in capital
    59,063,407       58,920,901  
Accumulated deficit
    (10,837,569 )     (9,759,926 )
Accumulated other comprehensive income
    5,845,627       3,498,594  
 
           
Total stockholders’ equity
    54,087,161       52,675,265  
 
           
Total liabilities and stockholders’ equity
  $ 57,715,103     $ 55,992,321  
 
           
See notes to consolidated condensed financial statements which are an integral part of these statements

3


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
                         
    Period from        
    inception to        
    March 31,     Three Months Ended March 31,  
    2008     2008     2007  
    US$     US$     US$  
             
Revenue
  $     $     $  
Cost of goods sold
                 
 
                 
Gross profit
                 
 
                       
Operating expenses:
                       
Research and development (1 and 2)
    15,035,462       1,772,390       1,098,020  
General and administrative (3)
    8,349,246       1,259,302       638,093  
 
                 
Total operating expenses
    23,384,709       3,031,692       1,736,113  
 
                 
Research and development income
    8,902,807       250,000       249,997  
Loss from operations
    (14,481,902 )     (2,781,692 )     (1,486,116 )
Other income
    3,635,768       1,701,282       307,586  
 
                 
Net loss before tax
    (10,846,133 )     (1,080,410 )     (1,178,530 )
Income tax benefit
    8,564       2,767        
 
                 
Net loss
  $ (10,837,569 )   $ (1,077,643 )   $ (1,178,530 )
 
                 
 
                       
Basic and diluted net loss per share
  $ (0.18 )   $ (0.01 )   $ (0.01 )
 
                 
 
                       
Number of shares used to compute per share data
    60,576,408       156,958,812       128,060,905  
 
                 
 
Notes:
                         
1   Net of research grant income in these amounts
    1,854,687       218,144       149,726  
 
                       
2   Includes non-cash compensation expense (research and development)
    462,124       70,534       19,267  
 
                       
3   Includes non-cash compensation expense (general & administrative)
    517,563       86,772       26,331  
See notes to consolidated condensed financial statements which are an integral part of these statements

4


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
                         
    Period      
    from inception      
    to March 31,   Three Months Ended March 31,  
    2008   2008   2007
 
  US$   US$   US$
 
           
Cash flows from operating activities provided by/(used in):
                       
Net loss
    (10,837,569 )     (1,077,643 )     (1,178,530 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and impairment of plant & equipment
    1,831,449       346,471       77,244  
Share based payments expense
    979,687       157,306       45,598  
Loss on fixed assets disposal
    97,715              
Translation (gain)/loss
    330,373       80,324       7,952  
Change in assets and liabilities:
                       
Inventory — Raw materials
    (789,723 )     (360,707 )      
Receivables
    (423,327 )     62,575        
Prepaid expenses and other current assets
    (2,917,083 )     (2,117,773 )     (147,401 )
Grants receivable
    (157,963 )     (87,601 )     (72,758 )
Income tax payable
          (15,869 )      
Employee entitlements
    556,370       110,808       48,036  
Accounts payable and accrued expenses
    941,130       (26,353 )     146,309  
Other liabilities
                 
 
                 
Net cash provided by/(used in) operating activities
    (10,388,941 )     (2,928,462 )     (1,073,550 )
 
                 
Cash flows from investing activities:
                       
Purchases of investment securities
    (2,753,679 )            
Purchases of property, plant and equipment
    (13,301,233 )     (1,571,495 )     (1,296,522 )
 
                 
Net cash used in investing activities
    (16,054,912 )     (1,571,495 )     (1,296,522 )
 
                 
Cash flows from financing activities:
                       
Gross proceeds from share issue
    56,945,133              
Transaction costs on share issue
            (14,800 )      
Proceeds from stock options exercised
    154,283             23,425  
 
                 
Net cash provided by/(used in) financing activities
    57,099,416       (14,800 )     23,425  
 
                 
Net increase in cash and cash equivalents
    30,655,563       (4,514,757 )     (2,346,647 )
Cash and cash equivalent at beginning of period
          36,990,422       23,885,198  
Effect of exchange rate fluctuations on the balances of cash held in foreign currencies
    3,345,374       1,525,272       329,406  
 
                 
Cash and cash equivalents at end of period
    34,000,937       34,000,937       21,867,957  
 
                 
See notes to consolidated condensed financial statements which are an integral part of these statements

5


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Unaudited)
                                                                 
                                    Additional           Foreign   Total
    Preference Shares   Ordinary shares   Paid-in   Accumulated   currency   stockholders’
    Shares   Amount   Shares   Amount   capital   deficit   translation reserve   equity
        US$       US$   US$   US$   US$   US$
Balances at December 31, 2007
                    156,958,812       15,696       58,920,901       (9,759,926 )     3,498,594       52,675,265  
Transaction costs on share issued in 2007
                              (14,800 )                 (14,800 )
Comprehensive Income
                                                               
Net loss
                                  (1,077,643 )           (1,077,643 )
Foreign currency translation reserve
                                          2,347,033       2,347,033  
 
                                                               
Total Comprehensive Income
                                                            1,269,390  
 
                                                               
Exercise of stock options issued to employees
                                               
Stock option expense
                              157,306                   157,306  
 
                                                               
Balances at March 31, 2008
                156,958,812       15,696       59,063,407       (10,837,569 )     5,845,627       54,087,161  
 
                                                               
See notes to consolidated condensed financial statements which are an integral part of these statements

6


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
Organization of the Company
     Universal Biosensors, Inc. (the “Company”) was incorporated on September 14, 2001 in the United States, and its wholly owned subsidiary and operating vehicle, Universal Biosensors Pty Ltd, was incorporated in Australia on September 21, 2001. Collectively, the Company and its wholly owned subsidiary Universal Biosensors Pty Ltd are referred to as “Universal Biosensors” or the “Group”. The Company’s shares of common stock in the form of CHESS Depositary Interests (“CDIs”) were quoted on the Australian Securities Exchange (“ASX”) on December 13, 2006 following the initial public offering in Australia of the Company’s shares of common stock. Our securities are not currently traded on any other public market.
     The Company is a specialist medical diagnostics company focused on the development, manufacture and commercialization of a range of in vitro diagnostic tests for point-of-care use. In vitro diagnostic testing involves the testing of a body fluid or tissue sample outside the body. The diagnostic tests comprise a novel disposable test strip and a reusable meter. The diagnostic tests are small, portable and easy-to-use.
     Universal Biosensors has rights to an extensive patent portfolio comprising certain patent applications owned by our wholly owned Australian subsidiary, Universal Biosensors Pty Ltd, and a large number of patents and patent applications licensed to us by LifeScan, Inc. (“LifeScan”), an affiliate of Johnson & Johnson Corporation.
     The Group has a range of point-of-care blood tests in development including an immunoassay point-of-care test to measure the amount of C-reactive protein in the blood which may be used to assist in the diagnosis and management of inflammatory conditions and a prothrombin time test which may be used for monitoring the therapeutic range of the anticoagulant, warfarin. The Group has developed a working prototype of the immunoassay C-reactive protein test and the prothrombin time test. Universal Biosensors also intends to develop additional immunoassay based point-of-care test devices by taking selected disease biomarkers currently measured in the central laboratory environment and creating tests using those biomarkers for the point-of-care setting using our novel platform of electrochemical cell technologies. Universal Biosensors propose to focus on the development of products which do not rely on the development of new medicines, treatments or biomarkers, but where existing therapies or practice can be enhanced significantly by simple and accurate diagnostic tools incorporating well known biomarkers.
     On October 29, 2007, Universal Biosensors entered into a Master Services and Supply Agreement with LifeScan which contains the terms pursuant to which Universal Biosensors Pty Ltd will provide certain services in the field of blood glucose monitoring to LifeScan and will act as a non exclusive manufacturer of blood glucose test strips for LifeScan (“Master Services and Supply Agreement”). The Master Services and Supply Agreement envisages that Universal Biosensors will manufacture the blood glucose test strips in its Rowville facility on a non exclusive basis, should the blood glucose product receive clearance to sell and be launched by LifeScan. LifeScan is solely responsible for registration strategy and commercial efforts. Additionally, the Group will continue to provide research and development services to LifeScan in the area of diabetes management to extend and develop the glucose sensor technology owned by LifeScan under a development and research agreement (“Development and Research Agreement”).
     All business operations and research and development activities are undertaken in Melbourne, Australia by the Company’s wholly owned subsidiary, Universal Biosensors Pty Ltd, under a research and development sub-contract and sub-license agreement between Universal Biosensors Pty Ltd and the Company.
     The Group is considered a development stage enterprise as its planned commercial manufacturing operations have not yet commenced.
Interim Financial Statements
     The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the financial statements and footnotes thereto as of and for the year ended December 31, 2007, included in the Form 10-K of Universal Biosensors, Inc.

7


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
     The year-end condensed balance sheet data as at December 31, 2007 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
Basis of Presentation
     These financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All amounts are expressed in United States dollars unless otherwise stated.
     The Company’s financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained operating losses since inception. The Company expects to continue to incur losses as it continues the development of its point-of-care tests and expands the organization and commercial manufacturing capability until the Company is able to generate sufficient revenues under the Master Services and Supply Agreement and/ or from the sale of any of its own products.
Principles of Consolidation
     The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary Universal Biosensors Pty Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
     The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, deferred income taxes, asset retirement obligations and obligations related to employee benefits. Actual results could differ from those estimates.
Cash & Cash Equivalents
     The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. For cash and cash equivalents, the carrying amount approximates fair value due to the short maturity of those instruments.
Short-Term Investments (Held —to-maturity)
     Short-term investments constitute all highly liquid investments with term to maturity from three months to twelve months. The carrying amount of short-term investments is equivalent to its fair value.
Concentration of Credit Risk and Other Risks and Uncertainties
     Cash and cash equivalents consists of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the balance sheet. The Company’s cash and cash equivalents are invested with two of Australia’s four largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash or cash equivalents to the extent of the amount recorded on the balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents.

8


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
     The blood glucose test being developed with LifeScan and the Company’s own product candidates require approvals or clearances from regulatory authorities including the U.S. Food and Drug Administration or other international regulatory agencies prior to commercialized sales. There can be no assurance that the blood glucose test or the Company’s own product candidates will receive any of the required approvals or clearances. If any such approval or clearances were denied or delayed, it may have a material adverse impact on the Company.
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
     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 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. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were recognized directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement.
     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 income statement in the same period or periods during which the hedged forecast transaction affects the income statement and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognized immediately in the income statement.
     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 still is expected 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 income statement.
     Exposure to foreign exchange risks arises in the normal course of the Company’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates.
     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.

9


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Inventory
     Raw materials are stated at the lower of cost and net realizable value. Costs of purchased inventory are determined after deducting rebates and discounts.
Receivables
     Receivables are recognized initially at fair value and subsequently measured at amortized cost, less provision for doubtful debts. Receivables are due for settlement no more than 45 days from the date of recognition.
     Collectibility of receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognized in the income statement.
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 4 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations as incurred and include minor corrections and normal services and does not include items of capital nature.
                 
 
     
    March 31,     December 31,  
    2008     2007  
    $     $  
Plant and equipment
    3,674,268       3,349,905  
Leasehold improvements
    6,876,201       5,548,792  
Capital work in process
    7,614,957       6,929,624  
 
           
 
    18,165,426       15,828,321  
Accumulated depreciation
    (1,794,321 )     (1,386,070 )
 
           
Property, plant & equipment, net
    16,371,105       14,442,251  
 
           
     Capital work in process relates to assets under construction and comprises primarily of specialized manufacturing equipment. Legal right to the assets under construction rests with the Company. The amounts capitalized for capital work in process represents the percentage of expenditure that has been completed, and once the assets are placed into service the Company begins depreciating the respective assets. The accumulated amortisation of capitalised leasehold improvements for the fiscal year ended December 31, 2007 and for the three month period ended March 31, 2008 was $264,668 and $518,373, respectively.
     The Company receives Victorian government grant monies under a grant agreement to support the establishment of a medical diagnostic manufacturing facility in Victoria through the purchase of plant and equipment. Plant and equipment is presented net of the government grant of $132,240 and $0 for the year ended December 31, 2007 and for the three month period ended March 31, 2008, respectively. The grant monies are recognized against the acquisition costs of the related plant and equipment as and when the related assets are purchased. Grant monies received in advance of the relevant expenditure are treated as deferred income and included in “Current Liabilities” on the balance sheet as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the Company under the grant agreement are recorded as “Currents Assets” on the balance sheet.

10


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
     Depreciation expense was $1,831,449 for the period from inception to March 31, 2008 and $346,741 and $77,244 for the three months ended March 31, 2008 and 2007, respectively.
     The movement in accumulated depreciation is agreed to depreciation expense as follows:
                 
    March 31,     December 31,  
    2008     2007  
    $     $  
Movement in accumulated depreciation
    408,251       351,325  
Written down value of fixed assets disposed
          391,542  
Difference in exchange rates
    (61,510 )     (148,340 )
 
           
Depreciation expense
    346,741       594,527  
 
           
Research and Development
     Research and development expenses consists of costs incurred to further the Group’s research and development activities and include salaries and related employee benefits, costs associated with clinical trial and preclinical development, regulatory activities, research-related overhead expenses, costs associated with the manufacture of clinical trial material, costs associated with developing a commercial manufacturing process, costs for consultants and related contract research, facility costs and depreciation. Research and development costs are expensed as incurred.
     The Group receives Australian Commonwealth government grant funding under an R&D Start Grant Agreement as compensation for expenses incurred in respect of certain research activities into dry chemistry immunosensors. Such grants reduce the related research and development expenses as and when the relevant research expenses are incurred. Grants received in advance of incurring the relevant expenditure are treated as deferred research grants and included in current liabilities on the balance sheet as the Group has not earned these amounts until the relevant expenditure has been incurred. Grants due to the Group under research agreements are included in current assets on the balance sheet.
     Research and development expenses for the period from inception to March 31, 2008 and for the three months ended March 31, 2008 and 2007 are as follows:
                         
    Period from        
    inception to        
    March 31,     Three Months Ended March 31,  
    2008     2008     2007  
    $     $     $  
Research and development expenses
    16,890,149       1,990,534       1,247,746  
Research grants received recognized against related research and development expenses
    (1,854,687 )     (218,144 )     (149,726 )
 
                 
Research and development expenses as reported
    15,035,462       1,772,390       1,098,020  
 
                 
Income Taxes
     The Company applies Statement of Financial Accounting Standards No. 109 — Accounting for Income Taxes (“SFAS 109”) 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.

11


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
     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.
     The Company adopted FASB Interpretation FIN No. 48, “Accounting for Uncertainty in Income Taxes” effective January 1, 2007 which has not had a material impact on the Company’s consolidated financial statements. The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense.
     We are subject to income taxes in the United States and Australia. U.S. federal income tax returns up to the 2006 financial year have been lodged. Internationally, consolidated income tax returns up to the 2006 financial year have been lodged.
Asset Retirement Obligations
     Asset retirement obligations (“ARO”) are legal obligations associated with the retirement and removal of long-lived assets. SFAS No. 143 “Accounting for Asset Retirement 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 wherein 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:
                 
    March 31,     December 31,  
    2008     2007  
    $     $  
Opening balance at January 1
    1,381,372        
New obligations
          1,344,925  
Accretion expense
    29,957       34,682  
Foreign currency translation
    57,428       1,765  
 
           
Ending balance at December 31
    1,468,757       1,381,372  
 
           
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 by using available market information and appropriate valuation methodologies.
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. Impairment, if any, is measured as the amount by which the carrying amount of the assets exceeds its fair value. Impairment, if any, is assessed using discounted cash flows.

12


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Australian Goods and Services Tax (GST)
     Revenues, expenses and assets are recognized net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognized as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis.
Revenue Recognition
Research and development revenue
     The Company receives research and development revenue under a Development and Research Agreement with LifeScan. The Development and Research Agreement provides details of the amount to be charged to LifeScan each year for the provision of research and development services. For fiscal 2008, LifeScan is paying the Company approximately $250,000 per quarter under the Development and Research Agreement. The revenue derived from the Development and Research Agreement is recognized over the period in which the agreed upon research services are completed. Under the Development and Research Agreement, we are not matching the revenue to a specific expenditure but to a specified period of research. The annual research and development revenue received from LifeScan is agreed with LifeScan from time to time and is subject to the Company continuing its research and development activities in the blood glucose area, the provision of quarterly reports and other obligations under the Development and Research Agreement. We have and continue to satisfy the requirements of the Development and Research Agreement.
     This Development and Research Agreement has been in place since soon after the Company’s inception. There are no claw backs or repayment obligations relating to any funds received under the Development and Research Agreement.
Fee Income
     Under the terms of the Master Services and Supply Agreement, the Company received an initial non-refundable fee of $1,000,000 in consideration for the grant of certain rights to LifeScan. The Company recorded the fee income as revenue upon receipt. This revenue is recorded under the caption “Other income” in the consolidated statements of operations as it is not indicative of the core operating activities or revenue producing goals of the Company.
Interest revenue
     Interest revenue is recognized as it accrues, taking into account the effective yield on the financial asset.
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 consolidated financial statements are presented using a reporting currency of U.S. dollars.
     The functional currency of the Company and Universal Biosensors Pty Ltd is Australian dollars for all years presented.

13


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 Statement of Operations.
     The Company has recorded foreign currency transaction gains/(losses) of $95,968 for the period from inception to March 31, 2008, and $35,369 and ($14,705) for the three month period ended March 31, 2007 and 2008, respectively.
Group companies
     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 Foreign Currency Translation Reserve (“FCTR”).
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.
Patent and License Costs
     Legal fees incurred for patent application costs have been charged to expense and reported in research and development expense.
Clinical Trial Expenses
     Clinical trial costs are a component of research and development expenses. These expenses include fees paid to participating hospitals and other service providers, which conduct certain product development 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 Group’s leases are considered operating leases. The costs of operating leases are charged to the statement of operations on a straight-line basis over the lease term.

14


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Stock-based Compensation
     Prior to January 1, 2006, the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, in accounting for its fixed-plan stock options. For periods prior to January 1, 2006, the Company complied with the disclosure only provisions of FASB Statement No.123, “Accounting for Stock-Based Compensation”, or SFAS 123. No stock-based employee compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant (or within permitted discounted prices as it pertains to the ESPP). Results for periods before January 1, 2006 have not been restated to reflect, and do not include the impact of, FASB Statement No. 123(R), “Share Based Payment”, or SFAS 123(R).
     As of January 1, 2006, the Company adopted SFAS 123(R), using the modified prospective method, which requires measurement of compensation expense of all stock-based awards at fair value on the date of grant and amortization of the fair value over the vesting period of the award. The Company has elected to use the straight-line method of amortization. Under the modified prospective method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123 shall be recognized in net income in the periods after adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation Transition and Disclosure”.
     Such value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R). There were no transitional adjustments on adoption of SFAS 123 (R).
     The total share-based compensation expense recorded by the Company for the period from inception to March 31, 2008 and for the three months ended March 31, 2008 and 2007 is allocated among the following categories:
                         
    Period from    
    inception to    
    March 31,   Three Months Ended March 31,
    2008   2008   2007
    $   $   $
Research and development
    462,124       70,534       19,267  
General and administrative
    517,563       86,772       26,331  
 
                       
Total share-based compensation expense
    979,687       157,306       45,598  
 
                       
     The above charges had no impact on the Company’s cash flows.
     The assumptions for the option grants computed using the Black-Scholes option pricing model for options issued during the 2007 financial year and for the three month period ended March 31, 2008 were:
                                 
    Grant Date
    March 2008   October 2007   September 2007   March 2007
Exercise Price
  $ 0.82     $ 1.04     $ 1.02     $ 0.95  
Share Price at Grant Date
  $ 0.84     $ 1.10     $ 1.04     $ 0.98  
Volatility
    76 %     76 %     72 %     74 %
Expected Life
    10 years       10 years       10 years       10 years  
Risk Free Interest Rate
    5.87 %     6.13 %     5.99 %     5.86 %
Fair Value of Option
  $ 0.59     $ 0.72     $ 0.66     $ 0.64  

15


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
     A summary of activity in the Employee Option Plan for the three-month period ended March 31, 2008 is as follows:
                 
    Number of Options   Weighted — Average
    Over Shares   Exercise Price
Outstanding Balance, December 31, 2007
    4,946,395     $ 0.55  
Granted
    1,049,000       0.82  
Exercised
             
Lapsed
    (5,334 )     1.01  
 
               
Outstanding Balance, March 31, 2008
    5,990,061       0.60  
 
               
 
Exercisable shares as of March 31, 2008
               
     As of March 31, 2008, there was $1,081,677 of unrecognized compensation expense related to unvested share-based compensation arrangements under the Option Plan. This expense is expected to be recognized as follows:
         
Fiscal Year        
2008 — remaining periods
  $ 316,076  
2009
    436,231  
2010
    329,370  
 
     
 
    1,081,677  
 
     
Pension Costs
     As required by Australian law, Universal Biosensors Pty Ltd contributes to standard defined contribution superannuation funds on behalf of all employees at an amount up to nine percent of each such employee’s salary. Superannuation is a compulsory savings program whereby employers are required to pay a portion of an employee’s remuneration to an approved superannuation fund that the employee is typically not able to access until they are retired. The Company permits employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the statement of operations as they become payable.
Net Loss per Share and Anti-dilutive Securities
     Basic and diluted net loss per share is presented in conformity with Statement of Financial Accounting Standards No. 128 — Earnings Per Share (“SFAS 128”). Basic and diluted net loss per share has been computed using the weighted-average number of common shares outstanding during the period. All periods present in these financial statements have been retroactively adjusted to give effect to the stock split in December 2006. The potentially dilutive options issued under the Universal Biosensors Employee Option Plan and the convertible preference shares were not considered in the computation of diluted net loss per share because they would be anti-dilutive given the Group’s loss making position in this and previous years.
Total Comprehensive Income
     The Company follows SFAS No. 130, “Reporting Comprehensive Income (Loss)” (“SFAS 130”). 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.

16


 

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
     In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” effective January 1, 2008 which has not had a material impact on the Company’s consolidated financial statements.
     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. The Company adopted SFAS 157 effective January 1, 2008 which has not had a material impact on the Company’s consolidated financial statements.
Subsequent Events
     There has not arisen in the interval between the end of the financial year and April 30, 2008 any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.

17


 

UNIVERSAL BIOSENSORS, INC.
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K filed with the United States Securities and Exchange Commission (“SEC”). This Form 10-Q contains, including this discussion and analysis, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward looking statements, including statements relating to future events and our future financial performance. Those statements in this Form 10-Q containing the words “believes”, “anticipates”, “plans”, “expects”, and similar expressions constitute forward looking statements, although not all forward looking statements contain such identifying words.
     The forward looking statements contained in this Form 10-Q are based on our current expectations, assumptions, estimates and projections about the Company and its businesses. All such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those results expressed or implied by these forward-looking statements, including those set forth in this Quarterly Report.
Overview
     We are a specialist medical diagnostics company focused on the development, manufacture and commercialization of in vitro diagnostic test devices for point-of-care use. In vitro diagnostic testing involves the testing outside of the body of a body fluid (e.g. blood or saliva) or tissue sample (biopsies or swabs). The diagnostic blood test devices we are developing comprise a novel disposable test strip and a reusable meter. The devices are designed to be used near to or at the site of the patient (at the “point-of-care”) to provide accurate and quick results to enable treatment to be immediately reviewed. We have rights to an extensive patent portfolio comprising a number of patent applications owned by our wholly owned Australian subsidiary, Universal Biosensors Pty Ltd, and a large number of patents and patent applications licensed to us by LifeScan, an affiliate of Johnson & Johnson.
     We are developing an immunoassay point-of-care test to measure the amount of C-reactive protein in the blood C-reactive protein test which may be used to assist in the diagnosis and management of inflammatory conditions and a prothrombin time test for monitoring the therapeutic range of the anticoagulant, warfarin. We also intend to leverage our intellectual property platform to develop additional immunoassay based point-of-care test devices by taking proven disease biomarkers currently used in the central laboratory environment and adapting those diagnostic tests to the point-of-care setting.
     In October 2007, we entered into a Master Services and Supply Agreement which contains the terms pursuant to which Universal Biosensors Pty Ltd will provide certain services in the field of blood glucose monitoring to LifeScan and will act as a non exclusive manufacturer of blood glucose test strips for LifeScan. Additionally, we will continue to provide contract research and development services to LifeScan in the in the field of blood glucose monitoring pursuant to a Development & Research Agreement. With the exception of the first year of our operations when we made a small profit of $110,670, we have incurred net losses since our inception. Our accumulated losses from inception to March 31, 2008 are $10,837,569. We expect to continue to incur losses as we continue the development of our point-of-care tests and expand our organization and commercial manufacturing capability until we are able to generate sufficient revenues under the Master Services and Supply Agreement and/ or from the sale of any of our own products. LifeScan will have control over the commercialization of the blood glucose test strips (which are not currently approved for marketing and sale), including sole discretion to decide where and how to market and sell the test strips. After an initial costing phase, LifeScan will pay Universal Biosensors Pty Ltd an annually agreed transfer price per test strip manufactured and supplied by Universal Biosensors Pty Ltd, with such transfer price not to exceed a maximum amount specified in the Master Services and Supply Agreement.
     Pursuant to the terms of the Master Services and Supply Agreement, Universal Biosensors Pty Ltd will provide a range of services to LifeScan, including continued development activities with respect to the initial test strips and services in support of the regulatory approval of the blood glucose monitoring product and the manufacture of the initial blood glucose tests strips. In January 2008, LifeScan paid Universal Biosensors Pty Ltd a one-time initial fee of $1,000,000 in connection with the services, and will pay Universal Biosensors Pty Ltd a total of up to three milestone amounts upon the achievement of regulatory approval of the initial blood glucose monitoring product in three specified jurisdictions. In addition, Universal Biosensors Pty Ltd will receive a quarterly service fee which will be calculated with reference to the number of relevant products sold by LifeScan irrespective of who manufactures such products. The service fee is capable of being paid out as a lump sum fee in certain circumstances. We will also be paid a fee in connection with blood glucose tests strips manufactured by us.

18


 

UNIVERSAL BIOSENSORS, INC.
Results of Operations
Research and Development Expenses
     Our operating expenses to date have substantially been for research and development activities. 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. All research and development costs, including those funded by an Australian research and development grant program, are expensed as incurred. Research and development expenses include:
    consultant and employee related expenses, which include salary and benefits;
 
    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.
     Research and development expenses for the respective periods are as follows:
                         
    Period from    
    inception to    
    March 31,   Three Months Ended March 31,
    2008   2008   2007
    $   $   $
Research and development expenses
    16,890,149       1,990,534       1,247,746  
Research grants received recognized against related research and development expenses
    (1,854,687 )     (218,144 )     (149,726 )
 
                       
Research and development expenses as reported
    15,035,462       1,772,390       1,098,020  
 
                       
     These expenses are related to developing our electrochemical cell platform technologies and diagnostic test pilot manufacturing production. Our expenses have significantly increased and are expected to continue to increase significantly throughout the balance of 2008 as we expand our research and development programs and expand our organization and commercial manufacturing capability. The initial glucose sensor strip we are developing in conjunction with LifeScan and the associated meter components of the blood glucose product are well advanced in the validation stage of product development. We currently have two non glucose development programs, including a program to develop immunoassay based tests (with the first such immunoassay test being a test for C-reactive protein) and a prothrombin time test. We made good progress with both these development programs. If the development efforts continue to be successful for each of these tests, we expect to be in a position to commence the formal validation phase in 2009, a process requiring approximately one year, following which, we will commence the process of seeking regulatory clearance for the test. Our other non-glucose program is the development of a prothrombin time test. This test is designed to be used to monitor the therapeutic window of the Coumadin (warfarin) family of drugs. The prothrombin time strip and meter program continues to advance well and we anticipate adding resources to this program this financial year.
     We have not reported our internal historical research and development costs or our personnel and personnel-related costs on a project-by-project basis. Our programs share a substantial amount of our common fixed costs such as facilities, depreciation, utilities and maintenance. Accordingly, we do not track our research and development costs by individual research and development program.

19


 

UNIVERSAL BIOSENSORS, INC.
     In addition, we expect research and development expenditures to grow as we advance our development programs and explore other commercial opportunities our technology platform can be applied to. We cannot predict what it will cost to complete our research and development programs or when or if they will be completed and commercialized. The timing and cost of any program is dependent upon achieving technical objectives, which are inherently uncertain and, both the C-reactive protein and prothrombin time tests still have a high degree of technical development risk. In addition, our business strategy contemplates that if appropriate we may enter into collaborative arrangements with third parties for one or more of our programs. In the event that third parties assume responsibility for certain research or development activities, the estimated completion dates of those activities will be under the control of the third party rather than with us. We cannot forecast with any certainty, which programs if any, will be subject to future collaborative arrangements, in whole, or in part, and how such arrangements would affect our research and development plans or capital requirements.
     As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development programs or when and to what extent we will receive cash inflows from the commercialization and sale of products. Our inability to complete our research and development programs in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our strategy. Our inability to raise additional capital on terms reasonably acceptable to us would jeopardize the future success of our business.
General and Administrative Expenses
     General and administrative expenses increased by $621,209 (97%) during the three months ended March 31, 2008 compared to the same period last year. General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, information technology and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, insurance expense, consultancy fees and professional fees for legal and accounting services. This increase in expenses reflects growth in the size and complexity of our operations, as well as the incremental costs of having our shares in the form of CDIs quoted on the ASX and compliance costs associated with becoming a United States domestic filer. We expect that our general and administrative expenses will increase as we expand our legal and accounting staff and marketing and sales staff, add infrastructure and incur additional costs related to operating as a company whose shares in the form of CDIs are quoted on the ASX, including directors’ and officers’ insurance, investor relations programs, increased director fees and increased professional fees.
Research and Development Income
     Our research and development income for the three months ended March 31, 2008 and 2007 was $250,000 and $249,997, respectively, recognized pursuant to the Development and Research Agreement with LifeScan.
Fee Income
     The Company received an initial non-refundable fee of $1,000,000 in January 2008 in consideration for the grant of certain rights to LifeScan pursuant to the Master Services and Supply Agreement.
Interest Income
     Interest income increased by $393,696 (128%) during the three months ended March 31, 2008, respectively, compared to the same periods last year. The increase in interest income is attributable to the greater level of funds invested during the year and increased returns on the funds invested.
Income Tax Benefit
     Income tax expense during the 2008 year relates to the reversal of over-provision for income tax.

20


 

UNIVERSAL BIOSENSORS, INC.
Net Loss
     Net loss decreased by $100,887 (9%) during the three months ended March 31, 2008 compared to the same period last year. While our expenditure increased for the comparative periods, the losses for the three month period ended March 31, 2008 were offset by the receipt of the initial fees of $1,000,000 from LifeScan and interest earned on our investments.
Basic and Diluted Net Loss per Share
                 
    Three months ended   Three months ended
    March 31, 2008   March 31, 2007
Net loss
    1,077,643       1,178,530  
Weighted average number of ordinary shares used as denominator in calculating basic and diluted net loss per share
    156,958,812       128,060,905  
Basic and diluted net loss per share
    ($0.01 )     ($0.01 )
Liquidity and Capital Resources
     Since inception, our operations have mainly been financed through the issuance of equity securities. Additional funding has come through payments received from LifeScan under the Development and Research Agreement, an initial one time payment under the Master Services and Supply Agreement and research grants and interest on investments. Through to March 31, 2008, we had received aggregate net cash proceeds from the following: (a) $28,130,694 from the renounceable rights issue; (b) $29,983,522 from the issuance of equity securities other than those issued under the renounceable rights offer; (c) $8,902,807 from LifeScan under our Development and Research Agreement; (d) $1,986,926 as contributions from government and state grants; (e) $1,000,000 from LifeScan as an initial fee under our Master Services and Supply Agreement and (f) $2,635,768 from interest on investments. As of March 31, 2008, we had $34,000,937 in cash, cash equivalents and short-term investments. Our cash and investment balances are held in money market accounts and short-term instruments. Cash in excess of immediate requirements is invested in short-term instruments with regard to liquidity and capital preservation.
     For the three months ended March 31, 2008, we used net cash of $2,928,462 for operating activities. This consisted of a net loss for the period of $1,077,643, which included $346,471 of non-cash depreciation and amortization and non-cash stock option expense of $157,306. Net cash used in investing activities during the three months ended March 31, 2008 was $1,571,495, which primarily included the additional fitout of our new facilities. During this quarter we also made deposits towards a new manufacturing equipment of approximately $1,619,000. These deposits have not been treated as “Property, plant and equipment” in the balance sheet but as “other current assets” as title has not yet passed to us. Net cash used in financing activities during the three months ended March 31, 2008 was $14,800.
     As at March 31, 2008, we had cash and cash equivalents of $34,000,937 as compared to $36,990,423 as of December 31, 2007. This decrease was due to the funding of our ongoing operations including capital expenditure outlay.
     In October 2007, we entered into a Master Services and Supply Agreement with LifeScan. In January 2008 we received an initial one time payment of $1,000,000. The receipt and timing of any further revenue under the Master Services and Supply Agreement is uncertain.
     If at any time LifeScan indicates that it will not proceed with commercialization of the blood glucose test covered by the Master Services and Supply Agreement, or if the product does not obtain regulatory approval, we will use the installed manufacturing equipment for the immunoassay and prothrombin time tests we are developing, contingent on those tests reaching the point of manufacture. To reach that point, development efforts will need to continue to be successful. If development efforts continue to be successful, we expect to be in a position to commence formal validation of the C-reactive protein test and the prothrombin time test in 2009, following which, we will seek regulatory clearance for these tests. We intend to sell our C-reactive protein and prothrombin time tests using specialist distributors in Europe, the US and internationally. We also intend to develop additional immunoassay based point-of-care test devices by taking selected disease biomarkers currently measured in the central laboratory environment and creating tests using those biomarkers for the point-of-care setting using our novel platform of electrochemical cell technologies. If appropriate, we may seek commercial partners to assist in the development or sales and distribution of its existing and future tests.
     The total cost of the projects which we are undertaking is subject to a range of factors. As a result, we consider that at this stage of our development we are unable to provide investors with reliable details in relation to the potential cost of our project to us. We believe that the proceeds of the renounceable rights issue, together with our cash, cash equivalents and short-term marketable securities balances, and the interest we earn on these balances, will allow the Group to perform under the Master Services and Supply Agreement and to progress the Group’s other development programs. In the event we do not receive the milestone payments as described under the Master Services and Supply Agreement and we are not able to generate revenue for the manufacturing and supply of the blood glucose test in 2008, we believe that our current cash and cash equivalents will be sufficient to fund our ongoing operations until the end of 2009. In order to achieve our objectives, we will likely require additional funding. The amount and timing of these future funding requirements is uncertain. To meet these financing requirements, we may raise funds through public or private equity offerings, debt financings, and through other means, including collaborations and license agreements or other means determined by the Directors at that time.

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UNIVERSAL BIOSENSORS, INC.
     We note our forecasted ability to maintain our financial resources to support our operations for this period is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our planned research, development and commercialization activities.
Operating Capital and Capital Expenditure Requirements
     The sale of additional equity securities will result in dilution to our stockholders. If we raise additional funds in the future through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our business.
     As a result of the numerous risks and uncertainties associated with our business strategy, we are unable to estimate the exact amounts of our capital and working capital requirements. We estimate our total capital expenditures in 2008 to be in the range of $6,000,000 to $8,000,000 for the purchase of equipment to support our activities, such as mobilization to meet our obligations under the Master Services and Supply Agreement, capacity expansion, final product validation activities, for ongoing development of our existing products, and for other ongoing research and development activities. We have also funded the majority of the fit out cost of our new facilities at Corporate Avenue from our existing cash. Our capital expenditure in connection with the fit out in 2008 is likely to total approximately $1,800,000. Our future funding requirements will depend on many factors, including, but not limited to:
    expenses we incur in manufacturing, developing, marketing and selling products;
 
    any need to scale our manufacturing operations to meet demand for blood glucose strips under the Master Services and Supply Agreement, or for our point-of-care tests, including additional costs related to the fit out of our manufacturing facility in Melbourne, Australia and the acquisition of additional manufacturing equipment;
 
    changes to our operations to enable us to perform services required under the Master Services and Supply Agreement;
 
    whether the timing and amount of receipts of revenue from LifeScan under the Master Services and Supply Agreement through: (i) milestone payments upon the achievement of regulatory milestones; (ii) services fees calculated with reference to blood glucoses tests strips sold by LifeScan; and (iii) income from the manufacture of blood glucose tests strips by Universal Biosensors for LifeScan is sufficient to offset our costs in total or in part;
 
    the success of our research and development efforts, and whether or not additional funds are required to support these;
 
    the rate of progress and cost of our product development activities;
 
    the timing and amount of revenue generated by sales of our point-of-care tests;
 
    costs and timing of regulatory approvals;
 
    costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
 
    the terms and timing of any collaborative, licensing and other arrangements that we may establish; and
 
    the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

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UNIVERSAL BIOSENSORS, INC.
Off-Balance Sheet Arrangement
     The future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 31, 2008 are:
         
Less than 1 year
  $ 459,110  
1 — 3 years
    966,271  
3 — 5 years
    1,035,263  
More than 5 years
    538,730  
 
     
Total minimum lease payments
  $ 2,999,374  
 
     
     The above relates to our operating lease obligations in relation to the lease of our premises.
Contractual Obligations
     Our future contractual obligations primarily for future rental payment obligations on the current office and manufacturing space, including financing costs, at March 31, 2008 were as follows:
                                         
    Payments Due By Period
    Total   Less than 1 year   1 — 3 years   3 — 5 years   More than 5 years
Long-Term Debt Obligations
                             
Asset Retirement Obligations (1)
    1,468,757                         1,468,757  
Operating Lease Obligations (2)
    2,999,374       459,110       966,271       1,035,263       538,730  
Purchase Obligations
                             
Other Long-Term Liabilities on Balance Sheet under GAAP (3)
    116,829                         116,829  
Total
    4,584,960       459,110       966,271       1,035,263       2,124,316  
 
(1)   Represents legal obligations associated with the retirement and removal of long-lived assets.
 
(2)   Our operating lease obligations relate to the lease of our premises.
 
(3)   Represents long service leave owing to the employees
Segments
     We operate in one segment. Our principal activities are the research, development, manufacture and commercialization of in vitro diagnostic test devices for point-of-care use. We operate predominantly in one geographical area, Australia.

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UNIVERSAL BIOSENSORS, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
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 anticipated sales and purchases in U.S. dollars and Euros. The goal of this hedging program is to economically guarantee or lock-in the exchange rates on our foreign exchange exposures. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
     The following table sets out the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
                 
    2009 (*)     Fair Value  
Anticipated Transactions and Related Derivatives
               
$AUD Functional Currency:
               
Forward exchange agreements (Sell $AUD/Buy Euros)
               
Contract amount
  AUD$477,343     (U.S.$22,955 )
Average contractual exchange rate
    0.6135          
 
*   Expected maturity or transaction date
Interest Rate Risk
     Our exposure to interest income sensitivity, which is affected by changes in the general level of Australian interest rates, particularly because the majority of our investments are in Australian dollars in cash and cash equivalents. 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 and will fall in value in the event market interest rates increase. 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.

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UNIVERSAL BIOSENSORS, INC.
Item 4 Controls and Procedures
Disclosure Controls and Procedures
     We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. The effectiveness of any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate improper conduct completely. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud.
     We carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer, and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act as of March 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures as of March 31, 2008 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls
     There were no changes in these controls or procedures identified in connection with the evaluation of such controls or procedures that occurred during the last fiscal quarter, on in other factors that have materially affected or are reasonably likely to materially affect these controls or procedures.

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UNIVERSAL BIOSENSORS, INC.
PART II
Item 6 Exhibits
         
Exhibit No   Description   Location
3.1*
  Amended and Restated Articles of Incorporation   Incorporated herein by reference
3.2**
  Amended and Restated By-Laws   Incorporated herein by reference
31.1
  Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)   Filed herewith
31.2
  Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)   Filed herewith
32.0***
  Section 1350 Certificate   Filed herewith
 
*   Previously filed as an exhibit by the same number of the Company’s Form 10 filed on April 30, 2007
 
**   Previously filed as an exhibit by the same number of the Company’s Amendment No. 5 to Form 10 filed on April 29, 2008
 
***   This exhibit is furnished rather than filed, and shall not be incorporated by reference into any filing of the registrant in accordance with Item 601 of Registration S-K

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UNIVERSAL BIOSENSORS, INC.
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  UNIVERSAL BIOSENSORS, INC.
 
(Registrant)
 
 
  By:   /s/ MARK MORRISSON    
Date: April 30, 2008    Mark Morrisson   
    Chief Executive Officer and Executive Director   
 
     
  By:   /s/ SALESH BALAK    
Date: April 30, 2008    Salesh Balak   
    Chief Financial Officer   

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UNIVERSAL BIOSENSORS, INC.
INDEX TO EXHIBITS
Quarterly Report on Form 10-Q
Dated November 8, 2007
         
Exhibit No   Description   Location
31.1
  Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)   Filed herewith
31.2
  Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)   Filed herewith
32.0
  Section 1350 Certificate   Filed herewith