AgJunction
Annual Report 2018

Plain-text annual report

ALEXIUM INTERNATIONAL GROUP LIMITED ANNUAL REPORT For The Period Ended 30 June 2018 ABN 91 064 820 408 PRESENTED IN US DOLLARS 1 ALEXIUM INTERNATIONAL GROUP LIMITEDTABLE OF CONTENTS Company Directory Letter from the Chair Review of Operations Corporate Governance Statement Directors’ Report Declaration of Independence Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes on the Consolidated Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information 3 4 5 6 18 43 44 45 46 48 49 91 92 96 2 ALEXIUM INTERNATIONAL GROUP LIMITEDCOMPANY DIRECTORY DIRECTORS Ms Susan Thomas Brigadier General Stephen Cheney Mr Craig Metz Ms Karen Thurman Ms Claire Poll Ms Rosheen Garnon Dr Robert Brookins COMPANY SECRETARY Mr Kevin Kye (Resigned 27 February 2018) Ms Maja McGuire (Appointed 27 February 2018) REGISTERED OFFICE AUDITORS SHARE REGISTRY BANKERS SOLICITORS Level 11, 125 St Georges Terrace Perth WA 6000 Telephone: +61 8 9384 3160 Grant Thornton Audit Pty Ltd Level 43 Central Park 152-158 St Georges Terrace Perth WA 6000 Automic Registry Services Level 5, 126 Phillip St Sydney NSW 2000 Telephone: 1300 288 664 Macquarie Bank 235 St Georges Terrace Perth WA 6000 Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street Perth WA 6000 ABN DOMICILE AND COUNTRY OF INCORPORATION 91 064 820 408 Australia LEGAL FORM OF ENTITY Listed Public Company SECURITY EXCHANGE Australian Securities Exchange (Perth) Limited ASX Code: AJX NASDAQ International Designation Ticker: AXXIY 3 ALEXIUM INTERNATIONAL GROUP LIMITEDLETTER FROM THE CHAIR Dear Shareholders, It is always a pleasure to work with entrepreneurs who are passionate and focussed on commercialising their technology. When this is combined with exceptional teamwork, a great culture, and innovative technology, it is truly very exciting. When I reflect on the first four months of my time as Chair of Alexium, there has been hard work in spades by the very dedicated, passionate, and focussed staff. My focus is to ensure that we have the right culture and structure in place to enable these talented people to have the framework to enable success. Since stepping in as Chair, my focus has been in two key areas. • We addressed operating expenses and resource management to ensure the cornerstone initiatives are managed well and that we can reach profitability within our current cash resources; and • We are focussed on reliable revenue streams and sustainable margins. Of course, the outstanding strength of Alexium is their suite of innovative products for which there appears to be a strong market demand. • The Alexicool® technology has been performing extremely well with our customers launching a number of new products in CY 2019; • Progress with Alexiflam FR for the flame retardation of military uniforms is progressing well with key milestones achieved over the past few months; and • Alexiflam NF is an exciting proprietary product for which we see multiple opportunities. Less discussed is the number of talented and dedicated staff who I would like to acknowledge and thank for their contributions. Alexium has gained a strong reputation as having a responsive team with excellent technical expertise. Whilst I cannot make you promises. I am confident that the key indicators of future success, which include: • • the number of new bedding lines which are proposing to include Alexium’s pcm technology; and the interaction which we have with key clients in both fire retardant and bedding, mean that I strongly believe that 2H of FY 2019 will be very pleasing. Beyond 2019, Alexium has a well-defined growth strategy which includes 3 clear levels of priorities for the next 18 months. The near-term goal is to achieve profitability from the sales of phase change materials to the bedding industry. As we move forward, two key milestones are: • getting final agreement for the FR Nyco application to military uniforms; and • developing the Alexicool products for an expanded range of product types. I would like to thank my fellow board members for their contribution and support. I look forward to being able to report to you in future reports on how these strategies have been progressed and the achievements that we will be able to demonstrate. Ms Susan Thomas Chair 4 ALEXIUM INTERNATIONAL GROUP LIMITEDREVIEW OF OPERATIONS Dear Shareholders, When discussing Alexium, I always concentrate on the innovative and proprietary aspects of our technologies. This has been and continues to be central to the company’s business model. Our focus is addressing market gaps and opportunities that standard products cannot. That philosophy was first realised with Alexium’s flame-retardant treatment for military uniforms, and over the past few years it has expanded into phase-change materials. However, I continue to see that Alexium’s value is much more than that — an innovative product is just the beginning. Translating that expertise into product design, production-scale insights, and supply-chain knowledge is just as necessary. At this time, market know-how is as integral to Alexium’s business model as the groundbreaking products we create. Actualising this has been one of Alexium’s greatest challenges and greatest successes. The financials for the past year reflect this as well as the improvement in Alexium’s commercial strategies. As discussed in recent communications, we are seeing positive results, with our customers launching more than 15 new retail products in 2019 that are based on Alexicool technology. This outcome indicates that our refined commercial strategies are proving effective. With this growth, Alexium has a clear path to profitability simply based on the Alexicool product line. Coupling that with our other cornerstone initiatives, Alexiflam FR and Alexiflam NF, one can see that Alexium has a robust pipeline for significant growth. I am very excited about where we are, and the reporting will demonstrate our progress over the next year. Looking forward, I see two major factors that will drive Alexium’s growth through FY19. First, the recent technical and commercial successes will have a compounding effect where market expansion and further evolution of the Alexicool technology will grow the business more easily and quickly. Second, the work on our flame-retardant products (Alexiflam FR for military applications and Alexiflam NF) is progressing very well, and these products offer a much broader range of markets for Alexium. Both of these factors reflect Alexium’s status as a growth company. Dr. Bob Brookins Chief Executive Officer 5 ALEXIUM INTERNATIONAL GROUP LIMITED CORPORATE GOVERNANCE STATEMENT 2018 Alexium International Group Limited (Company or Alexium) is committed to best practice corporate governance and has reviewed all practices in line with ASX Corporate Governance Council’s principles of good corporate governance and best practice recommendations. Throughout the financial year ended 30 June 2018, and as at the date of this statement, the Board has considered the recommendations contained in the ASX corporate governance council’s Corporate Governance Principles and Recommendations (3rd edition) (Recommendations). The Board considers and applies the Recommendations taking into account the circumstances of the Company. Where the Company’s practice departs from a Recommendation, this corporate governance statement identifies the area of divergence and reasons for it, or the alternative practise adopted by the Company. The documents that govern the Company’s corporate governance framework, including its Constitution, charters and polices are available in the Corporate Governance section on the Company’s website - http://alexiuminternational.com/about/#corpGov Recommendation Current Practice 1.1 A listed entity should disclose: a. The respective roles and responsibilities of its board and management; and b. Those matters expressly reserved to the board and those delegated to management. The Company supports a clear segregation of duties between management and the Board. The Board is responsible for the strategic direction of the Company with oversight and review of the management and administration of the Company. The Board delegates responsibility for the day-to-day operations and administration of the Company to the Chief Executive Officer/Managing Director. The respective roles and responsibilities of the Board, its Committees and senior executives are set out in the board and committee charters. These charters are available on the Company’s website. Details on the number of meetings held throughout the year and attendance at those meetings can be found in the Company’s 2018 Annual Report. 6 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 Recommendation Current Practice 1.2 A listed entity should: a. Undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and b. Provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with proper functioning of the board. A listed entity should: a. Have a diversity policy; b. Disclose that policy or a summary of it; c. Disclose the measurable objectives for achieving gender diversity and the its progress towards achieving them; and d. The respective proportions of men and women. 1.3 1.4 1.5 The Board has established policies and procedures that apply to the appointment of new directors, which include checks as to the person’s character, experience, and appropriate background checks. At each annual general meeting, the Company provides shareholders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a Director. Non-Executive Directors are provided a formal letter of appointment which sets out their duties and responsibilities, rights and remuneration entitlements. Senior executives are employed under individual service contracts which set out their terms of employment including details of their duties, responsibilities, rights and remuneration entitlements. The Company Secretary is directly accountable to the Board, through the Chair, on all matters to do with proper functioning of the board. The Company Secretary is accessible to all Directors. The Board is responsible for the appointment and removal of the Company Secretary. The Board has adopted a Diversity Policy which aims to ensure that the Company’s workforce, including the Board, is made up of individuals with diverse skills, values, backgrounds and experience to the benefit of the Company. The Diversity Policy does not include a requirement for the Board to establish measurable objectives for achieving gender diversity. Given the small size of the Company workforce, the Board has determined that it is not currently practicable to establish measurable objectives in this area. The proportion of women employees in the whole organisation, women in senior executive positions and women on the Board as at 30 June 2018 are set out in the following table: 7 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 Recommendation Current Practice 1.6 1.7 2.1 A listed entity should: a. Have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and b. Disclose whether performance evaluations were undertaken. A listed entity should: a. Have and disclose a process for periodically evaluating the performance of senior management; and b. Disclose whether performance evaluations were undertaken. A listed entity should have a nomination committee which: - Consists of at least 3 members, a majority of whom are independent directors; - Is chaired by an independent director; And disclose: - The charter of the committee; - The members of the committee - The number of times the committee met and individual attendance at those meetings Whole Organisation Snr Executive Positions Non-Executive Directors Proportion of Women 12 out of 26 (46%) 1 out of 6 (17%) 4 out of 6 (67%) The Diversity Policy is available on the Company’s website. The assessment of the Board, each Board Committee and each individual Director was undertaken during the year ended 30 June 2018. An appropriate questionnaire was completed by all Directors. The results were collated and discussed by the Board. The Company conducts performance evaluations of all staff (including senior management), and these are completed by the 1st of April on an annual basis. Additionally, the Chair and CEO performed a performance review of senior management in June 2018. Details on management performance incentives and remuneration are contained in the Remuneration Report of the Director’s Report, in the Company’s 2018 Annual Report. Reflecting the current size and composition of the Board and Company, the Board has elected to carry out the functions of a nomination committee which includes Board renewal, succession planning, induction and evaluation. 8 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 Recommendation Current Practice 2.1 If it does not have a nomination committee disclose that fact and the process it follows to address that role. 2.2 A listed entity should have and disclose a board skills matrix. The Board has developed a Board skills matrix setting out the mix of skills and diversity that the Board currently has or is looking to achieve. During the year ended 30 June 2018, the Board reviewed whether the Directors as a group have the range of expertise, skills, knowledge and operational and technical expertise relevant to the operation of the Company required to address existing and emerging business and governance issues and fulfil their role on the Board and on the Board Committees. Strategy Executive Management Corporate Governance Commercial Framework Development Skills and Experience of Directors Strategic planning & execution experience in developing, implementing, measuring and reporting strategic objectives that succeed in delivering long term sustainable shareholder value. Experience at an executive level including the ability to: • appoint and evaluate the performance of the CEO and senior executive managers; • oversee strategic human resource management including workforce planning, and employee and industrial relations; and • oversee large scale organisational change. Previous experience as either an executive or non-executive director that demonstrates sound understanding of Corporate Governance Principles in an ASX listed Company. Ability to identify key issues and opportunities for the Company and develop appropriate policies to define the parameters within which the organisation should operate. 9 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 Financial Performance Risk and Compliance Oversight Marketing Innovation and Entrepreneurial Human Resources Legal Supply Chain Management Skills and Experience of Directors Qualifications and experience in accounting and/or finance and the ability to: • analyse key financial statements; • critically assess financial viability and performance; • contribute to strategic financial planning; • oversee budgets and the efficient use of resources; • oversee funding arrangements and accountability; • business unit and corporate finance reporting; and • capital markets experience in sourcing funding from either debt or capital markets. Ability to identify key risks to the organisation in a wide range of areas including legal and regulatory compliance, and monitor risk and compliance management frameworks and systems. • Marketing and distribution strategies for B2B. • Marketing experience in key business areas. • Proven success as an innovator. • The required entrepreneurial mindset to ensure success ina fast-moving market environment. • R & D experience in chemical formulations. Staff engagement & executive remuneration experience in staff engagement principles and executive remuneration packaging, KPI management and reporting. • Legal experience in, or awareness of, legal obligations under the Corporations Act 2001, tax, ASX Listing Rules and the equivalent US laws. • Application for and management of patents and other intellectual property. Logistics and operational experience in supply chain management. Further details regarding the skills and experience of each Director are included in the Director’s Report within the 2018 Annual Report. 10 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 Recommendation Current Practice 2.3 A listed entity should disclose: - The names of the directors considered by the board to be independent directors and length of service. - If a director has an interest / association / relationship that meets the factors of assessing independence. The independence of Directors was measured during the reporting period having regard to the defining characteristic set out in Box 2.3 of the Recommendations. The following table sets out the Directors of the Company during the reporting period, including their non-executive and independent status. Name Appointment date Resignation date Non – executive? Independent? Ms Susan Thomas 10 December 2017 N/A 15 April 2015 N/A Yes Yes Brigadier General Stephen Cheney Mr Craig Metz Ms Claire Poll 1 December 2014 14 November 2018 Yes 10 December 2017 N/A Yes Ms Karen Thurman 2 March 2017 14 November 2018 Yes Dr Robert Brookins 13 July 2018 N/A Ms Rosheen Garnon 19 September 2018 N/A Mr Gavin Rezos 29 January 2010 9 May 2018 Dr Dirk Van Hyning 13 November 2017 31 May 2018 No Yes Yes No Yes Yes Yes Yes Yes No Yes No No 2.4 2.5 2.6 A majority of the board should be independent directors. In accordance with the Board Charter, the majority of Directors are independent. Only the MD & CEO is not considered independent, by virtue of him being an Executive of the Company. The chair should be an independent director and should not be the same person as the CEO. Ms Susan Thomas is an independent non-executive Chair. The roles of the Chair and Chief Executive Officer/Managing Director are not exercised by the same individual. The Board Charter sets out distinct responsibilities of each role. A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for Directors. New Directors are provided with a formal letter of appointment and introductory materials. The Board Charter provides that the Company Secretary is responsible for arranging an induction program for any new director. 11 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 2.6 3.1 4.1 A listed entity should: - have a code of conduct; and - disclose the code or a summary of it. The board of a listed entity should have an audit committee which: - Has at least three members all of whom are non-executive directors and a majority of independent directors; and - Is chaired by an independent chair, who is not chair of the board. Disclose: - The charter of the committee; - The relevant member qualifications; The number of times the committee met and individual attendance at those meetings. Directors are encouraged and given the opportunity to broaden their knowledge of the Company by visiting Alexium’s operational office. During the reporting period, Directors made a number of visits to the Company’s operational site. Directors are encouraged to undertake professional development opportunities as and when required in order to further develop and maintain their skills and knowledge. The Company has established a Code of Conduct which applies to all Directors, senior executives and staff. The Code of Conduct is available on the Company’s website. The Audit & Risk Committee (ARC) comprises of the following members, all of whom are independent non- executive Directors: • Mr Chair Metz (Chair); • Ms Karen Thurman; • Ms Susan Thomas; and • Ms Rosheen Garnon. In addition to the ARC members, the MD & CEO, CFO, external auditor and Company Secretary regularly attend ARC meetings. Members’ qualifications and experience, together with the number of meetings held throughout the year and attendance at those meetings is set out in the Company’s 2018 Annual Report. The ARC Charter which sets out the Committee’s role and responsibilities, composition, structure and membership requirements is available on the Company’s website. 4.2 The board should receive declarations for CEO & CFO in accordance with S.295A of Corporations Act before approving financial statements. Prior to Board approval of the Company’s annual financial reports, the Chief Executive Officer and Chief Financial Officer provide the Board with declarations required under section 295A of the Corporations Act 2001 (Cth) and Recommendation 4.2. 12 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 4.3 5.1 6.1 6.2 6.3 A listed entity should ensure its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. The Company’s external audit function is performed by Grant Thornton. Representatives of Grant Thornton will attend the Company’s 2018 Annual General Meeting and will be available to answer shareholder questions regarding the conduct of the audit and preparation and conduct of the Independent Auditor’s Report. A listed entity should: - Have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and - disclosure that policy or a summary of it. A listed entity should provide information about itself and its governance to investors via its website. A listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. The Company has adopted a Price Sensitive Information Policy which sets out the processes and practices that ensure its compliance with the continuous disclosure requirements under the ASX Listing Rules and Corporations Act 2001 (Cth). The Price Sensitive Information Policy is available on the Company’s website. The Company’s website http://alexiuminternational.com/ provides detailed information about its business and operations. Shareholders can find information about the Company’s corporate governance practices on the website within the Corporate Governance section under About. This includes the Company’s Constitution, Board and Committee Charters and the Company’s other corporate governance and policies. The Company has adopted a Shareholder Communication and Participation Policy which outlines the range of media used to communicate with shareholders and the types of information provided. The Company encourages participation by shareholders at the Company’s general meetings, investor presentations and via the contact details provided on the Company’s website. The Shareholder Communication and Participation Policy is available on the Company’s website. The Company views general meetings as an important forum for reciprocal communication between itself and shareholders. The Company provides a direct voting facility to allow security holders to vote ahead of general meetings without having to attend or appoint a proxy. Shareholders are encouraged to participate in general meetings and are given the opportunity to ask questions of the Company and its auditors at the annual general meeting. 13 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 The Company provides shareholders with the option of receiving communications from, and sending communications to, the Company and Share Registry electronically. The Company provides a printed copy of the Annual Report only to those shareholders who have specifically elected to receive a printed copy. Other shareholders receive the Annual Report via email and are advised that it is available on the Company’s website. Shareholders are encouraged to register on the Company website to receive email alerts of ASX announcements and media releases. The Company’s share register is managed by Automic Pty Ltd. Shareholders can access their shareholding details or make enquiries about their shareholding electronically through the Automic Investor Centre. The Audit and Risk Committee (ARC) has the responsibility to establish policies on the system of internal control and identification and management of material risks in accordance with the Company’s Risk Management Policy. A copy of the Risk Management Policy is available on the Company’s website. Further details regarding the ARC and its membership are set out in response to Recommendation 4.1. 6.4 A listed entity should give security holders the option to receive communications from, and send communication to, the entity and its security registry electronically. 7.1 The board of a listed entity should have a committee to oversee risk, which: - Has at least three members all of whom are non-executive directors and a majority of independent directors; and - Is chaired by an independent chair, who is not chair of the board. Disclose: - The charter of the committee; - The members of the committee; and - The number of times the committee met and individual attendance at those meetings - If it does not have a risk committee disclose that fact and the process it follows to address that role. 14 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 7.2 The board or a committee of the board should: - Review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and - Disclose whether such a review has taken place. 7.3 A listed entity should disclose: If it has an internal audit • function, how the function is structured and what role it performs; If it does not have an internal audit function, disclose that fact and the process it follows to address that function. • The Audit and Risk Committee (ARC) is responsible for reviewing the Company’s risk management framework to ensure the Company’s governance processes and practices continue to be sound and that Alexium manages risk within the Board approved risk appetite. The ARC conducted its review during the reporting period and concluded that controls over risk management processes were considered adequate and effective. In addition to meetings of the ARC, the Board is updated on material business and financial risks on an on-going basis. The Company currently does not retain a dedicated internal audit position. Management and the Board consider this is appropriate, taking into consideration the stage of the Company’s life cycle, the scale and relative simplicity of its current operations, and size of its finance function. The internal audit function is performed by senior management and reviewed by the board. Currently this function comprises: • regular review and testing of the adequacy of controls for risks identified as presenting the highest overall exposure; • management’s periodic confirmation that the assessment • • of these identified risks and their controls remain appropriate; identification and review of any newly identified risks that may develop resulting from changes to the business; and regular and recurring review of any deficiencies identified as part of an external audit and the subsequent actions taken to mitigate these risks. Where considered appropriate, external guidance may be sought on specific risks or controls. The Audit and Risk Committee regularly discusses the appropriateness of controls with the external auditor and if considered necessary would initiate an audit of a particular function. 15 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 7.4 The entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks, and if it does, how it manages those risks. Economic Sustainability Managing economic sustainability is central to the Company’s operation and ongoing viability. The most significant risk currently being managed is cash resources, and the Company’s ability to secure additional revenue streams. The Company ensures its organisational structure includes appropriate resources to manage these risks. A key focus of senior executives is on securing sustaining financial resources and optimising existing cash resources and, where required, external advisors will be engaged to assist senior executives. Environmental Sustainability A key focus of Alexium’s product portfolio is the environmentally friendly nature of these. With this, Alexium can ensure that the environmental impact by its customers products are minimal and acceptable. Additionally, Alexium’s manufacturing partners are selected in part based on their adherence to established environmental standards as well as compliance with manufacturing standards such as ISO 9001. Social Sustainability Social sustainability is an important aspect of Alexium’s culture. Alexium values diversity in the workplace and has worked to have a diverse staff based on social, economic, and ethnic backgrounds. The staff’s compensation and promotion structure is designed to encourage long-term careers. Alexium also strives to work with suppliers and consultants in our local community. For our markets as a whole, Alexium is actively engaged in key organisations for our suppliers and customers. 8.1 The board of a listed entity should: - have a remuneration committee which has at least three members all of whom are non-executive directors and a majority of independent directors; and - Is chaired by an independent director; and The Remuneration Committee comprises of the following members, all of whom are independent non-executive Directors: • Brigadier General Stephen Cheney (Chair); • Ms Claire Poll; and • Ms Susan Thomas. In addition to the Remuneration Committee members, the MD & CEO and Company Secretary regularly attend Remuneration Committee meetings. Members’ qualifications and experience, together with the number of meetings held throughout the year and attendance at those meetings is set out in the Company’s 2018 Annual Report. 16 ALEXIUM INTERNATIONAL GROUP LIMITEDCORPORATE GOVERNANCE STATEMENT 2018 8.1 8.2 8.3 Disclose: - The charter of the committee; - The members of the committee; and - The number of times the committee met and individual attendance at those meetings If it does not have a remuneration committee disclose that fact and the process it follows to address that role. A listed entity should separately disclose its policies and practices regarding the remuneration of non- executive directors and the remuneration of executive directors and other senior executives. The Remuneration Committee Charter which sets out the Committee’s role and responsibilities, composition, structure and membership requirements is available on the Company’s website. Non-executive Directors are paid fees from an aggregate sum approved by shareholders of the Company. Non- executive Directors are remunerated at a fixed fee for their time and responsibilities and their remuneration is not linked to the operating performance of the Company. There are no termination or retirement benefits for non-executive Directors other than superannuation. Remuneration of the Chief Executive Officer/Managing Director and senior executives consist of a base salary, fringe benefits (including medical insurance) and performance incentives. Details of remuneration are contained in the Remuneration Report, which forms part of the Directors’ Report in the Company’s 2018 Annual Report. A listed entity which has an equity-based remuneration scheme should: - Have a policy on whether participants are permitted to enter into transactions which limit the economic risk of participating in the scheme; - Disclose that policy or a summary of it. The Company’s Securities Dealing Policy prohibits Directors and key management personnel from entering into transactions in associated products which operate to limit the economic risk of holding securities in the Company. Further, any Director or key management personnel of the Company who enters into margin lending arrangements or otherwise encumbers their securities of the Company is required to provide details of those security arrangements which may be subject to prohibitions on dealing as contained in the Securities Dealing Policy. 17 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT Your Directors present their report on Alexium International Group Limited (“the Company” or “Alexium”) and the consolidated entity (referred to hereafter as “the Group”) for the period ended 30 June 2018. The Company recently announced a change to Alexium’s presentation currency from the Australian Dollar to the US Dollar. With the Company’s operations, employees, suppliers and customers being almost entirely in the United States, this change helps provide a clearer picture of financial results and reduces almost all volatility related to foreign exchange. This financial report, the comparative period within, and all future financial reports, will therefore be presented in US Dollars. DIRECTORS The Directors of the Company in office during the period ended 30 June 2018 and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. • Ms Susan Thomas (Appointed 11 December 2017) • General Stephen Cheney • Mr Craig Metz • Ms Claire Poll (Appointed 11 December 2017) • Ms Karen Thurman • Dr Robert Brookins (Appointed 13 July 2018) • Mr Gavin Rezos (Resigned 9 May 2018) • Dr Dirk Van Hyning (Appointed 13 November 2017; Resigned 31 May 2018) • Mr Nicholas Clark (Resigned 1 August 2017) PRINCIPAL ACTIVITIES The development of specialty chemicals where there is a market opportunity for commercialisation. During the period activities included: • Research and development in consultation with end clients; • Obtaining patents in relation to new products developed; and • Commercialisation and sales of the products. DIVIDENDS No dividend was paid during the period and the Board has not recommended the payment of a dividend. SHARE CAPITAL 345,443,598 ordinary shares and 2,400,000 unlisted options were on issue as at 30 June 2018. 18 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT OPERATING AND FINANCIAL REVIEW Operations and Technology Review The Group maintains its operating headquarters in Greer, South Carolina, USA. The research, development, sales, and administration are all conducted out of a new custom-designed facility completed during 2017. With this facility, the Group is positioned to focus its resources on technology development and commercialisation and to continue to leverage a non-capital-intensive manufacturing model for the production of its products. As outlined in the Appendix 4C for the period ended 30 June 2018, the Group’s strategy and efforts to date have focused on the development and commercialisation of high-performance products for phase change materials (PCMs) and flame retardants applications. The Group’s current focus revolves around three cornerstone initiatives: 1. Expansion of Alexicool® products in Phase Change Material (PCM) markets; 2. Application of flame retardant nylon cotton blends (FR NyCo) for military uniforms; and 3. Commercialisation of Alexiflam®NF. Over this past year, Alexium has significantly progressed these initiatives. Some of the key achievements for FY 2018 are as follows: Expansion of Alexicool products into new market segments: Building on the successful launch of Alexicool into the bedding market, the Group has introduced this cost-effective and durable phase change material (PCM) finish into broader segments of the bedding market. Additionally, advances in the Alexicool product line have enabled the Group to expand its offerings to more components in the mattress. Introduction of an analytical method for PCM-treated textiles: Due to a lack of established analytical methods for assessing the performance of PCM-treated textiles, the Group developed an analytical method for this purpose. This technique has been well received within the bedding market and has helped the Group establish a reputation as a supplier of quality PCM products. Development of novel FR NyCo technology: In response to new market opportunities, the Group has developed a novel FR NyCo technology to provide a measure of flame retardant protection for a broader segment of military uniforms. This effort represents a significant increase in the value of the FR NyCo technology to the Company. Commercialisation of Alexiflam NF: Over the past few years, the Group has developed a proprietary flame-retardant treatment for cotton rich fabrics. Completion of key milestones has advanced this product’s commercial efforts across diverse market opportunities. The advances in the three cornerstone initiatives have positioned the Group for a broader range of revenue streams, a more diverse customer base, and improved gross margins. During the reporting period the Group has taken significant measures to reduce operating expenses, review pricing, and better position Alexium to achieve profitability. 19 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT Financial Result Overview The Group’s net loss attributable to members of the Group for the financial year ended 30 June 2018 was $3,961,119 (2017: 9,136,923). This represents a 57% decrease in net loss over the prior period. The primary drivers behind this improvement in net loss are described below. Revenues from ordinary operating activities were $11,911,816 (2017: $17,929,361). This decrease in revenue was offset by an increase in gross profit of $2,114,067 during the period. Gross profit for the period was $2,354,942 (2017: $240,875) representing an average gross margin percentage across all lines of business of 20% (2017: 1%). This is a result of the Group’s shift to an improved business model. Operating costs decreased to $6,584,616 from $8,286,959 in the prior period primarily due to decreases in administrative and employee benefits expense and the capitalisation of $662,717 of R&D activities into intangible assets in the PCM, FR cotton, and military markets. In December 2017, the Company raised $10.1m through the issuance of securities. This included a placement of 34.3m new shares issued at AU $0.35 to provide US $8.9m in capital and a share purchase plan offering which raised an additional US $1.2m. These funds are being used for fundamental balance sheet strength ahead of anticipated customer production ramp-up, expansion in additional analytical equipment, product testing, and IP protection. In September 2017, the Company entered into a secured debt facility with US based GPB Debt Holdings II LLC (the Note). The Note provided $10m to fund key operational and strategic projects focused on profitability and growth. As part of the Note, Alexium agreed to issue GPB warrants for the issue of 4,255,319 ordinary shares with a five-year term at an exercise price of AU $0.47 per share. The exercise price of the warrants was adjusted to AU $0.35c (the price of the December 2017 placement). As at 30 June 2018 the cash position was $10,641,763 (2017: $2,620,759) and the Group had 345,443,598 ordinary shares on issue (2017: 303,827,998). During the reporting period, the composition of the board changed with the retirement of former Executive Director Nick Clark on 19 July 2017, retirement of former Chairperson Gavin Rezos on 9 May 2018, and retirement of Dirk Van Hyning as CEO and MD on 31 May 2018. Additionally, the Group welcomed new Board appointments with the addition of Claire Poll and Susan Thomas on 11 December 2017; this was followed by the appointment of Ms. Thomas as Chairperson on 9 May 2018. 20 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT Material Business Risks The Group has identified the below specific risks which could impact upon its prospects: Competition in key markets: The Group has worked diligently on its PCM-based products to ensure that market competition is well understood and that the Group’s product portfolio adequately responds to these competitors. This response includes: • Effective pricing strategies and product innovation; • Analytical tools that provide an objective means of demonstrating the value of the Group’s products over competitive products; Identification of market gaps where current commercial technologies are not effective; and • • Protection of Alexium’s position in the market place by protecting intellectual property. Sufficient capital for achieving profitability: The Group monitors and manages its resources to ensure there is sufficient capital for achieving profitability. Based on the Group’s revenue forecasts and budget, the Board is confident that the Company is sufficiently capitalised. Periodic reviews are conducted to evaluate this on an ongoing basis. Commercial risks due to market dynamics: Beyond threats from competitors, the Group identifies changes in the markets themselves as potential risks, and they are working to mitigate these risks through diversification of its product portfolio, customer driven product innovation, and building a broader customer base. Maintaining strong intellectual property position: Product innovation is key to the Group’s business model, thus maintaining a strong intellectual property position is critical. To ensure this, the Group is attentive to developing next-generation products that are not only well-differentiated in the market but are also inventive and meet market needs. Maintaining a well-educated and highly experienced technical staff will continue to be a focus for the Group. Critical roles of key staff members: Due to the Group’s staff count, an inevitable position is to have key staff members who play critical roles for the Group. To mitigate this risk, these key staff members are competitively incentivised. The Company has a development program to ensure succession. Likely Developments During the reporting period, the Group continued to capitalise on the work and developments over the past several years which have positioned Alexium well in terms of its three cornerstone initiatives. 21 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT In FY2019, Alexium is committed to: • Expansion of Alexicool products in PCM markets for bedding; • Application of flame retardant nylon cotton blends for military uniforms; • Commercialisation of Alexiflam NF; • Further growth of Alexium’s technology; • Ensuring a financially strong and stable business through detailed planning, responsible management and transparency of strategy and outcomes; and • Significant growth of the group’s revenue with reinvigorated sales teams. The Group’s business strategies to achieve the above goals include: • Strengthening and maintaining key relationships supporting the group’s cornerstone initiatives; • Applying a disciplined and conservative approach to expenditure relative to sales growth; • Focusing on three cornerstone initiatives to produce near term revenue and contribute to growth; and • Leveraging the success of Alexicool products with sophisticated marketing strategies for increased market adoption. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Contributed equity increased by $8,534,382 (from $45,833,450 to $54,367,832) as a result of a share capital issued totalling $10,106,575 less $468,358 in issuance costs, options converted to shares of $338,244, shares issued in lieu of salary and services of $52,728 and negative foreign currency translation impact of $1,494,807. Further details can be found in the Consolidated Statement of Changes in Equity and Note 16 provided in the financial report below. The Group refinanced it’s $5m credit facility with a $10m convertible note, extending the maturity to three years and securing additional funds to support working capital. The group also raised $10.1m to provide sufficient capital to fund growth efforts in the military and bedding markets through the issuance of 34.3m shares via institutional placement and 4.7m shares via share purchase plan. Dr Robert Brookins was appointed as interim CEO during the period (see “Events Since the End of the Financial Period” for further details related to Dr Brookins’ appointment) and Susan Thomas was appointed as Non-Executive Chair. The Company recently announced a change to Alexium’s presentation currency from the Australian Dollar to the US Dollar. This financial report, the comparative period within, and future financial reports, will be presented in US Dollars. EVENTS SINCE THE END OF THE FINANCIAL PERIOD Other than the items listed below, there has not arisen any item, transaction or event of a material and unusual nature ; which in the opinion of the Directors of the Company, is likely to significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. • Dr Brookins was appointed as CEO and Managing Director as of 17 July 2018. 22 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT ENVIRONMENTAL REGULATIONS The Group’s operations are currently located solely in the United States, and as such are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory in Australia. The Directors have considered compliance with the National Greenhouse and Energy Reporting Act 2007 which requires entities to report annual greenhouse gas emissions and energy use. US Laws concerning the environment that affect or could affect our operations include, among others, the Clean Water Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, regulations promogulated under these Acts, and any other federal, state or local laws or regulations governing environmental matters. We believe that we are in compliance with these laws and that future compliance will not materially affect our earnings or competitive position. A key focus of the Group’s product portfolio is the environmentally friendly nature of its products. With this, the Group can ensure that the environmental impact by its customers products are minimal and acceptable. Additionally, the Group’s manufacturing partners are selected in part based on their adherence to established environmental standards as well as compliance with manufacturing standards such as ISO 9001. For the period ended 30 June 2018, the Board is not aware of any breach of applicable environmental regulations by the Company. INFORMATION ON DIRECTORS The names of the Directors holding office during the period ended 30 June 2018 are set out below, together with details of Directors’ experience, qualifications, special responsibilities and other listed company directorships during the past three financial years. Ms Susan Thomas Ms Thomas has been an independent Non-Executive Director of the Company since 11 December 2017. She was appointed Chair of the Board of Directors on 9 May 2018. Ms Thomas is a member of the Remuneration Committee and the Audit and Risk Committee. Experience Ms Susan Thomas has had a distinguished career in law, corporate finance and IT.  Ms Thomas began her career as a corporate lawyer with Freehill, Hollingdale & Page in Sydney. During the 1990s, Ms Thomas established and grew FlexiPlan Australia, a successful investment administration platform sold later to MLC. Sourcing strategic partners, growing administered funds to $1.7billion, as well as overseeing over 140 staff, Ms Thomas’ achievements saw her acknowledged as an industry leader by the financial planning community. Ms Thomas is also a Senior Executive Coach at Foresight Global Coaching, working with c-suite executives. 23 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT Qualifications: LLB B.Com. Other listed directorships during the past 3 financial years: Company Temple and Webster Limited Commenced February 2016 Fitzroy River Holdings Limited November 2012 Royalco Resources Limited March 2017 Ceased Current Current Current Residence: Ms Thomas is an Australian resident and resides in Perth, Western Australia Brigadier General Stephen Cheney General Cheney has been an independent Non-Executive Director of the Company since 15 April 2015. He was appointed Deputy Chair of the Board of Directors on 11 April 2018. General Cheney is the Chair of the Remuneration Committee. Experience: General Cheney is the former Inspector General of the Marine Corps and Commanding General of Parris Island Marine Base. He is also the former Deputy Executive Secretary to US Defense Secretary Dick Cheney under President George H.W. Bush. General Cheney sat on Secretary of State John Kerry’s Foreign Affairs Policy Board and is CEO of the Washington D.C. based policy group, American Security Project. Qualifications: USMC (ret) Other listed directorships during the past 3 financial years: N/A Residence: Washington DC, USA Mr Craig Metz Mr Metz has been an independent Non-Executive Director of the Company since 1 December 2014. Mr Metz is the Chair of the Audit and Risk Committee. Experience: Mr. Metz is a Partner in the Washington, DC Office of Nelson Mullins Riley and Scarborough LLP, an AM LAW 100 Firm.  He has more than 30 years of experience in Federal Legislative and Regulatory Affairs, with a background in Defense and Information Technology, as well as in the representation of a variety of corporate clients.  Mr. Metz served as the Chief of Staff to the Late Congressman Floyd Spence during his six-year Chairmanship of the United States House of Representatives Armed Services Committee and he was a Counsel to the United States Senate Labor and Human Resources Committee.  He has also been appointed to positions in the Executive Branch of the Federal Government, including, serving in the Senior Executive Service.  24 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT Prior to entering private practice, Mr. Metz represented the Federal Government Relations interests of the EMC Corporation, which was acquired by Dell in 2016, and is now Dell EMC. A native of South Carolina, Mr. Metz is a member of the Bars of South Carolina and the District of Columbia. He is the recipient of the Order of the Palmetto, the highest civilian honor of the State of South Carolina, as well as a number of other recognitions from the South Carolina Military Department.  Mr. Metz is a member of the Board of Directors of the South Carolina Business Council, as well as a member of the National Defense Industrial Association, the Washington International Trade Association, and the National Association of Corporate Directors.  Qualifications: J.D. (Juris Doctor) Other listed directorships during the past 3 financial years: N/A Residence: Washington DC, USA Ms Claire Poll Ms Poll has been an independent Non-Executive Director of the Company since 11 December 2017. Ms Poll is a member of the Remuneration Committee. Experience: Ms Claire Poll is an experienced corporate director having led, over the past 20 years, strategy and corporate development for start-up technology companies through to large multi-billion dollar companies in Australia, the United Kingdom (UK) and more recently the United States (US). Ms Poll, who originally qualified as a solicitor in Western Australia, has worked as a non-executive director, corporate executive and general counsel in private and public listed companies in the US, UK and Australia in the areas of venture capital, mobile satellite communications, information technology and biopharmaceuticals. Ms Poll started her corporate career with Burns Philp & Company Limited, the diversified global company involved in food manufacturing, shipping and general trading. Ms Poll is a founding executive of Nasdaq and AIM listed Verona Pharma plc (AIM: VRP; Nasdaq: VRNA) and a non-executive director of Landgate. Qualifications: BA B.JURIS. LLB ASIA Ms Poll received a Bachelor of Law from the University of Western Australia and holds a post graduate diploma in Applied Corporate Finance, M&A and Advanced Industrial Equity Analysis. Other listed directorships in the past 3 financial years: Company Verona Pharma plc Commenced September 2006 Ceased September 2016 Residence: Ms Poll is an Australian resident and resides in Perth, Western Australia. 25 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT Fmr Congresswoman Karen Thurman Fmr Congresswoman Karen Thurman has been an independent Non-Executive Director of the Company since 2 March 2017. Ms Thurman is a member of the Audit and Risk Committee. Experience: Ms Thurman was elected to the US House of Representatives in 1992 and consecutively re-elected four additional terms. Ms Thurman is an expert on healthcare, veteran’s affairs, and tax reform. Ms Thurman served on the House Ways and Means Committee, where she fought for affordable prescription drugs, increased access to health insurance, and tax relief. Congresswoman Thurman has also served on both the House Agriculture Committee and the Committee on Government Reform & Oversight. Ms Thurman continues to advocate on issues in D.C. and is well regarded on both sides of the House. Qualifications: BA, Post Baccalaureate Other listed directorships in the past 3 financial years: N/A Residence: Washington DC, USA Dr Robert Brookins Dr Brookins was appointed as the Company’s Interim Chief Executive Officer on 31 May 2018 and was later appointed as the Chief Executive Officer and Managing Director on July 13, 2018. Experience: Dr Brookins has more than 15 years of experience in organic synthesis and materials chemistry. He received his Ph.D. from the University of Florida in the areas of synthesis and characterisation of conjugated poly- electrolytes and polymers with an emphasis on developing new polymerisation methods. Upon completion of his Ph.D., he worked at the US Air Force Research Laboratory at Tyndall AFB, FL where he developed decontamination methods for chemical and biological threats and developed novel synthetic routes for reactive and functional surfaces. In 2010, Dr Brookins joined Alexium where he and his team pioneered new classes of flame retardants for key textile markets. Additionally, his research focuses on phase change materials, particularly novel application methods and analytical tools. Dr Brookins has been instrumental in the research and development of the Company’s innovative technologies. Dr Brookins led the development and commercialisation of Alexium’s phase change material (PCM) platform technologies and the Alexicool® product line, which is the foundation of the Company’s recent success in sales to the bedding and top-of-bed markets. Dr Brookins has, during his 8 years with the Company, been involved in multiple facets of the business, including working with customers on product design and marketing, analysing markets to assess opportunities, and planning for logistics and supply-chain management. In addition, Dr Brookins co- invented Alexium’s flame retardant (FR) technologies for military uniforms and formaldehyde-free, flame retardant products for cotton-based materials. Dr Brookins has been immersed in the operations and strategy of the business and has gained significant experience working within the senior leadership team of the Company. 26 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT Qualifications: Ph.D., M.A.E. B.A. B.Sc Other listed directorships in the past 3 financial years: N/A Residence: Greer, South Carolina, USA Other Directors in office during the reporting period Director Office Held Commenced Ceased Mr Gavin Rezos Non-Executive Chair 2010 Dr Dirk Van Hyning Mr Nicholas Clark CEO & MD CEO & MD 13 November 2017 18 March 2013 1 August 2017 9 May 2018 31 May 2018 Mr Gavin Rezos Mr Rezos has extensive Australian and international investment banking experience and is a former Investment Banking Director of HSBC Group with regional roles during his HSBC career based in London, Sydney and Dubai. Mr Rezos has held Chief Executive Officer positions and executive directorships of companies in the technology sector in Australia, the United Kingdom, the US and Singapore and was formerly a Non-Executive Director of Iluka Resources Limited, a then ASX top 50 company, and of Rowing Australia, the peak Olympic sports body for rowing in Australia from 2009 until 2014. Dr Dirk Van Hyning Before joining Alexium, Dr Van Hyning was with Milliken Research Corporation, a global innovation company, where he began as a Research Engineer in 1999 and earned subsequent promotions to Project Management Leader and Senior Development Engineer-Military and Protective Businesses. Dr Van Hyning received his Ph.D. and M.S. in Chemical Engineering from the University of Illinois at Urbana- Champagne and his B.S. in Chemical Engineering from North Carolina State University. Dr Van Hyning has received several honours and awards, including the Hans Kuhn Award for Outstanding Technology Commercialisation and holds four patents. Mr Nicholas Clark Mr Clark was appointed to the board on 18 March 2013. Mr Clark originally commenced with Alexium International as the Group’s CFO and Company Secretary until March 2013. Mr Clark has extensive experience in executive management, mergers and acquisitions globally. He has held roles such as Deputy Head, Mergers and Acquisitions, Head of Foreign Investments, and Head of Commercial and Contract Services, in particular with CITIC, one of China’s largest resource groups. COMPANY SECRETARY Ms Maja McGuire was appointed Company Secretary on 27 February 2018, replacing Mr Kevin Kye. Mrs McGuire combines her company secretarial duties with her role as General Counsel and brings to the role 10 years’ experience in the provision of corporate and compliance advice, including working with listed companies as general counsel, company secretary and in top tier private practice. She holds a BComm and LLB from the University of Western Australia. 27 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors and of each Board committee held during the reporting period ended 30 June 2018, and the number of meetings attended and number of meetings applicable based on appointment date for each Director were: Directors Board of Directors Audit & Risk Committee Remuneration Committee Ms Susan Thomas Brigadier General Stephen Cheney Ms Claire Poll Mr Craig Metz Ms Karen Thurman Mr Gavin Rezos Dr Dirk Van Hyning Mr Nicholas Clark 7/7 10/10 7/7 10/10 10/10 7/7 4/5 1/1 3/3 4/4 2/2 5/5 5/5 n/a n/a n/a 0/0 2/2 0/0 2/2 2/2 n/a n/a n/a The Board and committees meet regularly on an informal basis in addition to the above meetings. 28 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT REMUNERATION REPORT - AUDITED The remuneration report is set out under the following main headings: A. Key Management Personnel B. Remuneration Policy C. Remuneration Governance D. Details of Remuneration E. Service Agreements F. Share-based Compensation G. Additional Disclosures Relating to Key Management Personnel H. Loans to Key Management Personnel The information provided in this Remuneration Report has been audited as required under section 308(3C) of the Corporations Act (Cth). A. Key Management Personnel For the purposes of this report personnel deemed Key Management Personnel (“KMP”) at any time during the reporting period ended 30 June 2018 are: Name Position Ms Susan Thomas Non-Executive Chair – appointed 9 May 2018 Non-Executive Director – appointed 11 December 2017 Brigadier General Stephen Cheney Non-Executive Director Mr Craig Metz Non-Executive Director Ms Karen Thurman Non-Executive Director Ms Claire Poll Non-Executive Director – appointed 11 December 2017 Dr Robert Brookins Interim Chief Executive Officer – appointed Chief Executive Officer and Mr Aaron Krech Chief Financial Officer Managing Director on 13 July 2018 Dr Dirk Van Hyning Former Chief Executive Officer and Managing Director – resigned 31 May 2018 Mr Gavin Rezos Former Non-Executive Chairman – resigned 9 May 2018 Mr Nicholas Clark Former Executive Director – resigned 1 August 2017 29 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT B. Remuneration Policy The objective of the Company’s remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered and set to attract and retain suitably qualified and experienced candidates. The Company is in the process of conducting a review of the remuneration framework with a goal of ensuring that remuneration is aligned with performance and the creation of value for shareholders. The Group’s remuneration framework aims to ensure that: • Rewards reflect the competitive global market in which the group operates; • Incentive remuneration is linked to KPI’s, which are designed to encourage behaviours that will lead to short, medium, and long-term success. • Rewards to executives are linked to the creation of value to shareholders; • Executives are rewarded for both financial and non-financial performance; and • Remuneration arrangements ensure equity between executives and facilitate the deployment of human resources. The Board seeks independent advice on remuneration policies and practices. In accordance with best practice corporate governance, the structure of Non-Executive and Executive remuneration is separate and distinct. Remuneration Committee responsibilities are carried out by General Stephen Cheney, Ms Claire Poll and Ms Susan Thomas. Non-Executive Director Remuneration Policy Fees and payments to the Non-Executive Directors reflect the demands which are made on and the responsibilities of the Directors. The Non-Executive Director’s fees and payments are reviewed by the remuneration committee to ensure they are appropriate and in line with the market. Non-Executive Directors receive a fixed fee for service. The Non-Executive Directors’ fees are determined within an aggregate director’s’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at USD375,000 per annum and was approved by shareholders at the 2016 Annual General Meeting. No retirement benefits are provided other than compulsory superannuation. Executive Remuneration Policy The Company’s Executive Director and other Executives remuneration packages contain the following key elements: • Primary benefits – base salary, short-term incentives, superannuation or pension contributions and in the case of US based executives a health benefit plan. • Equity – performance rights and shares under the Company’s Performance Rights Plan and Incentive Share Plan (as approved by shareholders at the 2016 Annual General Meeting). The combination of these components comprises the Executive Directors’ and Executive’s total remuneration. External remuneration information provides benchmark information to ensure remuneration is set to reflect the market for a comparable role. Base fees are reviewed annually to ensure the level is competitive with the market. There is no guaranteed salary increase included. 30 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT C. Remuneration Governance The Remuneration Committee is a committee of the Board. It is primarily responsible for: • Reviewing and approving the executive remuneration policy to enable the Company to attract and retain Executives and Directors who will create value for shareholders; • Ensuring that the executive remuneration policy demonstrates a clear relationship between key executive performance and remuneration; • Recommending to the Board the remuneration of Executive and Non-Executive Directors; • Fairly and responsibly rewarding Executives having regard to the performance of the group, the performance of the Executive and the prevailing remuneration expectations in the market; • Reviewing the Company’s recruitment, retention and termination policies and procedures for senior management; • Reviewing and approving the remuneration of direct reports to the Chief Executive Officer/Managing Director, and as appropriate other senior executives; and • Reviewing and approving any equity-based plans and other incentive schemes. The Corporate Governance Statement provides further information on this Committee. 31 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT D. Details of Remuneration Details of the remuneration of the KMP of the Group is set out below: Short-term Benefits Other Benefits 2018 Non-Executive Directors Salary and Fees Medical benefits Other Post employment super- annuation Share-based Payments Performance Rights Short Term Incentive Plan Long Term Incentive Plan Total Ms Susan Thomas 33,599 - 60,301 (5) Mr C Metz Brig. Gen. S Cheney Ms K Thurman Ms Claire Poll Mr G Rezos (1) Total Non-Executive Directors Executive Directors 57,259 53,718 54,228 27,542 - - - - 135,726 11,436 - - - - - 362,072 11,436 60,301 Mr N Clark(2) 15,000 2,403 - - 15,000 2,403 377,072 13,839 60,301 Total Executive Directors Total Directors Executives Dr R Brookins 186,672 9,064 12,388 (4) Mr A Krech 184,167 4,630 1,676 (4) Dr D Van Hyning (3) 278,771 14,918 23,333 (3) Total Executives 649,610 28,612 37,397 Total Directors and Executives 1,026,682 42,451 97,698 - - - - - - - - - - - - - - - - - - - - - - - - - 12,799 7,813 - 20,612 20,612 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 93,900 57,259 53,718 54,228 27,542 147,162 433,809 17,403 17,403 451,212 220,923 198,286 317,022 736,231 1,187,443 (1) Mr Rezos served as Executive Chair in the period ended 30 June 2017 and transitioned to Non-Executive Chair on 1 July 2017. (2) Resigned 1 August 2017. (3) During the year Dr Van Hyning was a director from 13 November 2017 until resignation on 31 May 2018. He is to be paid seven months’ severance which will cease on 31 December 2018. (4) Paid leave benefit earned in the period ended 30 June 2018. (5) Executive remuneration as permitted under section 13.9 of the Constitution was payable to Susan Thomas for services performed in addition to her role as Non-Executive Chair on behalf of the Company. This work was required during this transition of the Company in relation to business plans, review of the Company’s skills matrix, and development of new financial models. These fees are in line with market comparable rates and due to the short-term nature of this work, the Board were of the view that it was more appropriate to manage through additional fees rather than create an Executive Chair position. 32 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT DIRECTOR’S REPORT Short-term benefits Other Benefits 2017 Non-Executive Directors Salary and fees Medical benefits Other Post employment super- annuation Share-based payments Performance rights Short Term Incentive Plan Long Term Incentive Plan Total Mr G Rezos(1) 300,000 10,757 Mr C Metz 61,000 Brig. Gen. S Cheney 56,000 Ms K Thurman 20,333 Mr C Smith Gander(3) 37,907(3) - - - - - - - - 3,588(3) - - - - - - 131,167(4) Waived Nil 441,924 - - - - - - - - - 61,000 56,000 20,333 41,495 - - - - - 475,240 10,757 3,588 131,167 620,752 Mr N Clark (2) 447,917 14,658 144,100(6) 197,987(5) Waived Nil 804,662 447,917 14,658 144,100 197,987 923,157 25,415 144,100 3,588 329,154 - - Total Non-Executive Directors Executive Directors Total Executive Directors Total Directors Executives Dr D V Hyning 207,500 13,968 7,843(9) Mr R Brookins 153,733 8,412 5,512(9) Mr A Krech 150,000 4,674 8,402(9) Total Executives 511,233 27,054 21,757 - - - - - - - - Total Directors and Executives 1,434,390 52,469 165,857 3,588 329,154 - - - - - - - - - - - - - - 804,662 1,425,414 229,311 167,657 163,076 560,044 1,985,458 (1) Mr Rezos served as Executive Chair in the 2017 financial year and transitioned to Non-Executive Chair on 1 July 2017. (2) Resigned 1 August 2017. (3) Resigned 13 February 2017; all benefits paid are through the date of resignation. (4) On 21 November 2016, shareholders approved the issue of 285,713 shares to Mr Gavin Rezos in lieu of salary. (5) On 21 November 2016, shareholders approved the issue of 431,264 shares to Mr Nicholas Clark in lieu of salary; At 30 June 2017, these shares have not yet been issued and were subsequently forfeited. (6) Includes legal, motor vehicle allowance and relocation expenses reimbursement in accordance with the executive services contract executed in 2014. (7) Board agreed to waive any STI award in full, given the negative TSR for the year. (8) Minimum starting 50% threshold was not achieved, and no award was made. (9) Paid leave benefit earned in the current period. 33 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT E. Service Agreements On appointment, the Non-Executive Directors enter into an agreement with the Company in the form of a letter of appointment. The letter outlines the Board’s policies and terms, including remuneration relevant to the office of director. The Company has also entered into service agreements with other executives as noted below, which contain standard terms and conditions for agreements of this nature, including confidentiality restraint on competition and intellectual property provisions. These agreements may be terminated by notice by either party, or earlier in the event of certain breaches of the terms and conditions. Specific terms and conditions of the service agreements of the Key Management Personnel at the end of the financial period are summarised below: Dr Robert Brookins, Interim Chief Executive Office – Term: the initial term of the Service Agreement is 12 months commencing on 1 August 2011 and thereafter on 6 months’ notice from either party. – Place of Work: South Carolina, United States of America for the term of employment. – Salary: A base salary of US$286,000 year, to be reviewed annually. – Incentive: Potential short-term and long-term incentive opportunities as determined by the Board of Directors. – Termination: Mr Brookins may terminate the Service Agreement without cause upon giving 6 months written notice to the Company. The Company may at its sole discretion terminate the employment without cause by giving 6 months written notice to Mr Brookins or make a payment of 6 months’ salary in lieu of notice. Aaron Krech, Chief Financial Officer – Term: Mr Krech’s service commenced on 8 December 2014. – Place of Work: South Carolina, United States of America for the term of employment. – Salary: A base salary of US$190,000 per year, to be reviewed annually. – Incentive: Potential short-term and long-term incentive opportunities as determined by the Board of Directors. – Termination: Mr Krech and the Company may, at their sole discretion, terminate the Service Agreement without cause. 34 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT F. Performance Rights The Directors and other KMPs of the Company were issued or are entitled to the following share-based remuneration during the reporting period for the year: (1) Performance Rights 113,887 Performance Rights were granted (2017: Nil) with a value of $113,887 (2017: $Nil); 99,284 performance rights with a value of $93,275 were forfeited during the period due to service commitments not being met Performance rights The valuation of performance rights granted and vested as remuneration of the Key Management Personnel of the Group during the reporting periods is detailed below: 2018 US$ 2017 US$ Name Granted during the year Value of performance rights exercised in year Forfeited in year Granted during the year Value of performance rights exercised in year Forfeited in year Non-Executive Directors Ms S Thomas Mr Craig Metz Brig. Gen. Stephen Cheney Ms K Thurman Ms C Poll Mr G Rezos Mr C Smith-Gander Total Non-Executive Directors Non-Executive Directors Mr N Clark Total Executive Directors Total Directors Executives Dr R Brookins Mr A Krech Dr D Van Hyning TOTAL - - - - - - - - - - - - 12,799 (1) 7,813 (1) 93,275 (2) 113,887 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (93,275) (93,275) - - - - - - - - - - - - - - - (1) Performance rights issued have a performance period ending 31 December 2018. (2) 99,284 performance rights ($93,275) forfeited during the period due to service term requirements not being met. - - - - - - - - - - - - - - - - - - - - - - (117,019) - (117,019) (187,231) (187,231) (304,250) - - - (304,250) 35 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT The number of performance rights in the Company held during the financial year by each KMP, including their personally related parties, is set out below. 113,887 performance rights were granted to Executives during the reporting year as compensation (2017: Nil). 2018- Number of Performance Rights Name Balance at start of year Performance Rights Granted during year as remuneration Vested and Converted to Shares during year Forfeited during year Performance Rights Balance at end of year Performance Rights Number Number Number Number Number Non-Executive Directors Ms S Thomas Mr Craig Metz Brig. Gen. Stephen Cheney Ms K Thurman Ms C Poll Mr G Rezos Total Non-Executive Directors Executive Directors Mr N Clark Total Executive Directors Total Directors Executives Dr R Brookins Mr A Krech Dr D Van Hyning Total Executives Total Directors and Executives - - - - - - - - - - - - - - - - - - - - - - - - - - - 41,164(1) 25,128(1) 99,284(2) 165,576 165,576 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 99,284 99,284 99,284 (1) Performance rights issued have a performance period ending 31 December 2018. (2) 300,000 (99,284 probability weighted at the date of issue) performance rights ($93,275) forfeited during the period due to service term requirements not being met. - - - - - - - - - - - - - - - - 36 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT Performance rights details Number of per- formance rights granted during 2018 Grant date Vesting date Expiry date Fair value per right at grant date AUD$ Name Executives Dr R Brookins 146,000 16/11/2017 31/12/2018 16/11/2020 Mr A Krech 155,000 16/11/2017 31/12/2018 16/11/2020 Dr D Van Hyning 300,000 16/11/2017 31/12/2018 16/11/2020 0.42 0.42 0.42 The performance rights had vesting criteria based on the following performance and market conditions: • Share price appreciation • Top line revenue increase over CY2017 • Bottom line EBITDA improvement over CY2017 • Returns as a percentage of items sold • New products developed in CY2018 • Partnerships formed in CY2018 (license, distributorship, etc.) • Percentage of new products launched on schedule • Number of new products developed • Number of new patent applications filed • Adherence to budget • Cash flow management • United States quotation The company is in the process of evaluating key performance indicators for key management personnel to reallocate rights to KMP with the goal to reallocate performance rights incentives that reflect the strategic direction of the Group. G. Share-based Compensation The Directors and other KMPs of the Company were issued or are entitled to the following share-based remuneration during the reporting period: (1) Options Nil Options (2017: Nil) with a value of $Nil (2017: $Nil). (2) Shares Nil shares (2017: 716,977) with a value of $Nil in lieu of salary (2017: $329,154). 37 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT - REMUNERATION REPORT Options No options were granted to directors during the 2018 or 2017 financial years. The movement in the number of options held by the Key Management Personnel, including their personally related parties, are set out below: 2018 Name Balance at start of year Granted during year as remuneration Exercised during year Other changes during year Balance at end of year Options Vested and exercisable at end of year Number Number Number Number Number Number Non-Executive Directors Ms S Thomas Mr Craig Metz Brig. Gen. Stephen Cheney Ms K Thurman Ms C Poll Mr G Rezos Total Non-Executive Directors Executive Directors Mr N Clark Total Executive Directors - 750,000 750,000 - - - 1,500,000 - - Total Directors 1,500,000 Executives Dr R Brookins Mr A Krech Dr D Van Hyning Total Executives - - - - Total Directors and Executives 1,500,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 750,000 750,000 - - - - 750,000 750,000 - - - 1,500,000 1,500,000 - - - - 1,500,000 1,500,000 - - - - - - - - 1,500,000 1,500,000 38 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT Shares The value of shares issued or agreed to be issued during the year was $Nil (2017: $329,154) which was calculated based on issue price of AUD$0.612 and was approved at the 2016 Annual General Meeting on 21 November 2016. The issue price represents volume weighted average closing price of shares on ASX in the five trading days to 5 October 2016, prior to 2016 Notice of Annual General Meeting. The movement in the number of shares held by the Key Management Personnel, including their personally related parties, are set out below: 2018 Name Balance at start of year Ordinary Shares Granted During the Year as Remuneration in lieu of salary Received during year on conversion of performance rights Received during year on exercise of options Other changes during year Ordinary Shares Balance at end of year Ordinary Shares Number Number Number Number Number Number Non-Executive Directors Ms S Thomas Mr Craig Metz - - Brig. Gen. Stephen Cheney 43,000 Ms K Thurman Ms C Poll - - Mr G Rezos 26,100,000 Total Non-Executive Directors Executive Directors 26,143,000 Mr N Clark 9,060,070 Total Executive Directors 9,060,070 Total Directors 35,203,070 Executives Dr R Brookins 2,774,500 Mr A Krech Dr D Van Hyning 80,000 790,000 Total Executives 3,644,500 Total Directors and Executives 38,847,570 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 285,715(1) 28,572(1) 28,572(1) 14,286(1) 28,572(1) 285,715 28,572 71,572 14,286 28,572 585,715(1) 26,685,715(2) 971,432 27,114,432 (5,880,070) 3,180,000(3) (5,880,070) (4,908,638) 3,180,000 30,294,432 387,740(4) - 14,286(1) 402,026 3,162,240 80,000 804,286(2) 4,046,526 (4,506,612) 34,340,958 (1) Director’s were allotted shares in December 2017 at AU$0.35 per share. This placement to Directors was approved by shareholders in May 2018. (2) As at resignation date. (3) As at 30 June 2018. (4) 581,240 shares were transferred to Dr Brookins and related parties and 193,500 shares were sold on market during the reporting period. 39 ALEXIUM INTERNATIONAL GROUP LIMITED DIRECTORS’ REPORT - REMUNERATION REPORT H. Additional Disclosures Relating to Key Management Personnel The interests of the Directors and other KMP of the Group in the shares and options of Alexium International Group Limited is set out below. Name No. of ordinary shares No. of performance rights No. of options over ordinary shares Ms Susan Thomas Mr Craig Metz Brig. Gen. Stephen Cheney Ms Karen Thurman Ms Claire Poll Dr Robert Brookins Mr Aaron Krech 285,715 28,572 71,572 14,286 28,575 3,162,240 80,000 I. Loans to Key Management Personnel - - - - - 146,000 155,000 - 750,000 750,000 - - - - No loans have currently been provided to KMP of the Group. THIS IS THE END OF THE AUDITED REMUNERATION REPORT 40 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT SHARES UNDER OPTION/WARRANT As at the date of this report there were 2,400,000 unissued ordinary shares under option (2017:13,491,626). Details of these options are as follows: Date Options Granted Expiry Date 1 October 2015 4 November 2016 4 November 2016 4 November 2016 30 September 2020 4 November 2019 4 November 2019 4 November 2019 Excercise price of shares No. under options $0.75 $0.75 $1.25 $1.75 1,500,000 300,000 300,000 300,000 2,400,000 During the reporting period, 4,255,319 warrants were agreed to be issued but have not yet been issued to GPB Debt Holdings II, LLC. These warrants have an exercise price of the lower of AU$0.35 or any price at which Alexium issues securities to the public. These warrants have an expiry date of 28 March 2023. GPB has the option for a cashless exercise. No option/warrant holder has any right under the options/warrants to participate in any other share issue of the Company or any other entity. The options/warrants are exercisable at any time after vesting and on or before the expiry date. Refer to Note 16 for details of the movements of the options during the year and ASX announcements for options exercised subsequent to the year end and to the date of this report. The group has 1,324,000 performance rights on issue (2017: Nil). These rights have been allocated to staff based on the rules set forth in the performance rights plan. INSURANCE OF OFFICERS During the reporting period, the Group paid a premium in respect of a contract insuring the Directors and Officers of the Company against a liability incurred as a Director or Officer to the extent permitted by the Corporations Act 2001 (Cth). Due to a confidentiality clause in the policy, the amount of the premium has not been disclosed. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Company, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a willful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. 41 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ REPORT PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under section 237 of the Corporations Act 2001 (Cth) for leave to bring proceedings on behalf of the economic entity, or to intervene in any proceedings to which the entity is a party, for the purpose of taking responsibility on behalf of the entity for all or part of those proceedings. No proceedings have been brought or intervened in or on behalf of the entity with leave of the Court under section 237 of the Corporations Act 2001 (Cth). ROUNDING OFF AMOUNTS Amounts in the financial statements and Directors’ report are presented in US dollars and all values are rounded to the nearest dollar, unless otherwise stated. INDEMNITY OF AUDITORS The Company has agreed to indemnify their auditors, Grant Thornton Audit Pty Ltd, to the extent permitted by law, against any claim by a third party arising from the Company’s breach of their agreement. The indemnity stipulates that Alexium will meet the full amount of any such liabilities including a reasonable amount of legal costs. NON-AUDIT SERVICES During the period, no non-audit services were provided by the Company’s auditor, Grant Thornton Audit Pty Ltd. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 (Cth) is attached. This report is made in accordance with a resolution of the Directors. Susan Thomas Chair Dated 31 August 2018 42 ALEXIUM INTERNATIONAL GROUP LIMITED    DECLARATION OF INDEPENDENCE Central Park, Level 43 152-158 St Georges Terrace Perth WA 6000 Correspondence to: PO Box 7757 Cloisters Square Perth WA 6850 T +61 8 9480 2000 F +61 8 9322 7787 E info.wa@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of Alexium International Group Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Alexium International Group Limited for the year ended 30 June 2018, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD Chartered Accountants M J Hillgrove Partner – Audit & Assurance Perth, 31 August 2018 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 43 ALEXIUM INTERNATIONAL GROUP LIMITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Revenue Cost of sales Gross Profit Other income Administrative expenses Sales and marketing expenses Research and development costs Occupancy expenses Other expenses Loss before finance costs Interest expense Gain on debt extinguishment Gain/(Loss) on embedded derivative Interest received Total finance costs Loss before tax Tax expense Loss for the year after tax Note 3 3 4 15 15 3 7 Consolidated 2018 US$ 2017 US$ 11,911,816 17,929,361 (9,556,874) (17,688,486) 2,354,942 240,875 - 159,000 (3,171,158) (5,022,655) (1,237,986) (942,052) (724,727) (1,415,970) (453,126) (1,218,141) (439,598) (1,134,183) (4,450,196) (8,554,583) (2,297,626) (449,342) 396,591 2,369,993 20,119 - (142,073) 9,075 489,077 (582,340) (3,961,119) (9,136,923) - (3,961,119) - (9,136,923) Other comprehensive income- Exchange differences on translation of foreign operations which will not be reclassified subsequently to profit or loss Total comprehensive loss for the year 694,044 (82,195) (3,267,075) (9,219,118) Loss for the year attributable to members of the group (3,961,119) (9,136,923) Total comprehensive loss for the year attributable to members of the group (3,267,075) (9,219,118) Basic loss per share (cents) Diluted loss per share (cents) 8 8 (1.22) (1.22) (3.03) (3.03) This consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes to the financial statements. 44 ALEXIUM INTERNATIONAL GROUP LIMITEDCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 Consolidated 2018 2017 2016 Restated to Restated to Note US$ US$ US$ Current Assets Cash and cash equivalents 20(a) Trade and other receivables Inventories Other current assets Total Current Assets Non-Current Assets Other financial assets Property, plant and equipment Intangible assets Total Current Assets Total Assets Current Liabilities Trade and other payables Deferred income Borrowings Other liabilities Total Current Liabilities Non-Current Liabilities Trade and other payables Deferred income Total Non-Current Liabilities Total Liabilities Net Assets / Liabilities Equity Contributed equity Reserves Accumulated losses Total Equity 9 10 11 12 13 14 15 15 15 16 18 19 10,641,763 513,800 1,516,548 69,876 12,741,987 20,788 1,955,519 761,150 2,737,457 15,479,444 438,793 - 243,667 - 682,460 7,180,965 630,983 7,811,948 2,620,759 1,097,489 1,607,164 77,727 5,403,139 27,310 1,876,857 110,102 2,014,269 7,417,408 1,406,563 24,947 4,499,674 202,735 6,133,919 302,888 811,951 1,114,839 8,494,408 7,248,758 8,347,728 142,690 1,232,727 67,616 9,790,761 27,599 607,732 110,457 745,788 10,536,549 2,096,257 13,665 28,667 - 2,138,589 13,802 - 13,802 2,152,391 6,985,036 168,650 8,384,158 54,367,832 6,423,821 45,833,450 4,188,853 43,657,181 5,443,707 (53,806,617) (49,853,653) (40,716,730) 6,985,036 168,650 8,384,158 This consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes to the financial statements. 45 ALEXIUM INTERNATIONAL GROUP LIMITEDCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 Contributed equity US$ Options Reserve US$ Performance Rights Reserve US$ Foreign Currency Reserves US$ Accumulated losses US$ Total US$ 45,833,450 5,856,738 619,640 (2,287,525) (49,853,653) 168,650 - - - - (3,961,119) (3,961,119) (1,494,807) (221,770) (21,489) 2,423,955 8,15 694,044 (1,494,807) (221,770) (21,489) 2,423,955 (3,952,964) (3,267,075) Balance at 1 July 2017 Loss for the year Foreign currency transition Total comprehensive loss for the year Transactions with owners in their capacity as owners: Issued capital 10,106,575 Capital raising cost (468,358) Options exercised 338,244 Share-based payment in lieu of salary 52,728 Performance rights - - - - - - - - - - 54,272 - - - - - - - - - - 10,106,575 (468,358) 338,244 52,728 54,272 Balance at 30 June 2018 54,367,832 5,634,968 652,423 136,430 (53,806,617) 6,985,036 This consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements. 46 ALEXIUM INTERNATIONAL GROUP LIMITEDCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 Contributed equity US$ Options Reserve US$ Performance Rights Reserve US$ Foreign Currency Reserves US$ Accumulated losses US$ Total US$ 43,657,181 5,590,802 601,036 (748,131) (40,716,730) 8,384,158 - - - - (9,136,923) (9,136,923) 1,265,046 173,549 18,604 (1,539,394) - (82,195) 1,265,046 173,549 18,604 (1,539,394) (9,136,923) (9,219,118) Balance at 1 July 2016 Loss for the year Foreign currency transition Total comprehensive loss for the year Transactions with owners in their capacity as owners: Issued capital Options exercised 509,607 - Share-based payment - 92,387 Shares issued in lieu of salary 401,616 - - - - - - - - - - 509,607 92,387 401,616 Balance at 30 June 2018 45,833,450 5,856,738 619,640 (2,287,525) (49,853,653) 168,650 This consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements. 47 ALEXIUM INTERNATIONAL GROUP LIMITEDCONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 Cash flow from operating activities Receipts from customers and other income Payments to suppliers and employees Interest received Interest and other costs of finance paid Goods & services tax received from ATO Consolidated Note 2018 US$ 2017 US$ 12,437,167 17,060,440 (16,881,341) (26,568,123) 3 20,119 9,075 (1,231,830) (386,472) 97,195 86,156 Net cash flows (used in) operating activities 20(b) (5,558,690) (9,798,924) Cash flows from investing activities Purchase of property, plant and equipment (41,797) (1,204,410) Purchase of other non-current assets Proceeds from disposal of property, plant and equipment Payments for development costs - 1,500 (662,653) (16,227) 410 - Net cash flows (used in) investing activities (702,950) (1,220,227) Cash flows provided by financing activities Proceeds from borrowings Transaction cost related to loans and borrowings Repayment of borrowings Proceeds from exercise of options Proceeds from issue of ordinary shares Transaction costs related to issue of shares 9,600,000 5,000,000 (453,979) (5,178,869) 360,677 10,520,333 (521,978) (94,450) (126,411) 498,993 - - Net cash flows provided by financing activities 14,326,184 5,278,132 Net increase / (decrease) in cash and cash equivalents 8,064,544 (5,741,019) Cash and cash equivalents at beginning of year Effect of exchange rate changes on cash and cash equivalents 2,620,759 (43,540) 8,347,728 14,050 Cash and cash equivalents at end of year 20(a) 10,641,763 2,620,759 This consolidated statement of cash flows should be read in conjunction with the accompanying notes to the financial statement. 48 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 1. CORPORATE INFORMATION The consolidated financial statements of Alexium International Group Limited and its subsidiaries (collectively, the Group) for the year ended 30 June 2018 were authorised for issue in accordance with a resolution of the directors on 31 August 2018. Alexium International Group Limited (the Company or the Parent) is a company limited by shares incorporated and domiciled in Australia, whose shares are publicly traded on the Australian Securities Exchange and NASDAQ International. These financial statements include the consolidated financial statements and notes of Alexium International Group Limited and controlled entities (‘Group’) and are presented in United States Dollars. These financial statements and notes represent a change in presentation currency from the Australian Dollar to the US Dollar. This change aligns the company’s financial reporting with the nature of the business operations which primarily occur in the United States. This financial report, the comparative period within, and all future financial reports, will therefore be presented in US Dollars. The nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation These financial statements are general purpose financial statements that have been prepared in accordance with Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001 (Cth). The Group is a for-profit entity for the purpose of preparing the financial statements. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in financial statements containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Material accounting policies adopted in the preparation of the financial statements are presented below. They have been consistently applied unless otherwise stated. The financial statements have been prepared on an accruals basis and are based on historical costs modified, where applicable by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The presentation is United States Dollars to correspond with the primary currency that influences sales price of goods, labour, materials, costs of providing goods for sale, and interest expense paid on the Company’s debt. Separate financial statements for the Company as an individual entity are no longer presented as the consequence of a change to the Corporations Act 2001 (Cth), however, required financial information for the Company as an individual entity is included in Note 22. These financial statements and notes represent a change in presentation currency from the Australian Dollar to the US Dollar and as such is considered a change in accounting policy applied retrospectively. This change aligns the company’s financial reporting with the nature of the business operations which primarily occur in the United States. This financial report, the comparative period within, and all future financial reports, will therefore be presented in US Dollars. 49 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (b) New and amended standards adopted by the Group in this financial report There have been no new and revised Standards and Interpretations issued by the Australia Accounting Standards Board (AASB) adopted by the Group that are relevant to its operations and effective for the current reporting period. (c) Impact of standards issued but not yet applied by the Group New and revised accounting standards and amendments that are currently issued for future reporting periods that are relevant to the Group include: AASB 9 Financial Instruments AASB 9 introduces new requirements for the classification and measurement of financial assets and liabilities and includes a forward-looking ‘expected loss’ impairment model on credit losses. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The effective date is for annual reporting periods beginning on or after 1 January 2018. The standard is required to be applied retrospectively to comparative periods in accordance with AASB 108. Subsequent to initial recognition, financial assets and liabilities are measured at: • Amortised cost • Fair value through other comprehensive income (FVOCI) • Fair value through profit or loss (FVPL) Further, AASB 9 introduces a new impairment model based on expected credit losses. This model makes use of more forward-looking information and applies to all financial instruments that are subject to impairment accounting. The company has undertaken a detailed assessment of the standard and determined that when this standard is first adopted for the year ending 30 June 2019, there will be no material impact on the transactions and balances recognised in the financial statements. AASB 15 Revenue from Contracts with Customers AASB 15 replaces AASB 118: Revenue, AASB 111 Construction Contracts and some revenue-related Interpretations. The introduction of AASB 15 is intended to replace existing accounting guidance and introduce a comprehensive revenue recognition model aimed at enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. In summary, AASB 15: • establishes a new revenue recognition model; • changes the basis for deciding whether revenue is to be recognised over time at a point in time; • provides a new and more detailed guidance on specific topics (e.g. multiple element arrangements, variable pricing, rights of return and warranties); and • expands and improves disclosures about revenue. 50 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 The Company is in the processes of evaluating which is the most appropriate adoption method, whether the full retrospective or the modified retrospective. Presently, the Company anticipates using the modified retrospective transition method. Under the modified retrospective method, the cumulative impact (if any) will be recognised at the date of initial application (July 1, 2018). The company has undertaken a detailed assessment of the standard and determined that when this standard is first adopted for the year ending 30 June 2019, there will be no material impact on the transactions and balances recognised in the financial statements. While the approach under AASB 15 is significantly different than the existing literature, due to the nature of the Company’s business, management has identified no significant differences that will impact the ultimate timing of revenue recognition at the Company. Management recognises that the implementation efforts are still underway, and additionally, that contracts / arrangements could change as the Company enters into new markets and expands its customer base. Management will continue to monitor any changes to ensure the accounting is in line with the context of AASB 15. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. Under the new standard, a lessee is required to: (a) recognise all right of use assets and lease liabilities, with the exception of short-term (under 12 months) and low value leases, on the statement of financial position. The liability is initially measured at the present value of future lease payments for the lease term; (b) recognise depreciation of right of use assets and interest on lease liabilities in profit or loss over the lease term; and (c) separate the total amount of cash paid into a principal portion (presented within financing activities) and interest portion (which the Group presents in operating activities) in the statement of cash flows. The new AASB 16: • • replaces AASB 117 Leases and some lease-related Interpretations; requires all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases; • provides new guidance on the application of the definition of lease and on sale and lease back accounting; largely retains the existing lessor accounting requirements in AASB 117; and requires new and different disclosures about leases. • • • The entity is yet to undertake a detailed assessment of the impact of AASB 16. However, based on the entity’s preliminary assessment, the Standard is expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2020. As per the Note 26(a), the group has commitments for minimum lease payments totalling $708,369 over the next five years and expects the impact of the change in accounting standard to approximate that amount. 51 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (d) Group Accounting Policies Fair Value of Assets and Liabilities The Group measures some of its assets and liabilities at fair value on either a recurring or non-recurring basis, depending on the requirements of the applicable Accounting Standard. Fair value is the price the Group would receive to sell an asset or would have to pay to transfer a liability in an orderly (i.e. unforced) transaction between independent, knowledgeable and willing market participants at the measurement date. As fair value is a market-based measure, the closest equivalent observable market pricing information is used to determine fair value. Adjustments to market values may be made having regard to the characteristics of the specific asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. To the extent possible, market information is extracted from either the principal market for the asset or liability (i.e. the market with the greatest volume and level of activity for the asset or liability) or, in the absence of such a market, the most advantageous market available to the entity at the end of the reporting period (i.e. the market that maximises the receipts from the sale of the asset or minimises the payments made to transfer the liability, after taking into account transaction costs and transport costs). For non-financial assets, the fair value measurement also takes into account a market participant’s ability to use the asset in its highest and best use or to sell it to another market participant that would use the asset in its highest and best use. The fair value of liabilities and the entity’s own equity instruments (excluding those related to share- based payment arrangements) may be valued, where there is no observable market price in relation to the transfer of such financial instruments, by reference to observable market information where such instruments are held as assets. Where this information is not available, other valuation techniques are adopted and, where significant, are detailed in the respective note to the financial statements. Valuation techniques In the absence of an active market for an identical asset or liability, the Group selects and uses one or more valuation techniques to measure the fair value of the asset or liability. The Group selects a valuation technique that is appropriate in the circumstances and for which sufficient data is available to measure fair value. The availability of sufficient and relevant data primarily depends on the specific characteristics of the asset or liability being measured. The valuation techniques selected by the Group are consistent with one or more of the following valuation approaches: • Market approach: valuation techniques that use prices and other relevant information generated by • market transactions for identical or similar assets or liabilities. Income approach: valuation techniques that convert estimated future cash flows or income and expenses into a single discounted present value. • Cost approach: valuation techniques that reflect the current replacement cost of an asset at its current service capacity. 52 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Each valuation technique requires inputs that reflect the assumptions that buyers and sellers would use when pricing the asset or liability, including assumptions about risks. When selecting a valuation technique, the Group gives priority to those techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Inputs that are developed using market data (such as publicly available information on actual transactions) and reflect the assumptions that buyers and sellers would generally use when pricing the asset or liability are considered observable, whereas inputs for which market data is not available and therefore are developed using the best information available about such assumptions are considered unobservable. Fair value heirarchy AASB 13 requires the disclosure of fair value information by level of the fair value hierarchy, which categorises fair value measurements into one of three possible levels based on the lowest level that an input that is significant to the measurement can be categorised into as follows: Level 1 Measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 Measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 Measurements based on unobservable inputs for the asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. If all significant inputs required to measure fair value are observable, the asset or liability is included in Level 2. If one or more significant inputs are not based on observable market data, the asset or liability is included in Level 3. The Group would change the categorisation within the fair value hierarchy only in the following circumstances: • • if a market that was previously considered active (Level 1) became inactive (Level 2 or Level 3) or vice versa; or if significant inputs that were previously unobservable (Level 3) became observable (Level 2) or vice versa. When a change in the categorisation occurs, the Group recognises transfers between levels of the fair value hierarchy (i.e. transfers into and out of each level of the fair value hierarchy) on the date the event or change in circumstances occurred. 53 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (e) Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent, Alexium International Group Limited and all of the subsidiaries. Subsidiaries are entities the parent controls. The parent controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. A list of the subsidiaries is provided in Note 23. The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. Intercompany transactions, balances and unrealised gains or losses on transactions between Group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group. Equity interests in a subsidiary not attributable, directly or indirectly, to the Group are presented as “non- controlling interests”. The Group initially recognises non-controlling interests that are present ownership interests in subsidiaries and are entitled to a proportionate share of the subsidiary’s net assets on liquidation at either fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net assets. Subsequent to initial recognition, non-controlling interests are attributed their share of profit or loss and each component of other comprehensive income. Non-controlling interests are shown separately within the equity section of the statement of financial position and statement of comprehensive income. (f) Foreign currency translation The consolidated financial statements are presented in United States dollars ($USD). The functional currency of the parent company is Australian Dollar and the functional currencies of the Company’s overseas subsidiaries are the Pound Sterling and the US Dollar. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date and exchange differences are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the date of the initial transaction. All resulting exchange differences are recognised on other comprehensive income. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. All resulting exchange differences are recognised on other comprehensive income. As at the reporting date the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of Alexium International Group Limited at the rate of exchange ruling at the balance sheet date and the statements of comprehensive income are translated at the weighted average exchange rates for the year. All resulting exchange differences are recognised on other comprehensive income. On disposal of a foreign entity, the cumulative exchange differences are reclassified to profit or loss as part of the gain or loss on sale. 54 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (g) Property, plant and equipment Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy (i)). Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Leased assets The Group uses finance leases for several pieces of analytical equipment used in our research and product development. Management applies judgment in considering the substance of a lease agreement and whether it transfers substantially all the risks and rewards incidental to ownership of the leased asset. Key factors considered include the length of the lease term in relation to the economic life of the asset, the present value of the minimum lease payments in relation to the asset’s fair value, and whether the Group obtains ownership of the asset at the end of the lease term. See below accounting policy for the depreciation methods and useful lives for assets held under finance leases. The interest element of lease payments is charged to profit or loss, as finance costs over the period of the lease. All other leases are treated as operating leases. Where the Group is a leasee, payments on operating lease agreements are recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. Subsequent costs The consolidated entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the consolidated entity and the cost of the item can be measured reliably. All other costs are recognised in profit or loss as an expense as incurred. Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives in the current and comparative years are as follows: Computer equipment Machinery and equipment 3 to 15 years Furniture, fixtures and office equipment 3 to 10 years Leased plant and equipment 3 years Shorter of the lease term or the useful life The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. 55 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (h) Intangible assets Acquired intangible assets Intangible assets acquired separately are capitalised at cost. Following initial recognition, the cost model is applied to the class of intangible assets whereby capitalised costs are amortised on a straight-line basis over their estimated useful lives, as these assets are considered finite. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (i)). Expenditure on internally generated goodwill and brands is recognised in the statement of comprehensive income as an expense as incurred. Expenditure on the research phase of projects to develop new specialty chemicals is recognised as an expense as incurred. Costs that are directly attributable to a project’s development phase are recognised as intangible assets, provided they meet the following recognition requirements: • • • • • the development costs can be measured reliably; the project is technically and commercially feasible; the Group intends to and has sufficient resources to complete the project; the Group has the ability to use or sell the software; and the software will generate probable future economic benefits. Development costs not meeting these criteria for capitalisation are expensed as incurred. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are expensed as incurred. Amortisation A summary of the policies applied to the consolidated entity’s intangible assets is as follows: Goodwill and intangible assets with an indefinite life are systematically tested for impairment at each balance sheet date. Capitalised development costs, patents, and trademarks with a finite life are amortised as follows: - Patents and Trademarks: Lesser of 20 years or average remaining life of patents and trademarks - Capitalised development costs: Over future periods on a basis related to expected future benefits - Software: Lesser of 5 years or average remaining life of software benefit Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted as appropriate. 56 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the profit or loss when the asset is derecognised. The useful lives of these intangible assets are assessed to be either finite or indefinite. Where amortisation is charged on assets with finite lives, this expense is taken to the income statement. Intangible assets are tested for impairment where an indicator of impairment exists (see accounting policy (i)). Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. (i) Impairment of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the assets is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less cost to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (j) Trade and other receivables Trade receivables, which generally have 30-120 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. (k) Determination and presentation of operating segments For management purposes, the Group is organised into one main operating segment which involves the development and commercialisation of its proprietary flame retardant and Phase Change Material technologies and selling its specialised chemistry to customers. All of the Group’s activities are interrelated and discrete financial information is reported to the Chief Executive Officer (Chief Operating Decision Maker) as a single segment. Accordingly, all significant operating decisions are based upon analysis of the Group as one segment. The Group has applied AASB 8 Operating Segments from 1 July 2009. AASB 8 requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. 57 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Board considers the business from both a product and a geographical perspective and takes the view that the Group operates under one operating segment. (l) Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (m) Financial instruments Recognition, initial measurement, and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted for transaction costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expired. (n) Embedded Derivative The Group has issued liability classified embedded derivatives in connection with its convertible debt. An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a standalone derivative. The embedded derivative is separated from the host contract and accounted for as a derivative if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract. The embedded derivative is measured at fair value with changes in value being recorded in profit or loss. (o) Trade and other payables Trade payables and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 60 days of recognition. 58 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (p) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. (q) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (r) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Risks and rewards of ownership are considered passed to the buyer at the time of delivery of the goods to the customer. Deferred income License agreements for the right to sell the Group’s products in given markets are generally granted by the Group for a specific time period and consideration. Consideration received for the license is initially deferred, included in other liabilities, and recognised on a straight-line basis over the corresponding license period. Interest and dividends Interest income is recorded when earned based on cash balances. Interest expenses are reported on an accrual basis using the effective interest method. Dividends are recognised at the time the right to receive payment is established. 59 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (s) Grant revenue Government grants are recognisable in profit or loss once there is reasonable assurance that the grant will be received, and the Group will comply with the conditions attached to the grant. Grant revenue is recognised on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. (t) Income tax and other taxes Deferred income tax is provided on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for the financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. • Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. • The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised, or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. 60 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. • The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (u) Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to members of the parent entity for the reporting year, after excluding any costs of servicing equity (other than ordinary shares and converting preference shares classified as ordinary shares of EPS calculation purposes), by weighted average number of ordinary shares of the Group, adjusted for any bonus issue. (v) Employee benefits Termination benefits Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than twelve (12) months after the reporting date, then they are discounted to their present value. Long-Term Employee Benefits The Group’s liabilities for annual leave and long service leave are included in other long-term benefits as they are not expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. They are measured at the present value of the expected future payments to be made to employees. The expected future payments incorporate anticipated future wage and salary levels, experience of employee departures and periods of service, and are discounted at rates determined by reference to market yields at the end of the reporting period on high quality corporate bonds that have maturity dates that approximate the timing of the estimated future cash outflows. Any re-measurements arising from experience adjustments and changes in assumptions are recognised in profit or loss in the periods in which the changes occur. The Group presents employee benefit obligations as current liabilities in the statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve (12) months after the reporting period, irrespective of when the actual settlement is expected to take place. 61 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Short-term employee benefits Short-term employee benefits are benefits, other than termination benefits, that are expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. Examples of such benefits include wages and salaries, non-monetary benefits and accumulating sick leave. Short-term employee benefits are measured at the undiscounted amounts expected to be paid when the liabilities are settled. Employee benefit expenses are presented separately on the face of the statement of profit or loss and other comprehensive income. There are no employee-benefit expenses recognised within cost of sales. Share-based payment transactions The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. (w) Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for, as follows: • Raw materials: purchase cost on a first-in/first-out basis • Finished goods and work in progress: cost of direct materials and labour and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (x) Significant accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur. 62 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Change in presentation currency These financial statements and notes represent a change in presentation currency from the Australian Dollar to the US Dollar. This change, which required significant accounting judgement, aligns the company’s financial reporting with the nature of the business operations which primarily occur in the United States. This financial report, the comparative period within, and all future financial reports, will therefore be presented in US Dollars. Share-based payments The Group initially measures the cost of cash-settled transactions with employees using a binomial model to determine the fair value of the liability incurred. The Group initially measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. For cash-settled share-based payment transactions, the liability needs to be remeasured at the end of each reporting period up to the date of settlement, with any changes in fair value recognised in profit or loss. This requires a reassessment of the estimates used at the end of each reporting period. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 17. Fair value of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the discounted cash flow (DCF) and Black-Scholes option pricing models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. The assessed fair values of the embedded derivatives were determined using a Black-Scholes option pricing model which approximates the results that would have been achieved by using a binomial lattice. The model takes into account the expected price volatility of the underlying instrument, expected dividend yield and the risk-free interest rate. A collection of comparable companies has been used as a proxy for the volatility determined. Changes in assumptions in relation to these factors could affect the reported fair value of financial instruments. See Note 24 for further disclosures. Intangible Assets The Group assess at initial recognition whether an internally developed asset has met the recognition requirements established in AASB 138 and measures the direct and indirect costs of development using several estimates and assumptions. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired. In assessing impairment, management estimates the recoverable amount of each asset or cash-generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate. In the twelve months ended 30 June 2018 no impairment was identified. See Note 12 for further disclosures. 63 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (y) Going Concern These financial statements have been prepared on the basis of going concern, which contemplates the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. During the financial year ended 30 June 2018, the Group has generated a loss for the period of $3,961,119 (2017: $9,136,923) and the Group has used cash in operations of $5,558,690 (2017: $9,798,924). The Director’s assessment is based on continued growth in revenue and commercial sales which the company expects to continue over the next twelve months, the addition of a long-term debt facility, and continued reduction in expenses. The directors are satisfied that there is sufficient working capital to support the committed research and commercialisation activities over the next 12 months and the Group has the ability to realise its assets and pay its liabilities and commitments in the normal course of business. Accordingly, the directors have prepared the financial report on a going concern basis. 3. REVENUE & OTHER INCOME Sale of goods Other income (a) Interest received (a) Other income Consolidated 2018 ($) 2017 ($) 11,911,816 - 11,911,816 17,929,361 159,000 18,088,361 20,119 9,075 During the period the Group received $Nil (2017: $159,000) in grant revenue from the South Carolina Research Authority (SCRA). There were no other forms of government assistance from which the Group has directly benefited. 4. ADMINISTRATIVE EXPENSES Amortisation Employee benefits expense- Admin Insurance expenses Other administrative expenses Professional fees Share-based payments Total administrative expenses Consolidated 2018 ($) 2017 ($) 10,310 1,657,936 128,335 547,841 913,983 (87,247) 3,171,158 9,672 2,692,954 57,914 716,411 1,148,831 396,873 5,022,655 64 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 5. DEPRECIATION AND AMORTISATION EXPENSE Depreciation Amortisation Total depreciation and amortisation expenses 6. AUDITORS’ REMUNERATION The Group’s auditor is Grant Thornton Audit Pty Ltd Amount received or due and receivable by Grant Thornton Audit Pty Ltd for: (a) an audit or review of the financial report of the entity and any other entity in the consolidated group (b) Other services in relation to the entity and any other entity in the consolidated group- Services in connection with NASDAQ Listing Amount received or due and receivable by related practices of Grant Thornton Audit Pty Ltd for: (a) an audit or review of the financial report of the entity and any other entity in the consolidated group (b) Other services in relation to the entity and any other entity in the consolidated group Consolidated 2018 ($) 2017 ($) 294,385 13,384 307,769 258,391 12,235 270,626 Consolidated 2018 ($) 2017 ($) 110,519 120,329 6,441 116,960 46,150 166,479 - - - - - - 65 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 7. TAXATION (a) Income tax recognised in profit and loss Profit /(loss) before tax Prima facie tax on operating loss before income tax at 27.5% Deferred tax asset not recognised Tax effect of permanent differences: - Meals and entertainment - Interest on convertible note - Share-based payments expense - Lobbying expenses - Differences in jurisdictional tax rates Tax losses not brought to account Income tax benefit attributable to reversal of deferred tax liability on intangible assets (b) Deferred tax assets Deferred tax assets at 30 June brought to account: Employee benefits Accrued expenses Expenses deducted over 5 years Income tax losses (c) Deferred tax liability Unrealised FX Basis difference on fixed assets (d) Net deferred tax position Deferred tax liabilities Net deferred tax position 2018 ($) 2017 ($) (3,961,119) (9,136,923) (1,089,308) (4,358) (2,512,654) (27,923) 18,144 192,241 (23,993) 66,000 (367,032) 1,980,285 771,979 576 20,231 117,776 790,037 928,620 13,848 46,411 109,190 63,800 (664,040) 2,971,368 - - 29,342 14,561 485,474 529,377 2018 ($) 2017 ($) 2018 ($) 2017 ($) 848,378 80,242 928,620 524,479 4,898 529,377 2018 ($) 2017 ($) 928,620 928,620 - 529,377 529,377 - 66 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (e) Deferred tax assets not recognised Charitable contributions Accrued and prepaid expenses Basis difference on intangibles and start-up costs Deferred revenue 163(j) limitation Income tax losses Accrued and prepaid expenses Net deferred tax position 2018 ($) 2017 ($) 24,874 20,709 498 - 238,420 7,511,434 - 7,795,935 36,473 55,851 152,849 9,118 - 9,670,319 - 9,924,610 No income tax is payable by the Group. The Directors have considered it prudent not to bring to account the future income tax benefit of income tax losses until it is probable of deriving assessable income of a nature and amount to enable such benefit to be realised. The Group has estimated unrecouped income tax losses of $34,990,283 (2017: $29,960,460) which may be available to offset against taxable income in future years. The benefit of these losses and timing differences will only be obtained if there is sufficient probability that taxable profits will be generated by the Group in future periods. Deferred tax assets and liabilities which relate to income taxes levied by the same taxation authority are offset where the Group intends to settle those tax assets and liabilities on a net basis. 8. EARNINGS PER SHARE Classification of securities as ordinary shares The Group has only one category of ordinary shares included in basic earnings per share. Classification of securities as potential ordinary shares There are currently no securities to be classified as dilutive potential ordinary shares on issue. Weighted average number of ordinary shares used in the calculation of basic earnings per share Basic loss Basic / Diluted loss per share Consolidated 2018 Number 2017 Number 325,688,534 301,680,844 $ (3,961,119) (0.0122) $ (9,136,923) (0.0303) The above calculation does not include instruments that could potentially dilute basic earnings per share in the future as these instruments were anti-dilutive in the years presented. A summary of such instruments is as follows: 67 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Equity securities Options over ordinary shares Warrant options Performance rights Consolidated 2018 Number of securities 2017 Number of securities 2,400,000 4,255,319 1,324,000 7,979,319 13,491,626 - - 13,491,626 The Group has incurred a loss for the year. The diluted earnings per share is therefore disclosed as the same as the basic earnings per share. 9. TRADE AND OTHER RECEIVABLES Current Trade debtors Other receivables None of the trade and other receivables are past due or impaired. 10. INVENTORIES Raw materials Finished goods Total inventory Consolidated 2018 ($) 2017 ($) 487,353 26,447 513,800 2018 ($) 1,224,267 292,281 1,516,548 1,049,228 48,261 1,097,489 2017 ($) 1,073,391 533,773 1,607,164 68 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Leased assets Construction in Total Consolidated 11. PROPERTY, PLANT AND EQUIPMENT Cost or valuation Balance at 1 July 2016 Additions Disposals Transfers Foreign exchange movements Balance at 30 June 2017 Additions Disposals Foreign exchange movements Furniture & Equipment $ 649,591 147,958 (80,667) 1,098,263 (1,639) 1,813,506 42,646 (187,257) 1,066 $ 333,901 527,069 - - - 860,970 342,907 (197,060) - Balance at 30 June 2018 1,669,961 1,006,817 Depreciation and impairment Balance at 1 July 2016 Depreciation Disposals Foreign exchange movements Balance at 30 June 2017 Depreciation Disposals Foreign exchange movements 356,416 178,032 (76,648) (560) 457,240 194,350 (173,736) 52 260,020 80,359 - - 340,379 100,035 (197,061) - Balance at 30 June 2018 477,906 243,353 progress $ 240,676 857,587 - (1,098,263) - - - - - - - - - - - - - - - $ 1,224,168 1,532,614 (80,667) - (1,639) 2,674,476 385,553 (384,317) 1,066 2,676,778 616,436 258,391 (76,648) (560) 797,619 294,385 (370,797) 52 721,259 Net book value At 30 June 2016 At 30 June 2017 At 30 June 2018 293,175 1,356,266 1,192,055 73,881 520,591 763,464 240,676 - - 607,732 1,876,857 1,955,519 69 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 12. INTANGIBLE ASSETS (a) Patents and trademarks Cost Balance at 1 July Additions- acquired Impairment Foreign exchange movements Balance at 30 June Depreciation and impairment Balance at 1 July Additions- acquired Impairment Foreign exchange movements Balance at 30 June Consolidated 2018 ($) 2017 ($) 199,152 205,131 - - 3,187 202,339 101,864 10,309 - 1,472 113,645 - - (5,979) 199,152 94,674 9,809 - (2,619) 101,864 Net book value 88,694 97,288 (b) Capitalised development costs Cost Balance at 1 July Additions- internally developed Impairment Foreign exchange movements Balance at 30 June Depreciation and impairment Balance at 1 July Amortisation Impairment Foreign exchange movements Balance at 30 June Consolidated 2018 ($) 2017 ($) - 662,717 - - 662,717 - - - - - - - - - - - - - - - - 70 Net book value 662,717 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (c) Software Cost Balance at 1 July Additions- acquired Impairment Foreign exchange movements Balance at 30 June Depreciation and impairment Balance at 1 July Amortisation Impairment Foreign exchange movements Balance at 30 June Net book value Consolidated 2018 ($) 2017 ($) 15,377 - - - - 15,377 - - 15,377 15,377 2,563 3,075 - - 5,638 9,739 - 2,563 - - 2,563 12,814 Intangible assets have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense per the consolidated statement of profit or loss and other comprehensive income. The ultimate recoupment of costs carried forward for intellectual property is dependent on the successful development and commercial exploitation of the Group’s technology. In accordance with Note 2(h) on significant accounting policies, amortisation will be calculated on a straight-line basis over the average useful life of the assets and begins once the asset is placed in service. 13. TRADE AND OTHER PAYABLES Current Trade creditors Other creditors Consolidated 2018 ($) 2017 ($) 259,110 179,683 438,793 1,093,552 313,011 1,406,563 Trade and other payable amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days or recognition. 71 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 14. DEFERRED INCOME Deferred income Consolidated 2018 ($) 2017 ($) - 24,947 At period end 2017 the Group had sales orders which were paid in advance and had not shipped. Revenue was not recognised for the sales until shipment of the materials. 15. BORROWINGS Convertible note- On September 30, 2017 the Company entered a convertible note, secured by the company’s assets, with institutional lenders to refinance the Group’s previous debt. The USD$10 million note carries a thirty-six-month term and 13.5% annual interest rate and is convertible into ordinary shares upon a change of control. The Borrowings have been measured at amortised cost, a gain or loss is recognised in profit or loss when the borrowings are derecognised or impaired, and through the amortisation process. The Company allocates interest payments over the term of the borrowings at a constant rate on the carrying value. $5 million of the proceeds from the funding was used to pay down the loan facility originated on December 30, 2016, which carried a shorter term, higher interest rate, and greater warrant coverage. Capital leases- The Group leases certain equipment under financing leases expiring in various years through 2023, with terms ranging from 3 to 5 years. The assets and liabilities under financing leases are initially recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. See Note 26 for further disclosures. Loan facility Current capital leases payable Loan facility Non-current leases payable 2018 ($) 2017 ($) - 243,667 243,667 6,820,549 360,416 7,180,965 4,354,294 145,380 4,499,674 - 302,888 302,888 7,424,632 4,802,562 72 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Derivative liability Under the agreement, warrants will be issued up to 20% of the borrowings, with 47 cents (adjusted to 35 cents as being the price under the December 2017 placement) exercise price, for a period of five years. The borrowing is a hybrid instrument with liability and derivative liability components. The warrants and convertible note option include an embedded derivative relating to the exercise price that needs to be measured at fair value and separated with changes in value being recorded in profit or loss. Derivative liability has been valued using a Black-Scholes option pricing model which approximates the results that would have been achieved by using a binomial lattice Monte Carlo simulation. Pricing model inputs include; exercise price (0.35), risk-free rate (2.1%), remaining term (convertible note – 2.25 years, warrants - 4.25 years) and volatility (88.15%). Derivative liability Change in fair value of derivative liability recorded at profit or loss Gain on debt extinguishment 2018 ($) 2017 ($) 630,983 630,983 811,951 811,951 2018 ($) 2017 ($) 2,369,993 2,369,993 (142,073) (142,073) The previous loan facility of $5 million, which, was paid down at the origination of the current facility included 4,166,667 attached warrants. The warrants included an embedded derivative relating to the exercise price that was measured at fair value and separated with changes in value being recorded in profit or loss. At the time of extinguishment, the derivative liability had a carrying value of $396,591, the disposal of which is recognised on the consolidated profit and loss statement. Gain on debt extinguishment 2018 ($) 2017 ($) 396,591 396,591 - - 73 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 16. CONTRIBUTED EQUITY (a) Issued capital 2018 Shares 2017 Shares 2018 $ 2017 $ Ordinary shares fully paid 345,443,598 303,827,998 54,367,832 45,833,450 (b) Movement in share capital Balance at beginning of year 303,827,998 298,736,791 45,833,450 Options converted to shares 2,425,000 4,202,083 338,244 Capital raising Costs of capital raising Conversion of performance rights Shares issued in lieu of salary and sales achievement Shares issued in lieu of services Foreign currency translation (c) Movements in performance rights 43,657,181 509,607 - - - 39,005,600 - - - - - 10,106,575 (468,358) - 185,000 535,713 52,728 245,759 - - 353,411 - - (1,494,807) 155,857 1,265,046 2018 2017 Number Number 2018 $ 2017 $ Balance at beginning of year Rights expired during year Conversion of performance rights Rights forfeited during year Rights converted to shares during year Rights issued, net of costs - - - - - 1,324,000 1,324,000 3,250,000 (3,250,000) - - - - - - - - - - 54,272 54,272 304,250 (304,250) - - - - - 74 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (d) Share options issued At the year-end, there were Nil free attaching options outstanding (2017: 6,916,626) and 2,400,000 share- based payment options outstanding (2017: 6,575,000). Refer to Note 17(c) for details of the share-based payment options outstanding. (e) Movements in share options Year 2018 Grant date Exercise Price Expiry date Balance at beginning of year Number Granted during the year Number Exercised during the year Number Expired during the year Number Balance at end of year Number Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options 01/09/14 $0.18 31/08/17 175,000 13/05/15 $0.70 31/12/17 500,000 13/05/15 $0.80 31/12/17 1,000,000 20/5/15 $0.13 31/08/17 30,000 06/05/15 $0.75 07/05/18 6,916,626 06/08/15 $0.16 31/08/17 30,000 01/10/15 $0.75 30/09/20 1,500,000 04/11/15 $0.18 31/08/17 1,065,000 09/11/15 $1.207 09/11/17 125,000 09/11/15 $1.314 09/11/17 125,000 26/02/16 $0.20 31/08/17 1,125,000 04/11/16 $0.75 04/11/19 300,000 04/11/16 $1.25 04/11/19 300,000 04/11/16 $1.75 04/11/19 300,000 13,491,626 - - - - - - - - - - - - - - - (175,000) - - - (500,000) (1,000,000) (30,000) - - (6,916,626) (30,000) - (1,065,000) - - - - - (125,000) (125,000) (1,125,000) - - - - - - - - - - - - - 1,500,000 - - - - 300,000 300,000 300,000 (2,425,000) (8,666,626) 2,400,000 • 8,666,626 options expired during the current year (2017: 88,648). • 2,425,000 share-based payment options were exercised during the current year (2017: 3,343,750). • Nil free attaching options were exercised during the current year (2017: 858,333). • All options were exercised for an equivalent number of ordinary shares. 75 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Year 2017 Grant date Exercise Price Expiry date Balance at beginning of year Number Granted during the year Number Exercised during the year Number Expired during the year Number Balance at end of year Number Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options Unlisted options 30/11/12 $0.08 31/12/16 1,500,000 10/11/14 $0.25 9/11/16 946,981 10/11/14 $0.198 9/11/17 750,000 01/09/14 $0.18 31/08/17 175,000 13/05/15 $0.70 31/12/17 500,000 13/05/15 $0.80 31/12/17 1,000,000 20/5/15 $0.13 31/08/17 30,000 06/05/15 $0.75 07/05/18 6,916,626 06/08/15 $0.16 31/08/17 970,000 01/10/15 $0.75 30/09/20 1,500,000 04/11/15 $0.18 31/08/17 1,125,000 09/11/15 $1.207 09/11/17 125,000 09/11/15 $1.314 09/11/17 125,000 26/02/16 $0.20 31/08/17 1,218,750 - - - - - - - - - - - - - - 04/11/16 $0.75 04/11/19 04/11/16 $1.25 04/11/19 04/11/16 $1.25 04/11/19 - - - 300,000 300,000 300,000 (1,500,000) - (858,333) (88,648) (750,000) - - - - - (940,000) - (60,000) - - (93,750) - - - - - - - - - - - - - - - - - - - - - 175,000 500,000 1,000,000 30,000 6,916,626 30,000 1,500,000 1,065,000 125,000 125,000 1,125,000 300,000 300,000 300,000 In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation. 16,882,357 900,000 (4,202,083) (88,648) 13,491,626 (f) Terms and conditions of contributed equity Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation. 76 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (g) Capital management The Company’s objectives in managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits for the stakeholders and to maintain an optimal capital structure to reduce the cost of capital. 17. SHARE-BASED PAYMENTS The following is the summary of share-based payments expensed during the year: 2018 Number 185,000 $ 54,758 (431,264) (199,597) 1,324,000 57,592 2017 Number 1,320,388 - Nil $ 599,602 - Nil Nil Nil 900,000 92,387 (a) Shares issued during the year (b) Shares agreed to be issued forfeited during the year (c) Performance Rights allocated but not issued (d) Options issued during the year (a) Shares The equity-settled share-based payments provided during the year related to: (i) 185,000 shares issued as part of the employee share plan. (ii) 431,264 shares agreed to be issued in the prior year were forfeited during the year. The equity-settled share-based payments provided during the prior year related to: (i) 250,000 shares issued in lieu of incentive payment for sales achievement. (ii) 716,977 shares issued or agreed to be issued in lieu of salary to the Directors of the Company. The Company agreed and approved at the 2016 AGM on 21 November 2016. (iii) 353,411 shares issued in lieu of services provided by the external consultants of the Company. (vi) Share-based payments totalled $691,990, of which $295,117 was included in employee benefit expense and $396,873 is included as share-based payments. (b) Performance rights During the period ended 30 June 2018 1,324,000 performance rights were granted for the 12-month performance period ending 31 December 2018. At the reporting date, 450,000 of these rights had been forfeited due to staff departures and an expense of Nil recognised. An expense of $57,592 was recognised for the remaining 874,000 rights. 77 ALEXIUM INTERNATIONAL GROUP LIMITED NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (c) Options The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in share-based payment options. 2018 2017 Number WAEP Number WAEP Outstanding at 1 July 6,575,000 $ 0.63 9,018,750 $ Granted during the year Reinstated during the year Forfeited during the year - $ - $ - $ - - - 900,000 $ - $ - $ Exercised during the year (2,425,000) $ 0.19 (3,343,750) $ Expired during the year Outstanding at 30 June (1,750,000 $ 2,400,000 $ 0.84 0.94 - $ 6,575,000 $ 0.39 1.25 - - 0.13 - 0.63 The weighted average remaining contractual life of share options outstanding at the end of the financial year was 0.45 years (2017: 0.13 years), and the exercise prices range from 75 cents to 175 cents (2017: 18 cents to 175 cents). The assessed fair values of the options were determined using a variation of the binomial option pricing model that considers factors specific to the share incentive plans. The following principal assumptions were used in the valuation: Number 30-Jun-18 Average fair value per option 30-Jun-17 $ Number Average fair $ value per option - - - - - - - - - 900,000 0.102652 92,387 - - - 900,000 0.102652 92,387 a) Services rendered b) Directors 2017 (No.) of options issued 300,000 300,000 300,000 Services rendered Spot price of asset Exercise price Risk free rate (%) Start date Expiry date Volatility 0.59 0.75 1.71% 04/11/2016 04/11/2019 60% 0.59 1.25 1.71% 04/11/2016 04/11/2019 60% 0.59 1.75 1.71% 04/11/2016 04/11/2019 60% 78 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 18. RESERVES 2018 Option premium reserve $ Balance at 1 July 2017 5,856,738 Performance right expense - Performance rights reserve Foreign currency translation reserve $ 619,640 54,272 $ (2,287,525) - Total reserve $ 4,188,853 54,272 Foreign currency translation differences arising during the year Balance at 30 June 2018 2017 (221,770) 5,634,968 (21,489) 652,423 2,423,955 136,430 2,180,696 6,423,821 Option premium reserve $ Performance rights reserve Foreign currency translation reserve Total reserve $ $ $ Balance at 1 July 2016 5,590,802 601,036 Performance right expense 92,387 - (748,131) - 5,443,707 92,387 Foreign currency translation differences arising during the year Balance at 30 June 2017 19. ACCUMULATED LOSSES Balance at beginning of year Net loss attributable for the year Foreign currency translation Balance at end of year 173,549 5,856,738 18,604 619,640 (1,539,394) (2,287,525) (1,347,241) 4,188,853 Consolidated 2018 ($) 2017 ($) (49,853,653) (3,961,119) 8,155 (40,716,730) (9,136,923) - (53,806,617) (49,853,653) 20. NOTES TO THE STATEMENT OF CASH FLOWS (a) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents include cash on hand and in banks and deposits at call, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the year as shown in the statement of cash flows are reconciled to the related item in the statement of financial position as follows. Consolidated Cash on hand 2018 ($) 2017 ($) 10,641,763 2,620,759 79 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (b) Reconciliation of operating loss after income tax to net cash used in operating activities Operating loss after income tax Non-cash items Depreciation and amortisation of non-current assets Share-based payment Fair value movement- embedded derivative Interest and amortisation on cost of raising borrowings Gain on Debt Extinguishment Unrealised foreign exchange (gains) / losses Changes in assets and liabilities net of effect of purchase of subsidiaries (Increase) / Decrease in trade and other receivables (Increase) / Decrease in inventories on hand (Increase) / Decrease in other current assets Increase / (Decrease) in trade and other payables Increase / (Decrease) in other current liabilities Net cash (used in) operating activities Consolidated 2018 ($) 2017 ($) (3,976,257) (9,136,923) 322,907 (87,247) (2,369,993) 1,068,060 (396,591) 393,727 270,626 679,015 142,072 62,870 - (1,560) 583,689 (954,799) 90,616 7,851 (374,437) (10,111) (967,770) (689,694) (227,682) 214,017 (5,558,690) (9,798,924) (c) Reconciliation of property, plant and equipment additions to investing activities Property, plant and equipment additions per note 11 Non-cash items Addition of financing leases Foreign exchange movement on transfers Change in liabilities related to additions (Increase) / Decrease in current liabilities Purchase of property, plant and equipment per statement of cash flows 21. RELATED PARTY TRANSACTIONS (a) American Security Project Consolidated 2018 ($) 2017 ($) 385,553 1,532,614 (342,907) (527,069) - - (849) 41,797 198,865 1,204,410 During the period, the following was paid to American Security Project, a related party of Brig. Gen. Stephen Cheney, Non-Executive Director: (i) US$23,778 (2017: US$51,240) was for lease charges on office space in Washington D.C. which expired in March 2018 (ii) Nil (2017: US$50,000) contribution to “Pathways to the Future of US-Cuba Relations” program which facilitated access to high level government and military officials in order to further our efforts in the protective military garment space. 80 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (b) Nelson Mullins Riley & Scarborough LLP During the period, the following was paid to Nelson Mullins, a related party of Craig Metz, Non-Executive Director: (i) US$48,000 (2017: US$48,000) was paid by The Nardelli Group on behalf of Alexium for the continuation of Government Relations Activity. (c) Transactions with key management personnel Short-term employee benefits Salary and fees Medical benefits Other Total short-term employee benefits Post-employment super-annuation Total post-employment benefits Share-based payments- Performance rights Total share-based payments Short-Term Incentive Plan Long-Term Incentive Plan Total incentive plan payments Total remuneration 22. SEGMENT REPORTING 2018 ($) 2017 ($) 1,026,682 1,434,390 42,451 97,698 52,469 165,857 1,166,831 1,652,716 - - 3,588 3,588 20,612 20,612 329,154 329,154 - - - - - - 1,187,443 1,985,458 For management purposes, the Group is organised into one main operating segment which involves the development and licensing of its proprietary flame retardant (FR) and phase change material (PCM) chemistries, reactive surface treatment (RST) technologies, and selling its specialised chemistry to customers. All of the Group’s activities are interrelated and discrete financial information is reported to the Chief Executive Officer (Chief Operating Decision Maker) as a single segment. Accordingly, all significant operating decisions are based upon analysis of the Group as one segment. The financial results from this segment are equivalent to the financial statements of the Group as a whole. Geographic information of revenue and non-current assets excluding financial instruments are as follows: 81 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 2018 Sales revenue Interest revenue Other income Interest expense Property, plant and equipment Intangible assets Depreciation and amortisation 2017 Sales revenue Interest revenue Other income Interest expense Property, plant and equipment Intangible assets Depreciation and amortisation Australia US Cyprus Total - 11,911,816 10,985 437,210 2,075,375 - - 2,342 9,134 (40,619) 222,251 1,923,164 657,318 291,670 - - - - 32,355 88,695 13,757 11,911,816 20,119 396,591 2,297,626 1,955,519 746,013 307,769 Australia US Cyprus Total - 17,929,361 5,946 - 26,690 3,793 - 3,281 3,129 159,000 422,652 1,837,889 12,814 254,426 - - - - 35,175 97,288 12,919 17,929,361 9,075 159,000 449,342 1,876,857 110,102 270,626 23. INVESTMENTS IN CONTROLLED ENTITIES Name of Entity Parent Entity Country of Incorporation Percentage Owned (ordinary shares) Percentage Owned (ordinary shares) 2018 (%) 2017 (%) Alexium International Group Limited Australia Subsidiaries of Alexium International Group Limited Alexium Limited Alexium Inc. Cyprus USA 100 100 100 100 The parent entity has an interest free unsecured loan with Alexium Inc. amounting to US$40,196,893 (2017: US$23,765,319). The parent entity has an interest free unsecured loan with Alexium Ltd amounting to US$303,108 (2017: US$298,348). 82 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 24. FINANCIAL INSTRUMENTS (a) Interest rate risk exposures The Group is exposed to interest rate risk through primary financial assets and liabilities. The carrying amounts of financial assets and financial liabilities held at balance date approximate their estimated net fair values and are given below. The net fair value of a financial asset or a financial liability is the amount at which the asset could be exchanged, or liability settled in a current transaction between willing parties after allowing for transaction costs. The Group’s exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and financial liabilities is set out below: Weighted Average Effective Interest Rate Variable Interest Rate Fixed Maturity Dates Less than 1 Year Fixed Maturity Dates 1-5 Years Fixed Maturity Dates 5+ years Non- Interest Bearing Total 2018 % $ $ $ $ $ $ Financial Assets Cash and cash equivalents Trade and other receivables/other financial assets Financial Liabilities Trade and other payables Capital lease liabilities Convertible note Derivative Liability 0.38 10,317,995 - - - 9.27 13.50 - - - 10,317,995 - - - - - - - - - - - - - 289,572 402,232 - - 10,000,000 630,983 289,572 11,033,215 - - - - - - - - 323,768 10,641,763 513,800 513,800 837,568 11,155,563 438,793 438,793 - - - 691,804 10,000,000 630,983 438,793 11,761,580 83 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Weighted Average Effective Interest Rate Variable Interest Rate Fixed Maturity Dates Less than 1 Year Fixed Maturity Dates 1-5 Years Fixed Maturity Dates 5+ years Non- Interest Bearing Total 2017 % $ $ $ $ $ $ Financial Assets Cash and cash equivalents Trade and other receivables/other financial assets Financial Liabilities Trade and other payables Capital lease liabilities Convertible note Derivative Liability (b) Interest rate risk 0.21 889,260 - - - 9.93 15.00 - - 889,260 - - - - - - - - - - - - - 182,533 345,444 4,499,674 - - 811,951 4,682,207 1,157,395 - - - - - - - - 1,731,499 2,620,759 1,097,489 1,097,489 2,828,988 3,718,248 1,634,245 1,634,245 - - - 527,977 4,499,674 811,951 1,634,245 7,473,847 At 30 June 2018, if interest rates had increased by 1% from the year end variable rates with all other variables held constant, post tax profit and equity for the Group would have been $106,418 higher (2017: changes of 1% $26,208 higher/$26,208 lower) based on cash and cash equivalents. The 1% (2016: 1%) sensitivity is based on reasonably possible changes, over a financial year, using an observed range of historical RBA movements over the last year. (c) Foreign currency risk The Group currently conducts its operations across international borders. A large proportion of the Group’s revenues, cash inflows, other expenses, capital expenditure and commitments are denominated in foreign currencies, mostly with costs and income in US dollars with smaller, less frequent transactions in GBP, Euros and Australian Dollars. For the reporting period ended 30 June the Group has changed reporting currencies from Australian Dollars to US Dollars. This change was made to mitigate the Group’s exposure to foreign currency risk. While the majority of transactions will now have decreased risk of currency fluctuations, the Group does still conduct business, procure services, and engage in financing activities in other currencies. This will result in the income, expenditure and cash flows of the Group being exposed to the fluctuations and volatility of the rate of exchange between other currencies and the US dollar, as determined in international markets. 84 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Exposure to foreign exchange risk may result in the fair value or future cash flows of a financial instrument fluctuating due to movement in foreign exchange rates of currencies in which the Group holds financial instruments which are other than the AUD functional currency of the parent or USD functional currency of US Alexium Inc. or the UK pound sterling functional currency of Alexium Ltd. With instruments being held by overseas operations, fluctuations in the US dollar and UK pound sterling may impact on the Group’s financial results. The following table shows the foreign currency risk on the financial assets and liabilities of the Group’s operations denominated in currencies other than the functional currency of the operations. Consolidated USD AUD GBP Other Total USD Net Financial Assets/(Liabilities) in USD Functional currency of entity: Australian dollar US dollar UK pound sterling Statement of financial position exposure 40,196,893 - - 303,108 (571,573) - - - - - 40,196,893 (268,465) 2017 Consolidated USD AUD GBP Other Net Financial Assets/(Liabilities) in USD Functional currency of entity: Australian dollar US dollar UK pound sterling Statement of financial position exposure 23,765,319 - - 298,348 (682,318) - - - - - 40,500,001 (571,573) 39,928,428 Total USD 24,063,667 (682,318) - - - - - - - - 23,765,319 (383,970) 23,381,349 The above balances relate to intercompany loans between member companies of the Group. (d) Credit Risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. The Group does not hold any credit derivatives to offset its credit exposure. The Group’s exposure to credit risk is minimal. As of 24 August 2018, Alexium had collected 99% of all receivables outstanding at 30 June 2018. Total bad debt expense for the year was $12,364, 0.1% of total revenue. As the Group does not currently have any significant debtors, lending, stock levels or any other credit risk, a formal credit risk management policy is not maintained. 85 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 As at 30 June 2018, the Group’s non-derivative financial liabilities have contractual maturities as summarised below: (e) Liquidity risk The Group manages liquidity risk by continuously monitoring scheduled debt servicing payments for long-term financial liabilities as well as forecasted cash inflows and outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day basis, as well as based on a rolling 30-day projection. Long-term liquidity needs for a 180-day and 360-day period are identified monthly. Net cash requirements are compared to available borrowing facilities to determine headroom or shortfalls. As at 30 June 2018, the Group’s non-derivative financial liabilities have contractual maturities as summarised below: 2018 Consolidated Trade and other payables Finance lease obligations Borrowings Total 2017 Consolidated Trade and other payables Finance lease obligations Borrowings Total Current 1-5 Years 5+ years 438,793 289,572 - 728,365 - 402,232 13,078,750 13,480,982 Current 1-5 Years 5+ years 1,431,510 182,553 5,562,500 7,176,563 - 345,444 - 345,444 (f) Fair values of financial assets and liabilities Cash and cash equivalents The carrying amount approximates fair value because of their short-term to maturity. Trade receivables and trade creditors The carrying amount approximates fair value Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3: unobservable inputs for the asset or liability. - - - - - - - - 86 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 As at 30 June 2018 and 2017, there were no other financial assets and liabilities other than cash, trade receivables and payables, and borrowings. Measurement of fair value of financial instruments The Group’s finance team performs valuations of financial items for financial reporting purposes, including Level 3 fair values, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. Valuation processes and fair value changes are discussed among the audit committee and the valuation team at least every year, in line with the Group’s reporting dates. Embedded derivatives (Level 3) The assessed fair values of the derivatives were determined using a Black-Scholes option pricing model which approximates the results that would have been achieved by using a binomial lattice. The model takes into account the expected price volatility of the underlying instrument, expected dividend yield and the risk-free interest rate. A collection of comparable companies has been used as a proxy for the volatility determined. The embedded derivative liability is classified as non-current based on a convertible note maturity of three years and warrant expiration date of five years from the 29 September 2017 issuance date. The following shows the levels within the hierarchy of financial assets and liabilities measured at fair value on a recurring basis at 30 June 2018 and 30 June 2017. 2018 Financial Liabilities Derivative Liability Total Liabilities 2017 Financial Liabilities Derivative Liability Total Liabilities Level 1 Level 2 Level 3 Total Level 1 - - - - Level 2 - - - - 630,983 630,983 630,983 630,983 Level 3 Total 811,951 811,951 811,951 811,951 There were no transfers Level 1 and Level 2 in 2018 or 2017. 87 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 25. PARENT ENTITY INFORMATION The following details information related to the parent Entity, Alexium International Group Limited, at 30 June 2018. The information presented here has been prepared using consistent accounting policies as presented in Note 2. Parent Entity Current assets Non-current assets Total assets Current assets Non-current assets Total assets Contributed equity Accumulated losses Foreign currency reserve Performance rights reserves Options reserves Total equity Loss for the year Other comprehensive income net of tax for the year Total comprehensive income net of tax for the year The Group’s commitments and contingencies are detailed in Note 26. 26. COMMITMENTS AND CONTINGENCIES The Group has the following contingent liabilities and commitments. 2018 (US$) 2017 (US$) 1,458,930 13,133,137 14,592,067 155,498 7,451,533 7,607,031 269,540 1,192,780 1,462,320 481,719 811,951 1,293,670 54,367,832 45,833,450 (53,806,617) (49,853,653) 136,430 652,423 5,634,968 6,985,036 (3,952,964) 685,889 (3,267,075) (2,287,525) 619,640 5,856,738 168,650 (9,136,923) (82,195) (9,219,118) Reactive Surface Treatment (RST) technology is a legacy chemistry for Alexium which is not currently utilised in any of the Company’s existing FR or PCM solutions. Alexium has entered into an agreement with the United States Department of Defense whereby Alexium owns exclusive rights for the RST Technology under patent application in the United States in exchange for a 2.5% gross sales royalty to be paid to the US Government. Alexium has also entered into an agreement with Dr Owens for exclusive rights to the rest of the world, for the same patent application excluding the United States, in exchange for a 5% gross sales royalty to be paid to Dr Owens. These royalties only apply where the RST technology is used in the product production process, which does not include the Company’s current fire-retardant and phase change products. 88 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (a) Commitments Lease commitments 1) Operating leases The Group leases certain premises under operating lease agreements. These premises are used for administration and operational activities with lease terms approximating 1-10 years. There are no contingent rent payments, and one lease is on month to month terms. Minimum future rental payments under non-cancellable leases having remaining terms in excess of one year are as follows as of 30 June: Consolidated 2018 ($) 2017 ($) Commitments for minimum lease payments in relation to operating Within one year Later than one year but not later than 5 years 2) Finance leases 121,395 586,974 708,369 123,832 495,607 619,439 The Group leases certain equipment under financing leases expiring in various years through 2023, with terms ranging from 3 to 5 years. The assets and liabilities under financing leases are initially recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under financing leases is included in depreciation expense and totalled $100,035 and $80,359 for the years ended 30 June, 2018 and 2017 respectively. Present value of future minimum rental payments under financing leases having remaining terms in excess of one year are as follows as of 30 June: 89 ALEXIUM INTERNATIONAL GROUP LIMITEDNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 Not later than one year Later than one year and not later than five years Total Future finance charges on finance leases Present value of finance lease liability Present value of finance lease liabilities totals the following as of 30 June: 2018 ($) 2017 ($) 289,572 402,232 691,804 (87,721) 604,083 182,533 345,444 527,977 (79,709) 448,268 Not later than one year Later than one year and not later than five years Total 2018 ($) 2017 ($) 243,667 360,416 604,083 145,380 302,888 448,268 Lease liabilities are secured over property, plant, and equipment. These assets will revert back to the lessor in the event of a default, as described in the agreements. The Group had no other commitments as at 30 June 2018. (b) Contingencies The Group has no other contingent liabilities as at 30 June 2018. 27. DIVIDENDS No dividend has been declared or paid during the current financial year or the prior financial year. The Group does not have any franking credits available for current or future years as it is not in a tax paying position. 28. SUBSEQUENT EVENTS On 13 July 2018, the Board of Directors appointed Dr. Robert Brookins as Chief Executive Officer and Managing Director. Dr. Brookins was appointed as interim Chief Executive Officer on 31 May 2018. Please see the 13 July 2018 Appendix 3X for more details. No other significant event has occurred since the end of the financial year that may have a significant impact on the financial position of the group. 90 ALEXIUM INTERNATIONAL GROUP LIMITEDDIRECTORS’ DECLARATION The Directors of the Company declare that: 1. The financial statements, comprising the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of financial position, consolidated statement of cash flows, consolidated statement of changes in equity and accompanying notes, are in accordance with the Corporations Act 2001 and: (a) comply with Accounting Standards and the Corporations Regulations 2001, other mandatory professional reporting requirements (b) give a true and fair view of the Company’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and (c) comply with International Financial Reporting Standards as disclosed in Note 2 of the financial statements. 1. The remuneration disclosures included in the Directors’ Report (as part of the audited Remuneration Report) for the year ended 30 June 2018, comply with section 300A of the Corporations Act 2001 (Cth). 2. In the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 3. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the directors by: Susan Thomas Chair Dated 31 August 2018 91 ALEXIUM INTERNATIONAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT Central Park, Level 43 152-158 St Georges Terrace Perth WA 6000 Correspondence to: PO Box 7757 Cloisters Square Perth WA 6850 T +61 8 9480 2000 F +61 8 9322 7787 E info.wa@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report To the Members of Alexium International Group Limited Report on the audit of the financial report Opinion We have audited the financial report of Alexium International Group Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and b complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 92 ALEXIUM INTERNATIONAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Borrowings – Embedded derivative liability – refer to Notes 2 (n) and 15 On September 30, 2017 the Group entered a convertible note, secured by the Group’s assets, with institutional lenders to refinance the Group’s previous debt facility and increase working capital. The USD$10 million note with GPB debt Holdings II LLC carries a thirty-six-month term and 13.5% annual interest rate and is convertible into ordinary shares upon a change of control. Under the agreement, warrants will be issued up to 20% of the borrowings for a period of five years. The borrowing is a hybrid instrument with liability and derivative liability components. An embedded derivative is a provision in a contract that modifies the cash flow of that contract by making it dependent on an underlying measurement. Determining the appropriate accounting treatment for embedded derivatives may be complex and involve significant management judgement. This area is a key audit matter as there is a risk of material misstatement associated with the significant management judgment applied to determining the accounting treatment and associated estimates in applying fair value measurements. Intangible assets – refer to Notes 2 (h), 2 (x) and 12 The Group has capitalised development costs in relation to its current development projects (Nyco, Alexiflam NF and Alexicool CCE). There is a risk that costs capitalised may not comply with the recognition requirements relevant to AASB 138 Intangible Assets. Management judgement is applied in determining the commercial and technical feasibility of capitalised projects, including management’s assessment of future economic benefits. Our procedures included, amongst others: • evaluating and assessing the design of controls over the processes to record, review and report the Group’s debt facilities; • obtaining and reading the loan agreements to understand the transactions and its related terms; • • evaluating management’s determination of the accounting treatment of the convertible note. Management determined that it is a hybrid instrument, with an embedded derivative that needed a valuation; testing management’s assumptions used in the Black- Scholes option pricing calculation of the fair value of the embedded derivative, using the work of management’s expert; reviewing the calculation of amortised cost and interest expense of the loan to assess mathematical and clerical accuracy, as well as tracing inputs to source documentation; tracing the funds received and reimbursed into the respective financial institutions; • • • performing testing of management’s debt extinguishment calculations for the TCA Global Credit Master Fund debt; and • assessing the appropriateness of the financial statement disclosures. Our procedures included, amongst others: • understanding the design of controls over the processes to record and evaluate development costs capitalised; • assessing the appropriateness of management’s policy for capitalising development costs pursuant to AASB 138 by obtaining management’s position paper; • obtaining and reviewing evidence to support the key assumptions used by management including mostly third- party evidence, such as Memorandum of Understanding agreement on their current development projects, email correspondence with lawyers and invoices; • selecting a sample of capitalised costs and agreeing to third party support and payroll reports to identify whether they have been appropriately capitalised in accordance with accounting policies; 93 ALEXIUM INTERNATIONAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT This area is a key audit matter due to the subjectivity involved in assessing the recognition criteria for capitalised development costs. • assessing the appropriateness of the financial statement disclosures. Information other than the financial report and auditor’s report thereon The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors’ for the financial report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. 94 ALEXIUM INTERNATIONAL GROUP LIMITED INDEPENDENT AUDITOR’S REPORT Report on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 13 to 22 of the Directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Alexium International Group Limited, for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. GRANT THORNTON AUDIT PTY LTD Chartered Accountants M J Hillgrove Partner – Audit & Assurance Perth, 31 August 2018 95 ALEXIUM INTERNATIONAL GROUP LIMITED SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 10 September 2018. Quoted equity securities 345,443,598 fully paid ordinary shares are held by 5,510 shareholders. 1,500,000 unlisted options expiring 30/09/2020 at $0.75. Unquoted equity securities • • 300,000 unlisted options expiring 04/11/2019 at $0.75. • 300,000 unlisted options expiring 04/11/2019 at $1.25. • 300,000 unlisted options expiring 04/11/2019 at $1.75. Shareholder distribution The number of of shareholders, by size of holding, are: Holding Ranges 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - 9,999,999,999 Totals Unmarketable parcels Minimum $500.00 parcel at $0.13 per unit Substantial holders Holders Total Units % Issued Share Capital 540 1,571 904 2,046 444 256,482 4,722,065 7,362,069 70,577,846 262,525,136 5,505 345,443,598 0.07% 1.37% 2.13% 20.43% 76.00% 100.00% Holders 1,639 Total Units % Issued Share Capital 2,806,924 0.81% JP Morgan Nominees Australia Limited 32,440,267 Number of ordinary shares Percentage 9.3909% Voting rights The voting rights attaching to each class of equity securities are set out below: 1. Ordinary shares: On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 2. Options: No voting rights. Stock exchange listing 1. Quotation has been granted for all the ordinary shares of the company on all Member Exchanges of the Australian Stock Exchange Ltd. 2. Alexium is fully quoted on the NASDAQ International. 96 ALEXIUM INTERNATIONAL GROUP LIMITEDSHAREHOLDER INFORMATION Equity security holders Twenty largest holders of quoted equity securities are: 1 2 3 4 5 6 7 8 9 Name J P MORGAN NOMINEES AUSTRALIA LIMITED SANDHURST TRUSTEES LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 DR STUART LLOYD PHILLIPS & MRS FIONA JANE PHILLIPS BNP PARIBAS NOMINEES PTY LTD MR MARTIN KEITH THOMAS & MRS HELEN PATRICIA THOMAS LOMAND SERVICES LIMITED FLOREANT AMBO PTY LTD 10 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 11 CANNOW PTY LTD 12 DR STUART LLOYD PHILLIPS & MRS FIONA JANE PHILLIPS Number Percentage 32,440,267 16,722,684 9.39% 4.84% 10,000,000 2.89% 9,716,809 7,568,167 2.81% 2.19% 6,035,390 1.75% 5,431,500 5,281,500 5,060,715 4,314,439 4,000,000 3,500,000 1.57% 1.53% 1.47% 1.25% 1.16% 1.01% 13 MR ANIL BHASKAR UTTURKAR & MRS REKHA ANIL UTTURKAR 3,200,000 0.93% 14 DR STUART LLOYD PHILLIPS 15 DAVID RIVETT PTY LIMITED 16 MR ROBERT NEAL BROOKINS 17 CITICORP NOMINEES PTY LIMITED 18 SL & FJ PHILLIPS PENSION FUND 19 MS TEN SOO LAN 20 MR EGAN HARVEY JOHNSON 3,060,000 0.89% 2,800,000 0.81% 2,581,000 2,498,496 2,142,858 2,042,665 1,974,558 0.75% 0.72% 0.62% 0.59% 0.57% 97 ALEXIUM INTERNATIONAL GROUP LIMITEDalexiuminternational.com 98 ALEXIUM INTERNATIONAL GROUP LIMITED

Continue reading text version or see original annual report in PDF format above