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Annual Report 2017

Plain-text annual report

Annual Report for the year ended 30 June 2017 Adherium Limited ABN 24 605 352 510 Company Overview Adherium (ASX:ADR) is a global leader in digital health technologies which address sub- optimal medication use in chronic diseases. Our Smartinhaler™ platform is the world’s most clinically supported asthma and COPD medication adherence solution, leading to improved health outcomes for patients with chronic respiratory disease. Adherium has the broadest range of “smart” devices for respiratory medications globally. The Bluetooth® enabled Smartinhaler™ medication sensors wrap around a patient’s existing inhalers and automatically send usage data to their smartphone. Using the Smartinhaler™ app enables patients and healthcare professionals to track medication adherence, set daily reminders, and discover insights into their medication usage. Table of Contents Chairman’s Statement CEO’s Report Directors’ Report (including Remuneration Report) Auditor’s Independence Declaration 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 to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Australian Securities Exchange Additional Information 02 03 05 18 20 21 22 23 24 43 44 48 1 Annual Report 2017 Adherium LtdChairman’s Statement Adherium continues to make solid progress. In November last year new health outcomes data was released that showed our Smartinhaler™ technology generates a five-fold reduction in hospital re-admission in children with poorly controlled asthma. This data was published in the world leading respiratory journal Thorax, having been through an intensive peer-review process and we believe these results to be unrivalled. Key messages ORIGINAL ARTICLE Paediatric lung disease for Health and Care Excellence has recommended further studies to investigate their use clinically.18 An Australian study demonstrated that children’s adherence increased when electronic data were fed back, although it was underpowered to show any improvement in clinical outcomes.19 Paediatric lung disease A recent study in New Zealand improved self-reported asthma control in the short-term using electronic monitoring, no feed- STAAR: a randomised controlled trial of electronic back and reminder alarms.20 seeing subjects out of clinic every 2 months, used covert moni- However, this study involved adherence monitoring with reminder alarms and toring and had no effect on objective clinical outcomes. In order to determine whether clinically relevant benefits feedback to improve clinical outcomes for children could be observed in a routine clinical setting through the use of electronic monitoring, we undertook a study in which chil- dren with poorly controlled asthma were randomised to the use with asthma of reminder alarms and feedback or routine care. We hypothe- sised that by addressing both the intentional and non-intentional Robert W Morton,1,2 Heather E Elphick,1,2 Alan S Rigby,3 William J Daw,1,2 adherence barriers, rates would increase to a degree necessary to improve asthma control and clinical outcomes. David A King,1 Laurie J Smith,2 Mark L Everard4 METHODS The STudy of Asthma Adherence Reminders study was a multi- ABSTRACT centre, open-label, parallel group randomised controlled trial, Background Suboptimal adherence to inhaled steroids with an allocation ratio of 1:1. Written consent was taken from is common in children with asthma and is associated the parents/carers of all participants, and ethical approval for with poor disease control, reduced quality of life and the study was granted by the South Yorkshire Research Ethics even death. Previous studies using feedback of committee, REC reference 13/YH/0289. The protocol was regis- electronically monitored adherence data have tered with ClinicalTrials.gov, number NCT02451709. What is the key question? demonstrated improved adherence, but have not ▸ Can electronic adherence monitoring with demonstrated a significant impact on clinical outcomes. Participants and setting feedback and alarms improve clinical outcomes The aim of this study was to determine whether Children with doctor-diagnosed asthma aged 6–16 years attend- in children with poorly controlled asthma? introduction of this approach into routine practice would ing hospital clinics in Sheffield or Rotherham were screened for result in improved clinical outcomes. What is the bottom line? eligibility. Participants had to be taking regular inhaled steroids, Methods Children with asthma aged 6–16 years were ▸ Electronic monitoring with feedback and alarms with no change in their medication in the last month and an randomised to the active intervention consisting of improved adherence, decreased hospital Asthma Control Questionnaire (ACQ) score of at least 1.5, indi- electronic adherence monitoring with daily reminder admissions and courses of oral steroids cating they had poorly controlled asthma.21 alarms together with feedback in the clinic regarding required. could not speak English or had another significant chronic con- their inhaled corticosteroid (ICS) use or to the usual care dition were excluded. The EMDs available for this trial were Why read on? arm with adherence monitoring alone. All children had only compatible with seretide or symbicort inhalers. Therefore, ▸ This study provides the first unequivocal poorly controlled asthma at baseline, taking ICS and all participants were at BTS level 3 at the start of the trial. long-acting β-agonists. Subjects were seen in routine evidence that adherence monitoring with clinics every 3 months for 1 year. The primary outcome feedback can impact on important clinical Interventions was the Asthma Control Questionnaire (ACQ) score. outcomes when used in the management of Prior to randomisation, all participants had their inhaler tech- Secondary outcomes included adherence and markers of children with poorly controlled asthma. nique checked by a qualified asthma nurse, and received a brief asthma morbidity. asthma education session, emphasising the importance of taking Results 77 of 90 children completed the study inhaled steroids regularly. All participants were reviewed in their (39 interventions, 38 controls). Adherence in the routine asthma clinics 3 monthly and all treatment decisions intervention group was 70% vs 49% in the control were made by the clinical team. A member of the study team group (p≤0.001). There was no significant difference in downloaded data from the EMD at each visit. the change in ACQ, but children in the intervention Intervention group group required significantly fewer courses of oral Participants in the intervention group had a commercially avail- steroids (p=0.008) and fewer hospital admissions able EMD attached to their regular inhaler. The ‘Smartinhalers’ (p≤0.001). and ‘Smartturbos’ are manufactured by Adherium (Auckland, Conclusions The results indicate that electronic New Zealand) (figure 1). They have a CE safety mark and are adherence monitoring with feedback is likely to be of validated for adherence monitoring in asthma.12 significant benefit in the routine management of poorly were told the devices monitored the date and time of all actua- controlled asthmatic subjects. tions. At clinic visits, the adherence data from the previous Trial registration number NCT02451709; pre-result. 3 months were uploaded to the website http://www. smartinhalerlive.com, which displays the data graphically. These data were reviewed with the patient and parent/carer (figure 2). Open, non-judgemental discussions were held about the adher- ence rate, barriers identified and, if necessary, personalised strat- egies for improvement were devised. Devices were set to play reminder alarms (music or character noises), with different Large adult population studies and smaller paedi- atric studies have shown that adherence rates of 75%–80% are required to significantly improve asthma control.6–8 However, when objectively mea- sured, the average rate of adherence in children with asthma is around 50%, some way below this desired therapeutic level.9 Subjective and indirect measurements of adher- ence have been shown to overestimate rates due to patients wanting to be looked upon favourably by their clinician—the social desirability bias.10 11 Electronic monitoring devices (EMDs) record adherence rates by logging the exact date and time an inhaler is actuated, with modern devices proven to be highly accurate and reliable in the clinical setting.12 Monitoring allows intentional adherence barriers such as negative illness perceptions or medication beliefs to be identified, and addressed with regular open dialogue.13–15 Reminder alarms built into the devices can address non-intentional practical barriers such as simply forgetting to take the medication.16 Due to their cost, the British Thoracic Society (BTS) has questioned the viability of EMDs outside the research setting,17 and The National Institute INTRODUCTION Adherence to inhaled steroids is often suboptimal in children with asthma, resulting in poor disease control,1 increased need for oral steroids2 and decreased lung function.3 This leads to increased healthcare utilisation and associated cost.4 The recent National Review of Asthma Deaths in the UK reported that poor adherence was associated with 34% of deaths due to asthma, emphasising the significance of the problem.5 Participants who Participants 2 Control group Figure 1 ‘Smartturbo’ and ‘Smarttrack’ electronic adherence monitors. Adherium, New Zealand. times agreed for weekdays and weekends. Alarms sounded for 5 s, every minute for 15 min (or until actuation), if the inhaler had not been actuated within the previous 6 hours of the speci- fied time. The devices were locked to prevent tampering. Times were reviewed each study visit and changed if necessary. Control participants had the same EMDs attached to their regular inhaler, they were also told the devices monitored how much the inhalers were taken, but that these data would not be reviewed. Participants were seen in their standard asthma clinic and the data were downloaded, but not reviewed. The alarms were disabled, and the devices locked. Primary outcome The primary outcome for the study was change in the ACQ score at 3, 6, 9 and 12 months. This questionnaire has been vali- dated for the use in children aged 6–16 years.22 It integrates values generated by six clinical questions related to symptoms in the previous week and a value related to FEV1% predicted to generate a score of 0–6. The score is inversely related to asthma control with a high score indicating poor control. Secondary outcomes Secondary outcomes recorded at baseline and each visit were FEV1%,23 number of unplanned attendances to general practi- tioner (GP)/emergency department (ED) for asthma since last visit (as reported by parents), number of courses of oral steroids required, number of days off school due to asthma, use of β-agonists in the past week and BTS level of asthma therapy. Quality of life was measured using the Mini Paediatric Asthma Quality of Life Questionnaire (mini PAQLQ).24 rate was calculated for each 3-month period, both morning and afternoon doses, and recorded as a percentage. This was calcu- lated as number of doses actually taken/number of doses pre- scribed×100. The daily adherence was capped at 100%, to avoid falsely increased values due to dose dumping. The overall 3 monthly figure was a mean of each daily %. Parental beliefs about inhaled steroids and perceptions about asthma were recorded at baseline and 12 months with the Beliefs about Medicines Questionnaire (BMQ) and the Brief Perceptions Questionnaire (IPQ).25 26 Sample size The sample size was calculated using a repeated measures ana- lysis for four follow-up visits. The Minimal Clinically Important Morton RW, et al. Thorax 2016;0:1–8. doi:10.1136/thoraxjnl-2015-208171 The adherence Illness ▸ Additional material is published online only. To view please visit the journal online (http://dx.doi.org/10.1136/ thoraxjnl-2015-208171). 1Academic Unit of Child Health, University of Sheffield, Sheffield, South Yorkshire, UK 2Department of Respiratory Medicine, Sheffield Children’s Hospital, Sheffield, South Yorkshire, UK 3Hull York Medical School, University of Hull, Hull, Yorkshire, UK 4School of Paediatrics and Child Health, Princess Margaret Hospital University of Western Australia, Perth, Western Australia, Australia Correspondence to Dr Robert W Morton, Sheffield Children’s Hospital, Western Bank, Sheffield, South Yorkshire S10 2TH, UK; rwmorton99@gmail.com Received 8 December 2015 Revised 28 July 2016 Accepted 6 October 2016 To cite: Morton RW, Elphick HE, Rigby AS, et al. Thorax Published Online First: [please include Day Month Year] doi:10.1136/ thoraxjnl-2015-208171 Copyright Article author (or their employer) 2016. Produced by BMJ Publishing Group Ltd (& BTS) under licence. Morton RW, et al. Thorax 2016;0:1–8. doi:10.1136/thoraxjnl-2015-208171 1 Thorax article ‘STAAR: a randomised controlled trial of electronic adherence monitoring with reminder alarms and feedback to improve clinical outcomes for children with asthma’ was published on 4 Nov 2016 Adherium’s relationship with its primary pharmaceutical partner AstraZeneca continues to strengthen, and in the last year AstraZeneca has distributed Adherium’s sensor for their dry powder inhaler into multiple new G7 markets. Adherium is also Astra Zeneca’s strategic supplier of intelligent device innovation, and Adherium has developed new sensors for AstraZeneca’s main aerosol inhaler platform, and recently achieved clearance from the US FDA for these sensors. SmartTouch for Symbicort® device achieved US FDA 510(k) approval. Two channels to market are now being targeted in addition to our business with AstraZeneca. These are: • Direct to consumer: enabling people to effectively manage their own asthma and COPD and also their children’s or elderly parents’; and • Payor & Provider: supplying to the healthcare system to reduce chronic care costs. This strategy will increase the total number of channels to market Adherium has to five: Pharmaceutical, Provider, Payor, Patient, and Projects (clinical trials). 2017 has been an unprecedented year for investment into the digital health sector, with US$6.5 billion being invested in the first half. Our Thorax data demonstrates the proposition for investment, indicating that Adherium’s Smartinhaler technology could save the US healthcare system US$17 billion per annum in asthma alone. The US market represents just under half of the world’s healthcare spend, and so is critical to Adherium’s future. In June 2017 we appointed Arik Anderson as our US- based Group CEO. Arik has a background of 25 years in medical technologies working for global medical technology companies. In his last role at Terumo, he was responsible for global sales of more than US$300 million per annum in medical technologies for chronic care. An immediate task for Arik is to build out our commercial operations from our Silicon Valley office to support expansion into the US market across all of our channels. Our CEO rightly pays tribute to the achievements of our founder, Garth Sutherland, who conceived, built and led Adherium over the past 17 years. It has been a pleasure working with Garth in my first year as Chair and I look forward to his continuing contribution to building Adherium. We appreciate the support of all shareholders. We have commenced a programme to improve investor engagement with regular update calls and meetings. As part of this, I am happy to receive, and will respond to your questions as we build Adherium together. With our pharmaceutical distribution model operating and gaining momentum, we recently achieved a milestone of manufacturing and selling 100,000 Smartinhaler devices. During the year Adherium completed a strategic review to carefully select new channels to market for its broad range of sensors across all major asthma and COPD medications. Thomas Lynch Non-executive Chairman 2 Annual Report 2017 Adherium Ltd CEO’s Report I am Arik Anderson, Adherium’s Group CEO, and it is my pleasure to provide you with an update on Adherium as I complete my first 100 days. My view of Adherium so far is that the Company’s Smartinhaler™ technology represents the best medication adherence monitoring solution in the world, and accordingly I can see why AstraZeneca selected Adherium as its strategic partner based on their due diligence across the market. Secondly, Adherium has by far the most compelling clinical data demonstrating the effectiveness of its Smartinhaler™ technology in medication adherence monitoring. Thirdly, Adherium has a great pharmaceutical partner in AstraZeneca, and we can see that this collaboration has a multi-year head start on other initiatives in the market. Finally, Adherium also has the most extensive set of international regulatory approvals, and the broadest range of patents and trademarks. These are the reasons I chose to join the Adherium team. Adherium wins “Most Innovative Hi-Tech Hardware Product Award’ at the 2017 NZ High Tech Awards At Adherium, our vision is to become the adherence company. We are positioned strategically within a very large market opportunity. Each year there are just under a billion asthma or COPD inhalers manufactured to serve the world’s half-a-billion people who have chronic respiratory diseases - and these diseases are increasing in prevalence. However, despite the broad availability of effective medications, including inhaled steroids, between 40% and 50% of patients poorly control in their respiratory health in the G7 countries. The underlying cause of this poor control is widely understood to be due to sub-optimal medication adherence to available maintenance medications. This is where Adherium’s innovative approach of using connected digital technology has been proven in numerous peer reviewed journal articles to be effective at improving adherence. Adherence monitoring technology will become ubiquitous in the care of respiratory patients, and Adherium is at the heart of that transformation in chronic disease management and remote patient monitoring. The Company’s Smartinhaler™ technology represents the best medication adherence monitoring solution in the world I have hit the ground running with a strategic and operating plan approved by our board of directors. In the coming year we will build out our Silicon Valley office in the US as our global headquarters and commercial hub, and I have recently appointed Tim Marcotte as Adherium’s new CFO to help me with that task. Our other key priorities that you will hear me continue to report throughout the year because they are critical to our success are: • continued successful rollouts of our technology with AstraZeneca as they enter new geographies, and we anticipate this will amount to at least 25,000 devices delivered in fiscal 2018. The ongoing rollouts must continue to be successful to grow that momentum, and that will allow Adherium and AstraZeneca to realize the potential of adherence for Symbicort® and other treatments. Already this year we have released our new Model 4 version of the Turbu+ device and gained US FDA 510(k) approval for our SmartTouch for Symbicort® device to support these rollouts; 3 Annual Report 2017 Adherium Ltd • launch our direct-to-consumer channel, initially with a successful pilot in New Zealand defined as adding 1,300 active users by June 2018, followed by a launch in the US in the second half of fiscal 2018; and • development of our payer and provider relationships, including developing relationships with large self insured companies, leveraging our amazing clinical data and direct-to-consumer evidence to enable these entities to achieve healthcare cost savings while improving the quality of life of their customers and employees. Top: Adherium at the 2017 ERS Conference in Italy Bottom: Testing devices at our Asia-based manufacturing plant I would like to take this opportunity to thank Garth Sutherland, Adherium’s asthmatic founder, for the 17 years heavy lifting Garth has admirably completed, including 5 rounds of capital raising totalling more than $50 million, the AstraZeneca partnership, and the team, technology, and manufacturing partnerships Garth put in place. I am also excited to be working closely with our refreshed board, with Thomas Lynch as Chairman following his appointment in September 2016. Finally, I would like to thank all of Adherium’s employees, supporters, shareholders, partners and customers, I am very much looking forward to working with you all during this very exciting time. Arik Anderson Group CEO Adherence monitoring technology will become ubiquitous in the care of respiratory patients, and Adherium is at the heart of that transformation in chronic disease management and remote patient monitoring. 4 Annual Report 2017 Adherium Ltd Directors’ Report The Directors present their report on the consolidated entity (the Group), consisting of Adherium Limited (the Company or Adherium) and the entities it controlled at the end of, or during, the year ended 30 June 2017, together with the independent auditor’s report thereon. Directors The Directors of the Company at any time during the year and until the date of this report are: Mr Thomas Lynch, BSc, FCA. Age 61. Independent Non-Executive Chairman Appointed as a Director and Chairman on 1 September 2016. Mr Lynch has extensive capital markets experience in the internationalisation of the healthcare sector. He has recently stepped down as chair of Icon plc, one of the world’s largest clinical research organisations having served on its board for 22 years. Mr Lynch is currently a Chairperson at several notable organisations, including Evofem Holdings, Evofem, Dublin Academic Medical Centre, Sigmoid Pharma, Molecular Medicine Ireland and the Queen’s University of Belfast Foundation. Mr Lynch also serves as a non-executive director of GW Pharma plc, a biotechnology company listed on NASDAQ and AIM. In a pro-bono capacity, Mr Lynch serves as chair of the Ireland East Hospital Group, the largest hospital group in Ireland. Mr Lynch has also served in a range of roles at Elan Corporation plc and Amarin Corporation plc. Throughout his career, Mr Lynch has been involved in the listing of a number of companies on the NASDAQ market and brings significant international capital markets experience to Adherium. Mr Lynch has held no other Australian public company directorships in the last three years. Mr Jeremy Curnock Cook, MA. Age 68. Non-Executive Director Appointed as a Director on incorporation of Adherium Limited on 17 April 2015. Mr Curnock Cook was formerly head of the life science private equity team at Rothschild Asset Management in the UK and an active investor in the Australian life science sector. At Rothschild, Mr Curnock Cook was responsible for the launch of the first dedicated biotechnology fund for the Australian market. Over his 40-year career, Mr Curnock Cook has specialised in creating value in emerging biotech enterprises, through active participation with management. He has served on over 40 boards in various roles, including chair of private and public biotechnology companies listed on NASDAQ, LSE, TSX and ASX. Mr Curnock Cook received his MA in Natural Sciences from Trinity College in Dublin, Ireland. He is currently Managing Director of BioScience Managers (manager of a major shareholder in Adherium), Chairperson of Avena Therapeutics and AmpliPhi Biosciences and sits on the board of Avita Medical, Rex Bionics Pty and acts as an alternative director for Sea Dragon Ltd. Mr Curnock Cook was previously a director of Bioxyne Limited and Phylogica Limited. He has held no other Australian public company directorships in the last three years. Dr William Hunter, MD. Age 54. Independent Non-Executive Director Appointed as a Director on 17 December 2015. Dr Hunter has extensive experience in commercialising medical device technologies. He co-founded Angiotech Pharmaceuticals in 1992 and assumed the position of CEO in 1997 when Angiotech was a venture-stage, private, pre-clinical company with less than 50 employees. He led Angiotech through its IPO and listing on the Toronto Stock Exchange and NASDAQ. Dr Hunter has over 200 patents and patent applications to his name and products in which he was an inventor or co-investor, including the TAXUS® Drug-Eluting Coronary Stent, the Zilver PTX Peripheral Drug-Eluting Stent, the Quill barbed wound closure device and the 5-FU Anti-Infective Catheter. Combined, these products have generated revenues of over $12 billion and have helped the lives of over 6 million patients globally. He is currently President and CEO of Cardiome Pharma Corp (NASDAQ: CRME), a Director of Rex Bionics, Co-Founder of Canary Medical and is an Industry Expert Advisor for BioScience Managers (manager of a major shareholder in Adherium). He has previously served as a director of Epirus Biopharmaceuticals (NASDAQ: EPRS) and Union Medtech. Dr Hunter completed his BSc from McGill University and a MSC and MD from the University of British Columbia. Dr Hunter served as a practising physician in British Columbia for five years. Dr Hunter held no other Australian public company directorships in the last three years. As noted, as an Industry Expert Advisor for BioScience Managers, Dr Hunter has an association with a significant shareholder of the Company. The board of directors is of the opinion that this does not compromise Dr Hunter’s independence as to the best of the board’s knowledge he is not involved in decision making by BioScience Managers and the value of the advisory services provided is not material. 5 Annual Report 2017 Adherium LtdMr Bruce McHarrie, B.Com, FCA, GAICD. Age 59. Independent Non-Executive Director Appointed as a Director on 20 July 2015. Mr McHarrie is currently an independent director and consultant with over 20 years’ experience in the health and life sciences sectors. He was formerly with Telethon Kids Institute in Perth, Western Australia, for 15 years, where his roles included Chief Financial Officer, Director of Operations and Director of Strategic Projects. Prior to joining Telethon Kids, Mr McHarrie was a Senior Manager at Deloitte in London before moving to Rothschild Asset Management as Assistant Director of the Bioscience Unit, a life sciences private equity group investing in early stage biotechnology and healthcare companies. Outside his role at Adherium, he is currently an advisor to BioScience Managers (manager of a major shareholder in Adherium), a director at AusCann (Australasian Medical Cannabis) and an independent consultant. Bruce is a Fellow of the Institute of Chartered Accountants Australia and New Zealand. He holds a Bachelor of Commerce from the University of Western Australia and is a graduate member of the Australian Institute of Company Directors. Until recently, Mr McHarrie served as a non-executive director and chairman on the board of ASX listed company, Phylogica Limited. Mr McHarrie has held no other Australian public company directorships in the last three years. As noted, as an advisor to BioScience Managers, Mr McHarrie has an association with a significant shareholder of the Company. The board of directors is of the opinion that this does not compromise Mr McHarrie’s independence as to the best of the board’s knowledge he is not involved in decision making by BioScience Managers and the value of the advisory services provided is not material. Professor John Mills, AO, SB, MD, FACP, FIDSA, FRACP. Age 77. Independent Non-Executive Director Appointed as a Director on 20 July 2015. Professor Mills is an internationally-regarded physician, scientist and biotechnology businessman. He was recruited from the US to Melbourne 25 years ago as the managing director of the Burnet Institute of Medical Research and Public Health. Since then Professor Mills has been managing director of an ASX-listed company, Narhex Life Sciences, chairman of another ASX-listed company, AMRAD Corp., executive chairman of a Swedish biotechnology company, Cavidi AB and non-executive director of a further ASX listed company, Phosphagenics Corp. Ltd. Thirteen years ago he co-founded a boutique anatomic pathology practice, TissuPath Specialist Pathology. Before taking his current position as Director of R&D at TissuPath, he served as Managing Director for three years. He is currently an investment committee member at an Australian venture capital firm, GBS Venture Partners. Professor Mills is an honours graduate of the University of Chicago and Harvard Medical School, and is a Fellow of both the US and Australian Colleges of Physicians. His expertise is in infectious diseases and pulmonary diseases. He maintains a clinical practice at The Alfred Hospital in Melbourne. Professor Mills has held no other Australian public company directorships in the last three years. Mr Bryan Mogridge BSc, ONZM, FNZIOD. Age 71. Independent Non-Executive Director Appointed as a Director on 20 July 2015. Mr Mogridge has been a successful public company director for over 30 years. He has been CEO of two listed companies and has a background in science, manufacturing, investment and technology. His business philosophy is to be invested where he is involved and grow value for all shareholders. Mr Mogridge is currently Chairperson of Rakon Ltd and sits on the Board as a Director of Mainfreight, Clearspan, BUPA ANZ and Thinxtra. He also recently joined as a director of Auckland Regional Amenities Funding Board. Mr Mogridge also has significant involvement in philanthropy, chairing one of New Zealand’s most successful charities (The Starship Foundation) for 20 years, helping to transform sick children’s lives through New Zealand’s national children’s hospital “The Starship”. Mr Mogridge is currently a Trustee for The Starship Foundation. He has previously held directorships at Yealands Wine Group, Momentum Energy, Waitakere City Holdings, Enterprise Waitakere, Pyne Gould Corporation. Mr Mogridge has also previously chaired national organisations such as the NZ Wine Institute, the NZ Food and Beverage Exporters Council and the NZ Tourism Board. He was previously deputy chair of UBS NZ and chair of ASX-listed Lantern Hotel Group having resigned in June 2015 and held no other Australian public company directorships in the last three years. Mr Garth Sutherland, MSc, MAICD. Age 51. Executive Director Appointed as a Director on 20 July 2015. Mr Sutherland founded Adherium in 2001 (formerly known as Nexus6). Having had asthma all his life he wanted a solution for automatically tracking his asthma medication use to improve his asthma management. He is an inventor of 13 patent families related to the Smartinhaler™ platform and a contributor to over 70 registered designs and several trademarks registered or used by Adherium. Prior to Adherium, Mr Sutherland worked in a variety of commercial, marketing and engineering roles. He has spent over 20 years working for some of the world’s top technology companies in Europe, North America and Australasia including Microsoft and Gallagher Group. Mr Sutherland graduated with a Masters of Science in Physics from the University of Waikato, New Zealand, with First-Class Honours. Mr Sutherland has held no other Australian public company directorships in the last three years. Dr Doug Wilson, MB, ChB, FRACP, FRCPA was a Director and Chairman of Adherium until his resignation on 1 September 2016. 6 Annual Report 2017 Adherium LtdJoint Company Secretaries Rob Turnbull, B.Com, CA. Age 50. VP Finance & Business Services and Joint Company Secretary Appointed 21 August 2015. Mr Turnbull has over 25 years’ corporate experience, starting his career with PricewaterhouseCoopers where he worked in Auckland, Toronto, and London; and has over 15 years’ experience with technology and life-sciences companies. Mr Turnbull has also been Chief Financial Officer for an ASX-listed biotech company undertaking multiple international studies ranging from preclinical to clinical Phase 3, and with operations in the United States, Australia and New Zealand. In addition to capital markets financing and compliance, treasury, tax, financial reporting, commercial contract negotiations and general management, he has been involved in M&A activity to acquire and develop specific technologies. Mr Turnbull graduated from Auckland University with a Bachelor of Commerce, and is a Chartered Accountant and member of Chartered Accountants Australia and New Zealand. Mark Licciardo, B.Bus (Acc), GradDip CSP, FCSA, FCIS, FAICD. Age 53. Joint Company Secretary Appointed 10 May 2016. Mr Licciardo is Managing Director of Mertons Corporate Services Pty Ltd (Mertons) which provides company secretarial and corporate governance consulting services to ASX listed and unlisted public and private companies. Prior to establishing Mertons, Mr Licciardo was Company Secretary of the Transurban Group (2004-07) and Australian Foundation Investment Company Limited, Djerriwarrh Investments Limited, AMCIL Limited and Mirrabooka Investments Limited (1997-2004). Mr Licciardo has also had an extensive commercial banking career with the Commonwealth Bank and State Bank Victoria. Mr Licciardo is a former Chairman of Governance Institute of Australia (GIA) (formerly the Chartered Secretaries Australia) in Victoria, a fellow of both GIA and the Australian Institute of Company Directors (AICD), former Chairman of Melbourne Fringe Limited and a director of ASX listed Frontier Digital Ventures and several unlisted public and private companies. Directors’ Meetings The number of meetings of Directors (including meetings of committees of directors) held during the period and the number of meetings attended by each Director was as follows: Directors’ Meetings Audit & Risk Committee Meetings Nomination & Remumeration Committee Meetings Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended T Lynch J Curnock Cook W Hunter B McHarrie J Mills B Mogridge G Sutherland D Wilson 10 13 13 13 13 13 13 3 10 12 11 13 13 13 13 3 - 6 - 6 6 1 6* - - 4 - 6 6 1 3* - 3 5 - - 5 5 5* 2 3 5 - - 4 5 3* 2 *In attendance ex-officio. Committees of the Board The Company has established the following committees of the board, with membership in the year to 30 June 2017 as noted: Committee Audit & Risk Nomination & Remuneration Membership Bruce McHarrie (Chair), Non-Executive Director Jeremy Curnock Cook, Non-Executive Director (resigned September 2017) John Mills, Non-Executive Director Brian Mogridge, Non-Executive Director (appointed February 2017) Brian Mogridge (Chair), Non-Executive Director Jeremy Curnock Cook, Non-Executive Director John Mills, Non-Executive Director Thomas Lynch, Non-Executive Director (appointed December 2016) Doug Wilson, Non-Executive Director (resigned September 2016) The committees’ Charters are available on the Company’s website. 7 Annual Report 2017 Adherium LtdPrincipal Activities During the year, the principal continuing activity of the Group was the development, manufacture and supply of its Smartinhaler™ digital health technologies which address sub-optimal medication use and improve health outcomes in chronic disease. Results and Dividends The net loss after tax of the Group for the year ended 30 June 2017 was $12,810,000. No dividends were paid, declared or recommended during the year ended 30 June 2017. Review of Operations During the 2016 fiscal period Adherium transitioned its financial year end from March to June. Accordingly, the 2016 comparatives presented are for a fifteen-month period whereas this report is for the twelve-month period to 30 June 2017. Revenue this year was $2,347,000, up 12% on 2016 on a twelve-month (versus fifteen-month) basis with the delivery of 18,000 Smartinhaler™ devices and related mobile app and cloud services, mostly to our major commercial partner AstraZeneca in relation to: • AstraZeneca’s ongoing deployments of our monitoring technology into Europe; • the Australian commercial pilot programme involving over 130 respiratory clinicians and several channels to distribute the Smartinhaler™ asthma management solution to consumers; and • the BreatheMate COPD study across a number of US sites using Adherium’s SmartTouch™ for Symbicort® with supporting services provided by Adherium. In the latter part of fiscal 2017 this included delivery of 10,000 new Turbu+ devices (based on a new version of Adherium’s SmartTurbo) and software license updates to AstraZeneca for launches and expansion in key global markets including Australia, Austria, Italy, The Netherlands, and Switzerland. In addition, milestones were completed with the Medical Research Institute of New Zealand for two international studies being run with Adherium’s Smartinhaler™ platform during fiscal 2017. Revenue of $2,626,000 in the comparative fifteen months was generated on the supply of 30,000 Smartinhaler™ devices, mostly as an initial market launch volume to AstraZeneca’s commercial programme. Sales and marketing expenses were $3,312,000 for the year (2016: $2,148,000), reflecting the expansion of the global business development team in the current and previous period, and formal market research projects undertaken in the year related to new sales channels for Adherium. The Company also attended, presented, and exhibited at a number of global respiratory industry meetings, including European Respiratory Society (ERS) and American Thoracic Society (ATS). Research and development expenses for the year to 30 June 2017 of $4,242,000 (2016: $2,713,000) included: • development of the new version of Adherium’s SmartTurbo™, distributed as Turbu+ by AstraZeneca for their block-buster drug Symbicort® Turbuhaler, incorporating new sensor technology that generates more data for enhancing medication adherence and user experience. This device completed development, was transferred to manufacturing, and launched into multiple new markets by AstraZeneca; • grant by the US Patent and Trademark Office (USPTO) of a key patent covering medication adherence monitoring devices that include an optical dose counter, further strengthening the Company’s growing intellectual property portfolio; • preparation and submission of an FDA 510(k) application for Adherium’s SmartTouch™ for Symbicort®. Clearance of this by the US FDA was received in September 2017; • development of the next generation of our mobile apps (iOS and Android) and cloud software platform, enabling self-enrolment by patients. Adherium’s research and development activities are subsidized by grant income received from a New Zealand Government (Callaghan Innovation) Growth Grant. The increase in grant income from $290,000 in fiscal 2016 to $409,000 was reflective of increased research and development activities in fiscal 2017. Administrative expenses of $6,260,000 (2016: $3,906,000) included hires in the roles of Chairman, Chief Executive Officer, Chief Operating Officer, and Head of Corporate Development in the year, and the assistance of global consulting company Arthur D. Little in the development of the Company’s strategic plan to target new markets for the Smartinhaler™ technology. 8 Annual Report 2017 Adherium Ltd Non-cash costs in the year included share and option compensation expense of $478,000 (2016: $198,000), and depreciation and amortisation expenses of $270,000 (2016: $164,000). The 2016 period also included non-cash interest and fair value expenses of $378,000 related to increments in borrowing and embedded derivative classifications of the Convertible Notes prior to their conversion to Adherium shares, and the expensing of previously capitalised product development costs of $270,000. Cash reserves at 30 June 2017 were $22,779,000 (2016: $27,211,000), a net use of funds of $4,432,000 reflecting the operations discussed above together with an $8m share placement to Fidelity International Limited, one of the world’s leading investment institutions. There was increased activity across all areas of Adherium’s business following its IPO in August 2015, enabling the Company to support AstraZeneca’s global distribution of Adherium’s technology. This relationship has evolved from development and clinically focused to commercially focused, and continues to be an important strategic cornerstone of our business, in both potential revenue generation and technology validation. The Company’s intention is now to add to this segment of its business by distributing its technology through direct to consumer, and payer and provider channels. In preparation for this, a critical review of activities and resources was undertaken at the end of fiscal 2017 for alignment with the Company’s revised strategy. Salaries and wages at $6.8m in 2017 (2016: $3.7m) was the Company’s largest expense, with the increase representing a full financial year after building the internal resource needed to meet expected demand post-IPO and focus on new business development opportunities. As a result of the strategic review, a reorganisation and consolidation of staffing was implemented. In relation to this, approximately $3m of costs recorded in fiscal 2017 as salaries and wages and other administrative costs relate to roles removed or costs that will not be incurred in fiscal 2018. Significant Changes in the State of Affairs There have been no significant changes in the state of affairs of the Group during the financial year ended 30 June 2017. Events since the end of the Financial Year There are no matters or circumstances that have arisen since the end of the financial year that have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs in future years. Likely Developments and Expected Results Commentary on the Group’s strategic direction and plan is set out in the CEO’s Report on pages 3 to 4. Environmental Regulation The Group’s operations are not subject to any significant environmental Commonwealth or State regulations or laws. Directors’ Interests The relevant interest of each Director in shares and options over shares in the Company as notified by the Directors to the ASX in accordance with section 205G of the Corporations Act 2001 as at 30 June 2017 is: Director T Lynch J Curnock Cook W Hunter B McHarrie J Mills B Mogridge G Sutherland Ordinary Shares Options over Ordinary Shares 600,000 380,000 300,000 300,000 340,000 9,613,023 * 11,869,055 - - - - - - 866,190 * relevant interest includes 7,813,023 ordinary shares held in the Director’s capacity as trustee of the Company’s Employee Share Plan. Indemnification and Insurance of Directors and Officers The Company has entered into deeds of access, insurance and indemnity with each director and officer which contain rights of access to certain books and records of the Group for a period of seven years after the director or officer ceases to hold office. This seven-year period can be extended where certain proceedings or investigations commence before the seven-year period expires. 9 Annual Report 2017 Adherium Ltd In respect of the indemnity of the directors and officers, the Company is required, pursuant to the constitution, to indemnify all directors and officers, past and present, against all liabilities allowed under law. Under the deed of access, insurance and indemnity, the Company indemnifies parties against all liabilities to another person that may arise from their position as a director or an officer of the Company or its subsidiaries to the extent permitted by law. The deed stipulates that the Company will meet the full amount of any such liabilities, including reasonable legal costs and expenses. In respect of insurance being obtained on behalf of the directors and officers, the Company may arrange and maintain directors’ and officers’ insurance for its directors and officers to the extent permitted by law. Under the deed of access, insurance and indemnity, the Company must obtain such insurance during each director’s and officer’s period of office and for a period of seven years after a director or an officer ceases to hold office. This seven year period can be extended where certain proceedings or investigations commence before the seven-year period expires. Disclosure of the insurance premiums and the nature of liabilities covered by such insurance are prohibited by the relevant contracts of insurance. Shares Under Option Unissued shares As at the date of this report, unissued ordinary shares of the Company under option comprised: Exercise price Total Number of Options $0.075268 $0.075268 $0.075268 $0.134039 $0.134039 $0.134039 $0.134039 $0.134039 $0.134039 $0.665 Outstanding at 30 June 2017 600,521 799,061 589,892 173,238 217,214 542,952 1,039,428 259,857 173,238 1,400,000 5,795,401 Vested 600,521 799,061 589,892 173,238 217,214 542,952 1,039,428 259,857 173,238 1,400,000 5,795,401 Expiry Date 31 March 2018 31 March 2019 31 March 2020 31 March 2020 30 November 2020 16 December 2020 1 January 2021 24 March 2021 31 March 2022 3 September 2018 The options over unissued ordinary shares do not entitle the holder to participate in any share issue of the Company or any entity in the Group. No options were granted to the Directors of the Company or other key management personnel of the Group in the year to 30 June 2017. Details of fully paid ordinary shares issued on exercise of options in the year to 30 June 2017 are contained in the accompanying consolidated financial statements. Proceedings on behalf of the Company There are no legal or other proceedings being made on behalf of the Company or against the Company as at the date of this report. Non-audit Services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. The fees paid to PricewaterhouseCoopers for other services set out in note 5 of the Group’s financial statements for the year ended 30 June 2017 related to independent assurance services provided pursuant to the Group’s claims for reimbursement under governmental research and development grant programmes. The directors are satisfied that the provision of these services during the year by the auditor did not impair the auditors’ independence as the amounts paid were not significant and the services provided were assurance related. 10 Annual Report 2017 Adherium LtdAuditor’s Independence Declaration A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 in relation to the audit for the financial year is provided with this report. Corporate Governance Statement The board of Directors of Adherium Limited is responsible for corporate governance. The board has prepared the Corporate Governance Statement (CGS) in accordance with the third edition of the ASX Corporate Governance Council’s Principles and Recommendations under which the CGS may be made available on the Company’s website. Accordingly, a copy of the Company’s CGS is available on the Adherium website at www.adherium.com under the Investors/Corporate Governance section. Remuneration Report (Audited) The Directors present the Group’s 2017 remuneration report which sets out the remuneration information for the Company’s Non-Executive Directors, Executive Director and other key management personnel of the Group. The report contains the following sections: (a) Details of key management personnel disclosed in this report (b) Remuneration governance (c) Executive remuneration policy and framework (d) Relationship between remuneration and Group performance (e) Non-Executive director remuneration policy (f) Details of remuneration of key management personnel (g) Service agreements (h) Details of share and option based compensation and bonuses (i) Equity instruments held by key management personnel (j) Other transactions with key management personnel (a) Details of key management personnel disclosed in this report The following persons acted as key management personnel of the Company and the Group during the year ended 30 June 2017. (i) Non-Executive and Executive Directors • • • • • • • • Thomas Lynch Non-Executive Chairman (appointed 1 September 2016) Doug Wilson Non-Executive Chairman (appointed 20 July 2015; resigned 1 September 2016) Jeremy Curnock Cook Non-Executive Director (appointed on incorporation 17 April 2015) William Hunter Non-Executive Director (appointed 17 December 2015) Bruce McHarrie Non-Executive Director (appointed 20 July 2015) John Mills Non-Executive Director (appointed 20 July 2015) Bryan Mogridge Non-Executive Director (appointed 20 July 2015) Garth Sutherland Executive Director (appointed 20 July 2015) and Founder (Group CEO until 9 June 2017) (ii) Non-Executive and Executive Directors • • • • Arik Anderson Rob Turnbull Mark Licciardo Group Chief Executive Officer (appointed 9 June 2017) Joint Company Secretary (appointed 21 August 2015) and VP Finance & Business Services (Chief Financial Officer until 11 September 2017) Joint Company Secretary (appointed 10 May 2016) Ross Bradding Chief Operating Officer (appointed 1 August 2016) (iii) Changes since the end of the reporting period In the period after 30 June 2017 and up to the date of this report the following changes to key management personnel were: • On 31 August 2017 Mr Ross Bradding resigned as Chief Operating Officer; and • On 11 September 2017 Mr Tim Marcotte joined the Group as Chief Financial Officer. 11 Annual Report 2017 Adherium Ltd (b) Remuneration Governance The Nomination and Remuneration Committee is a committee of the board. Its responsibilities include assisting the board in ensuring that the Company: • has coherent remuneration policies and practices which are observed and which enable it to attract and retain executives and directors who will create value for shareholders; • fairly and responsibly rewards executives having regard to the performance of the Company, the performance of the executive and the general pay environment; • provides disclosure in relation to the Company’s remuneration policies to enable investors to understand the costs and benefits of those policies and the link between remuneration paid to directors and key executives and corporate performance; and • complies with the provisions of the ASX Listing Rules and the Corporations Act. The primary purpose of the Nomination and Remuneration Committee is to support and advise the board in fulfilling its responsibilities to shareholders in ensuring that the board is appropriately remunerated, structured and comprised of individuals who are best able to discharge the responsibilities of directors by: • assessing the size, composition, diversity and skills required by the board to enable it to fulfil its responsibilities to shareholders, having regard to the Company’s current and proposed scope of activities; • assessing the extent to which the required knowledge, experience and skills are represented on the board; • establishing processes for the identification of suitable candidates for appointment to the board; • overseeing succession planning for the board and the Chief Executive Officer; • establishing processes for the review of the performance of individual directors and the board as a whole; • assessing the terms of appointment and remuneration arrangements for non-executive directors; and • assessment and reporting to the board in relation to: - executive remuneration policy; - - the remuneration of executive directors; the remuneration of persons reporting directly to the Chief Executive Officer, and as appropriate, other executive directors; - diversity plans, measurable diversity objectives and ensuring equality in remuneration across gender aligned, where relevant, with the ASX Corporate Governance Guidelines; - - superannuation arrangements; and - all equity-based plans. the Company’s recruitment, retention and termination policies and procedures; (c) Executive remuneration policy and framework Remuneration policy The policy for determining the nature and amount of remuneration of key management personnel is agreed by the board of directors as a whole on advice from the Nomination and Remuneration Committee. The board obtains professional advice where necessary to ensure that the Group attracts and retains talented and motivated directors and employees who can enhance the performance of the Group through their contributions and leadership. The Nomination and Remuneration Committee makes specific recommendations on the remuneration package and other terms of employment for the CEO having regard to his performance, relevant comparative information, and if appropriate, independent expert advice. For key management personnel, the Group provides a remuneration package that incorporates both cash-based remuneration and, if appropriate, share-based remuneration. The contracts for service between the Group and key management personnel are on a continuing basis, the terms of which are to align executive performance-based remuneration with Group objectives. The Nomination and Remuneration Committee is also responsible for making recommendations to the board in relation to the terms of any issue of equity-based remuneration to employees, as part of their individual package, or a wider staff incentive and retention scheme, and for ensuring that any such issue is made in accordance with the ASX Listing Rules. Executive pay The executive pay and reward framework has three components: • base pay and benefits, including legislative superannuation; • short-term performance incentives; and • long-term incentives through participation in the Adherium Employee Share Plans. A combination of some or all of these components comprises an executive’s total remuneration. Base pay Executives are offered a competitive base pay that comprises the fixed component of pay and rewards. Base pay for executives is reviewed annually to ensure that executive remuneration is competitive with the market. 12 Annual Report 2017 Adherium Ltd There are no guaranteed base pay increases included in any executives’ contracts. Short-term incentives (STI) Executives have a target STI opportunity depending on the accountabilities of the role and impact on the organisation. The STI is a cash-based incentive which forms part of the executive’s total compensation, representing between 0% and 50% of base salary. Each year, the Nomination and Remuneration Committee in conjunction with the CEO, will consider the appropriate targets and key performance indicators (KPIs) of each executive to link the STI plan and the level of payout if targets are met. This will include setting any maximum payout under the STI plan, and minimum levels of performance to trigger payment of STI. The targets and KPIs selected are chosen to align executive performance with the Group’s annual business objectives set by the board and encompassing business development, research & development, and cash management. The STI achievement is calculated and paid annually. The Nomination and Remuneration Committee in conjunction with the CEO assesses the extent to which targets and KPIs have been achieved at a Company and individual performance level to determine the STI to be paid. Measurement of achievement of the business objectives does not involve comparison with factors external to the Company. Long-term incentives (LTI) Long-term incentives are provided to certain employees via the Adherium Employee Share Plans (the Plans), one of which is operated for New Zealand resident participants and the other for participants resident elsewhere. The board has the discretion to offer and issue to eligible employees including directors: • ordinary shares in the Company issued at an issue price determined by the board. To date all shares have been • issued at the Company’s initial public offering price of A$0.50 per share; limited recourse loans where some or all of the issue price of the share awards are funded by way of a loan from the Company. The Plans are designed to focus directors and executives on delivering long-term shareholder returns. Share awards issued under the Plans generally vest in three equal tranches over three years of continuing employment. If the vesting condition is not met, the related share award is forfeited and loan cancelled such that the executive receives no benefit from unvested shares. Participation in the Plans is at the board’s discretion and executives do not have a contractual right to participate in the Plans. (d) Relationship between remuneration and Group performance The Group is presently in a business growth phase, as it undertakes continued product development, and seeks relevant regulatory approvals for its technologies and market penetration for its products, and this is the focus of executives and the board. During this phase expenditures continue to exceed revenues, and in the year ended 30 June 2017 the Group incurred a loss after tax of $12,810,000 (7.6 cent loss per share). In the year to 30 June 2017 the Company’s shares traded between 12.5 and 50 cents per share. Given the stage of the Group’s commercial development, the board does not utilise earnings per share as a performance measure and does not presently include the Company’s share price as a measure of executive performance. No dividends were paid, declared or recommended during the period ended 30 June 2017. (e) Non-Executive Director remuneration policy On appointment to the board, Non-Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the board policies and terms, including remuneration, relevant to the office of director. Non-Executive Directors receive a fee which is inclusive of fees for chairing or participating on board committees. They do not receive performance-based pay. Non-Executive Directors’ fees and payments are reviewed annually by the board. The Non-Executive Chairman’s fees are determined independently of the fees of Non-Executive Directors based on comparative roles in the external market. Non-Executive Chairman and Director fees were approved at the 2016 Annual General Meeting at $100,000 per annum for the Non-Executive Chairman (previously $80,000 per annum) and $50,000 for each Non-Executive Director (previously $40,000 per annum). Legislative superannuation contributions are also paid where applicable. A Non-Executive Director may be paid fees or other amounts as the board determines where a Director performs ser- vices outside the scope of the ordinary duties of a Director. The Company may reimburse Non-Executive Directors for their expenses properly incurred as a Director or in the course of office. 13 Annual Report 2017 Adherium Ltd (f) Details of remuneration of key management personnel Remuneration for the year ended 30 June 2017 Short Term Benefits Post Employment Benefits Share-based Payments Salaries & Fees $ Cash Bonus $ Superannuation $ Value of Options/ Loan Funded Shares5 Performance Related Renumeration Fixed Renumeration $ Directors’ remuneration Thomas Lynch 1 Jeremy Curnock Cook William Hunter Bruce McHarrie John Mills Bryan Mogridge Doug Wilson 1 Sub-total Directors Executives’ remuneration Arik Anderson 2 Garth Sutherland 2 Ross Bradding 3 Mark Licciardo 4 Rob Turnbull Sub-total executives 80,000 46,667 46,667 46,667 46,667 46,667 13,333 326,668 44,181 264,474 212,130 44,628 207,801 773,214 Total key management personnel 1,099,882 - - - - - - - - - 79,342 - - 49,983 129,325 129,325 - - - 4,196 4,196 - - 8,392 - 14,047 6,364 - 7,796 28,207 36,599 1. Doug Wilson resigned 1 September 2016. At that time Thomas Lynch was appointed a Director and Chairman. 2. Arik Anderson joined Adherium as Chief Executive Officer on 9 June 2017. At that time, former Chief Executive Officer, Garth Sutherland, transitioned to the role of Founder. 3. Ross Bradding joined Adherium as Chief Operating Officer on 1 August 2016. Remuneration for the fifteen months ended 30 June 2016 Short Term Benefit Post Employment Benefits - Adherium Limited - Adherium (NZ) Limited - Adherium Limited - Adherium (NZ) Limited - Adherium Limited - Adherium Limited - Adherium Limited - Adherium Limited - Adherium (NZ) Limited - Adherium (NZ) Limited Directors’ remuneration Doug Wilson Jeremy Curnock Cook Bruce McHarrie William Hunter 1 John Mills Bryan Mogridge Matt McNamara 2 Maxine Simmons 2 Sub-total Directors Executives’ remuneration Garth Sutherland Bronwyn Le Grice 3 Mark Licciardo 4 Rob Turnbull Sub-total executives Total key management personnel Salaries & Fees $ Cash Bonus $ Superannuation $ Performance Related Renumeration Fixed Renumeration $ 80,000 41,908 40,000 14,162 40,000 20,000 40,000 40,000 15,019 14,162 345,251 312,638 181,186 5,718 234,101 733,643 1,078,894 - - - - - - - - - - - 22,105 - - - 22,105 22,105 - - - - 3,483 - 3,483 - - - 6,966 13,390 16,002 - 7,023 36,415 43,381 William Hunter was appointed a Non-Executive Director 17 December 2015. Adherium (NZ) Limited directors resigned on admission of Adherium Limited to the Official List of the ASX. Bronwyn Le Grice joined Adherium 19 August 2015 and resigned as Head of Commercial Development and Corporate Affairs on 22 April 2016, and as Joint Company Secretary 10 May 2016. 1. 2. 3. 14 $ - - - 12,200 6,100 6,100 6,100 6,100 6,100 42,700 19,165 21,652 27,125 67,942 110,642 $ - - - - - - - - 5,678 3,407 3,407 3,407 15,899 7,658 3,585 11,243 27,142 Share-based Payments Value of Options/ Loan Funded Shares5 Total $ 92,200 52,767 52,767 56,963 56,963 52,767 13,333 377,760 44,181 377,028 240,146 44,628 292,705 998,688 1,376,448 Total $ 80,000 47,586 40,000 17,569 43,483 20,000 43,483 40,000 18,426 17,569 368,116 355,791 197,188 5,718 244,709 803,406 1,171,522 $ 13% 12% 12% 11% 11% 12% - - - 26% 9% 26% 4% 6% $ - - - - 18% 19% 8% - - 1% 87% 88% 88% 89% 89% 88% 100% 100% 74% 91% - 74% 96% 94% - - - - - - 82% 81% 92% 99% Annual Report 2017 Adherium Ltd (f) Details of remuneration of key management personnel Remuneration for the year ended 30 June 2017 Short Term Benefits Post Employment Benefits Share-based Payments Salaries & Fees Cash Bonus Superannuation Value of Options/ Loan Funded Shares5 $ 12,200 6,100 6,100 6,100 6,100 6,100 - 42,700 - 19,165 21,652 - 27,125 67,942 110,642 Performance Related Renumeration $ Fixed Renumeration $ 13% 12% 12% 11% 11% 12% - - 26% 9% - 26% 87% 88% 88% 89% 89% 88% 100% 100% 74% 91% - 74% Total $ 92,200 52,767 52,767 56,963 56,963 52,767 13,333 377,760 44,181 377,028 240,146 44,628 292,705 998,688 1,376,448 1. Doug Wilson resigned 1 September 2016. At that time Thomas Lynch was appointed a Director and Chairman. 2. Arik Anderson joined Adherium as Chief Executive Officer on 9 June 2017. At that time, former Chief Executive Officer, Garth Sutherland, transitioned to the role of Founder. 3. Ross Bradding joined Adherium as Chief Operating Officer on 1 August 2016. 4. A company of which Mr Licciardo is a director received fees from the Company for company secretarial and corporate governance consulting services. 5. The fair values of options and loan funded shares are calculated at the date of grant using a Black-Scholes pricing model and allocated to each reporting period in accordance with vesting. The values noted represent the portion of the fair value of the options or loan funded shares allocated to the reporting period. Remuneration for the fifteen months ended 30 June 2016 Short Term Benefit Post Employment Benefits Salaries & Fees Cash Bonus Superannuation Share-based Payments Value of Options/ Loan Funded Shares5 $ - 5,678 - 3,407 - - - - 3,407 3,407 15,899 7,658 - - 3,585 11,243 27,142 Performance Related Renumeration $ Fixed Renumeration $ 4% 6% - - - - 18% 19% 8% - - 1% 96% 94% - - - - 82% 81% 92% - - 99% Total $ 80,000 47,586 40,000 17,569 43,483 20,000 43,483 40,000 18,426 17,569 368,116 355,791 197,188 5,718 244,709 803,406 1,171,522 Directors’ remuneration Thomas Lynch 1 Jeremy Curnock Cook William Hunter Bruce McHarrie John Mills Bryan Mogridge Doug Wilson 1 Sub-total Directors Executives’ remuneration Arik Anderson 2 Garth Sutherland 2 Ross Bradding 3 Mark Licciardo 4 Rob Turnbull Sub-total executives Total key management personnel 1,099,882 $ 80,000 46,667 46,667 46,667 46,667 46,667 13,333 326,668 44,181 264,474 212,130 44,628 207,801 773,214 $ - - - - - - - - 79,342 - - - 49,983 129,325 129,325 Jeremy Curnock Cook - Adherium Limited - Adherium Limited - Adherium (NZ) Limited - Adherium (NZ) Limited - Adherium Limited - Adherium Limited - Adherium Limited - Adherium Limited - Adherium (NZ) Limited - Adherium (NZ) Limited Directors’ remuneration Doug Wilson Bruce McHarrie William Hunter 1 John Mills Bryan Mogridge Matt McNamara 2 Maxine Simmons 2 Sub-total Directors Executives’ remuneration Garth Sutherland Bronwyn Le Grice 3 Mark Licciardo 4 Rob Turnbull Sub-total executives Total key management personnel $ 80,000 41,908 40,000 14,162 40,000 20,000 40,000 40,000 15,019 14,162 345,251 312,638 181,186 5,718 234,101 733,643 1,078,894 $ - - - - - - - - - - - - - - 22,105 22,105 22,105 $ - - - - - - - $ - - - - - - - - - 4,196 4,196 8,392 14,047 6,364 7,796 28,207 36,599 3,483 3,483 6,966 13,390 16,002 7,023 36,415 43,381 1. 2. 3. William Hunter was appointed a Non-Executive Director 17 December 2015. Adherium (NZ) Limited directors resigned on admission of Adherium Limited to the Official List of the ASX. Bronwyn Le Grice joined Adherium 19 August 2015 and resigned as Head of Commercial Development and Corporate Affairs on 22 April 2016, and as Joint Company Secretary 10 May 2016. 4. A company of which Mr Licciardo is a director received fees from the Company for company secretarial and corporate governance consulting services, commencing 10 May 2016. 5. The fair values of options and loan funded shares are calculated at the date of grant using a Black-Scholes pricing model and allocated to each reporting period in accordance with vesting. The values noted represent the portion of the fair value of the options or loan funded shares allocated to the reporting period. 15 Annual Report 2017 Adherium Ltd (g) Service agreements Joint Company Secretary - Mr Mark Licciardo Mr Licciardo currently provides company secretarial and corporate governance services under a service arrangement between the Company and Merton Corporate Services Pty Ltd, a company associated with Mr Licciardo. The current arrangement has no predetermined termination date, with each party having the right to terminate the arrangement by giving ninety days’ notice in writing to the other party. Other key management personnel of the Group Remuneration and other terms of employment for other key management personnel of the Group are formalised in employment agreements which specify the components of remuneration, benefits and notice periods. Participation in the STI and LTI plans is subject to the board’s discretion. Other major provisions of the agreements relating to remuneration are set out below: Name Term of Agreement Notice Period Base Salary 2 Termination Payments 3 Arik Anderson, Group Chief Executive Officer No fixed term 1 month by Company; 3 months by executive US$400,000 6 months Garth Sutherland, Founder Ross Bradding, Chief Operating Officer Rob Turnbull, VP Finance & Business Services (Chief Financial Officer until 11 September 2017) No fixed term No fixed term No fixed term 3 months 1 NZ$280,000 2 months 1 NZ$245,000 1 month 1 NZ$220,000 6 months 2 months 1 month 1. The notice period applies without cause equally to either party. 2. Base salaries quoted are annual as at 30 June 2017; they are reviewed annually by the Nomination and Remuneration Committee. 3. Base salary payable if the Group terminates the employee with notice, and without cause (e.g. for reasons other than unsatisfactory performance). (h) Details of share and option based compensation Options over ordinary shares of the Company All options over ordinary shares issued by the Company are exercisable on a one-for-one basis, and any shares issued on exercise are fully paid and rank pari passu with existing ordinary shares. During the period to 30 June 2017 and to the date of this report: • • 173,238 options held by Garth Sutherland in relation to the 2010 financial year lapsed; and 150,000 options over ordinary shares were exercised by Rob Turnbull during the year to 30 June 2017. The options had a value of $144 at the time of exercise. Loan funded Employee Share Plan The board has established the loan funded Adherium Employee Share Plans (Plans). Offers of allocations under the plans were made to, and acceptances received from, key management personnel during the year ended 30 June 2017 as follows: Name Grant date Thomas Lynch 8 November 2016 Jeremy Curnock Cook 8 November 2016 Bruce McHarrie 8 November 2016 William Hunter 8 November 2016 John Mills 8 November 2016 Bryan Mogridge 8 November 2016 Garth Sutherland 8 November 2016 Ross Bradding 23 August 2016 Loan funded purchase price at $0.50 per share Number of shares Loan maturity date Fair value of award 600,000 300,000 300,000 300,000 300,000 300,000 521,367 459,145 $300,000 8 November 2021 $150,000 8 November 2021 $150,000 8 November 2021 $150,000 8 November 2021 $150,000 8 November 2021 $150,000 8 November 2021 $260,684 8 November 2021 $229,573 23 August 2021 $31,140 $15,570 $15,570 $15,570 $15,570 $15,570 $60,565 $41,583 All awards vest one third annually over three years of continued employment from the grant date. After vesting the participant may take title to the shares by repaying to the Company the proportion of the loan related to those shares. The fair value of the awards of loan funded shares are calculated at the date of grant using a Black-Scholes pricing model, which are being allocated over the vesting periods as share based compensation. 16 Annual Report 2017 Adherium Ltd (i) Equity instruments held by key management personnel Shareholdings The numbers of ordinary shares in the Company held during the period to 30 June 2017 by each director and other key management personnel of the Group, including their personally related parties, are set out below Name Thomas Lynch Jeremy Curnock Cook Bruce McHarrie William Hunter John Mills Bryan Mogridge Doug Wilson Garth Sutherland Ross Bradding Mark Licciardo Rob Turnbull 2 Balance at the start of the period 1 Purchases Other changes during the period Balance at the end of the period - 80,000 - - 40,000 8,358,807 1,039,428 11,347,688 - - 409,645 - - - - - - - - - - - 600,000 1 300,000 1 300,000 1 300,000 1 300,000 1 300,000 1 954,216 2 - 521,367 1 459,145 1 - 150,000 3 600,000 380,000 300,000 300,000 340,000 9,613,023 2 1,039,428 4 11,869,055 459,145 - 559,645 1. Award of loan funded shares under the Company’s Employee Share Plan. 2. Ordinary shares held jointly with the VP Finance & Business Services in their capacity as trustees of the Company’s Employee Share Plan. At 30 June 2017 7,813,023 ordinary shares were held in this capacity. 3. Exercise of options to acquire ordinary shares. 4. Holding as at the date of resignation. (j) Other transactions with key management personnel There were no other transactions with Directors or other key management personnel. End of audited Remuneration Report. This report is made in accordance with a resolution of the directors. Thomas Lynch Non-Executive Chairman Sydney 26 September 2017 17 Annual Report 2017 Adherium Ltd Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of Adherium Limited for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been: 1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Adherium Limited and the entities it controlled during the period. Jonathan Skilton Partner PricewaterhouseCoopers Auckland 29 September 2017 PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz 18 Annual Report 2017 Adherium Ltd Financial Statements 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 to the Financial Statements 19 Annual Report 2017 Adherium LtdConsolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2017 Notes June 2017 $000 June 2016 $000 Continuing Operations Sales Cost of sales Gross profit Grants income Manufacturing support Research and development costs Sales and marketing costs Administrative expenses Operating loss Interest income Interest expense Finance income (cost) - net Loss before income tax Income tax expense Loss for the period attributable to equity holders Other comprehensive income Items that may be reclassified subsequently to profit or loss when certain conditions are met: Foreign exchange differences on translation of foreign operation Other comprehensive income for the period, net of tax Total comprehensive loss for the period Total comprehensive loss attributable to: Equity holders of Adherium Limited 2,347 (1,186) 1,161 409 (1,179) (4,242) (3,312) (6,260) (13,423) 613 - 613 2,626 (1,336) 1,290 290 (879) (2,713) (2,148) (3,906) (8,066) 560 (379) 181 (12,810) (7,885) - - (12,810) (7,885) 22 22 203 203 (12,788) (7,682) (12,788) (7,682) 7 6 Basic and diluted loss per share 8 7.6 cents 6.6 cents The accompanying notes form part of the financial statements. 20 Annual Report 2017 Adherium LtdConsolidated Statement of Financial Position as at 30 June 2017 Notes June 2017 $000 June 2016 $000 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Total current assets Non-current assets Property, plant and equipment Intangible assets Total assets LIABILITIES Current liabilities Trade and other payables Income received in advance Total current liabilities EQUITY Share capital Accumulated deficit Other reserves Total equity Total liabilities & equity The accompanying notes form part of the financial statements. 9 10 11 12 13 14 22,779 27,211 826 726 78 948 418 49 24,409 28,626 417 265 298 31 25,091 28,995 2,382 4 2,386 1,394 104 1,498 15 74,278 66,720 (25,820) (13,010) (25,753) (26,253) 22,705 25,091 27,457 28,955 21 Annual Report 2017 Adherium Ltd Consolidated Statement of Changes in Equity for the year ended 30 June 2017 Share Capital Accumulated Deficit Share & Option Compensation Reserve Foreign Currency Translation Reserve Merger Reserve $000 $000 $000 $000 Total Equity $000 1,017 (7,885) 203 (7,682) 2,204 - - - - - (27,535) - - - - - 35,000 (3,706) 426 198 447 - 203 203 - - - - - - 650 (27,535) 27,457 - 22 22 - - - - - - - - - - - (12,810) 22 (12,788) 8,023 (511) 46 478 672 (27,535) 22,705 434 - - - - - - - - 198 632 - - - - - - 478 1,110 Equity as at 1 April 2015 Loss for the year Other comprehensive income Total comprehensive loss Transactions with owners: $000 5,261 - - - Shares issued on Convertible Notes conversion 2,204 Shares issued in capital reorganisation 27,535 Shares issued in initial public offering Share issue costs Shares issued on option exercise Share and option grants for services 35,000 (3,706) 426 - Equity as at 30 June 2016 66,720 Loss for the year Other comprehensive income Total comprehensive loss Transactions with owners: Shares issued in private placement Share issue costs Shares issued on option exercise Shares issued in initial public offering - - - 8,023 (511) 46 - (5,125) (7,885) - (7,885) - - - - - - (13,010) (12,810) - (12,810) - - - - Equity as at 30 June 2017 74,278 (25,820) The accompanying notes form part of the financial statements. 22 Annual Report 2017 Adherium LtdConsolidated Statement of Cash Flows for the year ended 30 June 2017 Notes June 2017 $000 June 2016 $000 Cash flows from operating activities: Receipts from customers Receipts from grants Interest received Resident withholding tax refunded (paid) Payments to employees Payments to suppliers Net cash provided from (used in) operating activities Cash flows from investing activities: Purchase of property, plant and equipment Purchase of software Product development costs incurred Net cash used in investing activities Cash flows from financing activities: Proceeds from the issue of shares Proceeds from the exercise of options Payment of capital raising costs Payment of convertible note issue costs Net cash provided from financing activities Net increase (decrease) in cash Cash at the beginning of the year Effect of exchange rate changes on cash balances Cash at the end of the year Reconciliation with loss after income tax: Loss after income tax Non-cash items requiring adjustment: Depreciation of property, plant and equipment Amortisation of intangible assets Product development costs expensed Interest accrued to borrowings Share and option compensation expense Foreign exchange (gain) Changes in working capital: Trade and other receivables Inventories Trade and other payables Income received in advance Net cash provided from (used in) operating activities The accompanying notes form part of the financial statements. 13 13 15 15 9 12 13 13 7 2,363 506 601 (9) (6,333) (8,709) (11,581) (362) (202) - (564) 8,023 46 (511) - 7,558 (4,587) 27,211 155 22,779 1,124 82 560 (15) (3,284) (6,380) (7,913) (297) (41) (102) (440) 35,000 426 (3,471) (43) 31,912 23,559 3,468 184 27,211 (12,810) (7,885) 234 36 - - 478 (74) 80 (303) 875 (97) (11,581) 152 12 270 378 198 (121) (630) 522 327 (1,136) (7,913) 23 Annual Report 2017 Adherium LtdNotes to the financial statements for the year ended 30 June 2017 1. General Information Adherium Limited (the Company or Adherium) is a company domiciled in Australia. The address of the Company’s registered office is Collins Square, Tower Four, Level 18, 727 Collins Street, Melbourne, VIC 3008. The consolidated financial statements of the Company as at and for the year ended 30 June 2017 comprise the Company and its subsidiaries (together referred to as the Group and individually as Group entities). The Group is a for-profit entity and primarily develops, manufactures and supplies digital health technologies which address sub-optimal medication use and improve health outcomes in chronic disease. The separate financial statements of the parent entity, Adherium Limited, have not been presented within this financial report as permitted by the Corporations Act 2001. The consolidated financial statements were authorised for issue by the Board on 26 September 2017. 2. Basis of Presentation This general purpose consolidated financial report for the twelve months ended 30 June 2017 has been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements have been prepared on a going concern basis, meaning the Group has the intention to continue its business for the foreseeable future, without the need to significantly curtail activity. As of June 30, 2017, the Group had net cash of $ 22,779,000 (2016: $27,211,000) and operating cash outflows of $11,581,000 (2016: $7,913,000). The Directors have approved forecasts that indicate the Group can manage its operating requirements beyond 12 months from the date of authorization of these financial statements. The directors considered the achievability of the assumptions underlying the forecast, and as with any forecast, there are uncertainties within the assumptions required to meet the Group’s expectations. Whether the Group can secure sufficient cash flows from new revenue streams over the next 12 months and beyond, and/or it can execute plans to reduce costs and/or raise additional capital, represent material uncertainties that cast significant doubt over the Group’s ability to continue as a going concern. If revenue forecasts from new sales initiatives are not met over the next 12-24 months, cash reserves could reduce to a level where the Group is unable to meet its obligations in the normal course of business. Despite these uncertainties, the Directors are of the view that the underlying assumptions in forecasting the performance and cash flows of the Group for the next year are reasonable and adoption of the going concern basis is appropriate from the date of approval of these financial statements. During the period to 30 June 2016 Adherium completed an initial public offering and listed on the Australian Securities Exchange. In that process the listing entity, Adherium Limited was incorporated in Australia by the existing New Zealand based operating company, Adherium (NZ) Limited (formerly Nexus6 Limited). Prior to the initial public offering and listing, the owners of Adherium (NZ) Limited swapped their security holdings for securities in Adherium Limited. This capital reorganisation did not fall within the scope AASB 3 Business Combinations, and from the shareholders’ perspective the reporting entity is the same before and after the reorganisation. Accordingly, the carrying values of the Group’s assets and liabilities on reorganisation, and the relevant comparative financial information, are that of Adherium (NZ) Limited. These financial statements are prepared for the year ended 30 June 2017, the comparative information is for the fifteen- month period from 1 April 2015 to 30 June 2016. During the period to 30 June 2016, the Group transitioned to a 30 June balance date. (a) Compliance with International Financial Reporting Standards These consolidated financial statements comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (b) Historical cost convention These financial statements have been prepared under the historical cost convention as modified by certain policies below. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. 24 Annual Report 2017 Adherium Ltd (d) Critical accounting estimates Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. (i) Impairment of non-current assets The Company reviews annually whether any property, plant and equipment have suffered any impairment in accordance with the accounting policy stated in note 3.10. In making this assessment, the extent of the likely future use of these assets is required to be estimated in determining if their value is impaired at the balance sheet date. The Company evaluates indicators of impairment, including expected future demand for devices, in relation to each type of asset at the balance sheet date. (ii) Recognition of deferred tax assets As at 30 June 2017, the Company has not recognised as an asset tax losses which could be offset against future taxable profits. These tax losses would only be recognised to the extent that it is expected that there will be future taxable profits and such losses will be available in the future (after shareholder continuity tests) to offset those future taxable profits. The Company has considered its future expected profitability and shareholder continuity and has concluded that sufficient certainty does not yet exist to recognise these tax losses as an asset. (e) Rounding of amounts The Company has applied the relief available to it under ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. Accordingly, amounts in the consolidated financial statements and Directors’ Report have been rounded to the nearest $1,000. 3. Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. 3.1 Principles of consolidation: The consolidated financial statements incorporate all of the assets, liabilities and results of Adherium Limited and all subsidiaries. Subsidiaries are all entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. A list of the subsidiaries is provided in note 20. All intercompany transactions are eliminated. The assets and liabilities of Group companies whose functional currency is not Australian dollars are translated into Australian dollars at the period-end exchange rate. The revenue and expenses of these companies are translated into Australian dollars at rates approximating those at the dates of the transactions. Exchange differences arising on this translation are recognised in the foreign currency translation reserve. On disposal or partial disposal of an entity, the related exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. 3.2 Segment Reporting The Company has considered the requirements for segmental reporting as set out in AASB 8: Operating Segments. The standard requires that operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Chief Executive Officer. The Company has determined that one segment exists for the Company’s Smartinhaler business. 3.3 Foreign currency translation (a) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. 25 Annual Report 2017 Adherium Ltd (b) Group Companies The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency is translated as follows: • Assets and liabilities are translated at period end exchange rates prevailing at that reporting date. • • Retained earnings are translated at the exchange rates prevailing at the date of the transaction. Income and expenses are translated at average exchange rates for the period. 3.4 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and taxes. The Company recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Company’s activities,as described below. Amounts received from customers in accordance with contractual sales terms before these revenue recognition criteria are met are deferred and recorded as Income Received in Advance until such time as the criteria for recognition as revenue are met. (a) Sales of devices The Company manufactures and sells a range of inhaled medication monitoring devices and related equipment. Sales of products are recognised when they have been delivered to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery does not occur until the products have been shipped to the specified location, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed or the Company has objective evidence that all criteria for acceptance have been satisfied. No element of financing is deemed present as the sales are made with a credit term of 30-60 days. (b) Sales of licences and subscriptions to software The Company sells licences and subscriptions to its device customers to enable access to data collected by purchased devices. Revenue is recognised in the accounting period to which the licence or subscription relates. (c) Grants Grants received for research and development are recognised in the Statement of Comprehensive Income when the requirements under the grant agreement have been met. Any grants for which the requirements under the grant agreement have not been completed are carried as liabilities until all the conditions have been fulfilled. (d) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. 3.5 Research and development Research costs include direct and directly attributable overhead expenses for product invention and design. Research costs are expensed as incurred. When a project reaches the stage where it is reasonably certain that future expenditure can be recovered through the process or products produced, development expenditure is recognised as a development asset within Intangible Assets when: • • • • a product or process is clearly defined and the costs attributable to the product or process can be identified separately and measured reliably; the technical feasibility of the product or process can be demonstrated; the existence of a market for the product or process can be demonstrated and the Company intends to produce and market the product or process; adequate resources exist, or their availability can be reasonably demonstrated to complete the project and market the product or process. In such cases the asset is amortised from the commencement of commercial production of the product to which it relates on a straight-line basis over the years of expected benefit. Research and development costs are otherwise expensed as incurred. 3.6 Employee benefits (a) Wages, salaries and annual leave Liabilities for wages and salaries, bonuses and annual leave expected to be settled within 12 months of the reporting date are recognised in accrued liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. 26 Annual Report 2017 Adherium Ltd (b) Share-based payments The Company operates equity-settled share and option plans and awards certain employees, directors and consultants shares and options, from time to time, on a discretionary basis. The fair value of the services received in exchange for the grant of the options is recognised as an expense with a corresponding increase in the share and option compensation reserve over the vesting period. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options at grant date. At each balance sheet date, the Company revises its estimates of the number of options that are expected to vest and become exercisable. It recognises the impact of the revision of original estimates, if any, in the Statement of Comprehensive Income, and a corresponding adjustment to equity over the remaining vesting period. 3.7 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. 3.8 Income Tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the Statement of Comprehensive Income, except to the extent that it relates to items recognised in directly in equity. In this case, the tax is also recognised directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the company generated taxable income. Deferred income tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 3.9 Goods and Services Tax (GST) The Statement of Comprehensive Income has been prepared so that all components are stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and payables, which include GST invoiced. 3.10 Impairment of non-financial assets Assets that are subject to amortisation and depreciation are reviewed whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of an asset is considered impaired when its recoverable amount is less than its carrying value. In that event, a loss is recognised in the Statement of Comprehensive Income based on the amount by which the carrying amount exceeds the recoverable amount. 3.11 Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 3.12 Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for impairment is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. 3.13 Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. 27 Annual Report 2017 Adherium Ltd 3.14 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any impairments recognised. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Statement of Comprehensive Income during the financial period in which they are incurred. Depreciation is determined principally using the diminishing value method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: Manufacturing tooling equipment Computer equipment Office furniture, fixtures & fittings 4 years 2 years 4 years 3.15 Intangible assets (a) Intellectual property Costs in relation to protection and maintenance of intellectual property are expensed as incurred unless the project has yet to be recognised as commenced, in which case the expense is deferred and recognised as contract work in progress until the revenues and costs associated with the project are recognised. Acquired patents, trademarks and licences have finite useful lives and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost over the anticipated useful lives, which are aligned with the unexpired patent term or agreement over trademarks and licences. (b) Acquired software Acquired software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (two to three years). (c) Product development Directly attributable product development costs that are capitalised in accordance with the research and development policy (3.5 above) include the associated direct external costs and employee costs. 3.16 Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 3.17 Convertible Notes The terms included in the convertible notes contract related to the conversion features, had they been a standalone contract, would have met the definition of a derivative. These are separated from the host contract because the terms are not considered closely related to the host and accounted for in the same way as a derivative and measured at fair value through profit or loss. The fair value of the embedded derivative is estimated based on market conditions prevalent at the issue date. The remainder of the proceeds are allocated to the loan instrument portion of the convertible note. Transaction costs are allocated to the liability and embedded derivative components in proportion to their initial carrying amounts. The embedded derivative is subsequently re-measured to fair value at each reporting date and any movements in fair value are immediately recognised in the statement of comprehensive income with ‘interest expense’. Transaction costs associated with embedded derivatives are expensed to the statement of comprehensive income when incurred. The host loan instrument portion meets the definition of a financial liability and is subsequently carried at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value of the loan instrument being recognised in the statement of comprehensive income in ‘interest expense’ over the period of the borrowings, using the effective interest method until extinguished on conversion or maturity of the notes. 28 Annual Report 2017 Adherium Ltd 3.18 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are deferred until the issue of the shares or options, and then shown in equity as a deduction, net of tax, from the proceeds. 3.19 Financial assets (a) Financial assets recognised in the Statement of Financial Position include cash and cash equivalents, and trade and other receivables. The Company believes that the amounts reported for financial assets approximate fair value. (b) Financial assets: Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Company’s loans and receivables comprise “trade and other receivables” and “cash and cash equivalents” in the Statement of Financial Position. Loans and receivables are measured at amortised cost using the effective interest method less impairment. 3.20 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders. 3.21 Comparative Information Where necessary, certain comparative information has been reclassified in order to provide a more appropriate basis for comparison. 3.22 New Accounting Standards for application in future periods The following standards have been issued but are not yet effective and have not yet been adopted: AASB 9 Financial instruments AASB 9 Financial instruments addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces all previous versions of AASB 9 and completes the project to replace IAS 39 that relates to the classification and measurement of financial instruments. AASB 9 retains but simplifies the mixed measurement model and establishes three primary measurement ategories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no material changes to classification and measurement. AASB 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The Company intends to apply this standard from 1 July 2018 and has yet to assess its full impact. AASB 15 Revenue from contracts with customers AASB 15 is effective for periods commencing on or after 1 January 2018. The standard addresses recognition of revenue from contracts with customers and sets out a five step model for revenue recognition with the core principle being for entities to recognise revenue to depict the transfer of goods or services to customers in way that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company has yet to assess AASB’s full impact. The Company intends to apply this standard from 1 July 2018. AASB 16 Leases AASB 16 replaces the AASB 117 Leases. Under AASB 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under AASB 117, a lessee was required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). AASB 16 will require a lessee to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. Included is an optional exemption for certain short-term leases and leases of low- value assets; however, this exemption can only be applied by lessees. The standard is effective for accounting periods beginning on or after 1 January 2019. The Company intends to apply this standard from 1 July 2019 and has yet to assess its full impact. There are no other standards, amendments, or interpretations to existing standards that have been issued and yet to be adopted by the Company that are likely to have a material impact on the financial statements. 29 Annual Report 2017 Adherium Ltd 4. Segment Information The chief operating decision maker is the Chief Executive Officer, who reviews financial information for the Company as a whole. The information reviewed is prepared in the same format as included in the financial statements. The Company has therefore determined that one reportable segment exists for the Company’s Smartinhaler business. (a) Geographic segment information The Company operates predominantly from New Zealand, with some manufacturing also undertaken by suppliers in Asia at which the Company locates equipment and tools: Domicile of non-current assets New Zealand and Australia South-East Asian Countries Other Countries June 2017 $000 June 2016 $000 546 111 25 682 178 148 3 329 The Company sells its products and services domestically and internationally. Revenues by customer region of domicile are: Location of customer sales New Zealand and Australia Europe North America b) Major customers Revenues are derived from major external customers as follows: Major customers Customer A group entities Customer B group entities 5. Expenses June 2017 $000 June 2016 $000 462 1,829 56 2,347 331 1,970 325 2,626 June 2017 $000 1,762 303 June 2016 $000 1,993 303 Loss before income tax includes the following specific expenses: June 2017 $000 June 2016 $000 Fees paid to PricewaterhouseCoopers for: Audit of the financial statements Other services - Fees in respect of grant review Total fees to PricewaterhouseCoopers Depreciation and amortisation Directors’ remuneration - Fees - Consulting - Share option compensation Total Directors’ remuneration 30 110 21 131 270 335 - 43 378 119 1 120 164 332 8 16 356 Annual Report 2017 Adherium Ltd Employee benefits expense - Wages and salaries - Share option compensation Total employee benefits expense Foreign exchange (gain) loss Operating lease costs 6. Income tax Current tax Deferred tax Income tax expense Numerical reconciliation of income tax expense to prima facie tax payable (receivable): Loss before income tax Tax calculated at domestic tax rates Tax effects of: Expenses not deductible for tax purposes Under (over) provision in prior year Deferred tax assets not recognised (note 16) Income tax expense The weighted average applicable tax rate was 29% (2016: 28%). 7. Interest 6,787 416 7,203 (74) 459 3,737 67 3,804 (121) 222 June 2017 $000 June 2016 $000 - - - (12,810) (3,697) 139 (84) 3,642 - - - - (7,885) (2,249) 174 - 2,075 - In January 2015 Adherium (NZ) Limited offered 2 million NZ$1 Convertible Notes on a pro rata basis to its shareholders. The Convertible Notes bore no interest from the issue date until 31 August 2015. Management had carried out an assessment of the terms of the Convertible Notes and judged that they consisted of two components: • a host loan instrument, measured at amortised cost; and • an embedded derivative representing the features which may convert the Convertible Notes to ordinary shares in Adherium (NZ) Limited. The Company received approval to be admitted to the official list of ASX Limited on 17 August 2015, and accordingly 4,763,205 ordinary shares in the Company were issued on conversion of the Convertible Notes (see note 15). Interest expense related to the component was as follows: Fair value change on conversion of embedded derivative Interest expense Total interest expense on Convertible Notes June 2016 $000 163 216 379 31 Annual Report 2017 Adherium Ltd 8. Earnings per share Basic loss per share is based upon the weighted average number of outstanding ordinary shares. For all periods presented, the Company’s potentially dilutive ordinary share equivalents (being the Options set out in note 15 and the Convertible Notes set out in note 7) have an anti-dilutive effect on loss per share and, therefore, have not been included in determining the total weighted average number of ordinary shares outstanding for the purpose of calculating diluted loss per share. In conjunction with the capital reorganisation ahead of the initial public offering and listing in August 2015, the Company undertook a share split of approximately 8.66:1. The effect of this share split has been incorporated into the calculation of weighted average shares outstanding for all periods presented. June 2017 $000 June 2016 $000 Profit (loss) after income tax attributable to equity holders (12,810) (7,885) Weighted average shares outstanding (basic) Weighted average shares outstanding (diluted) Basic and diluted loss per share 169,431,030 169,431,030 7.6 cents 119,606,316 119,606,316 6.6 cents 9. Cash and cash equivalents Cash at bank and on hand Deposits at call 10. Trade and other receivables Trade receivables and accruals Grant income accrued GST and other taxes receivable Security deposits 11. Inventories Raw materials and components Finished goods June 2017 $000 138 22,641 22,779 June 2016 $000 111 27,100 27,211 June 2017 $000 June 2016 $000 449 203 135 39 826 561 302 85 - 948 June 2017 $000 June 2016 $000 277 449 726 197 221 418 The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to $591,000 (2016: $1,111,000). 32 Annual Report 2017 Adherium Ltd12. Property, plant and equipment Manufacturing Equipment Computer Equipment Fixtures & Fittings Office Equipment $000 $000 $000 $000 As at 1 April 2015 Cost Accumulated depreciation Net book value Movements in the period ended 30 June 2016 Opening net book value Additions Depreciation Foreign currency translation Closing net book value As at 30 June 2016 Cost Accumulated depreciation Net book value Movements in the period ended 30 June 2017 Opening net book value Additions Disposals Depreciation Foreign currency translation Closing net book value As at 30 June 2017 Cost Accumulated depreciation Net book value 206 (64) 142 142 191 (129) 1 205 402 (197) 205 205 101 - (158) (4) 144 499 (355) 144 33 (19) 14 14 55 (18) 1 52 90 (38) 52 52 88 (2) (52) (2) 84 174 (90) 84 10 (2) 8 8 29 (3) 1 35 40 (5) 35 35 152 (5) (18) 1 165 188 (23) 165 4 (2) 2 2 6 (2) - 6 10 (4) 6 6 24 - (6) - 24 34 (10) 24 Total $000 253 (87) 166 166 281 (152) 3 298 542 (244) 298 298 365 (7) (234) (5) 417 895 (478) 417 33 Annual Report 2017 Adherium Ltd13. Intangible assets Software $000 Product development costs $000 - - - - 41 - (12) - 2 31 43 (12) 31 31 270 (36) - 265 313 (48) 265 190 - 190 190 32 57 - (270) (9) - - - - - - - - - - - - As at 1 April 2015 Cost Accumulated amortisation Net book value Movements in the period ended 30 June 2016 Opening net book value Additions - External costs - Employee costs Amortisation Accumulated costs written off (net) Foreign currency translation Closing net book value As at 30 June 2016 Cost Accumulated amortisation Net book value Movements in the year ended 30 June 2017 Opening net book value Additions - External costs Amortisation Foreign currency translation Closing net book value As at 30 June 2017 Cost Accumulated amortisation Net book value 34 Total $000 190 - 190 190 73 57 (12) (270) (7) 31 43 (12) 31 31 270 (36) - 265 313 (48) 265 Annual Report 2017 Adherium Ltd14. Trade and other payables Trade payables Accruals Employee benefits 15. Share capital June 2017 $000 June 2016 $000 1,020 196 1,166 2,382 591 294 509 1,394 Share numbers presented below have where applicable been restated to reflect the 8.66:1 share split undertaken prior to the Company’s initial public offering in August 2015. Similarly, amounts have been presented in Australian dollars following the change in presentation currency in the period to 30 June 2016. Ordinary Shares (b) $000 Adherium (NZ) Limited Share capital as at 31 March 2015 Shares issued on Convertible Notes conversion Shares acquired by Adherium Limited in reorganisation Adherium Limited Shares issued to Adherium (NZ) Limited shareholders Shares issued in initial public offering Share issue costs Shares issued in employee share plans Shares issued on option exercise 65,236,795 4,763,205 70,000,000 70,000,000 70,000,000 - 6,778,640 4,441,285 5,261 2,204 7,465 35,000 (a) 35,000 (3,706) - 426 Share capital as at 30 June 2016 151,219,925 66,720 Ordinary share issued Share issue costs Shares issued in employee share plans Cancellation of shares issued in employee share plan Shares issued on option exercise Share capital as at 30 June 2017 16,046,097 - 4,797,095 (708,383) 494,458 8,023 (511) - - 46 171,849,192 74,278 (a) Capital Reorganisation During the period to 30 June 2016 Adherium completed an initial public offering and listed on the Australian Securities Exchange. In that process the listing entity, Adherium Limited, was incorporated in Australia by the existing New Zealand based operating company, Adherium (NZ) Limited. Prior to the initial public offering and listing, the owners of Adherium (NZ) Limited swapped their security holdings for securities in Adherium Limited. This was accounted for as a capital reorganisation and the variance between the value of the shares issued to the shareholders of Adherium (NZ) Limited and carrying value of the Group’s assets and liabilities ($27,535,000) has been recorded in the Merger Reserve. (b) Ordinary Shares The ordinary shares have no par value and all ordinary shares are fully paid-up and rank equally as to dividends and liquidation, with one vote attached to each fully paid ordinary share. 35 Annual Report 2017 Adherium Ltd (c) Employee incentive plans Adherium Employee Share Option Plan (Adherium ESOP) In conjunction with the capital reorganisation Adherium Limited granted replacement options to Adherium (NZ) Limited option holders on equivalent terms. No further issue of options under the Adherium ESOP are contemplated. Exercise price range $0.075268 – 0.134039 Outstanding at 1 April 2015 Granted Exercised Outstanding at 30 June 2016 Granted Exercised Lapsed Outstanding at 30 June 2017 Options Weighted Average Exercise Price Weighted Average Remaining Contract Life (years) Exercisable Weighted Average Exercise Price Weighted Average Share Price at Exercise 9,331,144 $ 0.1000 4.0 8,522,695 $ 0.0969 173,238 $ 0.1340 (4,441,285) $ 0.0959 5,063,097 - (494,458) $ $ $ 0.1049 - 0.0931 (173,238) $ 0.0752 3.5 5,063,097 $ 0.1049 $ 0.5749 $ 0.1609 4,395,401 $ 0.1083 2.8 4,395,401 $ 0.1083 The weighted average fair value of options granted prior to the Company’s IPO was determined using the Black-Scholes valuation model: Significant Black-Scholes valuation model inputs Weighted average share price at grant date Exercise price Volatility Dividend yield Expected option life Annual risk-free interest rate Discount for lack of marketability Weighted average fair value of options granted June 2016 $ 0.1340 0.1340 75% 0% 5 years 4.2% 50% 0.0442 There were no options granted in the year ended 30 June 2017. The options granted in the period ended June 2016 were granted before the Company listed on the ASX. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of weekly share prices of listed peer companies over a six-year period prior to listing on the ASX. The Company has no legal or constructive obligation to repurchase or settle the options in cash. 36 Annual Report 2017 Adherium Ltd Adherium Employee Share Plans (Adherium ESP) The Company operates employee share plans for employees, directors and consultants within the Group. Participants are invited by the Board of Directors and those who accept an offer of ESP shares are provided with an interest free loan from the Company to finance the whole of the purchase of the ESP shares they were invited to apply for (ESP Loan). The ESP Loans are provided to participants on a non-recourse basis and upon vesting must be repaid in order to remove trading restrictions on vested ESP shares. The term of the ESP Loan is five years, however participants may forfeit their ESP shares if they do not repay the ESP Loan or leave the Company. Awards typically vest one third annually over a three-year period, and are subject to restriction until vesting conditions are met. The assessed weighted average fair value at grant date of the awards made during the 2017 financial period is 6.3 cents per award. The awards were priced using a Black-Scholes option pricing model that takes into account the exercise price, the term of the award, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the award. The following awards have been made under the Adherium ESP: Grant date Shares granted Issue price Vested as at 30 June 2017 Restricted as at 30 June 2017 Share price at grant date 16 May 2016 23 August 2016 6,778,640 1,742,879 8 November 2016 2,621,367 23 December 2016 432,849 (d) Other option issues $0.50 $0.50 $0.50 $0.50 2,257,287 4,521,353 - - - 1,742,879 2,621,367 432,849 $0.50 $0.48 $0.35 $0.26 There were no other options granted in the year ended 30 June 2017. Pursuant to a capital advisory agreement with the Lead Manager to the Company’s IPO, 1,400,000 options with an exercise price of $0.665 were granted in the period to 30 June 2016. The grant was contingent upon The Company and the Lead Manager entering into the capital advisory agreement after the Company’s IPO. The options were exercisable from 3 September 2016, and expire 3 September 2018. A fair value at grant date of $134,000 ($0.0956 per option) was determined using a Black-Scholes option pricing model, of which $19,000 has been recorded in the Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2017 (2016: $115,000). The significant inputs to the option pricing model were a grant date share price of $0.50, a 0% dividend yield, an expected option life of 1 year, an annual risk-free rate of 1.81%, and a volatility of 70.5%. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of weekly share prices of listed peer companies over a six-year period prior to listing on the ASX. The Company has no legal or constructive obligation to repurchase or settle the options in cash. 16. Deferred Income Tax June 2017 $000 June 2016 $000 Movements Deferred tax asset (liability) at the beginning of the year Credited (charged) to the income statement (note 6) Change in unrecognised deferred tax assets Deferred tax asset (liability) at the end of the year - 3,642 (3,642) - - 2,075 (2,075) - 37 Annual Report 2017 Adherium Ltd The movement in deferred income tax assets and liabilities during the period is as follows: Deferred tax assets (liabilities) Provisions and accruals Intangible assets Convertible notes $000 $000 $000 As at 1 April 2015 Credited (charged) to the income statement Impact of loss of shareholder continuity Effect of exchange rate changes - 97 - 4 Change in unrecognised deferred tax assets (101) - 107 - 4 (111) As at 30 June 2016 - - Credited (charged) to the income statement Effect of exchange rate changes Change in unrecognised deferred tax assets (26) - 26 147 1 (148) As at 30 June 2017 - - - (12) - - 12 - - - - - Tax losses $000 - 1,883 (1,697) (10) (176) Total $000 - 2,075 (1,697) (2) (376) - - 3,521 (11) 3,642 (10) (3,510) (3,632) - - Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable, or to the extent that they can be set off against deferred income tax liabilities. The Company did not recognise deferred income tax assets of $4,851,000 (2016: $1,341,000) in respect of losses amounting to $16,821,000 (2016: $4,554,000) that can be carried forward against future taxable income. The Company also did not recognise further deferred income tax assets of $355,000 (2016: $232,000) in respect of other timing differences amounting to $1,262,000 (2016: $830,000). 17. Related party transactions (a) Key management and personnel The key management personnel include the directors of the Company, the CEO, and senior executives responsible for the planning, directing and controlling of the Group’s activities. Compensation for this group was as follows: June 2017 $000 June 2016 $000 336 43 907 29 67 1,382 361 16 750 360 11 1,174 Directors - fees and other short term benefits - share and option compensation CEO and management - short-term benefits - post-employment benefit contributions - share and option compensation 38 Annual Report 2017 Adherium Ltd Key management personnel and their associates subscribed for share capital in the Company as follows: June 2017 Ordinary Shares June 2017 $000 June 2016 Ordinary Shares June 2016 $000 Shares in IPO Shares through options exercised - 150,000 150,000 $ - 20 20 120,000 1,212,666 1,332,666 $ 60 152 212 18. Financial instruments and risk management (a) Categories of financial instruments Financial assets Loans and receivables classification: Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Measured at amortised cost: Trade and other payables Convertible notes – liability component Measured at fair value: Convertible notes – embedded conversion derivative June 2017 $000 June 2016 $000 22,779 652 23,431 27,211 863 28,074 2,382 1,394 - - - - Total financial liabilities 2,382 1,394 The Convertible Notes did not bear interest (see note 7) and were therefore not cash flow interest rate sensitive prior to their conversion in August 2015. (b) Risk management The Company is subject to a number of financial risks which arise as a result of its activities. Foreign exchange risk During the normal course of business the Company enters into contracts with overseas customers or suppliers or consultants that are denominated in foreign currency. As a result of these transactions there is exposure to fluctuations in foreign exchange rates. The Company does not utilise derivative financial instruments. It operates a policy of holding cash and cash equivalents in the currency of near-term estimated future supplier payments, however it does not designate formal hedges and as such remains unhedged against foreign currency fluctuations. A foreign exchange gain of $166,000 is included in results for the period ended 30 June 2017 (2016: $121,000 gain). 39 Annual Report 2017 Adherium Ltd The carrying amounts of foreign currency denominated assets and liabilities are as follows: Assets New Zealand Dollars US dollars UK pound Liabilities New Zealand Dollars US dollars UK pound European euros Hong Kong dollars Japanese Yen June 2017 $000 June 2016 $000 4.524 1,120 146 1,516 513 30 19 2 5 6,145 670 30 936 233 126 - 4 - The following table details the Company’s sensitivity to a 10% increase and decrease in each of the currencies noted against the Australian dollar as at the reporting date. Decrease (increase) in loss after income tax 10% strengthening of Australian dollar against: New Zealand Dollars US dollars UK pound Hong Kong dollars Japanese Yen 10% weakening of Australian dollar against: New Zealand Dollars US dollars UK pound Hong Kong dollars Japanese Yen June 2017 $000 June 2016 $000 768 48 38 - 1 (939) (59) (46) - (1) 538 7 38 1 - (657) (8) (47) - - Cash flow and fair value interest rate risk The Company is exposed to interest rate risk as it holds cash and cash equivalents (refer note 9) and had borrowings. Trade and other receivables and payables do not bear interest and are not interest rate sensitive. The Company’s interest bearing financial assets bear interest at deposit rates for up to 90 days and accordingly any change in interest rates would have an immaterial effect on reported loss after tax. The Convertible Notes did not bear interest (see note 7) and were therefore not cash flow interest rate sensitive prior to their conversion in August 2015. 40 Annual Report 2017 Adherium LtdCredit risk The Company incurs credit risk from transactions with trade receivables and financial institutions in the normal course of its business. The credit risk on financial assets of the Company, which have been recognised in the statement of financial position, is the carrying amount, net of any allowance for doubtful debts. The Company does not require any collateral or security to support transactions with financial institutions or customers. The counterparties used for banking activities are financial institutions with an AA- credit rating (2016: AA-) and the Company assesses the credit quality of customers by taking into account their financial position, past experience and other factors. The credit quality of trade receivables can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: Counterparties with external credit rating: • AA- Counterparties without external credit rating: • existing customers (more than 6 months) with no defaults in the past Total trade receivables June 2017 $000 June 2016 $000 374 75 449 556 5 561 The Company is exposed to a concentration of credit risk as 83% of accounts receivable are with one counterparty (2016: 99%). The customer has an external credit rating of AA-. Liquidity risk The table below shows the Company’s non-derivative financial liabilities by relevant maturity grouping based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. As at 30 June 2017 Trade and other payables As at 30 June 2016 Trade and other payables Less than 3 months $000 Between 3 months and 1 year $000 2,382 1,394 - - Capital risk The Company manages its capital to ensure that it is able to continue as a going concern. The capital structure of the Company consists of cash and cash equivalents, and equity comprising issued capital, reserves and accumulated deficit. Fair value estimation 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 At 30 June 2016 the embedded conversion derivative with a fair value of $473,000 was classified as subject to recurring fair value measurement within Level 3 of the hierarchy. There were no transfers between the fair value hierarchy levels in 2016 or 2017. In the period to 30 June 2016, the Company performed its own estimate of the fair value of the embedded conversion derivative recognised separately from the host convertible notes (see note 7) using a present value technique. The main inputs to the valuation are the expected probability of the convertible notes converting and the discount rate used. At initial recognition and 30 June 2016 a probability of 75% of the convertible notes converting was applied together with a discount rate of 8.45%. A reasonably possible change at 30 June 2016 of plus or minus 5 percentage points to the estimate of the probability of the notes converting would have led to an increase or decrease respectively in the valuation of the derivative of $32,000. A reasonably possible change to the discount rate applied would not have a material impact upon the valuation. The Convertible Notes converted to shares in the Company immediately prior to its listing on the ASX in August 2015. 41 Annual Report 2017 Adherium Ltd 19. Parent entity information The following details information related to the legal parent, Adherium Limited as at 30 June 2017. The information presented here has been prepared using consistent accounting policies as presented in Note 1. Statement of Financial Position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Contributed equity Accumulated deficit Reserves Total equity Statement of Profit and Loss and Comprehensive Income Loss after tax Total comprehensive loss 20. Interests in controlled entities Parent June 2017 $000 Parent June 2016 $000 19,347 51,520 70,867 570 - 570 70,297 74,278 (4,677) 696 70,297 (3,288) (3,288) 22,479 44,059 66,538 822 - 822 65,716 66,720 (1,178) 174 65,716 (1,178) (1,178) The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 3: Name of Entity Status Country of incorporation Percentage owned Adherium (NZ) Limited Adherium North America, Inc. Adherium Europe Ltd Nexus6 Limited Operating Operating Operating Dormant shell New Zealand United States United Kingdom New Zealand 21. Contingencies and commitments June 2017 June 2016 100% 100% 100% 100% 100% 100% 100% 100% The Company had no contingencies or commitments to purchase any property, plant or equipment at 30 June 2017 (2016: nil). The following aggregate future non-cancellable minimum lease payments for premises have been committed to by the Company, but not recognised in the financial statements. June 2017 $000 June 2016 $000 373 973 - 199 797 67 $ 1,346 $ 1,063 Not later than one year Later than one year and not later than five years Later than five years 22. Events occurring after balance date There were no events occurring after balance date which require disclosure . 42 Annual Report 2017 Adherium LtdDirectors’ Declaration The Directors declare that the financial statements and notes set out on pages 20 to 42 in accordance with the Corporations Act 2001: (a) comply with Accounting Standards and the Corporations Regulations 2001, and other mandatory professional reporting requirements; (b) as stated in note 2, the consolidated financial statements also comply with International Financial Reporting Standards; and (c) give a true and fair view of the financial position of the consolidated entity as at 30 June 2017 and of its performance for the fifteen months ended on that date. In the Directors’ opinion there are reasonable grounds to believe that Adherium Limited will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made by the Chief Executive Officer and Chief Financial Officer to the Directors in accordance with sections 295A of the Corporations Act 2001 for the year ended 30 June 2017. This declaration is made in accordance with a resolution of the Directors. On behalf of the board. Thomas Lynch Non-Executive Chairman Sydney 26 September 2017 43 Annual Report 2017 Adherium Ltd Independent Auditor’s Report Independent auditor’s report To the shareholders of Adherium Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Adherium Limited (the Company) and its controlled entities (together, the Group) is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The financial report comprises: • • the consolidated statement of financial position as at 30 June 2017 the consolidated statement of profit or loss and other comprehensive income for the year then ended • • • • the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz 44 Annual Report 2017 Adherium Ltd Independent Auditor’s Report Material uncertainty related to going concern Without modifying our opinion, we draw attention to Note 2 of the Basis of Preparation within the consolidated financial statements, which indicates the Group incurred a net loss of $12,810,000 (2016: $7,885,000) and operating cash outflow of $11,581,000 (2016: $ 7,913,000) during the year ended 30 June 2017. The cash balance at 30 June 2017 was $22,779,000 (2016: $27,211,000). The Group’s ability to continue as a going concern is dependent on its ability to fund its operations until such time as it can secure sufficient cash flows from new revenue streams. If the Group is unable to secure sufficient cash flows from these new revenue streams over the next 15 months, and/or it cannot execute other plans to reduce costs, and/or raise additional capital, cash reserves could reduce to a level where the Group is unable to meet its obligations as they fall due, after that period. These conditions along with other matters as set forth in Note 2, indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters • Our audit focused on where the directors made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • We have determined that there are no Key Audit Matters to communicate. • For the purpose of our audit we used overall Group materiality of $149,500, which represents approximately 1% of the Group’s expenses. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of PwC 45 Annual Report 2017 Adherium Ltd Independent Auditor’s Report misstatements on the financial report as a whole. • We chose Group expenses because, the Group is in a start- up phase and has not been profitable for the past two years. Total expenses are a generally acceptable benchmark for start- up entities. • We selected 1% based on our professional judgement and it is within the range of commonly acceptable expense related thresholds. 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 for the current period. We have determined that there are no Key Audit Matters to communicate. We refer you to the material uncertainty in relation to going concern disclosed above. Other information The directors are responsible for the other information. The other information comprises the Company Overview, Chairman’s Statement, CEO’s Report, Directors’ Report (including Remuneration Report) and Australian Securities Exchange Additional Information, included in the Group’s annual report for the year ended 30 June 2017 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 accordingly 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 identified above 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 ability of the Company/Group 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 Company/Group or to cease operations, or has no realistic alternative but to do so. PwC 46 Annual Report 2017 Adherium Ltd Independent Auditor’s Report 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 the 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_files/ar*.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 11 to 17 of the directors’ report for the year ended 30 June 2017. In our opinion, the remuneration report of Adherium Limited for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Jonathan Skilton Partner Auckland, New Zealand 29 September 2017 PwC 47 Annual Report 2017 Adherium Ltd Australian Securities Exchange Additional Information Additional information required by the Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. The shareholder information set out below was applicable as at 13 September 2017. (a) Distribution of equity securities Ordinary share capital As at 13 September 2017 there were 171,849,192 ASX quoted ordinary shares held by 769 shareholders. All issued ordinary shares carry one vote per share and carry the rights to dividends. Range (size of holding) 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Number of Ordinary Shares Holders 7,352 396,282 1,183,600 15,440,493 154,821,465 171,849,192 20 116 137 366 130 769 There were 141 shareholders holding less than a marketable parcel of ordinary shares at a price of $0.095, totalling 429,446 ordinary shares. Unquoted options over ordinary shares As at 13 September 2017 there were 5,795,401 options over ordinary shares held by 10 holders. 1,400,000 options over ordinary shares (24.2% of all options outstanding) are held by Bell Potter Securities Limited. (b) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Substantial shareholders Notification Date Ordinary Shares Held One Funds Management Limited 28/07/2016 23,823,832 FIL Limited Mr Garth Sutherland K One W One Ltd I.G. Investment Management, Ltd and associates AstraZeneca PLC and its related bodies 29/07/2016 16,726,595 01/08/2016 11,869,055 26/07/2016 10,990,860 01/09/2015 26/08/2015 9,535,000 8,079,720 81,025,062 48 Annual Report 2017 Adherium Ltd(c) Twenty largest holders of quoted equity securities as at 13 September 2017 Ordinary Shares Shareholders HSBC Custody Nominees (Australia) Limited One Funds Management Limited K One W One Ltd Mr Garth Sutherland Adherium ESP Trustee Limited AstraZeneca AB Citicorp Nominees Pty Limited NZVIF Investments Limited Cure Kids Ventures Ltd Brispot Nominees Pty Ltd National Nominees Limited Bennamon Pty Ltd UBS Nominees Pty Ltd Doctor Iain Arthur McCormick Mogridge & Associates Ltd Popeye Investments Pty Ltd K M Fitzpatrick & Associates Pty Ltd Ross Alan Sutherland + Valerie Mary Sutherland + Garth Campbell Sutherland Dr John Douglas Wilson Mr John Leonard Walley + Mrs Lynn Walley + Walley Trustee Ltd Number 28,455,392 23,823,832 10,990,860 10,275,171 8,113,023 8,079,720 5,559,834 4,483,383 3,461,417 3,057,158 2,604,884 2,168,000 2,161,016 1,622,000 1,500,000 1,206,060 1,077,000 1,072,517 1,039,428 999,445 % 16.56 13.86 6.40 5.98 4.72 4.70 3.24 2.61 2.01 1.78 1.52 1.26 1.26 0.94 0.87 0.70 0.63 0.62 0.60 0.58 Total top 20 holders of ordinary shares 121,750,140 70.85 (d) Use of cash as at listing for business objectives In the year ended 30 June 2017, the Company has used the cash that it had at the time of admission in a way consistent with its business objectives. (e) Voting Rights On a show of hands, every shareholder present in person or by proxy holding stapled securities in the Company shall have one vote and upon a poll each stapled security shall have one vote. 49 Annual Report 2017 Adherium LtdShare Registry Computershare Investor Services Pty Ltd Yarra Falls, 452 Johnston Street Abbotsford, Victoria 3067, Australia Solicitors K&L Gates Level 25 South Tower 525 Collins Street Melbourne VIC 3000, Australia Auditors PricewaterhouseCoopers 188 Quay Street Auckland 1142, New Zealand Shareholder Enquiries 1300 850 505 (+61 3 9415 4000) Shareholders requiring clarification of holdings, or requesting changes of name or address should contact Computershare Investor Services directly on the above number. Shareholders wishing to create an online account with Computershare should visithttps://www.investorcentre.com Corporate Information ASX code: ADR Directors Mr Thomas Lynch (Chair) Prof John Mills Mr Jeremy Curnock Cook Mr Bruce McHarrie Mr Bryan Mogridge Dr William Hunter Mr Garth Sutherland Joint Company Secretaries Mr Rob Turnbull Mr Mark Licciardo Registered Office Collins Square, Tower 4 Level 18, 727 Collins St Melbourne VIC 3000, Australia +61 3 86575540 NZ Office (Prinicipal Administrative Office) Level 2, 204 Quay Street Auckland 1010, New Zealand +64 9 307 2771 Website www.adherium.com www.smartinhaler.com 50 Annual Report 2017 Adherium Ltd www.adherium.com 

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