For personal use only TABLE OF CONTENTS Company Directory Letter from the Chair Letter from CEO 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 1 2 3 4 11 28 29 30 31 32 33 65 66 70 ALEXIUM INTERNATIONAL GROUP LIMITED For personal use only COMPANY DIRECTORY DIRECTORS COMPANY SECRETARY REGISTERED OFFICE AUDITORS SHARE REGISTRY BANKERS SOLICITORS ABN Ms Rosheen Garnon Brigadier General Stephen Cheney Ms Claire Poll Dr Robert Brookins Ms Maja McGuire 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 Level 23, 235 St Georges Terrace Perth WA 6000 Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street Perth WA 6000 91 064 820 408 DOMICILE AND COUNTRY OF INCORPORATION Australia LEGAL FORM OF ENTITY SECURITY EXCHANGE Listed Public Company Australian Securities Exchange (Perth) Limited ASX Code: AJX ALEXIUM INTERNATIONAL GROUP LIMITED 1 For personal use only LETTER FROM THE CHAIR Dear Shareholders, It is my pleasure to present to you Alexium’s Annual Report for the year ending 30 June 2019 (FY19), my first as your Chair. With a new management team and Board in place, FY19 was a transformational year for Alexium. Significant progress has been made to refocus the Company on our cornerstone initiatives, which will underpin future sustainable growth of Alexium. Growth strategy targets high margin verticals Alexium is an IP-driven business and our strategy is to target high margin verticals with solutions specifically built for our customers. Accordingly, our dedicated staff have worked tirelessly to establish the Alexium brand in the wider market by aligning ourselves with strategic partners in key markets. We now have two suites of valuable products, namely Alexicool® and Alexiflam® that are gaining market traction. Alexiflam®: Partnerships to underpin growth of flame-retardant sales Alexiflam® FR is our patented flame retardant with applications to nylon and cotton blend materials. The opportunity for use with the US military alone is large with approximately 35.2 million pounds of fabric required per annum for uniforms across all branches of the military. Having signed a development agreement with Pine Belt Processing, we are about to provide chemically treated uniforms for a wear trial. There are also opportunities for us to grow in adjacencies, over the long term, as we look to grow in new markets. Alexiflam® NF was developed to address a market gap for an environmentally friendly flame-retardant treatment for cotton, with applications covering workwear, apparel and even wood. Following the signing of a MoU with ICL, we are well placed to negotiate a distribution agreement with ICL in a US$100+ million annual global market Alexicool®: Strong demand for thermal regulation technology in bedding products There are substantial opportunities for us to capitalise on the strong demand for our Alexicool® Phase-Change Material products, having launched a new Alexicool® FM product line in the first quarter of this calendar year. The market represents an $30 million opportunity for Alexium, and we have experienced increased demand for our products for top of bedding applications, signed supply contracts with a multi-billion-dollar North American mattress manufacturer, as well as with Pegasus Home Fashions, a world class manufacturer of pillow products. New Board and management team Given the substantial progress we have made across each of our cornerstone initiatives over the past year, I am confident that the new Board and management team will continue to build on the recent positive momentum created, as we execute on our growth plans in FY 2020 and beyond. I would like to thank my fellow directors for their dedication and valuable input into our strategy and acknowledge our highly talented staff and management team for the tremendous job they have done over the past 12 months. On behalf of Alexium’s board and management team, I thank you for your continued shareholder support over the past year and look forward to reporting on the progress we make over the exciting year ahead, as we look to sustainably scale growth. Ms Rosheen Garnon Chair ALEXIUM INTERNATIONAL GROUP LIMITED 2 For personal use only LETTER FROM CEO Dear Shareholders, I am delighted to share with you the substantial progress we have made over FY 2019 and provide a brief insight into what we plan to achieve for the year ahead. Fiscal year 2019 was my first full year as Chief Executive Officer and during the year we welcomed Mr Jason Lewis (Chief Financial Officer) and Mr Allen Reihman (Chief Commercial Officer) to the leadership team. With an enhanced leadership team in place we were able to refocus the business and concentrate on our core strengths, as we capitalise on high margin opportunities. The following report provides an overview of the key operational achievements made during the year, as we executed on our strategy. Key partners identified to drive commercialization of Alexiflam® technologies During FY 2019, we made significant advances in our FR NyCo technology where we completed Pyroman® testing of Alexium-created fabrics in addition to satisfying flammability requirements specified for a flame-retardant treatment to be used for everyday military uniforms. These are significant milestones, and the latter is the focus of our efforts for military applications. This work culminated in the signing of an exclusive Development Agreement with Pine Belt Processing for US military uniforms. We look forward to continuing to work closely with Pine Belt throughout FY 2020 as we progress development, ahead of an anticipated supply agreement for the final commercialised process and treatment. Additionally, during FY 2019, we signed a MoU with ICL (a global specialty minerals and chemicals company) regarding the future marketing, distribution, and potential manufacture of Alexiflam® NF. Alexiflam® NF is a proprietary flame-retardant we developed to treat cotton, linen and other cellulosic textiles. Having now received US Environmental Protection Agency (EPA) approval under TSCA for the manufacture and sale in the US, we are well placed to drive commercialisation in the global market for flame retardant cotton. Two Alexicool® technology supply agreements signed We have seen increasing demand for PCM cooling technologies in the bedding industry, as premium brands realise the value in temperature management. During March we entered into a Supply Agreement with a multi-billion-dollar North American mattress manufacturer, as the preferred supplier of PCM products. Additionally, in July we signed a supply agreement with Pegasus Home Fashions that will ensure their customers have access to products with enhanced cooling properties, as thermal regulation becomes an important requirement for consumers. We are delighted with the progress made on Alexicool® and see the expansion of Alexicool® products to be a key driver of near-term profitability. Strategic partnerships and improving cashflows underpin positive outlook We are encouraged by the strong quarter on quarter growth in cash inflows during the second half of FY 2019 as the benefits of our growth strategy flow and we begin to scale up growth. We expect this positive trend to continue in FY 2020 and will underpin positive EBITDA by the end of the 2019 calendar year. Alexium is well positioned for strong growth in the future as we execute on our strategy and leverage strategic partnerships. I would like to thank you for your continued shareholder support and look forward to delivering on the exciting operational initiatives planned for FY 2020 that will underpin long-term growth in shareholder value. Dr Bob Brookins Chief Executive Officer ALEXIUM INTERNATIONAL GROUP LIMITED 3 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Alexium International Group Limited - Corporate Governance Statement ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – 3rd edition For the year ended 30 June 2019 and approved by the Board as at 12 July 2019 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 2019, 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 Recommendations Current Practice 1.1 1.2 1.3 1.4 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 2019 Annual Report. 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, education 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. 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. 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. 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 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. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 4 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice 1.5 A listed entity should: a. Have a diversity policy; b. Disclose that policy or a summary 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. 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. A listed entity should: a. Have and disclose a process for the its individual periodically performance of the board, committees directors; and evaluating and b. Disclose whether performance evaluations were undertaken. A listed entity should: a. Have and disclose a process for the senior evaluating of periodically performance 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 director; And disclose: - - - The charter of the committee; The members of the committee The number of committee met and attendance at those meetings the individual independent times 1.6 1.7 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 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 2019 are set out in the following table: Whole Organisation (Excluding NEDs) Snr Executive Positions (CEO, CFO, CCO) Non-Executive Directors Proportion of Women 8 out of 25 (32%) 0 out of 3 (0%) 2 out of 3 (66%) The assessment of the Board, each Board Committee and each individual Director was undertaken prior to the date of this statement. An appropriate questionnaire was completed by all Directors. The results were collated and discussed by the Board. The Company conducts annual performance evaluations of all staff. Employee performance evaluations were undertaken in April 2019. The Remuneration Committee evaluated the performance of executive management in July 2019. Details on employee and executive management performance incentives and remuneration are contained in the remuneration report section of the Director’s Report, in the Company’s 2019 Annual Report. Reflecting the size and composition of the Board and Company, during the reporting period, the Board elected to carry out the functions of a nomination committee which includes Board renewal, succession planning, induction and evaluation. Post July 2019, the Board commenced delegating nomination committee functions to the new Nomination & Remuneration Committee. The Nomination & Remuneration Committee comprises of the following members, all of whom are independent non-executive Directors: • Ms Claire Poll (Chair); • Mr Stephen Cheney; and • Ms Rosheen Garnon. 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 2019 Annual Report. The new Nomination & Remuneration Committee Charter which sets out the Committee’s role and responsibilities, composition, structure and membership requirements is available on the Company’s website. 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. Prior to the date of this statement, 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. ALEXIUM INTERNATIONAL GROUP LIMITED 5 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice Strategy Executive Management Corporate Governance Commercial Framework Development Financial Performance • • • • • • • • • • Risk and Compliance Oversight Marketing Human Resources Legal Supply Chain Management • • 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. 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. Innovation and • Entrepreneurial • • Proven success as an innovator. The required entrepreneurial mindset to ensure success in a 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 2019 Annual Report. 2.3 A listed entity should disclose: - the directors The names of 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 Ms Rosheen Garnon Mr Stephen Cheney Ms Claire Poll Dr Robert Brookins Ms Susan Thomas Mr Craig Metz Ms Karen Thurman Appointment date Resignation date Non – executive? Independent? 19 September 2018 15 April 2015 10 December 2017 13 July 2018 10 December 2017 1 December 2014 2 March 2017 31 March 2019 14 November 2018 14 November 2018 Yes Yes Yes No Yes Yes Yes Yes Yes Yes No Yes Yes Yes ALEXIUM INTERNATIONAL GROUP LIMITED 6 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice 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 Rosheen Garnon is an independent non-executive Chair. The roles of the Chair and CEO/MD 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. 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. A listed entity should: - - Have a code of conduct; and Disclose the code or a summary of it. The Company has established a Code of Conduct which applies to all Directors, senior executives and staff. Employees are responsible for actively reporting any breaches of the Code of Conduct and are encouraged to follow the steps outlined in the Whistle-blower Policy. 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: - - - member The charter of the committee; The relevant qualifications; The number of committee met and attendance at those meetings. times the individual The board should receive declarations for CEO & CFO in accordance with S.295A of Corporations Act before approving financial statements. The Code of Conduct and the Whistle-blower Policy are available on the Company’s website. The Audit & Risk Committee (ARC) comprises of the following members, all of whom are independent non-executive Directors: Ms Rosheen Garnon (Chair); • Ms Claire Poll; and • Mr Stephen Cheney. • In addition to the ARC members, the MD & CEO, CFO, external auditor and Company Secretary regularly attend ARC meetings. The Board is in the process of reviewing its composition and skills, with view to ensuring that the ARC is chaired by an independent chair, who is not the Chair of the Board. 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 2019 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. 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 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 2019 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 its continuous disclosure with obligations under the Listing Rules; and Disclosure summary of it. that policy or a - 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. 2.4 2.5 2.6 3.1 4.1 4.2 4.3 5.1 ALEXIUM INTERNATIONAL GROUP LIMITED 7 For personal use only 6.1 6.2 6.3 6.4 7.1 7.2 CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice listed entity should provide A its itself and information about governance to investors via its website. listed entity should design and A implement relations program to facilitate effective two-way communication with investors. investor an 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. 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 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. the A listed entity should give security receive holders option send communications communication to, the entity and its security registry electronically. to and from, 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 committee met and attendance at those meetings If it does not have a risk committee disclose that fact and the process it follows to address that role. the individual times the The board or a committee of the board should: - entity’s risk Review management framework at least annually to satisfy itself that it continues to be sound; and Disclose whether such a review has taken place. - 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. 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 prior to the date of this statement 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. ALEXIUM INTERNATIONAL GROUP LIMITED 8 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice 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. 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. 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 director; and independent - Disclose: - - - The charter of the committee; The members of the committee; and The number of committee met and attendance at those meetings If it does not have a remuneration committee disclose that fact and the process it follows to address that role. the individual times 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. 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 organizational structure includes appropriate resources to manage these risks. A key focus of senior executives is on securing sustaining financial resources and optimizing 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 organizations for our suppliers and customers. The Remuneration Committee comprises of the following members, all of whom are independent non-executive Directors: • • • Ms Claire Poll (Chair); Mr Stephen Cheney; and Ms Rosheen Garnon. In addition to the Remuneration Committee members, the MD/CEO, CFO 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 2019 Annual Report. Post July 2019, the Board commenced delegating nomination committee functions to the new Nomination & Remuneration Committee. The composition of the Committee remains the same as the previous Remuneration Committee. The new Nomination & Remuneration Committee Charter which sets out the Committee’s role and responsibilities, composition, structure and membership requirements is available on the Company’s website. ALEXIUM INTERNATIONAL GROUP LIMITED 9 For personal use only CORPORATE GOVERNANCE STATEMENT 2019 Recommendations Current Practice 8.2 listed entity should separately A its policies and practices disclose regarding the remuneration of non- executive the directors remuneration of executive directors and other senior executives and 8.3 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. - 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. During the reporting period, additional fees were paid to previous Chair, Ms Susan Thomas, in connection with performance of extra services and special exertions on behalf of the Company pursuant to section 13.9 of the Constitution. As approved by shareholders at the 2018 AGM, some Non-executive Directors elected to salary sacrifice their non-executive cash remuneration (or part of) and elected to be paid an equivalent number of performance rights. This is consistent with the Recommendations given the performance rights are not subject to performance-based vesting conditions. Remuneration of the CEO/MD 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 2019 Annual Report. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 10 For personal use only DIRECTORS’ REPORT Your Directors present their report on Alexium International Group Limited (‘Company’ or ‘Alexium’) and the consolidated entity (referred to hereafter as ‘the Group’) for the period ended 30 June 2019. DIRECTORS The Directors of the Company in office during the period ended 30 June 2019 and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. Brigadier General Stephen Cheney • Ms Rosheen Garnon (Appointed 19 September 2018) • • Ms Claire Poll • Dr Robert Brookins (Appointed 13 July 2018) • Ms Susan Thomas (Resigned 31 March 2019) • Mr Craig Metz (Resigned 14 November 2018) • Ms Karen Thurman (Resigned 14 November 2018) PRINCIPAL ACTIVITIES Research and development in consultation with end clients; The development of specialty chemicals where there is a market opportunity for commercialisation. During the period activities included: • • 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 The following were on issue: Type Ordinary shares Unlisted options Outstanding warrants Performance rights 30-Jun-19 345,443,598 2,400,000 4,255,319 4,960,938 30-Jun-18 345,443,598 2,400,000 4,255,319 1,324,000 OPERATING AND FINANCIAL REVIEW Operations and Technology Review The Group’s strategy and efforts to date have focused on the development and commercialisation of high-performance products for phase change material (PCM) and flame retardant (FR) applications. Over the past year, the Group has made significant commercial progress in each of its cornerstone initiatives. Key results from this reporting period are shown below: Market penetration of Alexicool® products: In early FY 2019, the commercial pipeline for Alexicool® applications to textiles grew significantly with customers launching a range of new consumer products for mattress and top-of-bed applications. This pipeline drove revenue growth over the fiscal year, particularly in the second half of the fiscal year. With the number of consumer products and the market share for these products, the Group has established itself as a major supplier of PCM products in the bedding industry. Launch of Alexicool® FM for PCM applications to foam: Building on the success of Alexicool® textile applications and the Group’s network in the bedding industry, Alexicool® FM was launched this fiscal year for PCM applications to foam products. Market reception to the product performance and analytical validation has been strong, and the commercial pipeline has a number of opportunities for Alexicool® FM. Supply agreement with multi-billion-dollar mattress manufacturer: The Group entered into a Supply Agreement with a multi-billion-dollar North American manufacturer of mattresses as the preferred supplier of phase-change-material products for textile applications to their bedding products with the intent to form a strategic partnership. Under the Supply Agreement, Alexium will provide its Alexicool® products for application across the mattress manufacturer’s brands. This Supply Agreement clearly illustrates Alexium’s alignment with a leader in the mattress industry to provide mattresses with improved thermal regulation. ALEXIUM INTERNATIONAL GROUP LIMITED 11 For personal use only DIRECTORS’ REPORT Development Agreement for FR military uniforms: The Group announced the signing of a mutually exclusive Development Agreement with Pine Belt Processing (Pine Belt), a subsidiary of Warmkraft, Inc., covering the development and potential supply of the Group’s flame-retardant chemistry for the treatment of nylon/cotton military uniforms. The agreement follows months of product refinement and testing to provide a no melt, no drip flame retardant function for standard issue US military nylon/cotton uniforms. Pine Belt has significant expertise in the treatment of US military textiles having successfully treated over 25 million US military uniforms with their proprietary insect repellent coatings. Under the terms of the Development Agreement, the Group will work with Pine Belt to comply with their production requirements and to facilitate the provision of treated uniforms by Pine Belt to the US military for limited user evaluation (LUE or “wear trials”). Commercialisation of Alexiflam® NF: The Group signed an MoU with dual listed ICL (TASE/NYSE: ICL), a specialty minerals and chemical company with a leading position globally in the production and sale of brominated and phosphorous flame retardants. The MoU establishes a framework for the potential commercialisation of the disruptive Alexiflam® NF chemistry, leveraging ICL’s unrivalled global manufacturing, sales capabilities and extensive existing customer base. In support of this commercial effort, the Group announced that it had received US Environmental Protection Agency (EPA) approval under the US Toxic Substances Control Act (TSCA) for the manufacture and sale of Alexiflam® NF in the US. TSCA regulates the introduction of new chemical products in the US. This approval provides the Group with the ability to manufacture and sell the volumes of Alexiflam® NF needed to support the Company’s sales targets for military and industrial application in the US, The advances in the cornerstone initiatives have positioned the Group for a broader range of revenue streams, a more diverse customer base, and improved gross margins. Changes to senior management during the period include Jason Lewis as Chief Financial Officer and Allen Reihman as Chief Commercial Officer, both of whom have extensive background in the specialty chemical industry. Their experiences and knowledge along guidance from the board of directors and chief executive officer position the Group to transition from its research phase to a profitable commercial concern. Financial Result Overview The Group’s net loss attributable to members of the Group for the financial year ended 30 June 2019 was $6,939,521 (2018: $3,961,119). This represents a 75% increase in net loss over the prior period. The primary drivers behind this are described below. Revenues from ordinary operating activities were down 58% from the prior year at $5,059,039 (2018: $11,911,816) as the company focused on commercializing speciality products with substantial profit margins and shifted away from low margin revenue streams. This decrease in revenue was partially offset by an improvement in gross profit for the period which was $1,605,742 (2018: $2,354,942) representing an average gross margin percentage across all lines of business of 32% (2018: 20%). The Group has taken significant measures to reduce operating expenses to better position Alexium to achieve profitability. Operating costs decreased to $6,408,915 from $6,805,138 in the prior period without sacrificing the anticipated growth. Expenses are now normalized and will remain in check with the implementation refined controls and processes. We continue to evaluate supplier contracts and service agreements to ensure proper stewardship and expenditure control. As at 30 June 2019 the cash position was $3,843,343 (2018: $10,641,763). Cash and working capital management remains a top priority. Cash burn continues to decrease on a quarterly basis as sales increase and non-essential operating costs are brought into check. Material Business Risks The Group has identified the below specific risks which could impact upon its prospects: 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. 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 marketplace 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 budget, the Board is confident that the Company’s revenue forecasts, commercial pipeline, and funding options will ensure that the Company is sufficiently capitalised for the upcoming twelve months. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 12 For personal use only DIRECTORS’ REPORT 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. In FY2020, Alexium is committed to: • • • • • • • • Expansion of Alexicool® FM into bedding products; Commercialization of FR NyCo technology for military uniforms; Establishing key partnerships for commercialization of Alexiflam® NF; Further growth of the Group’s technology; Effective management of expenses and working capital; Significant growth of the Group’s revenue; Achieving positive EBITDA; and Ensuring a financially strong and stable business through detailed planning, responsible management and transparency of strategy and outcomes. The Group’s business strategies to achieve the above goals include: • • • Leveraging market position and Group resources for greater market penetration; Strengthening and maintaining key relationships supporting the Group’s cornerstone initiatives; and Applying a disciplined and conservative approach to expenditure relative to sales growth. 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. After the reporting period, the Company cleared an outstanding legal matter net cash consideration of $148,000 as referenced in note 13. Additionally, on 14 August 2019, the Company issued 2,042,065 fully paid ordinary shares were issued to directors, current and former employees. 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. 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 2019, 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 2019 are set out below, together with details of Directors’ experience, qualifications, special responsibilities and other company directorships during the past three financial years. Ms Rosheen Garnon Ms Garnon has been an independent Non-Executive Director of the Company since 19 September 2018. She was appointed Non-Executive Chair of the Board of Directors on 31 March 2019. Ms Garnon is currently Chair of the Audit & Risk Committee and a member of the Remuneration Committee. Experience: Ms Garnon has had a distinguished career in the accounting profession as a chartered accountant and taxation advisor. She was a senior partner with KPMG and held senior executive leadership roles with the Firm in Australia and at a global level. Ms Garnon was a member of the KPMG ALEXIUM INTERNATIONAL GROUP LIMITED 13 For personal use only DIRECTORS’ REPORT Australian Executive Leadership Team for 6 years as the National Managing Partner for the Taxation Division. She has extensive experience of working with Boards and C Suite executives. Ms Garnon’s qualifications include a Bachelor of Economics (Accounting Major) and Bachelor of Laws from the Australian National University. She is a Fellow of Chartered Accountants in Australia and New Zealand, a Chartered Tax Advisor and a Graduate of the Australian Institute of Company Directors. Ms Garnon is a Non-Executive Director of Australian Rail Track Corporation; a Non-Executive Director of The Smith Family; a Non-Executive Director of Creative Partnerships Australia; and a Non-Executive Director of Women Corporate Directors. She is also a Member of the Board of Taxation, an independent advisory board, that advises the Federal Treasurer and the Assistant Treasurer on Australia’s taxation policy, as well as a Member of the Australia Council for the Arts’ Major Performing Arts Panel. Qualifications: BEc (Accounting major), LLB, FCA, CTA, GAICD Other listed directorships in the past 3 financial years: N/A Other directorships during the last 3 financial years: Company Australian Rail Track Corporation The Smith Family Australian Business Arts Foundation Limited trading as Creative Partnerships Australia Women Corporate Directors Limited Residence: Ms Garnon is an Australian resident and resides in Sydney, New South Wales. Commenced 21-Nov-18 Feb-19 May-13 2012 Ceased Current Current Current Current Brigadier General Stephen Cheney General Cheney has been an independent Non-Executive Director of the Company since 15 April 2015. He was appointed Deputy Non-Executive Chair of the Board of Directors on 11 April 2018. General Cheney is a member of the Remuneration Committee and a member of the Audit & Risk 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 Defence 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 Other directorships during the last 3 financial years: Company American Security Project Commenced 2007 Ceased Current ALEXIUM INTERNATIONAL GROUP LIMITED 14 For personal use only DIRECTORS’ REPORT Ms Claire Poll Ms Poll has been an independent Non-Executive Director of the Company since 11 December 2017. Ms Poll is also the Chair of the Remuneration Committee and member of the Audit & Risk 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 Other directorships in the past 3 financial years: Company Landgate Presbyterian Ladies College Commenced Sep-06 Ceased September 2016 Commenced Jan-12 Sep-17 Ceased Current Current Residence: Ms Poll is an Australian resident and resides in Perth, Western Australia. Dr Robert Brookins Dr Brookins was appointed as the Company’s Chief Executive Officer and Managing Director on 13 July 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 polyelectrolytes 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. Qualifications : PhD., M.A.E. B.A. B. Sc Other listed directorships in the past 3 financial years: N/A Other directorships in the past 3 financial years: N/A Residence: Greer, South Carolina, USA ALEXIUM INTERNATIONAL GROUP LIMITED 15 For personal use only DIRECTORS’ REPORT Other Directors in office during the reporting period: Director Ms Susan Thomas Mr Craig Metz Ms Karen Thurman Office held Non-Executive Chair Non-Executive Director Non-Executive Director Commenced 11-Dec-17 01-Dec-14 02-Mar-17 Ceased 31-Mar-19 14-Nov-18 14-Nov-18 Ms Susan Thomas Ms Susan Thomas (LLB B. Com) 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. Mr Craig Metz Mr Metz (J.D. Juris Doctor) 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 Defence 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 Labour 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. 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 honour of the State of South Carolina, as well as a number of other recognitions from the South Carolina Military Department. Ms Karen Thurman Ms Thurman (BA, Post Baccalaureate) 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. COMPANY SECRETARY Ms Maja McGuire was appointed Company Secretary on 27 February 2018. 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 B.Com and LLB from the University of Western Australia. 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 2019, and the number of meetings attended and number of meetings applicable based on appointment/resignation date for each Director were: Directors Ms Rosheen Garnon Mr Stephen Cheney Ms Claire Poll Dr Robert Brookins Ms Susan Thomas Mr Craig Metz Ms Karen Thurman Board of Directors 7/7 9/9 9/9 9/9 6/6 3/3 3/3 Audit & Risk Committee 2/2 - 1/1 - 3/3 2/2 2/2 Remuneration Committee - 4/4 4/4 - 4/4 - - The Board and committees meet regularly on an informal basis in addition to the above meetings. ALEXIUM INTERNATIONAL GROUP LIMITED 16 For personal use only 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. Consequence on Shareholder Wealth E. Details of Remuneration F. Service Agreements G. Performance Rights H. Share-based Compensation I. Additional Disclosures Relating to Key Management Personnel J. 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 2019 are: Name Ms Rosheen Garnon Brigadier General Stephen Cheney Ms Claire Poll Dr Robert Brookins Mr Jason Lewis Mr Allen Reihman Ms Susan Thomas Mr Craig Metz Ms Karen Thurman Mr Aaron Krech Position Appointed Resigned 31-Mar-19 19-Sep-18 28-Sep-18 28-Sep-18 Executive Chair Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer Chief Financial Officer Chief Commercial Officer Executive Chair Non-Executive Director Non-Executive Director Former Chief Financial Officer 31-Mar-19 14-Nov-18 14-Nov-18 30-Sep-18 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 and medium to long-term; 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 Rosheen Garnon. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 17 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT 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 $375,000 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. 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. D. Consequence on Shareholder Wealth In considering the performance of the Group and the benefits for shareholder wealth, the Remuneration Committee has regard to a range of indicators in respect of senior executive remuneration and have linked these to the previously described short- and long-term incentives. The following table presents these indicators over the past five financial years, taking into account dividend payments, share price changes and returns of capital during the financial years: Net profit/ (loss) Dividends declared Share price as at 30 June (A$) EPS (cents) 2019 2018 2017 2016(1) 2015(1) (6,939,521) (3,691,119) (9,136,923) (10,912,499) (8,993,390) Nil 0.155 (2.01) Nil 0.120 (1.22) Nil 0.560 (3.03) Nil 0.700 (4.93) Nil 0.630 (4.42) (1) Net loss for fiscal year 2015 and 2016 were originally reported in AUD. These totals reflect the USD equivalent at the average exchange rate for the year ALEXIUM INTERNATIONAL GROUP LIMITED 18 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT E. Details of Remuneration Details of the remuneration of the KMP of the Group is set out below: Short-term benefits Share-based payments Other Benefits Salary and fees Non- Monetary benefits Bonus (3) Other Performance Rights (1) Shares in lieu of salary (2) Super- annuation Long- term benefits Termination Benefits Total Performance based % of Total 2019 Non-Executive Directors Ms R Garnon B.G. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman 39,021 57,068 57,208 26,250 24,194 22,333 Total 226,074 Managing Directors - - - - - - - - - - - - - - 2,742 - - 115,426(4) - - 118,168 - - - - - - - 21,750 14,183 - 52,500 - - 3,758 - - - - - 88,433 3,758 Dr R Brookins 305,001 10,231 71,040 Total 305,001 10,231 71,040 - - 83,794 83,794 Executives Mr J Lewis 166,154 10,630 38,400 48,000(5) Mr A Reihmam 164,423 8,585 36,000 50,222(6) Mr A Krech (7) 46,282 2,688 - - 15,440 14,475 - 376,859 21,903 74,400 98,222 29,915 Total Total - - - - - - - - - - - - 907,934 32,134 145,440 216,390 113,709 88,433 3,758 - - - - - - - - - - - - - - - - - - - - - - - - - 67,271 71,251 57,208 194,176 24,194 22,333 436,433 470,066 470,066 278,624 273,705 80,876 129,846 80,876 682,175 80,876 1,588,674 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 32.9% 19.3% 18.4% 0.0% (1) Performance Rights Plan details are found at Note 16 (2) Rights granted to directors in lieu of salary have vested at 30 June 2019 but not been issued as at that date (3) Short-term incentive plans paid as a cash bonus were awarded on 30 June 2019 for the achievement of a range of financial and non-financial corporate objectives during the current fiscal year. The percentage of bonus granted for all KMP’s was 80% and 20% was forfeited due to not meeting all of the performance criteria. Performance criteria included; • Financial - EBIT and revenue growth within key partners • Non-Financial - Securing supply contracts and licensing agreements with key partners (4) 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 busines s 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. (5) Sign-on bonuses awarded after six months of service equivalent to 20% of annual salary (6) Relocation reimbursement and sign-on bonuses awarded after six months of service equivalent to 20% of annual salary (7) Resigned 30 September 2018 ALEXIUM INTERNATIONAL GROUP LIMITED 19 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT Short-term benefits Share-based payments Other Benefits Salary and fees Non- Monetary benefits Bonus Other Performance Rights Shares in lieu of salary Super- annuation Long- term employee benefits Termination Benefits Total Performance based % of Total 2018 Non-Executive Directors Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman 53,718 27,542 33,599 57,259 54,228 - - - - - Mr G Rezos 135,726 11,436 Total 362,072 11,436 Managing Directors Mr N Clark (1) 15,000 2,403 Mr D Van Hyning (2) 278,771 14,918 Total 293,771 17,321 Executives Dr R Brookins Mr A Krech Total Total 186,672 184,167 9,064 4,630 370,839 13,694 1,026,682 42,451 - - - - - - - - - - - - - - - - 60,301(3) - - - 60,301 - - - 12,388 1,676 14,064 74,365 - - - - - - - - - - 12,799 7,813 20,612 20,612 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 53,718 27,542 93,900 57,259 54,228 147,162 433,809 - 17,403 23,333 317,022 23,333 334,425 - - - 220,923 198,286 419,209 23,333 1,187,443 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.8% 3.9% (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) 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. F. 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 KMP at the end of the financial period are summarised below: Dr Robert Brookins, Managing Director/ Chief Executive Officer • • • • • Term: the initial term of the Service Agreement is 12 months commencing on 1 August 2018 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 $296,000 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. ALEXIUM INTERNATIONAL GROUP LIMITED 20 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT Mr Jason Lewis, Chief Financial Officer • • • • • Term: the initial term of the Service Agreement is 12 months commencing on 18 September 2018 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 $240,000 year, to be reviewed annually. Incentive: Potential short-term and long-term incentive opportunities as determined by the Board of Directors. Termination: Mr Lewis 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 Lewis or make a payment of 6 months’ salary in lieu of notice. Mr Allen Reihman, Chief Commercial Officer • • • • • Term: the initial term of the Service Agreement is 12 months commencing on 19 September 2018 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 $225,000 year, to be reviewed annually. Incentive: Potential short-term and long-term incentive opportunities as determined by the Board of Directors. Termination: Mr Reihman 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 Reihman or make a payment of 6 months’ salary in lieu of notice. G. 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. 2,283,464 performance rights were granted (2018: 165,576) with a value of $217,868 (2018: $113,887). 25,128 performance rights were forfeited (2018: 99,284) with a value of $7,813 (2018:93,275) due to service terms not being met. The valuation of performance rights granted and vested as remuneration of the KMP of the Group during the reporting periods is detailed below: Non-Executive Directors Ms R Garnon Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Total Directors Managing Directors Dr R Brookins Total Managing Directors Executives Mr J Lewis Mr A Reihmam Mr A Krech Total Executives Total Directors and Executives 2019 Value of performance rights vested in year Granted During the year (1) Forfeited in year Granted During the year (2) 2018 Value of performance rights exercised in year Forfeited in year - - - - - - - - - - - - - - 128,123 128,123 83,794 83,794 - - - - - - - - - 46,320 43,425 - 89,745 217,868 15,440 14,475 - 29,915 113,709 - - (7,813) (7,813) (7,813) - - - - - - - 12,799 12,799 - - 7,813 7,813 20,612 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1) Performance rights issued have a performance period ending 30 June 2019 and vest over a three-year period ending 30 Jun 2021 (2) Performance rights issued have a performance period ending 31 December 2018 and vested immediately ALEXIUM INTERNATIONAL GROUP LIMITED 21 For personal use only 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: 2019 Non-Executive Directors Ms R Garnon Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Total Directors Managing Directors Dr R Brookins Total Managing Directors Executives Mr J Lewis Mr A Reihmam Mr A Krech Total Executives Total Directors and Executives 2018 Non-Executive Directors Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Mr G Rezos Total Directors Managing Directors Mr N Clark Dr D Van Hyning Total Managing Directors Executives Dr R Brookins Mr A Krech Total Executives Total Directors and Executives Balance at start of year Granted during year as remuneration Vested during year Forfeited during year Balance at end of year Number Number Number Number Number - - - - - - - - - - - - - - - - - - - - - 41,164 41,164 1,241,420 1,241,420 619,261 619,261 - - - - - - - - - - - 25,128 25,128 66,292 537,829 504,215 - 1,042,044 2,283,464 179,276 168,072 - 347,348 966,609 - - (25,128) (25,128) (25,128) - - - - - - - 1,282,584 1,282,584 537,829 504,215 - 1,042,044 2,324,628 Balance at start of year Granted during year as remuneration Vested during year Forfeited during year Balance at end of year Number Number Number Number Number - - - - - - - - - - - - - - - - - - - - - - 99,284 99,284 41,164 25,128 66,292 165,576 - - - - - - - - - - - - - - - - - - - - - - (99,284) (99,284) - - - (99,284) - - - - - - - - - - 41,164 25,128 66,292 66,292 ALEXIUM INTERNATIONAL GROUP LIMITED 22 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT Performance rights details as at 30 June 2019: Executives Dr R Brookins Mr J Lewis Mr A Reihmam Number of performance rights granted during 2019 Grant Date Vesting Date Expiry Date FV per Right at Grant Date 1,241,420 537,829 504,215 Various 28/03/19 28/03/19 Various Various Various Various 28/03/22 28/03/22 Various 0.155 0.155 The performance rights had vesting criteria based on the following performance and market conditions: • Share price appreciation H. Share-based Compensation The Director’s and other KMP’s of the Company were issued or are entitled to the following share-based remuneration during the reporting period: • Options - Nil Options were issued during the current or prior reporting period • • Shares - 921,414 shares (2018: Nil) with a value of $88,433 (2018: Nil) in lieu of salary Performance Rights - 2,283,464 Performance Rights (2018: 165,576) with a value of $217,868 (2018: $113,887) ALEXIUM INTERNATIONAL GROUP LIMITED 23 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT Options: No options were granted to directors during the 2019 or 2018 financial years. The movement in the number of options held by the Key Management Personnel, including their personally related parties, are set out below: 2019 Non-Executive Directors Ms R Garnon Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Total Directors Managing Directors Dr R Brookins Total Managing Directors Executives Mr J Lewis Mr A Reihmam Mr A Krech Total Executives Total Directors and Executives 2018 Non-Executive Directors Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Mr G Rezos Total Directors Managing Directors Mr N Clark Dr D Van Hyning Total Managing Directors Executives Dr R Brookins Mr A Krech Total Executives Total Directors and Executives 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 - 750,000 - - 750,000 - 1,500,000 - - - - - - 1,500,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 750,000 - - 750,000 - 1,500,000 - 750,000 - - 750,000 - 1,500,000 - - - - - - - - 1,500,000 - - - - 1,500,000 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 750,000 - - 750,000 - - 1,500,000 - - - - - - 1,500,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 750,000 - - 750,000 - - 1,500,000 750,000 - - 750,000 - - 1,500,000 - - - - - - - - - 1,500,000 - - - 1,500,000 ALEXIUM INTERNATIONAL GROUP LIMITED 24 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT Shares: The value of shares issued or agreed to be issued during the year was $88,433 (2018: $Nil) which was calculated based on an issue price of AUD$0.1334 and was approved at the 2018 Annual General Meeting on 14 November 2018. The issue price represents volume weighted average closing price of shares on ASX in the fourteen trading days prior to 14 September 2018. The movement in the number of shares held by the Key Management Personnel, including their personally related parties, are set out below: Non-Executive Directors Ms R Garnon Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Total Directors Managing Directors Dr R Brookins Total Managing Directors Executives Mr J Lewis Mr A Reihmam Mr A Krech Total Executives Total Directors and Executives Granted during year as remuneration in lieu of salary Received during year on conversion of performance rights Received during year on exercise of options Balance at start of year Other changes during year Balance at end of year - 71,572 28,572 285,715 28,572 14,286 428,717 3,162,240 3,162,240 - - 80,000 80,000 3,670,957 227,159 147,653 - 546,602 - - 921,414 - - - - - - 921,414 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 227,159 219,225 28,572 832,317 28,572 14,286 1,350,131 (42,240) (1) (42,240) 3,120,000 3,120,000 - - - - (42,240) - - 80,000 80,000 4,550,131 (1) Correction to total shares held overstated in previous period 2018 Non-Executive Directors Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Mr G Rezos Total Directors Managing Directors Mr N Clark Dr D Van Hyning Total Managing Directors Executives Dr R Brookins Mr A Krech Total Executives Total Directors and Executives Granted during year as remuneration in lieu of salary Received during year on conversion of performance rights Received during year on exercise of options - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Balance at start of year 43,000 - - - - 26,100,000 26,143,000 9,060,070 790,000 9,850,070 2,774,500 80,000 2,854,500 38,847,570 Other changes during year Balance at end of year 28,572 28,572 285,715 28,572 14,286 585,715 971,432 71,572 28,572 285,715 28,572 14,286 26,685,715 27,114,432 (5,880,070) 14,286 (5,865,784) 3,180,000 804,286 3,984,286 387,740 - 387,740 (4,506,612) 3,162,240 80,000 3,242,240 34,340,958 ALEXIUM INTERNATIONAL GROUP LIMITED 25 For personal use only DIRECTORS’ REPORT - REMUNERATION REPORT I. 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. Non-Executive Directors Ms R Garnon Brig. Gen. S Cheney Ms C Poll Ms S Thomas Mr C Metz Ms K Thurman Total Directors Executives Dr R Brookins Mr J Lewis Mr A Reihmam Mr A Krech Total Executives Total Directors and Executives J. Loans to Key Management Personnel No loans have currently been provided to KMP of the Group. THIS IS THE END OF THE AUDITED REMUNERATION REPORT No. of ordinary shares No. of performance rights No. of options over ordinary shares 227,159 219,225 28,572 832,317 28,572 14,286 1,350,131 3,120,000 - - 80,000 3,200,000 4,550,131 - - - - - - - 1,282,584 537,829 504,215 - 2,324,628 2,324,628 - 750,000 - - 750,000 - 1,500,000 - - - - - 1,500,000 ALEXIUM INTERNATIONAL GROUP LIMITED 26 For personal use only DIRECTORS’ REPORT SHARES UNDER OPTION/WARRANT As at the date of this report there were 6,665,319 unlisted options and warrants (2018 - 2,400,000). Details of these options are as follows: Date Options Granted 01/10/15 04/11/16 04/11/16 04/11/16 27/09/17 Expiry Date 30/09/20 04/11/19 04/11/19 04/11/19 27/09/22 Exercise price of shares A$ 0.75 A$ 0.75 A$ 1.25 A$ 1.75 A$ 0.35 Total No. under options 1,500,000 300,000 300,000 300,000 4,255,319 6,655,319 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 2,956,744 performance rights on issue (2018: 1,324,000). 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 ensuring 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. 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 The Company’s auditor, Grant Thornton Audit Pty Ltd corporate tax group has provided tax services to the Group beginning with the tax year ending 30 June 2019 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. Rosheen Garnon Chair Dated 30 September 2019 ALEXIUM INTERNATIONAL GROUP LIMITED 27 For personal use only 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 Limimted for the year ended 30 June 2019, 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, 30 September 2019 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. For personal use only CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019 Revenue Cost of sales Gross Profit 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 Consolidated 2019 US$ 5,059,039 (3,453,297) 1,605,742 (3,609,008) (1,282,435) (413,074) (557,287) (547,111) (4,803,173) (2,793,604) - 629,642 27,614 (2,136,348) (6,939,521) - (6,939,521) 2018 US$ 11,911,816 (9,556,874) 2,354,942 (3,171,158) (1,237,986) (724,727) (453,126) (1,218,141) (4,450,196) (2,297,626) 396,591 2,369,993 20,119 489,077 (3,961,119) - (3,961,119) Note 3 4 14 14 3 7 Other comprehensive income - Exchange differences on translation of foreign operations which will subsequently be reclassified to profit or loss Total comprehensive loss for the year Loss for the year attributable to members of the group Total comprehensive loss for the year attributable to members of the group (31,893) (6,971,414) 694,044 (3,267,075) (6,939,521) (6,971,414) (3,961,119) (3,267,075) Basic and diluted loss per share (cents) 8 (2.01) (1.22) This consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes to the financial statement ALEXIUM INTERNATIONAL GROUP LIMITED 29 For personal use only CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 Current Assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total Current Assets Non-Current Assets Other financial assets Property, plant and equipment Intangible assets Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Borrowings Total Current Liabilities Non-Current Liabilities Borrowings Derivative liability Total Non-Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Accumulated losses Total Equity Consolidated 2019 US$ 3,843,343 962,023 1,153,453 74,917 6,033,736 17,982 1,727,001 1,778,484 3,523,467 9,557,203 1,558,500 170,974 1,729,474 6,786,592 658,141 7,444,733 9,174,207 382,996 2018 US$ 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 8,494,408 6,985,036 54,367,832 5,078,244 (59,063,080) 382,996 54,367,832 6,423,821 (53,806,617) 6,985,036 Note 18 9 10 11 12 13 14 14 14 15 17 This consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements ALEXIUM INTERNATIONAL GROUP LIMITED 30 For personal use only CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 30 JUNE 2019 Contributed equity $ 54,367,832 - - - - Options Premium Reserve $ 5,634,968 - - - - Performance Rights Reserve $ 652,423 - - (593) (593) Foreign Currency Translation Reserve $ 136,430 (1,695,787) - (18,571) (18,571) Consolidated Accumulated Losses $ (53,806,617) 1,695,787 (6,939,521) (12,729) (6,952,250) - - - - - 54,367,832 - - - - - 5,634,968 - - 280,941 - 88,433 1,021,204 - - - - - (1,577,928) - - - - - (59,063,080) Total $ 6,985,036 - (6,939,521) (31,893) (6,971,414) - - 280,941 - 88,433 382,996 Balance at 1 July 2018 Change in accounting estimate (1) Loss for the period Foreign currency translation Total comprehensive income / (loss) Transactions with owners in their capacity as owners: Issued Capital Capital Raising Costs Performance Rights Expense Options Exercised Share-based payment in lieu of salary Balance at 30 June 2019 (1) Accumulated Losses and Foreign Currency Reserve balances at 1 July 2018 were adjusted from the 30 June 2018 balances reported in the FY 2018 Annual Report to reflect a reallocation of $1,695,786 between the two accounts related to the foreign currency translation. Balance at 1 July 2017 Loss for the period Foreign currency translation Total comprehensive income / (loss) Transactions with owners in their capacity as owners: Issued Capital Capital Raising Costs Performance Rights Expense Options Exercised Share-based payment in lieu of salary Balance at 30 June 2018 Contributed equity $ Options Premium Reserve $ 45,833,450 5,856,738 Performance Rights Reserve $ 619,640 Foreign Currency Translation Reserve $ (2,287,525) (1,494,807) (1,494,807) (221,770) (221,770) (21,489) (21,489) 2,423,955 2,423,955 Consolidated Accumulated Losses $ (49,853,653) (3,961,119) 8,155 (3,952,964) 10,106,575 (468,358) 338,244 52,728 54,367,832 - 54,272 - 5,634,968 652,423 136,430 (53,806,617) Total $ 168,650 (3,961,119) 694,044 (3,267,075) 10,106,575 (468,358) 54,272 338,244 52,728 6,985,036 This consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statement ALEXIUM INTERNATIONAL GROUP LIMITED 31 For personal use only CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2019 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 Net cash flows (used in) operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of other non-current assets Proceeds from disposal of property, plant and equipment Payments for development costs Net cash flows (used in) investing activities 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 Net cash flows from / (used in) financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of exchange rate changes on cash and cash equivalents Note 3 18(b) 18(c) 2019 $ 2018 $ 4,844,649 (8,052,450) 27,614 (1,219,230) 57,876 (4,341,541) (90,683) (60,000) - (987,153) (1,137,836) - - (1,258,696) - - - (1,258,696) (6,738,073) 10,641,763 (60,347) 12,437,167 (16,881,341) 20,119 (1,231,830) 97,195 (5,558,690) (41,797) - 1,500 (662,653) (702,950) 9,600,000 (453,979) (5,178,869) 360,677 10,520,333 (521,978) 14,326,184 8,064,544 2,620,759 (43,540) Cash and cash equivalents at end of year 18(a) 3,843,343 10,641,763 This consolidated statement of cash flows should be read in conjunction with the accompanying notes to the financial statement ALEXIUM INTERNATIONAL GROUP LIMITED 32 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 1. CORPORATE INFORMATION The consolidated financial statements of Alexium International Group Limited and its subsidiaries (collectively, the Group) for the year ended 30 June 2019 were authorised for issue in accordance with a resolution of the directors on 30 September 2019. Alexium International Group Limited (‘Company’ or ‘Parent’) is a company limited by shares incorporated and domiciled in Australia, whose shares are publicly traded on the Australian Securities Exchange. These financial statements include the consolidated financial statements and notes of Alexium International Group Limited and its controlled entities (‘Group’). These financial statements are presented in US Dollars. This presentation 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, are 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 Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (‘AASB’) 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 23. (b) New and amended standards adopted by the Group in this financial report New and revised accounting standards and amendments that are currently issued for and adopted during the reporting periods that are relevant to the Group include: AASB 9 Financial Instruments AASB 9: Financial Instruments replaces AASB 139: Financial Instruments; Recognition and Measurement Requirements 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. AASB 9 introduces changes to classification and measurement of financial assets and is required to be applied retrospectively to comparative periods in accordance with AASB 108. Subsequent to initial recognition, financial assets are measured at: • • • Amortised cost Fair value through other comprehensive income (FVOCI) Fair value through profit or loss (FVPL) ALEXIUM INTERNATIONAL GROUP LIMITED 33 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Under the new model, FVPL is a residual category. Financial assets are classified as FVPL if they do not meet the criteria of FVOCI or amortised cost. AAB 9 Classification and measurement Amortised cost FVPL FVOCI Classification Loans and receivables FVPL Available for sales Held to Maturity AASB 139 Resulting measurement Amortised cost FVPL FVOCI Amortised cost 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. A ‘simplified’ model applies for trade receivables with maturities of less than 12 months, which make up the bulk of the Group’s financial assets. Under the ‘simplified’ approach, short term trade receivables will recognise ‘lifetime expected credit losses’ from the first reporting period. These are the credit losses expected over the term of the receivable. The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance at the amount equal to the expected lifetime credit losses. In using this practical expedient, the Group uses its historical experience, external indicators and forward- looking information to calculate the expected credit losses using a provision matrix. At the reporting date expected lifetime credit losses are nil. Under AASB 9, fair value changes of liabilities designated at FVPL are presented as follows (AASB 9.5.7.7): • The fair value changes attributable to changes in the liability’s credit risk are recognised in OCI Fair value through other comprehensive income (FVOCI). The remaining changes in fair value are recognised in profit or loss. • As the accounting for financial liabilities remains largely unchanged from AASB 139, the Group’s financial liabilities were not impacted by the adoption of AASB 9. The Group’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVPL, which are carried at fair value with gains or losses recognised in profit or loss. Financial Instruments held by the Group and Assessment of Impact: Financial Assets/Liabilities Loans and receivables • Trade and other receivables FVPL • Other financial assets Trade and other payables Borrowings and derivatives • Convertible notes Comparison and Impact AASB 139 (Previous Standard) AASB 9 (New Standard) 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 possible. Bad debts are written off when identified No changes in initial recognition, impairment to be recognised using the ‘simplified model’. An estimated of bad debts expenses must be provided in period of recognition of the receivable. Financial assets 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 and loss which are measured initially at fair value Trade and other payables are carried at amortised cost. There is no difference in accounting for derivative liabilities and borrowings between AASB 139 and AASB 9. No changes in initial recognition and subsequent measurement. No changes in initial recognition and subsequent measurement. There is no difference in accounting for derivative liabilities and borrowings between AASB 139 and AASB 9. The only impact on the Group from implementation of AASB 9 is the application of the ‘simplified model’ for impairment of trade and other receivables, most of which have maturities less than 12 months. Based on this assessment, the Company has undertaken a detailed assessment of the standard and determined that there is no impact on the transactions and balances recognised in the financial statements. ALEXIUM INTERNATIONAL GROUP LIMITED 34 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 AASB 15 Revenue from Contracts with Customers AASB 15: Revenue from Contracts with Customers replaces AASB 118: Revenue, AASB 111: Construction Contracts and several 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. AASB 15 outlines the accounting requirements for when and how revenue is recognized using one core principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.“ This is accomplished by using a 5-step recognition process consisting of the following: 1.) Identifying the contract with a customer – The Group receives written communication from its customers in the form of purchase orders or emails. Each party’s rights are clearly defined including volumes, price, payment terms, and shipping date. Purchase orders from customers have a financial consideration that is based on the price per pound of product being sold at a given volume of chemistry requested by the customer. A sales order is not issued until it is probable the consideration is collectable. All customers are evaluated at inception or credit worthiness, and at every purchase order to review outstanding balances and probability of payment. 2.) Identifying the performance obligations - Management has identified the sole performance obligation of these contracts to be the complete transfer of the goods to the customer. In accordance with AASB 15.24, there are no additional goods or services, warranties, repurchase agreements, or public return policies, or other limitations of the seller that would not allow its performance obligation to be considered complete at this time of transfer. The Group considers the transfer complete in line with “FOB Shipping Point” International Commercial Terms and recognizes the completion of this performance obligation when the chemicals are shipped. 3.) Determining the transaction price - Pursuant to AASB 15.47, the Group considers the transaction price to be the amount of consideration to which it expects to be entitled in exchange for transferring promised goods to a customer. As and when a performance obligation is satisfied an entity should recognize revenue to the extent of the transaction price allocated to that performance obligation considering the impact of constraints arising from variable consideration. While the transaction prices vary across customers, this does not constitute variable consideration. Discounts do occur in the normal course of business, but these considerations are not determined beyond inception of the purchase order nor are they promised or implied. They are also not retroactive in nature and would impact prices only on future purchases. With this in mind, and pursuant to AASB 15.20, these changes in price would constitute a separate contract as the performance obligations for the new price would be “distinct” and the new price would reflect appropriate adjustments to that price to reflect the circumstances of the particular contract. Variable consideration includes discounts, rebates, refunds, credits, incentives, performance bonuses/penalties, contingencies, price concessions, or similar items. Variability in consideration can arise from either the amount being: • • Variable as explicitly stated in the contract or arising from customary business practice of the entity or Fixed but its receipt is contingent on the occurrence of a future event. The Company follows AASB15.48 when taking into account variable considerations. The below is an analysis of how the guidance is applied to all current contracts with customers: • • • Variable Consideration - The Company reviews and considers all aspects of customer contracts for variable considerations that would impact the recognition of revenue. Constraining estimates of variable consideration – Estimates are created and recorded when they are deemed highly probable to occur given consideration for factors outside the Group’s control, uncertainty around resolution for a long period time and experience with similar contracts. The existence of a significant financing component in the contract - Each invoice has specified payment terms. All amounts are expected to be received at these terms. Based on AASB 15.63, the Company need not adjust for a financing component if it is reasonably expected the customer pays for the goods in less than a year. • Non-cash consideration – As a normal practice, the Group does not have non-cash considerations with customers. However, the company would calculate a fair value of the non-cash consideration and apply the requirements based on paragraphs 56-58 of the standard. • Consideration payable to a customer – If a contract has a payable consideration, the Group would satisfy the standard by netting the ALEXIUM INTERNATIONAL GROUP LIMITED 35 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 consideration against the determined transaction price once the following events occurs: o o The Group recognises revenue for the transfer of goods of service to the customer; and The Group pays or promises to pay the consideration. 4.) Allocating the transaction price to the performance obligations - Given that there is a single performance obligation to each contract, and the price is clearly identified in the contract, the Group allocates the full contract price to the transfer of goods discussed in Step 2. 5.) Recognize revenue when/as performance obligation(s) are satisfied- The final step is to determine when revenue should be recognized for the single performance obligation: whether over time or at a point in time. In accordance with the standard, at contract inception an entity must determine whether control of the goods transfer to the customer over time using the criteria outlined in AASB 15.35-37. The Group considered the criteria and concluded that that it is appropriate to recognize revenue at a point in time. For each contract, management must determine the specific point in time at which it is appropriate to recognize revenue for the contract. AASB 15 states that an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: • • • • • The entity has a present right to payment for the asset. The customer has legal title to the asset. The entity has transferred physical possession of the asset. The customer has the significant risks and rewards of ownership of the asset. The customer has accepted the asset. As described above, AASB 15 provides certain indicators of the transfer of control. The list is not exclusive, nor must the conditions all be met for an entity to conclude that control of a good or service has been transferred. When assessing control, an entity should evaluate the point in time at which the customer can direct the use of, and obtain substantially all remaining benefits from, the asset. Management recognizes that the application of the control criteria requires judgment and there are various factors to consider. Accordingly, management believes that control is transferred in accordance with the shipping terms, as this is the point that the customer obtains legal title, when customer obtains the risk and rewards of ownership, and when the customer has an obligation to pay for the asset. Once this performance obligation is satisfied and control of the asset has been transferred revenue is recognized as earned based on the determined transaction price which considers variable pricing and allocation of price based on performance obligations. The Group has evaluated adoption methods, and determined the modified retrospective is most appropriate. Under the modified retrospective method, no cumulative impact was noted or recognised at the date of initial application (1 July 2018). (c) Impact of standards issued but not yet applied by the Group 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, except for 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 standard: • • • • • 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. Requires new and different disclosures about leases. The Company will implement the new standard using the modified retrospective method also known as the cumulative catch-up approach. Under the modified retrospective method, the cumulative impact (if any) will be recognized at the date of initial application (July 1, 2019). The modified retrospective permits the measurement of the right-of-use asset equal to the lease liability. ALEXIUM INTERNATIONAL GROUP LIMITED 36 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Under a modified retrospective approach, the Company Calculates lease assets and lease liabilities as at the beginning of the current period; Does not restate its prior-period financial information; Recognises an adjustment in equity at the beginning of the current period; and Carries forward all existing finance lease liabilities; • • • • • Makes additional disclosures specified in the new standard and is exempt from certain of the disclosures usually required by paragraph 28 of AASB 108 on a change in accounting policy The Company has undertaken a detailed assessment of the impact of AASB 16 and determined the Standard will 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. The group has commitments for minimum lease payments totalling $890,440 over the next five years, see Note 24. Management has estimated that the initial right of use asset and corresponding lease liability recorded at implementation will be approximately $890,440. The directors have reviewed all other new Standards and Interpretations that have been issued but are not yet effective for the year ended 30 June 2019. As a result of this review the directors have determined that there is no impact, material or otherwise, of the new and revised Standards and Interpretations on the Company and, therefore, no change is necessary to Company accounting policies. These accounting policies are consistent with Australian Accounting Standards and with International Reporting Standards. (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. • • 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. ALEXIUM INTERNATIONAL GROUP LIMITED 37 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Fair value hierarchy AASB 13: Fair value measurement 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. (e) Principles of Consolidation The consolidated financial statements incorporate all the assets, liabilities and results of the Group. 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 can affect those returns through its power over the entity. A list of the subsidiaries is provided in Note 21. 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 ($). 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 reporting 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 reporting 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. ALEXIUM INTERNATIONAL GROUP LIMITED 38 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (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 in Note 2(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 lessee, 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. Beginning in the period ending 30 June 2020, the Group will adopt AASB 16 Leases which requires recognition of all right of use assets and lease liabilities, except for short- term (under 12 months) and low value leases, on the statement of financial position. See Note 2(c). 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: Asset Type Computer equipment Machinery and equipment Furniture, fixtures and office equipment Leased plant and equipment Years 3 years 3 to 15 years 3 to 10 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. (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 Note 2(i). Internally Generated Intangible Assets 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: Development costs can be measured reliably; Project is technically and commercially feasible, • • • Group intends to and has sufficient resources to complete the project, • Group has the ability to use or sell the asset; and • The asset will generate probable future economic benefits. Development costs not meeting these criteria for capitalisation are expensed as incurred. ALEXIUM INTERNATIONAL GROUP LIMITED 39 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 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 reporting 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, and 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. 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 Note 2(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 to 60-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 and recognised in profit and loss 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 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. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 40 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (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 and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. 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 expires. Classification and initial measurement of financial assets Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable). Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories: • amortised cost • fair value through profit or loss (FVTPL) • fair value through other comprehensive income (FVOCI). All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL): • they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments as well as listed bonds that were previously classified as held-to-maturity under AASB 139. In the periods presented the corporation does not have any financial assets measured at amortized cost Financial assets at fair value through profit or loss (FVTPL) Financial assets that are held within a different business model other than ‘hold to collect’ or ‘hold to collect and sell’ are categorised at fair value through profit and loss. Further, irrespective of business model financial assets whose contractual cash flows are not solely payments of principal and interest are accounted for at FVTPL. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply (see below). Assets in this category are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. Financial assets at fair value through other comprehensive income (FVOCI) The Group accounts for financial assets at FVOCI if the assets meet the following conditions: • they are held under a business model whose objective it is “hold to collect” the associated cash flows and sell and • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. Any gains or losses recognised in other comprehensive income (OCI) will be recycled upon derecognition of the asset. In the periods presented the corporation does not have any financial assets categorised as FVOCI. ALEXIUM INTERNATIONAL GROUP LIMITED 41 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Impairment of financial assets AASB 9’s impairment requirements use more forward-looking information to recognise expected credit losses – the ‘expected credit loss (ECL) model’. This replaced AASB 139’s ‘incurred loss model’. Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost and FVOCI, trade receivables, contract assets recognised and measured under AASB 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss. Recognition of credit losses is no longer dependent on the Group first identifying a credit loss event. Instead the Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: • Financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’) • Financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’). ‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date. ‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. Trade and other receivables and contract assets The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. In calculating, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix. The Group assess impairment of trade receivables on a collective basis as they possess shared credit risk characteristics they have been grouped based on the days past due. At the reporting date expected lifetime credit losses are nil. Classification and measurement of financial liabilities The Group’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments). All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income. (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 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. (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. ALEXIUM INTERNATIONAL GROUP LIMITED 42 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 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. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material. (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 In accordance with the standard, revenue is recognised and measured when the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset [AASB 15.31] and no additional goods or services, warranties, repurchase agreements, or public return policies, or other limitations exist that that would not allow the Company to consider its performance completed at this time of transfer. The Company considers the transfer complete in line with “FOB Shipping Point” Incoterms and recognizes the completion of this performance obligation when the finished product is shipped. Sale of goods Revenue is recognised and measured when the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. AASB 15 - Revenue from Contracts with Customers outlines the accounting requirements for when and how revenue is recognized using one core principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.“ This is accomplished by using a 5-step recognition process consisting of the following: 1.) 2.) Identify the contract - The Group utilizes a set of criteria to clearly identify the existence of contracts with customers, which includes contract approval by both parties, identification of each parties’ rights and commitments, determination of payment terms, presence of commercial substance and a probability consideration will be collected. Identify the performance obligations - The Group has identified the sole performance obligation of customer contracts to be the complete transfer of the goods to the customer. In accordance with AASB 15.24, there are no additional goods or services, warranties, repurchase agreements, or public return policies, or other limitations of the seller that would not allow the Company to consider its performance completed at this time of transfer. The Company considers the transfer complete in line with “FOB Shipping Point” Incoterms and recognizes the completion of this performance obligation when products are shipped. 3.) Determine the transaction price - The Company considers the transaction price to be the amount of consideration to which it expects to be entitled in exchange for transferring promised goods or services to a customer. As and when a performance obligation is satisfied the Group recognizes revenue to the extent of the transaction price allocated to that performance obligation taking into account the impact of constraints arising from variable consideration [AASB 15.46]. 4.) Allocate the transaction price to separate performance obligations - Given that there is a single performance obligation to each contract, and the price is clearly identified in the contract, the Company allocates the full contract price to the transfer of goods discussed in Step 2, with the exception of combined contracts noted as having variable consideration. 5.) Recognize revenue when each obligation is satisfied - at contract inception The Group has determined that the sole performance obligation is the complete transfer of goods to the customer. The Company must then determine the specific point in time at which it is appropriate to recognize revenue for the contract. AASB 15 states that an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following The following specific recognition criteria must be met before revenue is recognised on sale of goods: • • • • • Company has a present right to payment for the asset; Customer has legal title to the asset; Company has transferred physical possession of the asset; Customer has the significant risks and rewards of ownership of the asset; and Customer has accepted the asset. Management recognizes that the application of the control criteria requires judgment and there are various factors to consider, as described above. Accordingly, management believes that control is transferred in accordance with the shipping terms, as this is the point that the customer obtains legal title, when customer obtains the risk and rewards of ownership, and when the customer has an obligation to pay for the asset. ALEXIUM INTERNATIONAL GROUP LIMITED 43 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 The standard discusses that an entity should consider whether there is any agreement to repurchase the asset transferred to the customer, or a component. This topic is not applicable to the Company as it is not the practice nor discussed in any contracts. Management recognizes 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. 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. (s) 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. 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 is classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (t) Earnings per share Basic earnings per share (‘EPS’) 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. ALEXIUM INTERNATIONAL GROUP LIMITED 44 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (u) 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 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 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 months after the reporting period, irrespective of when the actual settlement is expected to take place. 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. (v) 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; and 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. (w) 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. ALEXIUM INTERNATIONAL GROUP LIMITED 45 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 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 valuation model, which is dependent on the terms and conditions of the grant. This estimate also 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 16. 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 22(f) 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, the determination of a suitable discount rate, and the appropriate classification of cash generating units. In the twelve months ended 30 June 2019 no impairment was identified. See Note 12 for further disclosures. (x) 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. The director’s assessment is based on forecasted growth in commercial sales, which the Company expects to continue over the next twelve months, continued reduction in expenses, and capital infusion. The group also has a loan of $9,000,000 due for repayment on 29 September 2020. The ability of the Group to continue as a going concern is dependent upon the group meeting its intended revenue forecasts and for the group to raise additional equity and/ or new loan to enable the loan to be repaid. During the financial year ended 30 June 2019, the Group generated a loss of $6,939,521 (2018: $3,961,119) and the Group has used cash in operating and investing activities of $5,479,377 (2018: $6,261,640). As at 30 June 2019 the Group had net assets of $382,996 (2018: $6,985,036) and a cash balance of $3,843,343 (2018: $10,641,763). These matters give rise to a material uncertainty that may cast doubt whether the Group can continue as a going concern and realise its assets and pay its liabilities and commitments in the normal course of business. There is sufficient working capital to support the committed research and commercialisation activities over the next twelve months. The Directors are of the opinion that sufficient additional funding will be secured in the coming period and are reviewing all potential alternatives of funding the business. The directors are satisfied that the Group can successfully fund the business based on preliminary planning sessions and review of all possible capital opportunities available. The continuing viability of the Group and its ability to continue as a going concern and meet its debts and commitments as and when they fall due are dependent upon the Group successfully funding the business in the next twelve months. Accordingly, the directors have prepared the financial report on a going concern basis. However, the Directors note that if sufficient funds are not raised through the aforementioned sources, the going concern basis may not be appropriate with the result that the Group may have to realise its assets and extinguish its liabilities other than in the ordinary course of business and in amounts different from those stated in the financial report. 3. REVENUE & OTHER INCOME Sale of goods Rebates Interest received 2019 5,225,286 (166,247) 5,059,039 2018 11,911,816 - 11,911,816 27,614 20,119 ALEXIUM INTERNATIONAL GROUP LIMITED 46 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 4. ADMINISTRATIVE EXPENSES Employee benefits expense- Admin Professional fees Other administrative expenses Insurance expenses Total administrative expenses 5. DEPRECIATION AND AMORTISATION EXPENSE Depreciation Amortisation Total depreciation and amortisation expenses 6. AUDITORS’ REMUNERATION The Group’s auditor is Grant Thornton Australia. Amount received or due and receivable by Grant Thornton Australia 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 Amount received or due and receivable by related practices of Grant Thornton 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 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 Fair value movement 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 2019 2,662,003 653,150 165,844 128,011 3,609,008 2019 338,240 17,411 355,651 2018 1,570,689 913,983 558,151 128,335 3,171,158 2018 294,385 13,384 307,769 2019 2018 154,341 110,519 7,043 161,384 6,441 116,960 - - - - - - 2019 2018 (6,939,521) (3,961,119) (1,908,368) (331,123) (1,089,308) (4,358) 10,611 399,648 (173,152) 48,720 1,219 333,306 1,619,139 - 18,144 192,241 - (23,993) 66,000 (367,032) 1,980,285 771,979 ALEXIUM INTERNATIONAL GROUP LIMITED 47 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (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 assets Deferred tax liabilities Net deferred tax position (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 Net deferred tax position 1,339 23,902 83,671 1,583,548 1,692,460 1,334,855 357,605 1,692,460 1,692,460 1,692,460 - 23,978 174,965 - - - 8,507,735 8,706,678 576 20,231 117,776 790,037 928,620 848,378 80,242 928,620 928,620 928,620 - 24,874 20,709 498 - 238,420 7,511,434 7,795,935 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 $43,498,0181 (2018: $34,990,238) 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 2019 Number 2018 Number 345,443,598 325,688,534 $ (6,939,521) $ (3,961,119) (0.0201) (0.0122) 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: ALEXIUM INTERNATIONAL GROUP LIMITED 48 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Equity securities Options over ordinary shares Warrant options Performance rights 2019 Number 2,400,000 4,255,319 4,960,938 11,616,257 2018 Number 2,400,000 4,255,319 1,324,000 7,979,319 As 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 Trade debtors Other receivables None of the trade and other receivables are past due or impaired. 10. INVENTORIES Raw materials Finished goods Provision for obsolescence Total inventory 11. PROPERTY, PLANT AND EQUIPMENT Cost or valuation Balance at 30 June 2017 Additions Disposals Foreign exchange movements Balance at 30 June 2018 Additions Disposals Transfers Foreign exchange movements Balance at 30 June 2019 Depreciation and impairment Balance at 30 June 2017 Depreciation Disposals Foreign exchange movements Balance at 30 June 2018 Depreciation Disposals Foreign exchange movements Balance at 30 June 2019 Net book value At 30 June 2017 At 30 June 2018 At 30 June 2019 2019 943,027 18,996 962,023 2018 487,353 26,447 513,800 2019 699,183 462,500 (8,230) 1,153,453 2018 1,224,267 292,281 - 1,516,548 Furniture & Equipment Leased assets Construction in Progress Total 1,813,506 42,646 (187,257) 1,066 1,669,961 134,987 (119,601) 9,450 (2,646) 1,692,151 457,240 194,350 (173,736) 52 477,906 203,740 (86,099) (1,433) 594,114 1,356,266 1,192,055 1,098,037 860,970 342,907 (197,060) - 1,006,817 - - - - 1,006,817 340,379 100,035 (197,061) - 243,353 134,500 - - 377,853 520,591 763,464 628,964 - - - - - 9,450 - (9,450) - - - - - - - - - - - - - - 2,674,476 385,553 (384,317) 1,066 2,676,778 144,437 (119,601) - (2,646) 2,698,968 797,619 294,385 (370,797) 52 721,259 338,240 (86,099) (1,433) 971,967 1,876,857 1,955,519 1,727,001 ALEXIUM INTERNATIONAL GROUP LIMITED 49 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 12. INTANGIBLE ASSETS Cost or valuation Balance at 30 June 2017 Additions Written-off Foreign exchange movements Balance at 30 June 2018 Additions Written-off Foreign exchange movements Balance at 30 June 2019 Amortization and impairment Balance at 30 June 2017 Amortization Written-off Foreign exchange movements Balance at 30 June 2018 Amortization Written-off Foreign exchange movements Balance at 30 June 2019 Net book value At 30 June 2017 At 30 June 2018 At 30 June 2019 Patents and Trademark Capitalized Development Costs Software Total 199,152 - - 3,187 202,339 - (161,817) - 40,522 101,864 10,309 - 1,472 113,645 9,836 (112,988) - 10,493 - 662,717 - - 662,717 1,023,574 - - 1,686,291 - - - - - 1,583 - - 1,583 97,288 88,694 30,029 - 662,717 1,684,708 15,377 - - - 15,377 60,000 - - 75,377 2,563 3,075 - - 5,638 5,992 - - 11,630 12,814 9,739 63,747 214,529 662,717 - 3,187 880,433 1,083,574 (161,817) - 1,802,190 104,427 13,384 - 1,472 119,283 17,411 (112,988) - 23,706 110,102 761,150 1,778,484 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 is calculated on a straight-line basis over the average useful life of the assets and begins once the asset is placed in service. Capitalized development Costs that are directly attributable to a technology’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 asset the asset will generate probable future economic benefits. Costs directly attributable to capitalized development include; employee expenses incurred on technology development, external testing fees, and product trial costs. Development costs not meeting these criteria for capitalisation are expensed as incurred. The ultimate recoupment of costs carried forward for capitalized development is dependent on the successful development and commercialization of the Group’s technology. Any capitalised developed that is not yet complete is not amortised but is subject to impairment testing. ALEXIUM INTERNATIONAL GROUP LIMITED 50 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Impairment testing for intangible assets An impairment loss is recognised for the amount by which the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. Cash flow forecasting inputs are based on the Board approved budget for FY2020 along with forecasts from management for an additional four years. Management forecasts include an assessment of market size and the ability of the Group to penetrate the market. The forecasting methods also include identifiable and addressable markets for the Group along with consideration for customer adoption rates. These forecasts are also based on management’s knowledge of the business and assessment of the likely current economic environment impacts, adjusted to account for an expected arm’s length market participant’s view of cash flow risks. In particular, the discounted cash flow forecast for Alexiflam® technologies in relation to military uniforms is based on current supply chain information which has been accumulated during the development process including current production scale trials and evaluations taking place with the military. The directors note that whilst there is an exclusivity agreement in place regarding the development of this technology, no supply agreement has been entered as at the reporting date. With the assistance of an independent third-party valuation firm, the Group estimated the recoverable amount of the Alexiflam® and Alexicool® CGUs as of 30 June 2019. This firm has significant experience in the US speciality chemical industry. The valuer used a combination of management provided cash flow projections and observable external market information to determine the key assumptions for their determination. The fair value measurement is categorized in its entirety as Level 3 in the fair value hierarchy designated in AASB 13. This categorization has several market observable factors including public companies deemed comparable to the Group, market royalty rates for comparable transactions and discount rate market factors for such items as risk free rate, beta, equity risk premium and size premium. There are important assumptions used in the valuation including the enterprise value. Management forecasts include growth rates of 0.6% to 5.8% after a technology has been commercialized, risk adjusted discount rates averaging 17.5%, obsolescence factors and royalty rates ranging from 3.0% in the first quartile to a maximum of 8.0%. The valuation was subject to stress-testing by conducting sensitivity analysis with respect to the various key assumption inputs. Management do not believe that any reasonable possible change in these assumptions would result in an impairment of either CGU technologies. No impairment loss has been recognised for Alexiflam® and Alexicool® technologies CGUs as of 30 June 2019 (2018: $nil). 13. TRADE AND OTHER PAYABLES Trade creditors Other creditors Additional provisions 2019 557,098 853,402 148,000 1,558,500 2018 259,110 179,683 - 438,793 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. After the reporting period, the Company cleared an outstanding legal matter net cash consideration of $148,000. 14. BORROWINGS Convertible note On 30 September 2017 the Company entered a convertible note, secured by the Company’s assets, with institutional lenders to refinance the Group’s previous debt. The $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. $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. During the period, the Group made a $1 million payment towards the principal balance which reduced the remaining outstanding balance to $9 million. The Borrowings have been measured at amortised cost in accordance with AASB 9 and 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. The carrying balance over the remaining life of the facility will increase to the current principal balance of $9 million. Loan facility carrying value Remaining amortization of effective interest Principal balance outstanding 2019 6,596,153 2,403,847 9,000,000 2018 6,820,549 3,179,451 10,000,000 ALEXIUM INTERNATIONAL GROUP LIMITED 51 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 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 24 for further disclosures. Loan facility Current capital leases payable Loan facility Non-current leases payable 2019 - 170,974 170,974 6,596,153 190,439 6,786,592 2018 - 243,667 243,667 6,820,549 360,416 7,180,965 Total Borrowings 6,957,566 7,424,632 Derivative liability Under the loan 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 Monte Carlo binomial lattice simulation. Pricing model inputs include; exercise price (0.35), risk-free rate (1.0%), remaining term (convertible note – 1.25 years, warrants - 3.25 years) and volatility (80.91%). Derivative liability Change in fair value of derivative liability recorded at profit or loss Prior period change in fair value of derivative liability recorded at profit or loss 2019 658,141 658,141 290,897 338,745 629,642 2018 630,983 630,983 2,369,993 - 2,369,993 Gain on debt extinguishment 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 2019 - - 2018 396,591 396,591 ALEXIUM INTERNATIONAL GROUP LIMITED 52 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 15. CONTRIBUTED EQUITY (a) Issued capital Ordinary shares fully paid (b) Movement in share capital Balance at beginning of year Options converted to shares 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 Balance at beginning of year Rights expired during year Rights forfeited during year Rights converted to shares during year Rights issued, net of costs (d) Share options issued 2019 Shares 2018 Shares 2019 $ 2018 $ 345,443,598 345,443,598 54,367,832 54,367,832 345,443,598 - - - - - - - 345,443,598 303,827,998 2,425,000 39,005,600 - - 185,000 - - 345,443,598 54,367,832 - - - - - - - 54,367,832 45,833,450 338,244 10,106,575 (468,358) - 52,728 - (1,494,807) 54,367,832 1,324,000 - (241,220) - 3,878,158 4,960,938 - - - - 1,324,000 1,324,000 54,272 - (180,183) - 543,141 417,230 - - - - 54,272 54,272 At the year-end, there were Nil free attaching options outstanding (2018: Nil) and 2,400,000 share-based payment options outstanding (2018: 2,400,000). Refer to Note 16(c) for details of the share-based payment options outstanding. (e) Movements in share options 2019 Unlisted options Unlisted options Unlisted options Unlisted options Grant Date Exercise Price Expiry date 10/01/15 11/04/16 11/04/16 11/04/16 $0.75 $0.75 $1.25 $1.75 30/09/20 11/04/19 11/04/19 11/04/19 Balance at beginning of year Number 1,500,000 300,000 300,000 300,000 2,400,000 Granted during the year Number - - - - - Exercised during the year Number - - - - - Expired during the year Number - - - - - Balance at end of year Number 1,500,000 300,000 300,000 300,000 2,400,000 ALEXIUM INTERNATIONAL GROUP LIMITED 53 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 2018 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 Grant Date Exercise Price Expiry date 09/01/14 13/05/15 13/05/15 20/05/15 05/06/15 08/06/15 10/01/15 11/04/15 11/09/15 11/09/15 26/02/16 11/04/16 11/04/16 11/04/16 $0.18 $0.70 $0.80 $0.13 $0.75 $0.16 $0.75 $0.18 $1.21 $1.31 $0.20 $0.75 $1.25 $1.75 31/08/17 31/12/17 31/12/17 31/08/17 05/07/18 31/08/17 30/09/20 31/08/17 11/09/17 11/09/17 31/08/17 04/11/19 04/11/19 04/11/19 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 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 13,491,626 - - - - - - - - - - - - - - - (175,000) - - (30,000) - (30,000) - (1,065,000) - - (1,125,000) - - - (2,425,000) - (500,000) (1,000,000) - (6,916,626) - - - (125,000) (125,000) - - - - (8,666,626) - - - - - - 1,500,000 - - - - 300,000 300,000 300,000 2,400,000 (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. (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. 16. SHARE-BASED PAYMENTS The following is the summary of share-based payments expensed during the year: (a) Shares issued during the year (b) Shares forfeited during the year (c) Shares in lieu of salary (d) Performance Rights granted (e) Options issued during the year Net share-based payment expense (a) Shares 2019 2018 Number - (241,220) 921,414 2,956,744 - 3,636,938 $ Number $ - (173,767) 88,433 454,708 - 369,374 185,000 (431,264) - 1,324,000 - 1,077,736 54,758 (199,597) - 57,592 - (87,247) The equity-settled share-based payments provided during the year related to: • Nil shares (2018:185,000 shares) issued as part of the employee share plan. • Nil shares (2018: 431,264 shares) agreed to be issued in the prior year were forfeited during the year. • 921,414 shares (2018: Nil) in lieu of salary. ALEXIUM INTERNATIONAL GROUP LIMITED 54 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (b) Performance rights During the period ended 30 June 2019 3,878,158 performance rights (2018: 1,324,000) were granted for the 12-month performance period ending 30 June 2019. An operating expense of $280,941 (2018: $57,592) was recognised for the vested performance rights. (c) Options The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in share-based payment options. Outstanding at 1 July Granted during the year Reinstated during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 30 June 2019 2018 Number 2,400,000 - - - - - 2,400,000 WAEP 0.94 - - - - - 0.94 Number 6,575,000 - - - (2,425,000) (1,750,000) 2,400,000 WAEP 0.63 - - - 0.19 0.84 0.94 The weighted average remaining contractual life of share options outstanding at the end of the financial year was 0.36 years (2018: 0.45 years), and the exercise prices range from 75 cents to 175 cents (2018: 75 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. a) Directors b) Services rendered 30-Jun-19 Average fair value per option 0.00 Nil Number 1,500,000 900,000 2,400,000 $ Number $7,323 Nil $7,323 30-Jun-18 Average fair value per option - - - - - $ Nil Nil - The following principal assumptions were used in the valuation: (No) of Options Issued Spot Price of Asset Exercise Price (A$) Risk Free Rate (%) Start Date Expiry Date Volatility Services Rendered 300,000 0.155 0.75 1.01% 04-11-16 04-11-19 81% 300,000 0.155 1.25 1.01% 04-11-16 04-11-19 81% 300,000 0.155 1.75 1.01% 04-11-16 04-11-19 81% Directors 1,500,000 0.155 0.75 1.01% 10-01-15 30-09-20 81% ALEXIUM INTERNATIONAL GROUP LIMITED 55 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 17. RESERVES Balance at 30 June 2018 Change in accounting estimate (1) Loss for the period Foreign currency translation Total comprehensive income / (loss) Transactions with owners in their capacity as owners: Issued Capital Capital Raising Costs Performance Rights Expense Options Exercised Share-based payment in lieu of salary Balance at 30 June 2019 Options Premium Reserve 5,634,968 - - - - - - - - - 5,634,968 Performance Rights Reserve 652,423 - - (593) (593) - - 280,941 - 88,433 1,021,204 Foreign Currency Translation Reserve 136,430 (1,695,787) - (18,571) (18,571) - - - - - (1,577,928) Total 6,423,821 (1,695,787) - (19,164) (19,164) - - 280,941 - 88,433 5,078,244 (1) Accumulated Losses and Foreign Currency Reserve balances at 1 July 2018 were adjusted from the 30 June 2018 balances reported in the FY 2018 Annual Report to reflect a reallocation of $1,695,786 between the two accounts related to the foreign currency translation. Balance at 30 June 2017 Loss for the period Foreign currency translation Total comprehensive income / (loss) Transactions with owners in their capacity as owners: Issued Capital Capital Raising Costs Performance Rights Expense Options Exercised Share-based payment in lieu of salary Balance at 30 June 2018 Options Premium Reserve 5,856,738 Performance Rights Reserve 619,640 Foreign Currency Translation Reserve (2,287,525) (221,770) (221,770) (21,489) (21,489) 2,423,955 2,423,955 - - - - - 5,634,968 - - 54,272 - - 652,423 - - - - - 136,430 Total 4,188,853 - 2,180,696 2,180,696 - - 54,272 - - 6,423,821 ALEXIUM INTERNATIONAL GROUP LIMITED 56 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 18. 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. Cash on hand (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 (Gain)/ Loss on Fair value movement- embedded derivative Interest and amortization on borrowings Loss on Impairment 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 (c) Reconciliation to net cash used in investing activities Property, plant and equipment additions per Note 11 Intangible asset additions per Note 12 Non-cash items Addition of financing leases Foreign exchange movement on transfers (Increase) / Decrease in current liabilities Net cash flows (used in) investing activities 2019 2018 3,843,343 10,641,763 2019 2018 (6,939,521) (3,961,119) 355,651 369,374 (629,642) 1,453,261 48,750 - - (448,223) 363,095 (5,041) 616,205 474,550 (4,341,541) 2019 (144,437) (1,083,574) - - 90,175 (1,137,836) 322,907 (87,247) (2,369,993) 1,068,060 - (396,591) 393,727 583,689 90,616 7,851 (982,908) (227,682) (5,558,690) 2018 (385,553) (662,717) 342,907 - 2,413 (702,950) ALEXIUM INTERNATIONAL GROUP LIMITED 57 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 19. RELATED PARTY TRANSACTIONS (a) American Security Project During the period, the following was paid to American Security Project, a related party of Brig. Gen. Stephen Cheney, Non-Executive Director: - Nil (2018: $23,778) was for lease charges on office space in Washington D.C. which expired in March 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: - Nil (2018: $48,000) was paid in current year, prior year the Group paid The Nardelli Group on behalf of Alexium for services related to Government Relations Activity. (c) Transactions with key management personnel Short-term employee benefits Salary and fees Non-monetary benefits Other Total short-term employee benefits Post-employment super-annuation Total post-employment benefits Share-based payments- Performance rights Share-based payments – Shares in lieu of salary Total share-based payments Short-Term Incentive Plan Termination Benefits Total incentive plan payments Total remuneration 2019 2018 907,934 32,134 216,390 1,156,458 3,758 3,758 113,709 88,433 202,142 145,440 80,876 226,316 1,026,682 42,451 97,698 1,166,831 - - 20,612 - 20,612 - - - 1,588,674 1,187,443 ALEXIUM INTERNATIONAL GROUP LIMITED 58 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 20. SEGMENT REPORTING 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: 2019 Sales Revenue Interest Revenue Other Income Interest Expense Property, Plant and Equipment Intangible assets Depreciation and Amortisation 2018 Sales Revenue Interest Revenue Other Income Interest Expense Property, Plant and Equipment Intangible assets Depreciation and Amortisation Australia US Cyprus - 12,321 - 1,453,261 - - - 5,059,039 15,293 - 1,340,343 1,727,001 1,748,455 343,880 - - - - - 30,029 11,771 Total 5,059,039 27,614 - 2,793,604 1,727,001 1,778,484 355,651 Australia US Cyprus Total - 10,985 437,210 2,075,375 - - 2,342 11,911,816 9,134 (40,619) 222,251 1,923,164 672,455 291,670 - - - - 32,355 88,695 13,757 11,911,816 20,119 396,591 2,297,626 1,955,519 761,150 307,769 Effective 1 July 2019, the directors have determined that the FR (Alexiflam®) and PCM (Alexicool®) Technologies, constitute separating operating segments for the purposes of AASB 8 as a result of the following: • Business operations for Alexiflam® and Alexicool® are managed separately; • The R&D activity for Alexiflam® is not incidental to the overall operations of Alexium; • Both technologies are capable of earning revenues in their own right. This is evidenced by sales during 30 June 2019 of $117,000 for Alexiflam®. • Sales metrics, trends in sales growth, customer base, level of capital investments and operating cash flows from 1 July 2019 will be managed on an operating segment basis. • Management KPIs for the year commencing 1 July 2019 are set in alignment with these two operating segments. • The directors also considered the forecast revenues from each operating segment where the revenue and profit and loss from future sales of Alexiflam® are anticipated to be more than 10% of combined revenue. 21. INVESTMENTS IN CONTROLLED ENTITIES Name of Entity Parent Entity Alexium International Group Limited Subsidiaries of Alexium International Group Limited Alexium Limited (1) Alexium Inc. (2) Country of Incorporation Percentage Owned (ordinary shares) 2019 (%) 2018 (%) Australia Cyprus USA 100 100 100 100 (1) The parent entity has an interest free unsecured loan with Alexium Inc. amounting to $39,186,654 (2018: $40,196,893). (2) The parent entity has an interest free unsecured loan with Alexium Ltd amounting to $291,446 (2018: $303,108). ALEXIUM INTERNATIONAL GROUP LIMITED 59 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 22. 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 > 1 Year $ Fixed Maturity Dates 1-5 Years $ Fixed Maturity Dates 5+ years $ Non- Interest Bearing $ Total $ 0.38 3,138,132 - - 3,138,132 - - - - - - - 9.27 13.50 - - - - - - - - 198,438 - - 198,438 - 206,217 9,000,000 658,141 9,864,358 0.38 10,317,995 - - - 10,317,995 - - - - - - - 9.27 13.50 - - - - - - - - 289,572 - - 289,572 - 402,232 10,000,000 630,983 11,033,215 - - - - - - - - - - - - - - - - 705,211 3,843,343 962,023 1,667,234 962,023 4,805,366 1,558,500 - - - 1,558,500 1,558,500 404,655 9,000,000 658,141 11,621,296 323,768 10,641,763 513,800 837,568 513,800 11,155,563 438,793 - - - 438,793 438,793 691,804 10,000,000 630,983 11,761,580 2019 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 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 (b) Interest rate risk At 30 June 2019, if interest rates had increased by 1% from the yearend variable rates with all other variables held constant, post tax profit and equity for the Group would have been $38,433 higher (2018: $106,418 higher) based on cash and cash equivalents. The 1% sensitivity is based on reasonable possible changes 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. ALEXIUM INTERNATIONAL GROUP LIMITED 60 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 The Group changed reporting currencies from Australian Dollars to US Dollars during the reporting period ended 30 June 2018. 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. 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. 2019 Functional currency of entity: Australian dollar US dollar UK pound sterling Statement of financial position exposure 2018 Functional currency of entity: Australian dollar US dollar UK pound sterling Statement of financial position exposure USD Net Financial Assets/(Liabilities) in USD Other GBP AUD Total USD 39,186,654 - - 39,186,654 40,196,893 - - 40,196,893 - - - - - - - - 291,446 (560,617) - (269,171) 303,108 (571,573) - (268,465) - - - - - - - - 39,478,100 (560,617) - 38,917,483 40,500,001 (571,573) - 39,928,428 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 counterparty, 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 30 September 2019, Alexium had collected 100% of the receivables outstanding at 30 June 2019. Total bad debt expense for the year was nil. 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. (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 2019, the Group’s non-derivative financial liabilities have contractual maturities as summarised below: Current 1-5 Years 5+ years 2019 Trade and other payables Finance lease obligations Borrowings Statement of financial position exposure 2018 Trade and other payables Finance lease obligations Borrowings Statement of financial position exposure ALEXIUM INTERNATIONAL GROUP LIMITED 1,558,500 198,438 - 1,756,938 - 206,217 10,944,000 11,150,217 438,793 289,572 - 728,365 - 402,232 13,078,750 13,480,982 - - - - - - - - 61 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 (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. As at 30 June 2019 and 2018, 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 Monte Carlo binomial lattice simulation. The model considers 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 2019 and 30 June 2018 2019 Derivative Liability Statement of financial position exposure 2018 Derivative Liability Statement of financial position exposure There were no transfers Level 1 and Level 2 in 2019 or 2018. Level 1 Level 2 Level 3 Total - - - - - - - - 658,141 658,141 658,141 658,141 630,983 630,983 630,983 630,983 ALEXIUM INTERNATIONAL GROUP LIMITED 62 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 23. PARENT ENTITY INFORMATION The following details information related to the parent Entity, Alexium International Group Limited, at 30 June 2019. The information presented here has been prepared using consistent accounting policies as presented in Note 2. Current Assets Non-current assets Total Assets Current Liabilities Non-current liabilities Total Liabilities Contributed Equity Accumulated losses Foreign Currency Reserves Performance rights reserves Option 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 parent entity has no contingent liabilities or commitments at 30 June 2019. 24. COMMITMENTS AND CONTINGENCIES The Group has the following contingent liabilities and commitments. (a) Commitments 2019 698,849 7,067,227 7,766,076 128,786 7,254,294 7,383,080 54,367,832 (59,063,080) (1,577,928) 1,021,204 5,634,968 382,996 (6,939,521) (31,893) (6,971,414) 2018 1,458,930 13,133,137 14,592,067 155,498 7,451,533 7,607,031 54,367,832 (53,806,617) 136,430 652,423 5,634,968 6,985,036 (3,952,964) 685,889 (3,267,075) 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 term. Minimum future rental payments under non-cancellable leases having remaining terms in excess of one year are as follows as of June 30: Commitments for minimum lease payments in relation to operating leases are payable as follows: Within one year Later than one year but not later than 5 years 2019 2018 128,259 762,181 890,440 121,395 586,974 708,369 ALEXIUM INTERNATIONAL GROUP LIMITED 63 For personal use only NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 Finance leases The Group leases certain equipment under financing leases expiring in various years through 2024, 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 $134,500 and $100,035 for the years ended June 30, 2019 and 2018, respectively. Present value of future minimum rental payments under financing leases having remaining terms in excess of one year are as follows as of June 30: Present value of future minimum rental payments under financing leases having remaining terms in excess of one year are as follows as of June 30: 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 June 30: Not later than one year Later than one year and not later than five years Total 2019 2018 198,438 206,217 404,655 (43,242) 361,413 170,974 190,439 361,413 289,572 402,232 691,804 (87,721) 604,083 243,667 360,416 604,083 Lease liabilities are secured over property, plant, and equipment. These assets will revert to the lessor in the event of a default, as described in the agreements. Licensing agreements 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 Defence 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. The Group had no other commitments as at 30 June 2019. (b) Contingencies The Group has no other contingent liabilities as at 30 June 2019. 25. 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. 26. SUBSEQUENT EVENTS 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. After the reporting period, the Company cleared an outstanding legal matter net cash consideration of $148,000 as referenced in note 13. Additionally, on 14 August 2019, the Company issued 2,042,065 fully paid ordinary shares were issued to directors, current and former employees. 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. ALEXIUM INTERNATIONAL GROUP LIMITED 64 For personal use only DIRECTOR’S 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 2019 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. The remuneration disclosures included in the Directors’ Report (as part of the audited Remuneration Report) for the year ended 30 June 2019, comply with section 300A of the Corporations Act 2001 (Cth). 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. 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). 2. 3. 4. 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: Rosheen Garnon Chair Dated 30 September 2019 ALEXIUM INTERNATIONAL GROUP LIMITED 65 For personal use only 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 Qualified 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 2019, 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, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial report of Alexium International Group Limited 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 2019 and of its financial performance for the year ended on that date; and b complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Qualified Opinion Carrying value of capitalized development costs The Group's capitalized development costs are carried in the statement of financial position at $1,684,708. AASB 136 Impairment of Assets requires the entity to perform an impairment test on annual basis to determine the assets recoverable amount. The Directors have performed impairment testing as outlined in Note 12. As at the date of this report, we have been unable to obtain sufficient appropriate audit evidence to support the Directors’ assessment that the carrying value of the capitalized development costs do not exceed their recoverable amount. Accordingly, in the event that the carrying value of the assets exceed their recoverable amount, it would be necessary for the carrying value of the assets to be written down to their recoverable amount. 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 Grant Thornton Audit Pty Limited ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Limited 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 Limited is a member firm of Grant Thornton International Limited (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. For personal use only independent of the Company 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 qualified opinion Material uncertainty related to going concern We draw attention to Note 2(x) in the financial statements, which indicates that the Group incurred a net loss of $6,939,521 and had cash outflows from operating and investing activities of $5,479,377 during the year ended 30 June 2019. The Group has debt of $9,000,000 due for repayment on 29 September 2020. As stated in Note 2(x), these events or conditions, along with other matters as set forth in Note 2(x), indicate that a material uncertainty exists that may cast doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. 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. In addition to the matter described in the Basis for Qualified Opinion section and the Material uncertainty related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Key audit matter Borrowings and embedded derivative liability – refer to summary of significant accounting policy Note 2 and Note 14 On 30 September 2017 the Company entered a convertible note, secured by the Company’s assets, with institutional lenders to refinance the Group’s previous debt. The $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. During the period, the Group made a $1 million payment towards the principal balance which reduced the remaining outstanding balance to $9 million. Under the loan 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. Being a hybrid financial instrument, the Group is required to calculate the fair value of the derivative financial liability component of the instrument utilising complex risk adjusted valuation techniques, with the remaining balance of the fair value determined to be the debt component. This area is a key audit matter due to the complex valuation techniques required to estimate the derivative financial liability and the management assumptions required in the calculation. How our audit addressed the key audit matter 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; understanding the terms of the loan agreement and considering the appropriateness of the accounting treatment in line with accounting standards; assessing the methodology management have used against our understanding of the inputs; 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 reimbursed into the respective financial institutions; tested the mathematical accuracy of the calculation of the derivative liability and challenging managements experts approach and assumptions in determining the fair value; and assessing the appropriateness of the financial statement disclosures. For personal use only 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 2019, 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. Report on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 17 to 26 of the Directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Alexium International Group Limited, for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. For personal use only 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 LIMITED Chartered Accountants M J Hillgrove Partner – Audit & Assurance Perth, 30 September 2019 For personal use only SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 16 September 2019. Quoted equity securities 345,443,598 fully paid ordinary shares are held by 4,806 shareholders. Unquoted equity securities Date Options/Warrants Granted 01/10/15 04/11/16 04/11/16 04/11/16 30/09/17 Expiry Date Exercise price of shares No. under options 30/09/20 04/11/19 04/11/19 04/11/19 30/09/22 A$ 0.75 A$ 0.75 A$ 1.25 A$ 1.75 A$ 0.35 1,500,000 300,000 300,000 300,000 4,255,319 Shareholder distribution The number of shareholders, by size of holding, are: Holding Range 1 1,001 5,001 10,001 100,001 - - - - - 1,000 5,000 10,000 100,000 999,999,999 Holders Total Units 519 1,306 741 1,764 446 4,776 229,974 3,951,120 5,965,635 61,992,953 275,345,981 347,485,663 % Issued Share Capital 0.07% 1.14% 1.72% 17.84% 79.24% 100.00% Unmarketable parcels Minimum parcel A$500 at $0.160 per unit Holding Range Substantial holders Rank 1 2 SANDHURST TRUSTEES LTD J P MORGAN NOMINEES AUSTRALIA Name Holders Total Units 1,281 1,850,532 % Issued Share Capital 0.53% Total Units 32,435,001 24,238,357 % Issued Share Capital 9.33% 6.98% Voting rights The voting rights attaching to each class of equity securities are set out below: • 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. • Options: No voting rights. • Warrants: No voting rights. Stock exchange listing • Quotation has been granted for all the ordinary shares of the company on all Member Exchanges of the Australian Stock Exchange Ltd. ALEXIUM INTERNATIONAL GROUP LIMITED 70 For personal use only SHAREHOLDER INFORMATION Equity Security Holders Twenty largest holders of quoted equity securities: J P MORGAN NOMINEES AUSTRALIA SANDHURST TRUSTEES LTD HSBC CUSTODY NOMINEES DR STUART LLOYD PHILLIPS & HSBC CUSTODY NOMINEES Rank 1 2 3 4 5 6 MR MARTIN KEITH THOMAS & LOMAND SERVICES LIMITED 7 DUCKY'S LIFELINE PTY LTD 8 HSBC CUSTODY NOMINEES 9 CANNOW PTY LTD 10 DR STUART LLOYD PHILLIPS 11 DR STUART LLOYD PHILLIPS & 12 FLOREANT AMBO PTY LTD 13 14 DAVID RIVETT PTY LIMITED 15 MR ANIL BHASKAR UTTURKAR & 16 BNP PARIBAS NOMINEES PTY LTD 17 MR ROBERT NEAL BROOKINS 18 19 20 CITICORP NOMINEES PTY LIMITED SL & FJ PHILLIPS PENSION FUND BOND STREET CUSTODIANS LIMITED Name Total Units 32,435,001 24,238,357 10,842,631 10,002,947 10,000,000 5,431,500 5,281,500 5,214,680 4,628,083 4,000,000 3,747,500 3,600,000 3,560,715 3,499,538 3,100,000 2,952,531 2,581,000 2,568,483 2,142,858 2,000,000 % Issued Share Capital 9.33% 6.98% 3.12% 2.88% 2.88% 1.56% 1.52% 1.50% 1.33% 1.15% 1.08% 1.04% 1.02% 1.01% 0.89% 0.85% 0.74% 0.74% 0.62% 0.58% ALEXIUM INTERNATIONAL GROUP LIMITED 71 For personal use only
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