Aroa Biosurgery Annual Report 2021

Plain-text annual report

ANNUAL REPORT 2021 AROA BIOSURGERY LIMITED | ASX: ARX NZCN: 1980577 ARBN: 638 867 473 1 Annual Report 2021 | AROAUnlocking regenerative healing for everybody 22 Annual Report 2021 | AROA CONTENTS Chairman’s Review CEO’s Report About AROA Directors’ Report Remuneration Report Independent Auditor’s Report Consolidated Financial Statements Notes to Consolidated Financial Statements Additional Information Glossary Corporate Directory 4 6 8 12 20 27 32 36 67 73 74 This Annual Report covers the financial year ended 31 March 2021 and is dated 21 June 2021. The Annual Report has been approved by the Board and is signed on behalf of Aroa Biosurgery Limited by: Jim McLean Independent Chair of the Board of Directors Brian Ward Managing Director and CEO 3 3 Annual Report 2021 | AROACHAIRMAN’S REVIEW Dear Shareholders, On behalf of the Board, I am pleased to present AROA’s Annual Report for the financial year ended 31 March 2021, the first since AROA’s successful admission to the ASX’s official list in July 2020, following its initial public offering. AROA has realised several strategic achievements in the last year. These achievements have advanced our founding purpose to develop, manufacture and distribute medical and surgical products to improve healing in complex wounds and soft tissue reconstruction. IPO AND ADMISSION AROA’s IPO and Admission was a key milestone for the business. It raised A$45 million, comprising of $30 million of primary capital through the issue of 40 million shares, with the remaining $15 million allocated to a limited sell down by early investors in the Company. The IPO received extraordinary support from institutional investors across Australia, New Zealand and other overseas markets. It also reflected a strong vote of confidence from existing shareholders who subscribed for approximately half of the funds raised. AROA was valued at A$225 million upon Admission, and was added to the S&P/ASX All Ordinaries Index effective from 22 March 2021. In the Prospectus, AROA stated that the raised funds would be used to facilitate the next steps in executing its growth strategy. The Company has materially advanced that growth strategy in the last year. SALES As outlined in the Prospectus AROA’s primary growth strategies are focused on the US, being AROA’s current principal market. AROA has, in the last year, taken notable steps in line with these strategies. In February 2021, the Company announced a plan to significantly expand its US direct sales capability and capacity, and to dissolve Appulse, the Company’s shared sales force joint venture arrangement with Hydrofera, LLC. The shift to a larger dedicated field sales team has been a pivotal move for AROA as it has expanded and simplified AROA’s sales structure. This will enable AROA’s sales efforts to be increasingly focused on hospital accounts and ambulatory surgical centres, where AROA expects its sales force to drive growth of AROA’s Myriad™ products. 4 In the last year, AROA has obtained regulatory approval to sell its products in a further six countries. Regulatory approvals received during the year included approval for Myriad Matrix™ in the European Union. At the end of the financial year, AROA had regulatory approval to distribute and sell products in 49 countries globally, including the European Union and the United Kingdom. CLINICAL VALIDATION The Company received further clinical validation for its AROA ECM™ platform products during the year. A pre- clinical study published in the leading scientific journal PLOS One demonstrated the ability of components in the AROA ECM platform technology to recruit stem cells. This has significant implications, as stem cells are known to play a critical role during soft tissue regeneration. Myriad Matrix was used across a range of procedures in four peer-reviewed publications during the period, with a fifth manuscript accepted for publication. Finally, the Ovitex™ range was subject to a peer-reviewed retrospective analysis published in the journal “Surgical Endoscopy”. As AROA continues to build a database of clinical evidence for its products, common themes are starting to emerge across a wide range of soft tissue repair procedures. These include a rapid rate of well vascularized soft tissue formation, resolution of underlying tissue inflammation and tolerance of contaminated fields that typically exist in these complex cases. PRODUCTS AND PIPELINE AROA has continued to expand its product portfolio, both with line extensions to existing products and with new products based on extensions to the use of its proprietary AROA ECM platform technology. In the last year, AROA received FDA clearance for Symphony™, a new AROA product designed to support healing during the proliferative phase to reduce the time to wound closure, particularly in patients where their healing is severely impaired or compromised due to disease. Annual Report 2021 | AROA Superior regenerative healing performance at a significantly lower price Shortly after the end of this year, AROA also received FDA clearance for Myriad Morcells™ and commercially launched that product in the US. Myriad Morcells is a morcellized (powdered) format of Myriad Matrix for soft tissue repair and complex wounds. The morcellized format increases the AROA ECM surface area to maximise delivery. It also easily conforms, to optimise contact with irregular wound beds. As outlined in the Prospectus, AROA is developing a new platform technology to address an unmet need within dead space management. Dead space is a cavity that remains within soft tissues following surgical dissection between tissue plains, trauma or after tissue removal. It may result in seroma formation (a collection of fluid) and may be associated with an increased risk of infection and breakdown of the surgical site. Dead space management devices therefore aim to reduce the occurrence of seroma formation and improve healing. During the year, AROA observed positive pre-clinical outcomes with its dead space management platform technology. In view of this, and following further assessment of the potential market opportunities of these product categories, AROA has decided to prioritise and accelerate commercialisation of the dead space management platform technology. INTELLECTUAL PROPERTY AROA continued to build out its intellectual property portfolio during the year, with a new provisional patent application in the US for a novel treatment system for the prevention of seroma, and to approximate surgically created tissue planes linked to dead space. This patent complements existing filings for a fluid drainage and delivery device, and for a negative pressure wound dressing. The Company was also granted patents for a laminated tissue graft product in several more jurisdictions including Australia, China, and Europe. MANUFACTURING During the year, the Company commenced the expansion of its manufacturing facility as outlined in the Prospectus. AROA intends the expansion to achieve a three-fold increase in capacity to meet the growing demand for its products. It will also provide scaled up capacity for new products and additional laboratory space to support the Company’s developmental activities. CONCLUDING REMARKS AROA has achieved these outcomes despite the challenges presented by COVID-19. On behalf of the Board, I would like to acknowledge the impact COVID-19 has had on many people around the world, including our shareholders, employees, customers and partners. In particular, we recognise AROA employees’ and partners’ dedication and initiative through the last year, and their continued commitment to AROA in the face of these challenges. On behalf of the Board, I would also like to thank AROA’s Executive team for their exceptional efforts in the Company’s IPO and Admission. Finally, I would like to thank my fellow Directors for their valuable and continued counsel. Looking ahead, the Board considers that AROA is well placed to grow in the emerging post COVID-19 healthcare environment, where clinical performance and value will come under increasing scrutiny. The Board remains committed to investing in AROA’s growth, and we would like to extend our sincere gratitude to AROA’s shareholders, employees, customers and partners for continuing to support AROA’s vision. Jim McLean Independent Chair of the Board of Directors 5 Annual Report 2021 | AROA CEO’S REPORT Dear Shareholders, I would like to begin by expressing how heartened I’ve been to see the pragmatic and solutions-focused manner in which AROA’s employees and partners have responded to this unprecedented period of global uncertainty and public health crises. They have worked with AROA to embrace the challenges presented, and in doing so, have showcased their continued support for the Company. STRATEGIC PROGRESS As Jim McLean outlined in the Chairman’s Review, AROA has, despite the challenges presented by COVID-19, realised several strategic achievements in the last year. The Company believes there is a significant global growth opportunity for its products and has a targeted strategy to increase utilisation of its products in the US and its other markets globally. These strategic achievements have materially advanced that growth strategy. IMPACT OF COVID-19 COVID-19 significantly impacted procedure volumes in the US during the year, due to the lockdowns and resulting postponement of surgeries. This affected AROA’s results for FY21, with product sales for the first half of FY21 down 10% (being 8% in constant currency) compared to the same period in FY20. Despite foreign exchange headwinds and a COVID-19 surge in the US in January 2021, sales recovered strongly in the second half of FY21, resulting in full year product sales of NZ$21.6 million. This represents a 5% increase over FY20 in constant currency. OUTLOOK Over the next two years, AROA is going to focus on building out its US commercial operations to drive revenue growth and take advantage of the opportunities presented from its expanded product portfolio. AROA expects that its Myriad family of products will help deliver strong growth in FY22 and underpin growth in the medium term. The Company received regulatory clearance for Myriad Matrix in Europe and India during the year, and is targeting commercial launch in the coming financial year. As previously disclosed in AROA’s results announcement for the year, AROA has forecasted product sales of between NZ$30 million to NZ$33 million in FY22. This represents a 39% to 53% increase on FY21. AROA’s expanded dedicated field sales team in the US is a key factor expected to contribute towards that growth. AROA anticipates that its sales team will ramp up Myriad sales and penetrate additional accounts. The growth forecast also reflects AROA’s expectation that TELA Bio, the Company’s US sales and marketing distributor for hernia and breast reconstruction products, will deliver strong growth. TELA Bio published revenue guidance in March 2021 of 48% to 65% growth in the 2021 calendar year compared to the same period in 2020. Finally, US medical procedure numbers also continue to reflect a positive trend, demonstrating month-on-month improvement. Although these numbers are yet to return to pre-COVID levels, there has been strong improvement over the past two quarters, supporting improved sales momentum. AROA has provided this guidance on the basis of the assumptions outlined above, no resurgence of COVID-19 in the US and an average NZD/ USD exchange rate of US$0.72. Given the demonstrable increase in US medical procedure numbers since the rapid roll-out of COVID-19 vaccinations there, AROA maintains its guidance. Growing clinical validation and products used in over 4 million procedures 6 6 Annual Report 2021 | AROA CONCLUDING REMARKS I want to take this opportunity to acknowledge and thank AROA’s employees, who have gone above and beyond to deliver this year in spite of the difficulties presented by COVID-19. The Company appreciates the commitment, passion and resilience they have demonstrated over the year, in executing AROA’s strategic goals whilst managing the physical, mental and social challenges of life during a global pandemic. AROA is pleased with its progress in the last year under challenging conditions and expects to continue into the new year with strong momentum. AROA’s products are designed to improve clinical outcomes at a cost that improves patients’ access to the benefits of biologics, and to drive better healing. We are focused on unlocking regenerative healing for everybody. Brian Ward Managing Director and CEO AROA’s Symphony product, which received FDA clearance in July 2020, requires a unique re-imbursement code within the US health system. AROA anticipates this to be issued during the 2021 calendar year, and is targeting a limited commercial launch in the 2021 calendar year, with a full launch in the 2022 calendar year following completion of clinical studies. Symphony has an estimated market size in the US of US$1.15 billion, so dramatically increases the total addressable market in the US for AROA’s product portfolio from US$1.5 billion to more than US$2.5 billion. AROA will continue to build a database of clinical evidence for its products in FY22, focusing on Myriad Matrix and Myriad Morcells. In particular, the Company intends to continue undertaking case study series across a range of soft tissue repair procedures. Additional planned clinical activities include a pilot study utilising AROA’s Endoform™ and Symphony products in the treatment of diabetic foot ulcers (followed, in due course, by a pivotal clinical study in relation to the same) and commencement of a Phase IV clinical study in India involving Endoform and Myriad. The Company anticipates publication in the current financial year of a large retrospective analysis of Endoform in the treatment of diabetic foot ulcer, and expects the BRAVO multi-centre study on Ovitex to conclude in FY22. Finally, the Company is targeting completion of its expanded manufacturing facility by the end of FY22. Operating capacity from the expansion will come on-line in phases as necessary, based on demand requirements for AROA’s products. AROA anticipates that following completion, it will have sufficient aggregate manufacturing facilities to support approximately NZ$100 million in sales per annum. 7 7 Annual Report 2021 | AROAABOUT AROA AROA is a soft-tissue regeneration company that develops, manufactures and distributes medical and surgical products to improve healing in complex wounds and soft tissue reconstruction. The Company commenced operations in 2008, and has its headquarters and manufacturing facilities in Auckland, New Zealand. AROA has an additional sales office and distribution function in the US. AROA ECM PLATFORM TECHNOLOGY The Company has developed AROA ECM, a proprietary soft tissue regeneration platform technology, which is based on the benefits of applying a unique ECM to wounds and soft tissue repair and reconstruction. AROA ECM is derived from sheep (Ovine) forestomach and contains a rich and complex mix of important biological molecules. AROA ECM can temporarily replace damaged tissue by acting as a scaffold to grow new tissue, and is used where tissue has been lost or damaged by disease or injury. The patient’s own cells grow into the AROA ECM product, re-establish a blood supply, and then form new tissue. Over time, the implanted AROA ECM is completely replaced by new patient tissue. AROA has extended this platform technology to also incorporate synthetic polymer reinforcement, antimicrobials, and other actives. Figure 1: AROA ECM’s source, structure and products AROA believes that its products based on the AROA ECM platform technology offer superior healing performance in complex wounds, soft tissue reconstruction and, when combined with synthetic fibres, reduce complications and reoccurrence rates in hernia1. COMPETITIVE ADVANTAGE OF THE AROA ECM PLATFORM TECHNOLOGY The AROA ECM platform technology affects tissue regeneration and healing in the same way and through the same general mechanisms in all products. The competitive advantage of AROA’s products are firstly, based on the advantages of the AROA ECM platform technology, and secondly, based on design features of each product which consider the specific requirements for each particular use case. The AROA ECM platform technology’s competitive advantage is based on the inherent regenerative properties of ovine forestomach tissue, the proprietary manufacturing process and a pricing strategy that makes products affordable and accessible. 1Bohn, G. A. (2019). Endoform: A Simple Tool to Assess Wound Proteases. Wound Management and Prevention, 65(3), 18-20 & Overbeck, N. et al. (2020). In-vivo evaluation of a reinforced ovine biologic: a comparative study to available hernia mesh repair materials. Hernia. 8 Unique tissue – ovine forestomach matrix Proprietary manufacturing process Annual Report 2021 | AROA • A rapidly growing and regenerating organ during normal development; • Immature tissue source with naturally high levels of secondary ECM molecules; • Native intact porous ECM which enables rapid cell infiltration and proliferation; Basement membrane layer to support epithelial attachment; Unusually dense network of blood vessels which are retained as vascular channels; • Gentle process that retains the innate biology of the ECM while removing components which can lead to an inappropriate immune response; • Avoids structural damage to the ECM and protein denaturation which affects function and immune response; • Retains the high levels of native secondary molecules; and • Deliberately designed (e.g. modular design) to allow large scale, high-volume and low-cost production. Excellent strength and handling characteristics; Pricing strategy Favourable “M2” immune response which directs regenerative healing, enabling dynamic reciprocity and a constructive remodelling; and Continually being remodelled and replaced over time. AROA’s products are typically 20%-40% less expensive than competing biological products and in many cases only a small premium over synthetic products. • • • • • AROA ECM OFFERS DISRUPTIVE VALUE Currently, the regenerative use of ECM technology is restricted because of its high cost. ECM technology tends to be used in more complex cases or where patients’ healing is impaired. A wider group of patients could benefit from this technology but cost constraints limit access. Instead, health care providers and surgeons use less expensive products that have poorer outcomes. Figure 2: AROA ECM offers disruptive value Note: AROA Management compilation based on peer reviewed publications The AROA ECM platform technology offers a leading ECM that is more affordable and accessible to a wider group of patients. For less complex conditions, this allows more patients to have earlier access to advanced treatments which may lead to earlier healing and fewer complications. 9 Annual Report 2021 | AROAPRODUCT PORTFOLIO AROA sells products in two broad categories: complex wounds and soft tissue reconstruction. All products are based on the AROA ECM platform technology and are specifically engineered for each use case. Figure 3: Commercial products and product pipeline AROA’s product range addresses a wide range of applications and large addressable markets. Figure 4: Phases of healing and AROA product use 10 SALES CHANNELS AROA sells and distributes its products through three sales and distribution channels to maximise operating leverage. Figure 5: AROA’s sales channels Channel Description Products Target Specialties Call point Sales force (FTE) US Commercial operations based in San Diego, with sales professionals across US Endoform Myriad Symphony Physicians, WOCN’s/ RN’s Podiatric, Plastic, Trauma & Orthopaedic surgeons Outpatient Wound Centres & Inpatient Operating Rooms 20 field, 8 Inside & 20 Independent Sales Representatives NASDAQ listed ~US$233 Market Cap exclusively sell Aroalicensed products Ovitex® Ovitex PRS TM (US and European Rights) General Surgeons Plastic Surgeons Operating Room 46 sales territories as at 30 March 2021 • • Aroa is appointing distributors for the countries outside the US in which it has received regulatory approvals. Aroa has the rights for Ovitex and Ovitex PRS outside of US and Europe International (Ex-USA) Direct sales AROA’s direct sales team is located throughout the US and is supported from AROA’s San Diego office. AROA expects this focused direct sales function to accelerate the growth of Myriad sales and, once launched, sales of AROA’s Symphony product. TELA Bio AROA licenses its AROA ECM platform technology to TELA Bio for abdominal wall reconstruction/hernia and plastics and reconstructive surgery (licensed to TELA Bio solely for breast reconstruction). Through the relationship, AROA is responsible for process development, product realisation, regulatory submissions and manufacture. TELA Bio is a co-development partner for reinforced bioscaffolds and has responsibility for commercialisation in the US and Europe and for clinical development. AROA receives 27% of net product sales generated by TELA Bio. International (ex-US) AROA pursues international sales outside the US through distribution agreements with local distributors in the relevant jurisdictions. AROA has regulatory approval to distribute and sell products in 49 countries and has agreements in place with over 20 local distributors. AROA believes there is a significant global growth opportunity for its products. Fully dedicated US field sales team and regulatory approvals in 49 countries 11 11 Annual Report 2021 | AROADIRECTORS’ REPORT The Directors present their report on the Group during and at the end of the financial year ended 31 March 2021. DIRECTORS The following persons held offices as Directors of the Company during the financial year: • • • James McLean Brian Ward Steven Engle • • • Philip McCaw John Pinion John Diddams James McLean Chair, Independent Non-executive Director First appointed 10 August 2011 James (Jim) is a resident of New Zealand. For 25 years he has served as either Chair, Director, or an executive of research and technology businesses for both commercial and New Zealand Government organisations. In addition to AROA, current appointments include Chair of Prevar Limited, R J Hill Laboratories Limited and Information Tools Limited. He was Chair of the New Zealand Institute of Plant & Food Research and Chair of its predecessor HortResearch, as well as several private businesses and start-up companies. He served on the board of the then Foundation for Research, Science, and Technology including five years as deputy Chair. Jim was an executive and director of Genesis Research & Development Corporation Limited during its early stages through public listing. Before specialising in science and technology businesses, Jim held management positions with an international manufacturing business and spent thirteen years as a partner at chartered accountants, EY. His time at EY was focused on business strategy and included two years’ secondment to EY’s Washington DC office. Jim has a BSc (Hons) in Chemistry from University of Otago and a Post Graduate Diploma in Accounting from Victoria University of Wellington. Committee responsibilities: Member Audit Committee, Member Risk Committee, Member Remuneration and Nomination Committee Brian Ward Managing Director and CEO First appointed 21 Sep 2007 Brian is the founder of AROA and he is a resident of New Zealand. He has held senior corporate roles in life sciences and health care companies over the last 25 years. He has extensive management experience in life science companies spanning clinical, technical, sales, marketing, corporate development and strategy having worked for a number of multinationals including Baxter, Beecham and SmithKline Beecham throughout the world. He has managed investments into New Zealand technology companies for the Foundation for Research Science and Technology, served as the founding CEO of NZBio, and has sat on a number of government and industry expert panels. Brian has been responsible for leading the Company’s growth from start-up through to becoming a vertically integrated medical device business with substantial US sales and a developing international presence. As founder, Managing Director and CEO of the Company, and a substantial shareholder in the Company, he is considered by the Board to not be an independent Director. He is a graduate from Massey University with a Bachelor’s degree in Veterinary Science, a Member of the Royal College of Veterinary Surgeons (UK), and holds a Masters degree in Business Administration graduating with distinction. 12 Committee responsibilities: Member IPO Due Diligence Committee Steven Engle Independent Non-executive Director First appointed 1 April 2015 Steven Engle is a resident of the US. He has over 20 years of executive leadership experience with public biotech companies developing breakthrough products in metabolic, autoimmune, oncologic and infectious disease areas. He was previously the CEO of CohBar, a clinical stage biotechnology company developing mitochondria-based therapeutics to treat age-related diseases and extend healthy lifespan. Before joining CohBar, Steven served as CEO of Averigon Consulting, an advisory firm to the life science industry. Prior to that, he held roles as Chairman and CEO of XOMA Corporation, a leader in the development of therapeutic antibodies and antibody technologies, and La Jolla Pharmaceutical Company, which discovered the biology of B cell tolerance, developed the first B cell toleragen for lupus patients, and received an approvable letter from the FDA. Earlier, he served as Vice President of Marketing for Cygnus, a drug delivery systems company, where he helped to gain FDA approval and to launch Nicotrol for smoking cessation. Steven is the non-executive Chairman of the Board of Prescient Therapeutics Ltd., an ASX listed clinical stage oncology company, and Executive Chairman of Author-it Software Corporation, a developer of authoring information solutions for pharmaceutical and biotechnology companies. He is a former director of industry associations, BIO, BayBio and BIOCOM, and was a member of the board of the Lupus Foundation of America. Steven holds M.S.E.E. and B.S.E.E. degrees from the University of Texas with a focus in biomedical engineering. Committee responsibilities: Chair Remuneration and Nomination Committee, Member Risk Committe Philip McCaw Non-executive Director First appointed 5 March 2008 Philip (Phil) McCaw is a resident of New Zealand and is the Founding Partner of Movac, one of New Zealand’s leading Venture Capital funds. Phil led the original investment round into AROA in 2008, has worked closely with the Company and has served on the Board since then. Phil has over 20-years’ experience investing into New Zealand technology companies and helping to guide their growth. Phil was an early investor in Trade Me, New Zealand’s leading on-line trading community, which was sold to Fairfax in 2006. He was also an early investor into PowerByProxi, a wireless power technology spin-out from Auckland University, which was sold to Apple in 2018. Outside of Movac, Phil remains an active angel investor and maintains a personal angel investment portfolio. He is a strong advocate for the development of the entrepreneurial and early-stage investment eco-system in New Zealand and was the past Chair of the Angel Association of New Zealand; a founding investor in the Lightning Lab technology accelerator; and a founding investor in the Kiwi Landing Pad in San Francisco. Prior to starting Movac Phil spent 10 years with Deloitte Consulting working in New Zealand and the US. Due to his relationship with ongoing substantial shareholders in AROA, Phil is considered by the Board to not be an independent Director. Phil has a Bachelor of Business Studies (Senior Scholar) from Massey University. Committee responsibilities: Member Remuneration and Nomination Committee 13 Annual Report 2021 | AROAJohn Pinion Independent Non-executive Director First appointed 1 February 2015 John is a resident of the US. He has over 26 years of global experience leading biologic, small molecule pharmaceutical, gene therapy and device operations across Asia, Europe and the Americas. His expertise and leadership spans engineering, quality, manufacturing and translational sciences. He joined Ultragenyx in July 2015 and currently holds the role of EVP, Translational Sciences and Chief Quality Operations Officer. He provides leadership for Ultragenyx’s translational sciences functions which includes Pharmacology and Toxicology, Research and Bioanalytical Development, as well as GxP Quality and Compliance and CMC Analytical Development and QC. As a key member of Ultragenyx’s executive leadership team reporting directly to the organization’s CEO, he also contributes to ongoing business development, clinical development, commercial and strategic planning activities. In the ten years prior to joining Ultragenyx, John has held roles of increasing responsibility at Genentech (subsequently Roche post Genentech acquisition), departing the organization as Senior Vice President and Global Head of Quality and Compliance for Pharma Technical Operations based in Basel, Switzerland. Previous to Genentech, John spent 17 years in operational and senior leadership roles in Baxter International’s Renal, Bioscience, Parenterals and Device divisions. He holds a B.S. in Mechanical Engineering from West Virginia University. Committee responsibilities: Chair Risk Committee, Member Audit Committee John Diddams Independent Non-executive Director First appointed 21 November 2019 John is a resident of Australia and has over forty years’ experience as a CFO, CEO and director of both private and publicly listed companies. John is currently a non-executive director of New Zealand based Volpara Health Technologies Limited (ASX:VHT), Surf Lakes Holdings Limited and DIT AgTech Limited. John has extensive knowledge and experience in the practical application of ASX Listing Rules, Australian corporations’ law, international accounting standards and corporate governance principles. He heads a CPA firm providing corporate advisory services to SME and mid-cap companies and has managed the listing process, secondary capital raisings and ASX listings in a number of diverse industry sectors, including oil and gas, food and retail, telecommunications, adventure tourism, biotechnology, and the dental and medical sectors. John holds a Bachelor of Commerce from the University of NSW, is a Fellow of the Australian Society of CPAs and a Fellow of the Australian Institute of Company Directors. Committee responsibilities: Chair Audit Committee, Chair IPO Due Diligence Committee 14 Annual Report 2021 | AROA Successful IPO and ASX listing BOARD AND COMMITTEE MEETINGS In addition to its usual Committees, the Board established an IPO Due Diligence Committee during the year to consider matters relating to the Company’s IPO and Admission, and provide the Board with recommendations on the same. Name Board of Directors Audit Committee2 Risk Committee2 Remuneration and Nomination Committee IPO Due Diligence Committee Eligible Attended Eligible* Attended Eligible* Attended Eligible* Attended Eligible* Attended Jim McLean Brian Ward Steven Engle Phil McCaw John Pinion John Diddams 9 9 9 9 9 9 9 9 9 9 9 9 4 4 4 4 4 4 4 3 3 3 3 3 3 3 2 2 2 2 2 2 2 3 11 2 11 11 11 *To attend as a member of that Committee With the exception of the IPO Due Diligence Committee, the Committees’ charters are available on the Company’s website. PRINCIPAL ACTIVITIES AROA is a soft tissue regeneration company. During the year, the Group’s principal activity was the development, manufacture and distribution of products to improve the healing in complex wounds and soft tissue reconstruction. 2 Previously called the Audit and Risk Committee. The Audit and Risk Committee had 3 meetings before separating into an Audit Committee and a Risk Committee in December 2020. Post separation, the Audit Committee had 1 meeting in the relevant period whilst the Risk Committee had yet to meet as its first meeting was scheduled for June 2021. The Board has oversight of all risk matters. 15 Annual Report 2021 | AROAREVIEW OF OPERATIONS AND ACTIVITIES Commentary on the Group’s operations and activities during the year is set out in the Chairman’s Review and CEO’s Report. FINANCIAL RESULTS FOR THE YEAR Normalised profit or loss3 Product sales Other revenue Total revenue Gross profit Reported Reported Reported 2021 2020 YOY % CC4 2021 CC4 YOY % NZ$000 NZ$000 NZ$000 21,575 21,924 (2) 23,123 5 767 3,152 (76) 822 (74) 22,342 25,076 (11) 23,945 15,524 18,737 (17) 17,127 (5) (9) Product gross margin % Other income 68% 2,682 71% (3) bps 71% 0 bps 1,137 136 2,722 Normalised selling and administrative expenses5 (18,142) (15,401) Research and development (6,425) (5,042) 18 27 (18,900) (6,425) Total normalised operating expenses (24,567) (20,443) 20 (25,325) Normalised EBIT (6,361) (568) 1,018 (5,476) Add back: Depreciation & amortisation Normalised EBITDA Net finance expenses 3,078 (3,283) 2,741 2,173 (1,111) (3,317) Normalised loss before income tax (7,472) (3,886) 12 3,078 (251) (2,398) (210) 67 92 (1,753) (7,229) 47 86 139 23 27 24 862 12 PRODUCT SALES (REPORTED) up 17% YoY 13.9m PRODUCT SALES (CONSTANT CURRENCY4) up 6% YoY 13.9m $11.9m $10.0m down 10% YoY $9.0m $10.0m $11.9m down 8% YoY $9.2m H1 FY20 H2 FY20 H1 FY21 H2 FY21 H1 FY20 H2 FY20 H1 FY21 H2 FY21 3The following Profit or Loss is non-GAAP financial information, as defined by the NZ Financial Markets Authority, and has been provided to assist users of financial information to better understand and assess the Group’s comparative financial performance without any distortion from NZ GAAP accounting treatment specific to one-off, non-cash fair value adjustment of pre-offer shares issued in February and May 2020 and the one-off transaction costs associated with the IPO. The impact of non-cash share based payments expense has also been removed from the Profit or loss. This approach is used by management and the Board to assess the Group’s comparative financial performance. 4Constant currency (CC) removes the impact of exchange rate movements. This approach is used to assess the Group’s underlying comparative financial performance without any distortion from changes in foreign exchange rates, specifically the USD. The NZD/USD exchange rate of 0.64 has been used in the constant currency analysis, representing the average rate for FY20. 5These items have been normalised by the amounts outlined within the ‘Reconciliation to NZ GAAP Profit or Loss’. 16 Product sales Product sales for the year were $21.6 million ($23.1 million in constant currency) which is down 2% on last year, but a 5% increase on a constant currency basis. Product sales for H1 FY21 of $9.0 million were down 10% (8% in constant currency) compared to H1 FY20, driven by the impact of the COVID-19 pandemic. Despite foreign exchange headwinds and a COVID-19 surge in the US in January, sales recovered strongly in H2 FY21 reaching $12.6 million. This represents an increase of 6% on H2 FY20 or 17% in constant currency. Other revenue Other revenue represents royalties, received under the Company’s licensing agreement with TELA Bio and project fee income, received for product development undertaken with TELA Bio. No royalties were received under the TELA Bio licensing agreement for the year, compared to the $3.0 million received in FY20. Product gross margin % Product gross margin decreased to 65% (66% in constant currency) in H1 FY21 compared to FY20 as a result of lower product sales, relative to the level of fixed indirect costs required to support higher sales volumes. Product gross margins recovered strongly in H2 FY21 to 71%, despite foreign exchange headwinds (74% in constant currency), resulting in a full year product gross margin of 68% (71% in constant currency) compared to 71% in FY20. Other income Other income represents government grants and subsidies. Normalised operating expenses Selling and administrative expenses increased (from $15.4 million in FY20) to $18.1 million for FY21, representing a 18% change (23% in constant currency). This reflects the increased investment into the Company’s US based sales operations and the increase in expenses from becoming a publicly listed entity. Research and development expenses increased (from $5.0 million in FY20) to $6.4 million for FY21, being a 27% change (no currency impact), reflecting the increase in staffing on pipeline products. Reconciliation to NZ GAAP profit or loss Normalised loss before income tax Share based payments Transaction costs Other losses Loss before income tax (NZ GAAP) Share based payments Reported Reported 2021 NZ$000 (7,472) (2,011) (1,606) (8,013) (19,102) 2020 NZ$000 (3,886) (418) (850) (1,006) (6,160) Share based payments of $2.0 million relate to the vesting of the share options issued to Directors and employees of the Company on IPO and certain employees in September. Transaction costs Transaction costs of $1.6 million relate to the costs associated with the IPO including lead manager fees, legal fees, accounting and audit fees, ASX listing fees and road show expenses. Out of the total costs of $3.0 million incurred during the year ended 31 March 2021, $1.6 million was recognised against share capital, with the remaining $1.6 million recorded within operating expenses. 17 17 Annual Report 2021 | AROAOther losses Other losses of $8.0 million are a non-cash, one-off expense attributable to the fair value adjustment of pre-offer shares issued in February and May 2020, which were classified as financial liabilities as opposed to equity in accordance with NZ IAS 32. During the reporting period, these financial liabilities at fair value through profit or loss were fully reclassified as equity, following the IPO. Cashflows Net cash outflow from operating activities of $5.0 million for FY21 compared to a net cash inflow from operating activities of $1.7 million in FY20, reflecting the increased investment in operating expenses. Cash on hand and term deposits, increased to $35.4 million as at 31 March 2021 from $3.9 million as at 31 March 2020, resulting from the successful pre-IPO and IPO placements netting $50.4 million. Repayment of borrowings totalled $12.6 million during the year with purchases of property, plant and equipment remaining modest at $1.3 million compared to $1.7 million in FY20. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Commentary on significant changes in the Group’s state of affairs during the financial year is set out in the Chairman’s Review. Other than as set out in the Chairman’s Review and CEO’s Report, the Directors are not aware of any matters or circumstances that have arisen since the end of the financial year which have significantly affected, or may significantly affect, AROA’s operations, the results of those operations, or the state of affairs of the Group in subsequent financial years. DIVIDENDS No dividends were paid, declared or recommended during the financial year. Clinical outcomes with clear economic benefits are driving uptake 18 18 INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The Company has arranged, as provided for under its Constitution, insurance policies for Directors’ and Officers’ liability which, with a deed of indemnity entered into with each Director, are intended to ensure (to the extent permitted by applicable law) that the Directors and Officers will not incur monetary losses as a result of actions undertaken by them as a director or officer (as applicable) of any Group company. Certain actions are specifically excluded, for example the incurring of penalties and fines which may be imposed in respect of breaches of the law. Under the deeds of indemnity with the Directors, AROA must (subject to its Constitution and the Companies Act) maintain such insurance during the Director’s directorship and for such period of time following the directorship as determined by the Board. CORPORATE GOVERNANCE STATEMENT The Board is responsible for corporate governance. The Board has prepared a Corporate Governance Statement in accordance with the fourth edition of the ASX Corporate Governance Council’s Principles and Recommendations. A copy of AROA’s Corporate Governance Statement is available on it’s website at www.aroabio.com under the Investors/Corporate Governance section. NON-AUDIT SERVICES AROA’s auditor is BDO Auckland Limited. The Group’s statutory audit fee for the financial year ended 31 March 2021 was NZ$128,000. During the year ended 31 March 2021, BDO Auckland Limited, or entities associated to it, provided the following non- audit services to the Group. Description of services Investigating accountant’s review of the IPO Prospectus Review of interim consolidated financial statements Review of certain eligibility declarations by AROA for research and development grant funding Assistance with the preparation and review of financial models for valuing certain pre-existing shares in AROA disclosed in the IPO Prospectus Fees (NZ$) 238,000 46,500 5,000 7,500 The Board is satisfied that the services noted above do not impair BDO’s independence as auditor on the basis that such services were not in conflict with BDO’s audit procedures or adequate safeguards were put into place to mitigate any independence risks. 19 Annual Report 2021 | AROAREMUNERATION REPORT (UNAUDITED) This Remuneration Report, which forms part of the Directors’ Report, sets out the remuneration information for AROA’s Directors and other key management personnel for the financial year ended 31 March 2021. KEY MANAGEMENT PERSONNEL Key management personnel of the Group are those persons having authority and responsibility for planning, directing and controlling the Group’s major activities, whether directly or indirectly. The Board has determined that the Key Management of the Group are the individuals whose details are set out below. Except as noted below, the named persons held their stated position for the whole of the financial year ended 31 March 2021 and since the end of that financial year. Name Non-Executive Directors: Position James (Jim) McLean Chair, Independent Non-executive Director Steven Engle Philip McCaw John Pinion John Diddams Executives Brian Ward James Agnew Independent Non-executive Director Non-executive Director Independent Non-executive Director Independent Non-executive Director Managing Director and CEO CFO & Joint Company Secretary (appointed Company Secretary in February 2020 and Joint Company Secretary from 23 July 2020) REMUNERATION FRAMEWORK The key objective of AROA’s remuneration policies and practices is to attract, retain, motivate and reward talent. To achieve this, AROA offers compensation and benefits that embody the following: • competitive within the industry; • motivate management to pursue AROA’s business objectives and pursue AROA’s growth and success; • • encourage a high level of performance; and align the interests of management with the interests of shareholders. REMUNERATION GOVERNANCE The Remuneration and Nomination Committee assists the Board in establishing remuneration and nomination policies and practices which satisfy the remuneration framework outlined above, as well as ensuring that the Board is appropriately structured and comprised of individuals who are best able to discharge the responsibilities of directors. To achieve this, the Remuneration and Nomination Committee’s responsibilities include (amongst others): reviewing the structure of remuneration to be paid to Non-Executive Directors and any changes to the same; reviewing the performance and remuneration of the CEO and executive managers and providing the Board with recommendations on the same; overseeing succession planning reviews and selection processes (as required from time to time) for the CEO and executive managers; • • • 20 • • • • providing the Board with recommendations in relation to the terms of any issue of equity based remuneration to Executives or employees as part of their individual package or a wider staff incentive and retention scheme; regularly assessing the structure, size, composition, skills, experience, independence and diversity required by the Board to fulfil its responsibilities and duties to shareholders having regard to AROA’s strategic direction, and reporting the outcome of that assessment to the Board; developing a process for evaluating the performance of individual Directors, Board committees and the Board as a whole; and establishing processes for identification of suitable candidates for appointment as new directors to the Board having regard to the skills required and skills represented on the Board. Where appropriate, the Remuneration and Nomination Committee engages external consultants to provide independent advice. In accordance with corporate governance best practice, the structure of Non-Executive Director remuneration is separate and distinct from that for the CEO and executive managers. NON-EXECUTIVE DIRECTOR REMUNERATION STRUCTURE Under the Company’s Constitution, the Board may decide the remuneration to which each Non-Executive Director is entitled for their services as a Director of the Company (subject to shareholder approval where applicable under the Companies Act or the ASX Listing Rules). The Board has determined that Non-Executive Directors shall be compensated by way of cash fees and share options, but that no performance-based compensation shall be offered in order to ensure that objectivity in decision making is not compromised. The Remuneration and Nomination Committee assesses and reviews each Non-Executive Director’s compensation annually having regard to the time commitment and responsibilities of that Director (and having regard to market comparatives every two years). The total amount of fees paid to all Non-Executive Directors for their services as Directors (including for any committee roles) must not exceed in aggregate in any financial year the amount fixed by AROA in a general meeting. At the date of this Annual Report, this amount is fixed at NZ$465,000. Remuneration (if any) in the form of shares or options in AROA granted to Non-Executive Directors is not included in this amount. The remuneration of Non-Executive Directors for the year ended 31 March 2021 is detailed later in this Remuneration Report. There are no retirement benefit schemes for the Non-Executive Directors, or termination gratuity on ceasing to hold office. Each Non-Executive Director is entitled to be paid for all reasonable travel, accommodation and other expenses incurred by that Director in connection with his attendance at meetings or otherwise in connection with AROA’s business. EXECUTIVES’ REMUNERATION STRUCTURE AROA aims to reward the Executives and senior management with a level and mix of remuneration commensurate with their position and responsibilities within AROA. The remuneration package consists of three components; • • • fixed annual remuneration comprising salary and legislative superannuation; cash based short term incentives; and long term incentives. Fixed annual remuneration The fixed annual remuneration of the Executives and senior management is reviewed annually, with any increases to remuneration being subject to individual, Company and market conditions. These include the following: • size, nature and responsibilities of the role; • market pay levels benchmarked against comparative roles in the industry; • • • • locality of role, relative to market benchmarks; individual experience, skill and performance; increases for employees across the company taking into account the Company’s financial performance and position; and annual inflation. 21 Annual Report 2021 | AROACash based short term incentives Cash based short term incentives are paid in the form of bonuses for achievement of AROA’s annual performance targets. These incentives are aimed at rewarding the achievement of predetermined annual financial, strategic or business performance targets. There is a minimum financial performance hurdle which must be achieved before the cash bonus is payable. The cash bonus is calculated as a percentage for fixed remuneration. For the Executives, this bonus is between 25%- 40% of annual salary. In addition to short term incentive cash bonuses, in consideration for their performance and efforts during the IPO process, the Executives were entitled to a share in a one-off IPO cash bonus pool of NZ$200,000. This bonus pool was distributed among the Executives and other AROA employees at the Board’s discretion. Long term incentives During the financial year ended 31 March 2021, AROA operated two employee and executive incentive plans; the AROA Employee Incentive Share Plan and the AROA Biosurgery Share Option Plan. 1. Share Plan AROA operated the Share Plan from 2014, with a view to align the interests of employees with the interests of shareholders through the grant of equity in the Company. Employees who were offered the opportunity to participate in the Share Plan were offered unpaid ordinary shares in the Company that then vested in tranches over a specified timeframe set out in the offer letter (usually three years). Subject to the Board’s right to make an earlier call on the shares offered pursuant to the Share Plan, any such shares offered and vested had to be paid up by the shareholder by the 10th anniversary of their issue. No grants were made under the Share Plan since 2018 and, apart from the terms of the loan arrangement outlined below, the Share Plan was wound up prior to Admission. Any shares offered pursuant to the Share Plan which were not fully paid up at Admission (whether by the loan arrangement outlined below or otherwise) were forfeited. The Board offered employees (but not Directors) who held shares offered pursuant to the Share Plan the opportunity to take out an interest free loan from AROA to pay up such shares. The maximum amount of the loan from AROA was NZ$0.8 million and until a shareholder fully repays their Share Plan shares, legal title in such shares will continue to be held by Mesynthes Nominee Limited and any dividends paid out will first be applied to repayment of their loan. This loan facility will expire on 31 March 2022. 2. Option Plan From time to time, AROA offers certain Directors, Executives and employees the opportunity to participate in the Option Plan. The Option Plan is intended to retain Executives and employees, and may also be used as equity-based compensation for Non-Executive Directors. Each option is issued for nil consideration and entitles the participant to subscribe for one ordinary share in the Company at a specified exercise price once the option has vested. Any shares issued on exercise of an option are fully paid and rank pari passu with existing ordinary shares in the Company. The vesting dates are determined by the Board and specified in the option offer letter, but they have typically vested in three tranches of 33% each over a period of up to three years. An option may be exercised at any time from its vesting date up until the expiry date specified in the option offer letter. For grants made prior to Admission, the expiry date is ten years after the grant date whilst grants made on or after Admission expire five years after the grant date. Should a Non-Executive Director, Executive or employee cease to be employed by AROA, all options which have not yet vested will automatically lapse unless the Board determines otherwise. Any options that have vested with that person must be exercised within 90 days of ceasing employment, or those vested options will also lapse, unless the Board determines otherwise. The exercise price for options is determined by the Board and specified in the option offer letter, but typically, for grants made: • • at the time of Admission, the exercise price for each option was A$0.75 per share, being the price offered for each ordinary share in AROA pursuant to the IPO; and after Admission, the exercise price for each option is the higher of the share price at the last capital raise and the volume weighted average price of ordinary shares in AROA on the ASX for the five trading days immediately preceding the grant date. For further details relating to the options, refer to Note 22 to the Consolidated Financial Statements. 22 CEO AND MANAGING DIRECTOR Brian Ward is employed by AROA in the role of both CEO and Managing Director. A summary of the key terms relating to his remuneration is outlined below. • • • Brian is entitled to a fixed remuneration, plus (subject to achievement of certain financial and product milestones) cash based short term incentives as well as long term incentives. Further details on his remuneration during the financial year ended 31 March 2021 are set out in this Remuneration Report. Brian does not receive any additional payments for his performance as Managing Director of AROA. The Remuneration and Nomination Committee assesses the level and composition of his remuneration and performance, annually, and makes recommendations to the Board on any changes to his remuneration package. DETAILS OF REMUNERATION OF KEY MANAGEMENT Key Management’s remuneration (in NZ$) for the year ended 31 March 2021 is set out below. Short term benefits Post employment benefits Long term incentives Cash salaries and fees Cash bonus Shares Superannuation Options6 Loan funding Total $ $ $ $ $ $ $ $84,784 $85,517 $65,833 $85,517 $68,641 - - - - - $483,333 $75,000 - - - - - - - - - - - $152,293 $121,842 $121,842 $121,842 - $16,750 $1,140,128 - - - - - - $237,077 $207,359 $187,675 $207,359 $68,641 $1,715,211 Non-Executive Directors Jim McLean Steven Engle Philip McCaw John Pinion John Diddams Executives Brian Ward James Agnew $245,517 $68,360 $7,6507 $8,498 $238,142 $58,8398 $627,006 TOTAL $1,119,144 $143,360 $7,650 $25,248 $1,896,088 $58,839 $3,250,329 SHARE BASED COMPENSATION Options granted to Key Management during the financial year ended 31 March 2021 are set out below. These options were issued pursuant to the Option Plan. As outlined in the Chairman’s Review, AROA sees significant opportunity in accelerating its product development targeting dead space management. This is a refinement of the position disclosed in the Prospectus and as a consequence, it has resulted in the Board resolving to re-align the performance condition attaching to certain options granted as compensation to Brian Ward and James Agnew (detailed further below); so that the performance condition for those options are more closely aligned to the revised product development strategy. The expiry date for these options remains unchanged. Accordingly, the vesting date and performance condition now attaching to 1,044,175 of the 3,132,525 options granted to Brian Ward in FY21, and 218,100 of the 654,300 options granted to James Agnew in FY21, are as follows: • • Vesting date: upon satisfaction of the performance condition on or after 31 March 2022 Performance condition: 510k Clearance of first iteration of “dead space management” product, and completion of first “in human” study with the 2nd iteration of the “dead space management” product. 6These amounts reflect the non-cash accounting cost of the share options granted based on NZ IFRS 2 – Share-based Payment. No cash payments are made in relation to these. 7This reflects shares issued in lieu of cash salary prior to Admission. 8This reflects the outstanding amount owed for shares issued under the Share Plan following the wind-up of that plan prior to Admission. 2323 Annual Report 2021 | AROANumber granted Fair value per option granted ($)9 Exercise price per share ($) Final vesting date First exercise date Last exercise date Fair value of options granted during the year ($)9 Non-Executive Directors Jim McLean Steven Engle Philip McCaw John Pinion 307,200 A$0.466 A$0.75 31 March 2023 31 March 2021 23 July 2025 A$0.466 245,775 A$0.466 A$0.75 31 March 2023 31 March 2021 23 July 2025 A$0.466 245,775 A$0.466 A$0.75 31 March 2023 31 March 2021 23 July 2025 A$0.466 245,775 A$0.466 A$0.75 31 March 2023 31 March 2021 23 July 2025 A$0.466 John Diddams - - - - - - - Executives Brian Ward James Agnew 3,132,525 (3 tranches of 1,044,195) A$0.34 A$0.75 upon satisfaction of the performance condition on or after 31 March 2022 654,300 (3 tranches of 218,100) A$0.34 A$0.75 upon satisfaction of the performance condition on or after 31 March 2022 31 March 2021 23 July 2025 A$0.34 31 March 2021 23 July 2025 A$0.34 9The fair value of the options has been measured using the Revenue Ruling 59-60 and standard practice. Revenue Ruling 59-60 outlines the standard of value, approach, methods, and factors to be considered in valuing shares of the stock of a closely held entity similar to the Company. Revenue rulings are public administrative rulings by the US Internal Revenue Service. 24 EQUITY INSTRUMENT DISCLOSURES RELATING TO KEY MANAGEMENT Options holdings The number of options in ordinary shares in the Company held during the financial year ended 31 March 2021 by each Key Management personnel, including their personally related parties, are set out below. Balance as at 1 April 2020 Granted as compensation Exercised Other changes10 Balance at the end of the year Vested and exercisable Unvested Non-Executive Directors Jim McLean Steven Engle Philip McCaw John Pinion John Diddams Executives Brian Ward 2,800 307,200 (2,800) - 307,200 - 307,200 8,443 245,775 624,782 879,000 633,225 245,775 - 245,775 - 245,775 - 245,775 8,443 245,775 624,782 879,000 633,225 245,775 12,464 - (8,064) 325,600 330,000 330,000 James Agnew 14,293 654,300 (14,293) 14,669 3,132,525 (14,669) - - 3,132,525 654,300 - - 3,132,525 654,300 TOTAL 61,112 4,831,350 (39,826) 1,575,164 6,427,800 1,266,450 5,161,350 Shareholdings The number of ordinary shares in the Company held during the financial year ended 31 March 2021 by each Key Management personnel, including their personally related parties, are set out below. Non-Executive Directors Jim McLean11 Steven Engle Philip McCaw13 John Pinion John Diddams14 Executives Brian Ward15 James Agnew Balance as at 1 April 2020 Received during the year on exercise of options or warrants Purchases or, as specified, other additions Sale Balance at the end of the year 2,480,625 226,500 11,85012 (146,667) 2,572,308 411,600 - - (185,067) 226,553 16,944,150 524,850 475,42512 (1,240,000) 16,704,425 457,875 6,300 8,32512 - 472,500 150,000 604,800 257,750 12 (200,000) 812,550 34,003,350 1,122,450 (2,000,000) 33,125,800 1,029,525 1,071,975 9,22516 (33,333) 2,077,392 10This reflects the split of share options held immediately prior to Admission at the ratio of 75:1, with effect on IPO. 11As a director of Mesynthes Nominee Limited, Jim McLean also has an interest in 4,794,300 shares held by Mesynthes Nominee Limited on bare trust for certain AROA employees until payment is received for such shares. 12Received on re-pricing of series C2 shares, which involved a split of shares held immediately prior to Admission at the ratio of 75:1. 13Phil McCaw holds his interest through McSyth Capital Investment Trust, of which he is one of 3 trustees and a beneficiary. Mr McCaw is also a principal of Movac, a substantial shareholder in the Company. Mr McCaw sits as one member of an investment committee of 6 with respect to the Movac Funds, however Mr McCaw has withdrawn from the investment committee with respect to decisions regarding any shares in the Company held by the Movac Funds. Accordingly, Mr McCaw does not control the voting or disposal of those shares and does not have a relevant interest in those shares. As a director of Mesynthes Nominee Limited, Mr McCaw also has an interest in 4,794,300 shares held by Mesynthes Nominee Limited on bare trust for certain AROA employees until payment is received for such shares. 14This includes interests in shares held by John Diddams’ related parties; Whitfield Investments Pty Ltd and Galdarn Pty Ltd. 15Brian Ward holds his interest through Arawai No. 2 Trust, of which he is one of 3 trustees and a beneficiary. 16This reflects shares issued in lieu of cash salary prior to Admission 25 Annual Report 2021 | AROAEND OF REMUNERATION REPORT This Directors’ Report, incorporating the Remuneration Report, is signed in accordance with a resolution of the Board. Jim McLean Independent Chair of the Board of Directors 21 June 2021 26 INDEPENDENT AUDITOR’S REPORT BDO Auckland INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF AROA BIOSURGERY LIMITED Opinion We have audited the consolidated financial statements of Aroa Biosurgery Limited (“the Company”) and its subsidiaries (together, “the Group”), which comprise the consolidated statement of financial position as at 31 March 2021, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 March 2021, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) (“ISAs (NZ)”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our network firm was the Investigating Accountant in relation to the Company’s listing on the ASX. The firm has no other relationship with, or interests in, the Company or any of its subsidiaries. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Recognition of revenue – TELA Bio revenue share Key Audit Matter How The Matter Was Addressed in Our Audit The Group's largest customer is TELA Bio who is the Group’s USA sales and distribution partner for abdominal wall reconstruction and hernia repair and breast reconstruction in North America and Europe. The contract with TELA Bio entitles the Group to an agreed percentage of TELA Bio’s net sales. This revenue is considered to be variable consideration (“revenue share”). The consideration is variable since the quantum of TELA Bio’s inventory that is eventually sold and the price that it is sold at are uncertain. 3 Our audit procedures comprised the following: • We have obtained Management’s calculations prepared for the revenue share accrual and evaluated the reasonableness of key inputs and assumptions, including those impacted by Covid-19. The key inputs included sales history, expiry dates of inventory held, average selling prices achieved by TELA Bio and independent research papers which cover TELA Bio • We have obtained confirmation from TELA Bio, confirming the actual revenue share 27 Annual Report 2021 | AROABDO Auckland Recognition of revenue – TELA Bio revenue share Key Audit Matter How The Matter Was Addressed in Our Audit for their sales made in the year ended 31 March 2021. • We have compared the key inputs and assumptions with those used by Management last year and considered if these are indicative of Management bias. • We considered if that the amount of variable consideration estimated is only recorded by the Group to the extent that it is highly probable that a significant reversal in the amount of the cumulative revenue recognised will not occur. • We have reviewed disclosures in the consolidated financial statements, including the revenue recognition policy, and the requirements of the accounting standard. Variable consideration to be recognised is estimated by using the expected value method. The estimation is based on information that is reasonably available to the Group which incorporates key factors including sales history, expiry date of inventory held, and average selling prices achieved by TELA Bio. The amount of variable consideration is only recorded by the Group to the extent that it is highly probable that a significant reversal in the amount of the cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We consider this to be a key audit matter because of the judgement involved in determining the variable consideration and the quantum of the accrued revenue of $3.116m. Refer to note 3 revenue and segment information and note 12 trade and other receivables of the consolidated financial statements. Recognition and measurement of Series C preference shares Key Audit Matter How The Matter Was Addressed in Our Audit Our audit procedures comprised the following: • We reviewed and evaluated the characteristics of the Series C Preference Shares offered in accordance with NZ IAS 32 – Financial Instruments: Presentation. • We have reviewed, in conjunction with our valuation specialists, Management’s fair value of the instruments that required fair value to be determined in accordance with NZ IFRS 13 Fair Value Measurement. • We have assessed the disclosures in note 11 in respect of Series C preference shares to the requirements of the accounting standard. The Group completed a pre-IPO capital raise in February 2020, raising $5.821m and May 2020, raising $19.804m. The securities issued were Series C(2) and C(3) Preference Shares, respectively. As stated in note 11 these securities had the attributes of both debt and equity instruments. Management elected that the entire instrument was designated as fair value through profit or loss (“FVTPL”), through the designation exemption as allowed in IFRS 9 Financial Instruments. Note 4 discloses there was a charge of $8.013m in profit or loss in the current year. Both instruments required fair value to be determined in accordance with IFRS 13 Fair Value Measurement. The valuation of the instruments required Management judgements in estimating: the probabilities of different scenarios allowed for in terms of the offers to determine the period over which the fair value adjustments would be 28 4 BDO Auckland Recognition and measurement of Series C preference shares Key Audit Matter How The Matter Was Addressed in Our Audit recognised in profit or loss; the conversion rate; and the AUD/NZD foreign exchange rate. As a result of the subjective nature of the judgements and given the magnitude of the expense in the current year, this was considered to be a key audit matter. Goodwill impairment test Key Audit Matter How The Matter Was Addressed in Our Audit The Group has recognised goodwill on a historical acquisition. The goodwill balance of $5.538 million at 31 March 2021 is subject to an annual impairment test in accordance with NZ IAS 36 - Impairment of Assets. The Directors performed their impairment test, with reference to COVID-19, by considering the recoverable amount of the Group's goodwill using a value in use calculation. This calculation is complex and subject to key inputs and assumptions such as discount rates and future cash flows, which inherently include a degree of estimation uncertainty and are prone to potential bias and inconsistent application and therefore considered to be a key audit matter Refer to note 15 intangible assets of the consolidated financial statements. Our audit procedures comprised the following: • We obtained Management’s value in use calculations prepared for the Cash Generating Unit (‘CGU’). We evaluated and challenged the key inputs and assumptions including those impacted by Covid-19. The key inputs included revenue growth rates, terminal growth rate, gross margins and discount rate. • We engaged our internal valuation experts to review the mechanics of the value in use calculation against the valuation methodology, and the discount rate used. • We reviewed Management's sensitivity analysis performed on key inputs and assumptions to determine the extent to which any changes would affect the recoverable amount of the assets. We also considered and tested alternate sensitivities. • We compared the carrying value of the CGU’s assets to the recoverable amount determined by the impairment test to identify any impairment losses. • We have reviewed disclosures in the consolidated financial statements, including impairment and sensitivity analysis, to the requirements of the accounting standard. Accounting for share based payment arrangements Key Audit Matter How The Matter Was Addressed in Our Audit During the year, the Group issued options to certain employees, including Directors, under the share based payment arrangements. The share based payment arrangements included both market based and non-market based vesting conditions. In determining the value of Our audit procedures comprised the following: • Agreed the terms of the share based payment arrangements issued during the year to contracts. • We have assessed, in conjunction with our valuation specialists, the appropriateness 5 29 Annual Report 2021 | AROABDO Auckland Accounting for share based payment arrangements Key Audit Matter How The Matter Was Addressed in Our Audit of the valuation methodology used by management's specialist and the key input assumptions such as volatility rates, expected life and probability of achieving the market-based performance condition. • We have assessed the Group's judgements in relation to the probability of achieving non-market based vesting conditions. • We recalculated the share based payments expense recorded in the Statement of Profit or Loss and Other Comprehensive Income over the relevant vesting periods • We reviewed the disclosures in note 5 and 22 in relation to the share based payment arrangements. the new arrangements, the Group used the services of a third-party valuation specialist. The Group also had existing share based payment arrangements that were exercised during the year. The share based payments expense recorded for the year ended 31 March 2021 is $1.985m. Details of these share based payment arrangements are disclosed in note 5 employee benefit expenses and note 22 share based payments reserve of the consolidated financial statements. There is judgement involved in determining the value of share based payment arrangements and subsequent recording of the fair value as an expense over the estimated vesting period. As a result and given the magnitude of the expense in the current year, the audit of the share based payment arrangements was considered a key audit matter. Other Information The directors are responsible for the other information. The other information comprises the Aroa Biosurgery FY21 Results and FY22 Outlook – Commentary, and Appendix 4E – ASX Listing Rule 4.2A (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, and the Annual Report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, 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. When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors. 30 6 BDO Auckland Directors’ Responsibilities for the Consolidated Financial Statements The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are 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 ISAs (NZ) 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 decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the financial statements is located at the External Reporting Board’s website at: https://www.xrb.govt.nz/assurance-standards/auditors- responsibilities/audit-report-1/. This description forms part of our auditor’s report. Who we Report to This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. The engagement partner on the audit resulting in this independent auditor’s report is Chris Neves. BDO Auckland Auckland New Zealand 24 May 2021 7 31 Annual Report 2021 | AROACONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 March 2021 NNootteess 3 3 7 4,5 6 6 8 Revenue Cost of sales GGrroossss pprrooffiitt Other income Selling and administrative expenses Research and development expenses Other losses OOppeerraattiinngg iinnccoommee//((lloossss)) bbeeffoorree nneett ffiinnaanncciinngg ccoossttss Finance income Finance expenses NNeett ffiinnaannccee eexxppeennsseess LLoossss bbeeffoorree iinnccoommee ttaaxx Income tax (expense)/credit LLoossss ffoorr tthhee yyeeaarr aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss OOtthheerr ccoommpprreehheennssiivvee iinnccoommee IItteemmss tthhaatt wwiillll oorr mmaayybbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss Exchange loss arising on translation of foreign operations IItteemmss tthhaatt wwiillll nnoott bbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss Changes in the fair value of equity investments at fair value through other comprehensive income 10 TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee TToottaall ccoommpprreehheennssiivvee lloossss ffoorr tthhee yyeeaarr aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss Earnings per share during the year: 22002211 $$000000 22,342 (6,818) 1155,,552244 2,682 (21,759) (6,425) (8,013) ((1177,,999911)) 796 (1,907) ((11,,111111)) ((1199,,110022)) (107) ((1199,,220099)) 332 615 994477 22002200 $$000000 25,076 (6,339) 1188,,773377 1,137 (16,669) (5,042) (1,006) ((22,,884433)) 3 (3,320) ((33,,331177)) ((66,,116600)) 202 ((55,,995588)) (118) 969 885511 ((1188,,226622)) ((55,,110077)) Basic earnings per share (cents) Diluted earnings per share (cents) 23 23 (6.39) (6.39) (212.63) (212.63) The above consolidated statement of profit and loss and other comprehensive income should be read in conjunction with the accompanying notes. 32 CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 March 2021 Revenue Cost of sales GGrroossss pprrooffiitt Other income Selling and administrative expenses Research and development expenses Other losses Finance income Finance expenses NNeett ffiinnaannccee eexxppeennsseess LLoossss bbeeffoorree iinnccoommee ttaaxx Income tax (expense)/credit OOppeerraattiinngg iinnccoommee//((lloossss)) bbeeffoorree nneett ffiinnaanncciinngg ccoossttss NNootteess 3 3 7 4,5 6 6 8 LLoossss ffoorr tthhee yyeeaarr aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss OOtthheerr ccoommpprreehheennssiivvee iinnccoommee IItteemmss tthhaatt wwiillll oorr mmaayybbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss Exchange loss arising on translation of foreign operations IItteemmss tthhaatt wwiillll nnoott bbee rreeccllaassssiiffiieedd ttoo pprrooffiitt oorr lloossss Changes in the fair value of equity investments at fair value through other comprehensive income 10 TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee TToottaall ccoommpprreehheennssiivvee lloossss ffoorr tthhee yyeeaarr aattttrriibbuuttaabbllee ttoo sshhaarreehhoollddeerrss Earnings per share during the year: 22002211 $$000000 22,342 (6,818) 1155,,552244 2,682 (21,759) (6,425) (8,013) ((1177,,999911)) 796 (1,907) ((11,,111111)) ((1199,,110022)) (107) ((1199,,220099)) 332 615 994477 22002200 $$000000 25,076 (6,339) 1188,,773377 1,137 (16,669) (5,042) (1,006) ((22,,884433)) 3 (3,320) ((33,,331177)) ((66,,116600)) 202 ((55,,995588)) (118) 969 885511 ((1188,,226622)) ((55,,110077)) Basic earnings per share (cents) Diluted earnings per share (cents) 23 23 (6.39) (6.39) (212.63) (212.63) The above consolidated statement of profit and loss and other comprehensive income should be read in conjunction with the accompanying notes. CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 March 2021 CCuurrrreenntt aasssseettss Cash and cash equivalents Term deposits Derivative assets Trade and other receivables Inventories Tax receivable Financial assets at fair value through other comprehensive income TToottaall ccuurrrreenntt aasssseettss NNoonn--ccuurrrreenntt aasssseettss Property, plant and equipment Prepayments Right of use assets Intangible assets TToottaall nnoonn--ccuurrrreenntt aasssseettss TToottaall aasssseettss CCuurrrreenntt lliiaabbiilliittiieess Trade and other payables Derivative liabilities Employee benefits Interest-bearing loans and borrowings Lease liabilities Financial liabilities at fair value through profit or loss TToottaall ccuurrrreenntt lliiaabbiilliittiieess NNoonn--ccuurrrreenntt LLiiaabbiilliittiieess Provisions Interest-bearing loans and borrowings Lease liabilities TToottaall nnoonn--ccuurrrreenntt lliiaabbiilliittiieess TToottaall lliiaabbiilliittiieess NNeett aasssseettss EEqquuiittyy Share capital Share based payment reserve Foreign currency translation reserve Equity investment reserve Accumulated losses TToottaall eeqquuiittyy On behalf of the Board 24 May 2021 NNootteess 9 9 26 12 13 10 14 12 19 15 16 26 17 18 20 11 18 20 21 22 22002211 $$000000 15,381 20,000 31 8,106 3,608 39 1,584 4488,,774499 6,707 171 5,951 18,077 3300,,990066 22002200 $$000000 3,850 - 1,188 7,516 4,005 451 969 1177,,997799 6,559 193 2,175 19,057 2277,,998844 7799,,665555 4455,,996633 2,744 - 2,030 9,952 566 - 1155,,229922 161 - 5,716 55,,887777 2211,,116699 5588,,448866 97,316 2,130 198 1,584 (42,742) 5588,,448866 4,310 386 949 22,523 215 6,827 3355,,221100 158 1,119 1,870 33,,114477 3388,,335577 77,,660066 29,353 951 (134) 969 (23,533) 77,,660066 Jim McLean - Chairman Brian Ward – CEO The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 33 Annual Report 2021 | AROA CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY For the year ended 31 March 2021 SShhaarree CCaappiittaall AAccccuummuullaatteedd LLoosssseess FFoorreeiiggnn CCuurrrreennccyy TTrraannssllaattiioonn RReesseerrvvee EEqquuiittyy iinnvveessttmmeenntt rreesseerrvvee SShhaarree BBaasseedd PPaayymmeenntt RReesseerrvvee TToottaall EEqquuiittyy NNootteess $$000000 $$000000 $$000000 $$000000 $$000000 $$000000 BBaallaannccee aass aatt 11 AApprriill 22001199 CCoommpprreehheennssiivvee iinnccoommee Loss for the year Other comprehensive income for the year TToottaall ccoommpprreehheennssiivvee iinnccoommee ffoorr tthhee yyeeaarr 2288,,888899 ((1177,,557755)) ((1166)) - - -- (5,958) - - (118) ((55,,995588)) ((111188)) TTrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss Employee shares exercised Share based payments TToottaall ttrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss 21,22 22 464 - 446644 - - -- - - -- -- - 969 996699 - - -- 770022 1122,,000000 - - -- (5,958) 851 ((55,,110077)) (169) 418 224499 295 418 771133 BBaallaannccee aass aatt 3311 MMaarrcchh 22002200 2299,,335533 ((2233,,553333)) ((113344)) 996699 995511 77,,660066 BBaallaannccee aass aatt 11 AApprriill 22002200 CCoommpprreehheennssiivvee iinnccoommee Loss for the year Foreign Currency Translation Reserve Other comprehensive income for the year TToottaall ccoommpprreehheennssiivvee iinnccoommee ffoorr tthhee yyeeaarr TTrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss Issue of Series C3 preference shares Issue of equity securities Employee shares exercised Employee shares forfeited Share based payments TToottaall ttrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss 2299,,335533 ((2233,,553333)) ((113344)) 996699 995511 77,,660066 - - - (19,209) - - - 332 - -- ((1199,,220099)) 333322 11 21 21 22 22 33,833 30,554 2,601 - 975 6677,,996633 - - - - - -- - - - - - - - 615 661155 - - - - - - - - -- (19,209) 332 615 ((1188,,226622)) - 33,833 - (807) (25) 2,011 30,554 1,794 (25) 2,986 -- -- 11,,117799 6699,,114422 BBaallaannccee aass aatt 3311 MMaarrcchh 22002211 9977,,331166 ((4422,,774422)) 119988 11,,558844 22,,113300 5588,,448866 The above consolidated statement of movements in equity should be read in conjunction with the accompanying notes. 34 CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY For the year ended 31 March 2021 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 March 2021 SShhaarree CCaappiittaall AAccccuummuullaatteedd LLoosssseess TTrraannssllaattiioonn FFoorreeiiggnn CCuurrrreennccyy RReesseerrvvee EEqquuiittyy iinnvveessttmmeenntt rreesseerrvvee SShhaarree BBaasseedd PPaayymmeenntt RReesseerrvvee TToottaall EEqquuiittyy CCaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess Cash receipts from sales revenue NNootteess NNootteess $$000000 $$000000 $$000000 $$000000 $$000000 $$000000 Cash receipts from license fees, project fees, and grant income Cash paid to suppliers and employees Interest received Dividends received Interest paid Income tax received Income tax paid 22002211 $$000000 21,044 2,552 (28,115) 134 - (853) 231 - NNeett ccaasshh ((oouuttffllooww))//iinnffllooww ffrroomm ooppeerraattiinngg aaccttiivviittiieess 30a ((55,,000077)) CCaasshh fflloowwss ffrroomm iinnvveessttiinngg aaccttiivviittiieess Purchase of property, plant and equipment Purchase of intangible assets Term deposits NNeett ccaasshh ((oouuttffllooww)) ffrroomm iinnvveessttiinngg aaccttiivviittiieess CCaasshh fflloowwss ffrroomm ffiinnaanncciinngg aaccttiivviittiieess Proceeds from issue of shares Proceeds from financial liabilities at FVTPL Transaction costs related to issues of equity securities or convertible debt securities Proceeds from borrowings Repayment of borrowings/deferred consideration Lease liability – Principal payments Lease liability – Interest payments 9 30b 30b NNeett ccaasshh iinnffllooww//((oouuttffllooww)) ffrroomm ffiinnaanncciinngg aaccttiivviittiieess 30b NNeett iinnccrreeaassee//((ddeeccrreeaassee)) iinn ccaasshh aanndd ccaasshh eeqquuiivvaalleennttss Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at beginning of year CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt eenndd ooff yyeeaarr 9 (1,265) (235) (20,000) ((2211,,550000)) 34,951 19,804 (4,329) - (12,596) (322) (409) 3377,,009999 1100,,559922 939 3,850 1155,,338811 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. BBaallaannccee aass aatt 3311 MMaarrcchh 22002200 2299,,335533 ((2233,,553333)) ((113344)) 996699 77,,660066 2288,,888899 ((1177,,557755)) ((1166)) 770022 1122,,000000 (5,958) ((55,,995588)) (118) ((111188)) 969 996699 - - -- - - - - -- BBaallaannccee aass aatt 11 AApprriill 22001199 CCoommpprreehheennssiivvee iinnccoommee Loss for the year Other comprehensive income for the year tthhee yyeeaarr TToottaall ccoommpprreehheennssiivvee iinnccoommee ffoorr TTrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss Employee shares exercised Share based payments TToottaall ttrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss 21,22 22 464 446644 BBaallaannccee aass aatt 11 AApprriill 22002200 CCoommpprreehheennssiivvee iinnccoommee Loss for the year Foreign Currency Translation Reserve the year Other comprehensive income for TToottaall ccoommpprreehheennssiivvee iinnccoommee ffoorr tthhee yyeeaarr TTrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss Issue of Series C3 preference shares Issue of equity securities Employee shares exercised Employee shares forfeited Share based payments TToottaall ttrraannssaaccttiioonnss wwiitthh sshhaarreehhoollddeerrss 11 21 21 22 22 33,833 30,554 2,601 - 975 6677,,996633 - - - -- - - - - - - - -- - - - -- - - - - - - - -- -- - - - -- - - - - - - - -- (169) 418 224499 995511 - - -- - - - -- - - (807) (25) 2,011 11,,117799 (5,958) 851 ((55,,110077)) 295 418 771133 (19,209) 332 615 ((1188,,226622)) 33,833 30,554 1,794 (25) 2,986 6699,,114422 2299,,335533 ((2233,,553333)) ((113344)) 996699 995511 77,,660066 (19,209) 332 ((1199,,220099)) 333322 615 661155 BBaallaannccee aass aatt 3311 MMaarrcchh 22002211 9977,,331166 ((4422,,774422)) 119988 11,,558844 22,,113300 5588,,448866 The above consolidated statement of movements in equity should be read in conjunction with the accompanying notes. 22002200 $$000000 22,373 3,865 (24,239) 3 1 (182) - (161) 11,,666600 (1,691) (179) - ((11,,887700)) 296 5,821 - 1,775 (7,730) (147) (399) ((338844)) ((559944)) (13) 4,457 33,,885500 35 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2021 11.. CCoorrppoorraattee iinnffoorrmmaattiioonn Aroa Biosurgery Limited ("the Company") together with its subsidiaries (the “Group”) is a leading regenerative medicine company which develops and manufactures medical devices for wound and tissue repair using its proprietary extracellular matrix (ECM) technology. The Company is a limited liability company incorporated and domiciled in New Zealand. The address of its registered office is 64 Richard Pearse Drive, Airport Oaks, Auckland. Aroa Biosurgery Incorporated is a subsidiary of Aroa Biosurgery Limited and is incorporated and domiciled in the United States. The address of its registered office is 7220 Trade St, Suite 306, San Diego, California 92121. The consolidated financial statements of Aroa Biosurgery Limited and its subsidiaries (the "Group") for the year ended 31 March 2021 comprise the Company and its two subsidiaries, Aroa Biosurgery Incorporated and Mesynthes Nominee Limited. All subsidiary entities have a balance date of 31 March. EEqquuiittyy hhoollddiinngg PPrriinncciippaall AAccttiivviittyy PPllaaccee ooff BBuussiinneessss Aroa Biosurgery Incorporated Sales & Distribution US Mesynthes Nominee Limited Nominee Shareholder NZ 22002211 %% 100 100 22002200 %% 100 100 The consolidated financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 2013 and the Companies Act 1993. These consolidated financial statements were authorised for issue by the Board of Directors on 24 May 2021. 22.. SSuummmmaarryy ooff ssiiggnniiffiiccaanntt aaccccoouunnttiinngg ppoolliicciieess Statement of compliance and basis of preparation The consolidated financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”). They comply with New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”), other New Zealand accounting standards and authoritative notices that are applicable to entities that apply NZ IFRS, as appropriate for-profit orientated entities. The consolidated financial statements also comply with International Financial Reporting Standards (“IFRS”). Basis of measurement The consolidated financial statements have been prepared on the historical cost basis, except for the following items (refer to individual accounting policies for details): - - - Financial assets at fair value through other comprehensive income; Financial liabilities at fair value through profit or loss; and Derivative assets and liabilities Functional and presentation currency The consolidated financial statements are presented in New Zealand dollars ($) which is the Company’s functional and Group’s presentation currency. All financial information is presented in New Zealand dollars rounded to the nearest thousands, except where otherwise indicated. Use of estimates and judgements The preparation of the consolidated financial statements in conformity with NZ IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Significant estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Estimates and judgements were made in respect of the value of development expenditure capitalised (refer to Note 4), the likely term of leased premises, which impacts leasehold improvements assets and right of use assets capitalised (refer to Notes 14 and 20), TELA Bio Incorporated (“TELA Bio”) accrued revenue (refer to Note 12), the value of share- based payments (refer to Note 22), the impairment of intangible assets (refer to Note 15), and the estimated fair value of financial liabilities at fair value through profit or loss (refer to Note 11). 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 22.. SSuummmmaarryy ooff ssiiggnniiffiiccaanntt aaccccoouunnttiinngg ppoolliicciieess ((ccoonnttiinnuueedd)) Use of estimates and judgements (Continued) As a result of the ongoing COVID-19 pandemic, the Group has experienced reduced demand during the year due to the overall reduction in economic activity. The pandemic has also impacted a number of financial statement areas, as outlined below. - Going concern: The Directors have concluded that the Company is a going concern. Refer below. - - - Inventory: Despite reduced trading levels, management considers any extra risk caused by COVID-19 as of reporting date is not material given the average remaining shelf life for inventories on hand being significantly more than 12 months and a strong recovery in sales activities noted in the second half of the year. Refer to Note 13. Investments: The Group’s financial assets include listed equities. Management is satisfied that there is no impairment to the value as of reporting date as the quoted price in the active market has improved post reporting date. Refer to Note 10. Intangible assets: The Group measured the recoverable amounts of assets by assessing the recoverable amount based on value in use calculations for goodwill. No impairment was noted. Refer to Note 15. To date the Company has undertaken the following steps to reduce the impact of COVID-19 on its operations: - - Reduced expenditure in non-critical business areas. Received wage subsidies and other business support measures made available by the New Zealand and US Governments. Refer to Note 3. Going concern The Group posted a net loss before tax of $19,102,000 for the year (2020: loss before tax of $6,160,000). The Group posted total operating cash outflow of $5,007,000 (2020: inflow of $1,660,000). The Directors have continued to apply the going concern assumption as the basis of the preparation of the consolidated financial statements. In reaching their conclusion that the going concern assumption is appropriate, the Directors have considered the ability to achieve financial performance and cash flow forecasts prepared by management, the ability to repay the outstanding deferred consideration to Hollister Incorporated (“Hollister”) in accordance with the extended contractual terms (refer to Note 18), and the sufficiency of the cash on hand as at the reporting date. In addition, management considers that the impact of COVID-19 pandemic does not cast significant doubt on the Group’s ability to continue as a going concern. This is in line with the product revenue recovering strongly, in excess of management’s internal expectations, in the second half of the reporting period. Management is not aware of any other event or condition that may cast significant doubt on its going concern assumptions. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Group as at the reporting date and the results of all subsidiaries for the year then ended. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions and balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Changes in accounting policies New standards that have been adopted in the annual financial statements for the year ended 31 March 2021, but have not had a significant effect on the Group are: - NZ IAS 1 Presentation of Financial Statements and NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment – Disclosure Initiative - Definition of Material); - Going Concern Disclosures (Amendments to FRS-44); and - Revisions to the Conceptual Framework for Financial Reporting. 37 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 33.. RReevveennuuee aanndd sseeggmmeenntt iinnffoorrmmaattiioonn NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 33.. RReevveennuuee aanndd sseeggmmeenntt iinnffoorrmmaattiioonn ((ccoonnttiinnuueedd)) Sales of goods (USA) Sales of goods (Rest of the world) Royalties (USA) Project fees (USA) TToottaall rreevveennuuee Revenue recognised point in time Revenue recognised over time TToottaall rreevveennuuee Segment information 22002211 $$000000 20,617 958 - 767 22002200 $$000000 21,017 907 2,992 160 2222,,334422 2255,,007766 21,575 767 2222,,334422 24,916 160 2255,,007766 Revenues from external customers are from sales of goods, royalties and project fees as reflected above. The Group sells its products and services to external customers who are largely located in the United States of America (the “USA”) as reflected in the sales above. Sales to the global market outside of the USA are growing. For the purpose of the internal reporting provided to the chief operating decision makers, business activities, performances and any associated assets and liabilities are reviewed as a consolidated group. Revenues of approximately $11,811,000 (2020: $13,576,000) are derived from a single external customer, being sales of products and services to TELA Bio, which is the Group’s USA sales and distribution partner. The Group held all of its non-current assets in New Zealand with an exception of the right-of-use assets of approximately $0.2m for the leasehold property in the USA. Other income The Group received subsidies and business support measures from the New Zealand and USA governments during the reporting period totalling $1.3 million (2020: $nil). The Group is in the business of developing, manufacturing and selling soft tissue repair products. Revenue from contracts with customers is recognised when performance obligations pursuant to that contract are satisfied by the Group. The Group has identified the following main categories of revenue: Sales of goods The Group’s revenue primarily consists of the sale of its products. Revenue is recorded when the customer takes possession of the product. All contracts with customers are standardised and satisfy the criteria of transaction approval, identification of each party’s rights, payment terms, commercial substance, and probable collection based on the customer’s ability and intention to pay. Revenue is recognised at a point in time when control over the product transfers to the customer, which is assessed to be at the time of receipt of goods by the customer. The Group also sells its products via a distributor model whereby the sales are made direct to a distributor being the customer of the Group, with the distributor permitted to resell the Aroa products to an end user. The Group has assessed these arrangements to consider that control passes to the distributor at the point the distributor takes possession of the products. The Group considers itself to be acting as principal in the sale of goods to distributors and recognise revenue on a gross basis. All contracts with distributors are standardised and satisfy the criteria of transaction approval, identification of each party’s rights, payment terms, commercial substance, and probable collection based on the customer’s ability and intention to pay. Revenue is recognised at a point in time when control over the product transfers to the distributor as the customer, which is assessed to be at the time of receipt of goods by the distributor. Revenue share The Group's largest customer is TELA Bio who is the Group’s USA sales and distribution partner for abdominal wall reconstruction and hernia repair and breast reconstruction in North America and Europe. The contract with TELA Bio entitles the Group to an agreed percentage of TELA Bio’s net sales. This revenue is considered to be variable consideration (“revenue share”). The consideration is variable since the quantum of TELA Bio’s inventory that is eventually sold and the price that it is sold at are uncertain. The consideration from TELA Bio is received from a transfer price for the products shipped to TELA Bio, with the balance of the consideration received on quarterly true up to the agreed percentage based on TELA Bio’s net sales. The Group estimates the true up on TELA Bio’s inventory at the reporting date by using the expected value method. The estimation is based on information that is reasonably available to the Group which incorporates key factors including sales history, expiry date of inventory held and average selling prices achieved by TELA Bio. The amount of variable consideration estimated is only recorded by the Group to the extent that it is highly probable that a significant amount of the cumulative revenue recognised will be received in the future. Royalties Royalties received are recognised at a point in time when the operational and revenue milestones are completed under the royalty agreement. In 2020, $3.0 million revenue related to a one-off licence fee, which did not recur during the reporting period. Project fees Project fees received are recognised over time when the performance obligations are fulfilled pursuant to the project development agreement. Any project fees received, for which the requirements under the project agreement have not been completed, are carried as income in advance (liability) until all applicable performance obligations have been fulfilled. 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 33.. RReevveennuuee aanndd sseeggmmeenntt iinnffoorrmmaattiioonn ((ccoonnttiinnuueedd)) Sales of goods (USA) Sales of goods (Rest of the world) Royalties (USA) Project fees (USA) TToottaall rreevveennuuee Revenue recognised point in time Revenue recognised over time TToottaall rreevveennuuee Segment information 22002211 $$000000 20,617 958 - 767 2222,,334422 21,575 767 2222,,334422 22002200 $$000000 21,017 907 2,992 160 2255,,007766 24,916 160 2255,,007766 Revenues from external customers are from sales of goods, royalties and project fees as reflected above. The Group sells its products and services to external customers who are largely located in the United States of America (the “USA”) as reflected in the sales above. Sales to the global market outside of the USA are growing. For the purpose of the internal reporting provided to the chief operating decision makers, business activities, performances and any associated assets and liabilities are reviewed as a consolidated group. Revenues of approximately $11,811,000 (2020: $13,576,000) are derived from a single external customer, being sales of products and services to TELA Bio, which is the Group’s USA sales and distribution partner. The Group held all of its non-current assets in New Zealand with an exception of the right-of-use assets of approximately $0.2m for the leasehold property in the USA. Other income The Group received subsidies and business support measures from the New Zealand and USA governments during the reporting period totalling $1.3 million (2020: $nil). 39 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 44.. OOppeerraattiinngg lloossss bbeeffoorree nneett ffiinnaanncciinngg ccoossttss Operating loss before net financing costs includes the following: Fair value adjustments to financial liabilities at FVTPL 11 Transaction costs relating to IPO Auditor's fees: Statutory audit Other assurance engagements: Half-year review Research and development review Raw materials and consumables Depreciation: Research and development Right of use assets Other Directors' fees Insurance Rental lease costs – low value and short-term leases Amortisation: Patents Customer relationships and reacquired rights Research and development * 22002211 $$000000 8,013 1,607 128 54 5 22002200 $$000000 1,006 850 84 45 5 2,865 2,959 14,20 24 15 15 451 666 747 389 756 121 54 1,161 5,974 323 438 776 295 356 118 45 1,161 4,719 * Total research & development expenditure is $6,425,000 (2020: $5,042,000). It includes an amount of $271,000 (2020: $101,000) funded by third parties outside of the Group. The balance of $6,154,000 (2020: $4,941,000) has been recognised in accordance with the Ministerial Direction/New Zealand Gazette, No 146. All research & development has been expensed in accordance with New Zealand Equivalent to International Accounting Standard 38 – Intangible Assets (‘NZ IAS 38’). 77.. OOtthheerr lloosssseess 77.. OOtthheerr lloosssseess 55.. EEmmppllooyyeeee bbeenneeffiitt eexxppeennsseess Salaries & wages (including bonuses) Employer contributions defined contribution Superannuation scheme inclusive of tax Share based payments - employee share ownership plan Share based payments - share options plan TToottaall eemmppllooyyeeee bbeenneeffiitt eexxppeennsseess 22002211 $$000000 16,166 652 96 1,889 1188,,880033 22002200 $$000000 10,015 218 4 414 1100,,665511 Employee entitlements includes an amount of $3,070,600 (2020: $2,256,820) disclosed as part of research and development expenditures in Note 4 and includes an amount of $304,846 (2020: $57,264) relating to share-based payments for shares issued to the Directors as disclosed in Note 22. 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Continued) For the year ended 31 March 2021 For the year ended 31 March 2021 66.. NNeett ffiinnaannccee iinnccoommee//((eexxppeennsseess)) 66.. NNeett ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Finance income and finance expenses have been accrued to reporting date using the effective interest method. Finance income and finance expenses have been accrued to reporting date using the effective interest method. NNoottee NNoottee 20 20 22002211 22002211 $$000000 $$000000 154 115544 154 115544 (23) (1,478) (23) (406) (1,478) ((11,,990077)) (406) ((11,,990077)) (1,096) (1,096) 1,742 1,742 (4) 664422 (4) 664422 ((11,,111111)) ((11,,111111)) 22002200 22002200 $$000000 $$000000 3 33 3 33 (112) (2,729) (112) (2,729) (128) ((22,,996699)) (128) ((22,,996699)) 2,288 (2,635) 2,288 (2,635) (4) ((335511)) (4) ((335511)) ((33,,331177)) ((33,,331177)) 22002211 $$000000 22002211 $$000000 (8,013) (8,013) ((88,,001133)) ((88,,001133)) 22002200 22002200 $$000000 $$000000 (1,006) (1,006) ((11,,000066)) ((11,,000066)) FFiinnaannccee iinnccoommee –– aasssseettss aatt aammoorrttiisseedd ccoosstt Interest received on bank balances FFiinnaannccee iinnccoommee –– aasssseettss aatt aammoorrttiisseedd ccoosstt TToottaall ffiinnaannccee iinnccoommee Interest received on bank balances TToottaall ffiinnaannccee iinnccoommee FFiinnaannccee eexxppeennsseess –– lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt Interest expenses – borrowings FFiinnaannccee eexxppeennsseess –– lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt Interest expenses – deferred consideration Interest expenses – borrowings Interest expenses – lease liabilities Interest expenses – deferred consideration TToottaall ffiinnaannccee eexxppeennsseess Interest expenses – lease liabilities TToottaall ffiinnaannccee eexxppeennsseess OOtthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Foreign currency (losses)/gains OOtthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Foreign currency gains/(losses) on deferred consideration Foreign currency (losses)/gains Finance cost – make good provision Foreign currency gains/(losses) on deferred consideration TToottaall ootthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Finance cost – make good provision TToottaall ootthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) NNeett ffiinnaannccee eexxppeennsseess NNeett ffiinnaannccee eexxppeennsseess Interest expenses on deferred consideration relates to the deferred consideration of $1,478,000 (2020: $2,729,000) owing to Hollister for the purchase of the Wound Care business. Refer to Note 18. Interest expenses on deferred consideration relates to the deferred consideration of $1,478,000 (2020: $2,729,000) owing to Hollister for the purchase of the Wound Care business. Refer to Note 18. Foreign currency gains on deferred consideration of $1,742,000 (2020: losses of $2,635,000) relates to the loan from Hollister for the purchase of the Wound Care business. Refer to Note 18. Foreign currency gains on deferred consideration of $1,742,000 (2020: losses of $2,635,000) relates to the loan from Hollister for the purchase of the Wound Care business. Refer to Note 18. Fair value adjustment on financial liabilities at FVTPL (refer to Fair value adjustment on financial liabilities at FVTPL (refer to Note 11) TToottaall ootthheerr lloosssseess Note 11) TToottaall ootthheerr lloosssseess 88.. 88.. IInnccoommee ttaaxxeess IInnccoommee ttaaxxeess income. income. Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates years. Current tax includes any tax liability arising from the declaration of dividends. enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax includes any tax liability arising from the declaration of dividends. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business • combination and that affects neither accounting nor taxable profit or loss; temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences arising on the initial recognition of goodwill; and temporary differences arising on the initial recognition of goodwill; and temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, probable that they will not reverse in the foreseeable future. using tax rates enacted or substantively enacted at the reporting date. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. • • • • • NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Continued) For the year ended 31 March 2021 For the year ended 31 March 2021 66.. NNeett ffiinnaannccee iinnccoommee//((eexxppeennsseess)) 66.. NNeett ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Finance income and finance expenses have been accrued to reporting date using the effective interest method. Finance income and finance expenses have been accrued to reporting date using the effective interest method. 22002200 22002211 NNoottee NNoottee FFiinnaannccee iinnccoommee –– aasssseettss aatt aammoorrttiisseedd ccoosstt Interest received on bank balances FFiinnaannccee iinnccoommee –– aasssseettss aatt aammoorrttiisseedd ccoosstt TToottaall ffiinnaannccee iinnccoommee Interest received on bank balances TToottaall ffiinnaannccee iinnccoommee FFiinnaannccee eexxppeennsseess –– lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt Interest expenses – borrowings FFiinnaannccee eexxppeennsseess –– lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt Interest expenses – deferred consideration Interest expenses – borrowings Interest expenses – lease liabilities Interest expenses – deferred consideration TToottaall ffiinnaannccee eexxppeennsseess Interest expenses – lease liabilities TToottaall ffiinnaannccee eexxppeennsseess OOtthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Foreign currency (losses)/gains OOtthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Foreign currency gains/(losses) on deferred consideration Foreign currency (losses)/gains Finance cost – make good provision Foreign currency gains/(losses) on deferred consideration TToottaall ootthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) Finance cost – make good provision TToottaall ootthheerr ffiinnaannccee iinnccoommee//((eexxppeennsseess)) NNeett ffiinnaannccee eexxppeennsseess NNeett ffiinnaannccee eexxppeennsseess 20 20 22002211 $$000000 $$000000 154 115544 154 115544 (23) (1,478) (23) (406) (1,478) ((11,,990077)) (406) ((11,,990077)) (1,096) 1,742 (1,096) (4) 1,742 664422 (4) 664422 ((11,,111111)) ((11,,111111)) 22002200 $$000000 $$000000 3 33 3 33 (112) (2,729) (112) (128) (2,729) ((22,,996699)) (128) ((22,,996699)) 2,288 (2,635) 2,288 (4) (2,635) ((335511)) (4) ((335511)) ((33,,331177)) ((33,,331177)) Interest expenses on deferred consideration relates to the deferred consideration of $1,478,000 (2020: $2,729,000) owing to Hollister for the purchase of the Wound Care business. Refer to Note 18. Interest expenses on deferred consideration relates to the deferred consideration of $1,478,000 (2020: $2,729,000) owing to Hollister for the purchase of the Wound Care business. Refer to Note 18. Foreign currency gains on deferred consideration of $1,742,000 (2020: losses of $2,635,000) relates to the loan from Hollister for the purchase of the Wound Care business. Refer to Note 18. Foreign currency gains on deferred consideration of $1,742,000 (2020: losses of $2,635,000) relates to the loan from Hollister for the purchase of the Wound Care business. Refer to Note 18. 77.. OOtthheerr lloosssseess 77.. OOtthheerr lloosssseess Fair value adjustment on financial liabilities at FVTPL (refer to Note 11) Fair value adjustment on financial liabilities at FVTPL (refer to TToottaall ootthheerr lloosssseess Note 11) TToottaall ootthheerr lloosssseess 22002211 22002211 $$000000 $$000000 (8,013) (8,013) ((88,,001133)) ((88,,001133)) 22002200 22002200 $$000000 $$000000 (1,006) (1,006) ((11,,000066)) ((11,,000066)) 88.. 88.. IInnccoommee ttaaxxeess IInnccoommee ttaaxxeess Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except income. to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates years. Current tax includes any tax liability arising from the declaration of dividends. enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax includes any tax liability arising from the declaration of dividends. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; • temporary differences arising on the initial recognition of goodwill; and • temporary differences arising on the initial recognition of goodwill; and • temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. • temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. 41 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 88.. IInnccoommee ttaaxxeess ((ccoonnttiinnuueedd)) In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Group to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised, such reductions are reversed when the probability of future taxable profits improves. Income tax recognised in profit or loss and other comprehensive income Reconciliation of income tax expense Accounting loss before income tax Income Tax @ 28% Impact of tax rates in overseas jurisdictions Expenses not deductible for tax purposes Foreign tax credits forfeited Income not subject to tax Recognition/derecognition of previously unrecognised deferred tax on temporary differences and tax losses Tax losses not recognised in current year IInnccoommee TTaaxx ((CCrreeddiitt)) Major components of tax expense/(income) CCuurrrreenntt ttaaxx eexxppeennssee//((ccrreeddiitt)) Current period R&D tax credit TToottaall ccuurrrreenntt ttaaxx bbeenneeffiitt Deferred tax (income) TToottaall ttaaxx eexxppeennssee//((iinnccoommee)) 22002211 $$000000 (19,102) (5,349) 110 3,225 - - 2,121 - 110077 22002211 $$000000 107 - -- - 110077 22002200 $$000000 (6,160) (1,725) (13) 1,159 150 (700) 74 853 ((220022)) 22002200 $$000000 274 (476) ((220022)) - ((220022)) As at 31 March 2021, the Company had tax losses of $14,587,081 (2020: $12,412,226). Utilisation of these tax losses is dependent upon the Group meeting the continuity of ownership provisions of the Income Tax Act 2007 and carrying forward and offsetting the net losses against net taxable income earned in subsequent years by the Group. The Group has elected to defer expenditure relating to research and development allowed under section DB34 of the Income Tax Act 2007. As at 31 March 2021, the Group had $12,100,040 (2020: $7,202,587) of expenditure available to offset against subsequent years income subject to section EJ23 of the Income Tax Act 2007. Deferred tax assets have been recognised to the extent they offset deferred tax liabilities. No additional deferred tax has been recognised on tax losses or deferred research and development expenditure in 2021 on the basis that large tax profits are not foreseeable in the year ending 31 March 2022. 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 88.. IInnccoommee ttaaxxeess ((ccoonnttiinnuueedd)) Deferred tax assets/(liabilities) recognised: Accrued revenue Deferred R&D expenditure Intangible assets Other Provision Unused tax losses TToottaall ddeeffeerrrreedd ttaaxx aasssseett//((lliiaabbiilliittyy)) rreeccooggnniisseedd Movement in deferred tax assets/(liabilities) recognised Opening balance Arising on acquisitions Credited to profit or loss for previously unrecognised temporary difference and tax losses TToottaall ddeeffeerrrreedd ttaaxx aasssseett//((lliiaabbiilliittyy)) uunnrreeccooggnniisseedd ((ttaaxx eeffffeecctteedd)) Deferred tax assets/(liabilities) unrecognised (tax effected) Temporary differences Deferred R&D expenditure Unused tax losses TToottaall ddeeffeerrrreedd ttaaxx aasssseett//((lliiaabbiilliittyy)) uunnrreeccooggnniisseedd ((ttaaxx eeffffeecctteedd)) 99.. CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss && tteerrmm ddeeppoossiittss 22002211 $$000000 (872) 2,870 (3,319) 856 465 - - 22002211 $$000000 - - - - 22002211 $$000000 531 519 4,084 55,,113344 22002200 $$000000 (458) 2,017 (3,644) (462) 277 2,270 - 22002200 $$000000 - - - - 22002200 $$000000 384 - 1,206 11,,559900 Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and other short-term deposits with maturities of three months or less and bank overdrafts. Bank balances Total cash and cash equivalents 22002211 $$000000 15,381 1155,,338811 22002200 $$000000 3,850 33,,885500 Prior to 1 May 2020, the cash balances included an amount held within a Deposit Control Account where the Group is permitted to withdraw 70% of the value of the deposits to such account, leaving 30% of the deposit value to serve as security for the payment toward deferred consideration. On 1 May 2020, the Group renegotiated the terms of its existing borrowing with Hollister. As a result, the 30% deposit value is no longer required to be escrowed as a security to Hollister. Refer to Note 18. During the year, the Group entered into short-term deposit arrangements with the Bank of New Zealand and ASB Bank for $10 million each at the average rate of 1.09% per annum. These deposits have a maturity of 6 months from February 2021. Term deposits Total term deposits 22002211 $$000000 20,000 2200,,000000 22002200 $$000000 - -- 43 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1100.. FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee The Group classifies the following financial assets at fair value through other comprehensive income (“FVTOCI”): - Equity investments for which the Group has elected to recognise fair value gains or losses through other comprehensive income. Financial assets measured at FVTOCI include the following: US listed equity securities TToottaall ffiinnaanncciiaall aasssseettss aatt FFVVTTOOCCII 22002211 $$000000 1,584 11,,558844 22002200 $$000000 969 996699 The USA listed equity securities comprise of the Group’s investment in TELA Bio. In November 2019, TELA Bio listed on the NASDAQ. The Group held 74,316 shares at a value of US$14.90 per share as at the reporting date (2020: US$7.82). The fair value of the listed equity securities is based on published market price (level 1 in the fair value hierarchy) and is revalued at reporting date. 1111.. FFiinnaanncciiaall lliiaabbiilliittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss The Group issued Series C (3) Preference shares during the reporting period and received $19,804,000 as consideration for the shares issued. Whilst these Preference shares can only convert into share capital, the terms of the offer include multiple embedded derivatives (variable number of shares to be issued) and as a result, these shares do not meet the definition of equity per NZ IAS 32. Management elected that the entire instrument was designated as fair value through profit or loss (“FVTPL”), through the designation exemption as allowed in NZ IFRS 9. With the exception of conversion rights, all other rights attached to these shares are consistent with Series C Preference shares (refer to Note 21). At initial recognition, the instrument was measured at transaction price, represented by the fair value of consideration given or received in exchange for the financial instrument. Its transaction costs were immediately recognised in profit or loss as the instrument is carried at FVTPL. The fair value is determined in accordance with NZ IFRS 13 Fair Value Measurement. The Group does not recognise a gain or loss on initial recognition of the financial liabilities because the fair value is neither evidenced by a quoted price in an active market for an identical liability (i.e. a level 1 input) nor based on a valuation technique that uses only data from observable markets. The difference between the fair value at initial recognition and the transaction price is recognised in profit or loss on a straight-line basis over the estimated life of the liability, with the aggregate difference yet to be recognised in profit or loss being held off the consolidated statement of financial position. The change between the initial fair value and fair value at reporting date is recognised in profit or loss (refer to Note 7). When valuing the instrument, management exercised judgement to estimate the probabilities of different scenarios allowed for in the terms of the offer to determine the period over which the fair value adjustments would be recognised in profit or loss on a straight-line basis. OOppeenniinngg ffiinnaanncciiaall lliiaabbiilliittiieess aatt FFVVTTPPLL aatt 11 AApprriill 22002200 Transaction price Transaction price - Series C(3) Transaction costs - Series C(3) Fair value change during the period Reclassification to equity CClloossiinngg ffiinnaanncciiaall lliiaabbiilliittiieess aatt FFVVTTPPLL aatt 3311 MMaarrcchh 22002211 NNootteess 22002211 $$000000 66,,882277 - 19,804 (811) 8,013 21 (33,833) -- 22002200 $$000000 -- 5,821 - - 1,006 - 66,,882277 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1100.. FFiinnaanncciiaall aasssseettss aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee 1122.. TTrraaddee aanndd ootthheerr rreecceeiivvaabblleess The Group classifies the following financial assets at fair value through other comprehensive income (“FVTOCI”): - Equity investments for which the Group has elected to recognise fair value gains or losses through other comprehensive income. Financial assets measured at FVTOCI include the following: US listed equity securities TToottaall ffiinnaanncciiaall aasssseettss aatt FFVVTTOOCCII US$7.82). and is revalued at reporting date. The USA listed equity securities comprise of the Group’s investment in TELA Bio. In November 2019, TELA Bio listed on the NASDAQ. The Group held 74,316 shares at a value of US$14.90 per share as at the reporting date (2020: The fair value of the listed equity securities is based on published market price (level 1 in the fair value hierarchy) 22002211 $$000000 1,584 11,,558844 22002200 $$000000 969 996699 1111.. FFiinnaanncciiaall lliiaabbiilliittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss The Group issued Series C (3) Preference shares during the reporting period and received $19,804,000 as consideration for the shares issued. Whilst these Preference shares can only convert into share capital, the terms of the offer include multiple embedded derivatives (variable number of shares to be issued) and as a result, these shares do not meet the definition of equity per NZ IAS 32. Management elected that the entire instrument was designated as fair value through profit or loss (“FVTPL”), through the designation exemption as allowed in NZ IFRS 9. With the exception of conversion rights, all other rights attached to these shares are consistent with Series C Preference shares (refer to Note 21). Measurement. At initial recognition, the instrument was measured at transaction price, represented by the fair value of consideration given or received in exchange for the financial instrument. Its transaction costs were immediately recognised in profit or loss as the instrument is carried at FVTPL. The fair value is determined in accordance with NZ IFRS 13 Fair Value The Group does not recognise a gain or loss on initial recognition of the financial liabilities because the fair value is neither evidenced by a quoted price in an active market for an identical liability (i.e. a level 1 input) nor based on a valuation technique that uses only data from observable markets. The difference between the fair value at initial recognition and the transaction price is recognised in profit or loss on a straight-line basis over the estimated life of the liability, with the aggregate difference yet to be recognised in profit or loss being held off the consolidated statement of financial position. 7). The change between the initial fair value and fair value at reporting date is recognised in profit or loss (refer to Note When valuing the instrument, management exercised judgement to estimate the probabilities of different scenarios allowed for in the terms of the offer to determine the period over which the fair value adjustments would be recognised in profit or loss on a straight-line basis. OOppeenniinngg ffiinnaanncciiaall lliiaabbiilliittiieess aatt FFVVTTPPLL aatt 11 AApprriill 22002200 Transaction price Transaction price - Series C(3) Transaction costs - Series C(3) Fair value change during the period Reclassification to equity NNootteess 22002211 $$000000 66,,882277 - 19,804 (811) 8,013 22002200 $$000000 5,821 1,006 -- - - - 21 (33,833) CClloossiinngg ffiinnaanncciiaall lliiaabbiilliittiieess aatt FFVVTTPPLL aatt 3311 MMaarrcchh 22002211 -- 66,,882277 Trade and other receivables are recognised initially at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method less provision for impairment. The Group applies the NZ IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. Trade receivables Less provision for impairment of trade receivables NNeett ttrraaddee rreecceeiivvaabblleess Prepayments Other receivables Other receivables – Revenue share Other receivables – Grant accrual TToottaall ccuurrrreenntt ttrraaddee aanndd ootthheerr rreecceeiivvaabblleess Prepayments TToottaall nnoonn--ccuurrrreenntt pprreeppaayymmeennttss 22002211 $$000000 2,790 (10) 22,,778800 918 573 3,116 719 88,,110066 22002211 $$000000 171 117711 22002200 $$000000 4,443 (20) 44,,442233 576 49 2,090 378 77,,551166 22002200 $$000000 193 119933 Trade receivables amounting to $2,780,000 (2020: $4,423,000) are shown net of impairment losses. Provisions have been made appropriately after considering the impact of COVID-19. Trade receivables are interest free. Trade receivables of a short-term duration are not discounted. Other receivables include Callaghan Innovation grant accrual, accrued revenue share from TELA Bio which is based on the historical performance and trends. The Group has a high probability of receiving this revenue share. The non-current portion of prepayment relates to the Group’s contract with Watercare for its access to water and associated investments made in its premises. The prepayment is amortised over the same period that the premises are leased by the Group. (i) Impaired receivables As at 31 March 2021, current trade receivables with a nominal value of $10,000 (2020: $19,568) were impaired and provided for. (ii) Past due but not impaired receivables As at 31 March 2021, trade receivables of $135,000 (2020: $1,307,420) were past due but not impaired. The ageing analysis of trade receivables is as follows: Current 1 - 30 days overdue 30 - 60 days overdue 60 - 90 days overdue 90+ days overdue TToottaall ttrraaddee rreecceeiivvaabblleess 22002211 $$000000 2,645 88 49 2 6 22002200 $$000000 3,116 1,249 52 6 20 22,,779900 44,,444433 45 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1133.. IInnvveennttoorriieess Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and costs to sell. An inventory provision is created to reflect instances where the estimated selling price is lower than costs. Raw materials Work in progress Finished goods Provision for obsolescence TToottaall iinnvveennttoorriieess 22002211 $$000000 539 1,436 1,913 (280) 33,,660088 22002200 $$000000 576 1,433 2,167 (171) 44,,000055 As at 31 March 2021, inventories of $279,832 (2020: $170,632) value were impaired and provided for. 1144.. PPrrooppeerrttyy,, ppllaanntt && eeqquuiippmmeenntt (i) Recognition and measurement Items of plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. (ii) Subsequent expenditure Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group. (iii) Depreciation For plant and equipment, depreciation is based on the cost of an asset less its residual value. Where significant components of individual assets that have a useful life that is different from the remainder of those assets, those components are depreciated separately. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. Assets under construction are not subject to depreciation. The useful life estimate for the current year of significant items of property, plant and equipment are as follows: 10 years Leasehold improvements 4 - 11 years Plant & equipment Fixtures & fittings 3 - 10 years Computer equipment & software 3 - 4 years 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1144.. PPrrooppeerrttyy,, ppllaanntt && eeqquuiippmmeenntt ((ccoonnttiinnuueedd)) Depreciation methods, rates and residual values are reviewed at reporting date and adjusted if appropriate. Certain plant and equipment were pledged as collateral to secure a loan facility with the Bank of New Zealand. The facility had a limit of $1,326,121 of which $nil was drawn as of 31 March 2021 (2020: $1,718,982). Refer Note 18. LLeeaassee--hhoolldd IImmpprroovvee-- mmeennttss CCaappiittaall WWoorrkk IInn PPrrooggrreessss PPllaanntt aanndd EEqquuiippmmeenntt FFiixxttuurree && FFiittttiinngg CCoommppuutteerr EEqquuiippmmeenntt && SSooffttwwaarree $$000000 $$000000 $$000000 $$000000 $$000000 1,472 114 - - 11,,558866 (945) (54) - ((999999)) 527 558877 807 458 (808) - 445577 7,506 249 808 (4) 88,,555599 - - - -- (2,738) (825) 4 ((33,,555599)) 807 445577 4,768 55,,000000 436 149 - - 558855 (161) (46) - ((220077)) 275 337788 698 270 - - 996688 (516) (167) - ((668833)) 182 228855 TToottaall $$000000 10,919 1,240 - (4) 1122,,115555 (4,360) (1,092) 4 ((55,,444488)) 6,559 66,,770077 CCoosstt Balance 1 April 2020 Additions Transfers in/ (out) Disposals BBaallaannccee 3311 MMaarrcchh 22002211 AAccccuummuullaatteedd DDeepprreecciiaattiioonn Balance 1 April 2020 Depreciation Disposals BBaallaannccee 3311 MMaarrcchh 22002211 NNeett BBooookk VVaalluuee Balance 1 April 2020 BBaallaannccee 3311 MMaarrcchh 22002211 LLeeaassee--hhoolldd IImmpprroovvee-- mmeennttss CCaappiittaall WWoorrkk IInn PPrrooggrreessss PPllaanntt aanndd EEqquuiippmmeenntt FFiixxttuurree && FFiittttiinngg CCoommppuutteerr EEqquuiippmmeenntt && SSooffttwwaarree TToottaall $$000000 $$000000 $$000000 $$000000 $$000000 $$000000 1,590 28 (146) -- 11,,447722 (821) (124) ((994455)) 667 897 (757) -- 880077 6,283 504 757 (38) 77,,550066 - - -- (1,985) (753) ((22,,773388)) 769 552277 667 880077 4,298 44,,776688 229 207 -- -- 443366 (75) (86) ((116611)) 154 227755 569 129 -- -- 669988 9,338 1,765 (146) (38) 1100,,991199 (370) (146) (3,251) (1,109) ((551166)) ((44,,336600)) 199 118822 6,087 66,,555599 CCoosstt Balance 1 April 2019 Additions Transfer in/(out) Disposals BBaallaannccee 3311 MMaarrcchh 22002200 AAccccuummuullaatteedd DDeepprreecciiaattiioonn Balance 1 April 2019 Depreciation BBaallaannccee 3311 MMaarrcchh 22002200 NNeett BBooookk VVaalluuee Balance 1 April 2019 BBaallaannccee 3311 MMaarrcchh 22002200 47 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1155.. IInnttaannggiibbllee aasssseettss Patents that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss as incurred. Trademarks have finite useful lives and are measured at cost less accumulated amortisation and accumulated impairment losses. Patent and trademark costs are amortised on a straight-line basis over the useful life. Goodwill, customer relationships and reacquired rights are attributable to the purchase of the wound care business entered into between the Group and Hollister Incorporated. Goodwill is not amortised. Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units (“CGUs”). Goodwill is allocated on initial recognition to each of the Group's CGUs that are expected to benefit from a business combination that gives rise to the goodwill. Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Customer relationships and reacquired rights are amortised on a straight-line basis in profit or loss over their estimated useful lives, from the date that they are available for use. The estimated useful lives for the current period are as follows: Patents and trademarks 8 - 17 years Customer relationships Reacquired rights 9 years 18 years Amortisation methods, rates and residual values are reviewed at reporting date and adjusted if appropriate. Currently no development expenditure is capitalised (refer to Note 4) PPaatteenntt && TTrraaddeemmaarrkk $$000000 CCuussttoommeerr RReellaattiioonnsshhiippss $$000000 RReeaaccqquuiirreedd rriigghhttss $$000000 5,563 - 55,,556633 9,772 - 99,,777722 GGooooddwwiillll $$000000 5,538 - 55,,553388 TToottaall $$000000 21,576 235 2211,,881111 CCoosstt Balance 1 April 2020 Additions BBaallaannccee 3311 MMaarrcchh 22002211 AAccccuummuullaatteedd AAmmoorrttiissaattiioonn Balance 1 April 2020 Amortisation BBaallaannccee 3311 MMaarrcchh 22002211 NNeett BBooookk VVaalluuee Balance 1 April 2020 BBaallaannccee 3311 MMaarrcchh 22002211 703 235 993388 (197) (54) ((225511)) 506 668877 48 (1,236) (618) ((11,,885544)) (1,086) (543) ((11,,662299)) - - -- (2,519) (1,215) ((33,,773344)) 4,327 33,,770099 8,686 88,,114433 5,538 55,,553388 19,057 1188,,007777 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1155.. IInnttaannggiibbllee aasssseettss ((ccoonnttiinnuueedd)) CCoosstt Balance 1 April 2019 Additions BBaallaannccee 3311 MMaarrcchh 22002200 AAccccuummuullaatteedd AAmmoorrttiissaattiioonn Balance 1 April 2019 Amortisation BBaallaannccee 3311 MMaarrcchh 22002200 NNeett BBooookk VVaalluuee Balance 1 April 2019 BBaallaannccee 3311 MMaarrcchh 22002200 524 179 770033 (152) (45) ((119977)) 372 550066 PPaatteenntt && TTrraaddeemmaarrkk $$000000 CCuussttoommeerr rreellaattiioonnsshhiippss $$000000 RReeaaccqquuiirreedd rriigghhttss $$000000 5,563 - 55,,556633 9,772 - 99,,777722 GGooooddwwiillll $$000000 5,538 - 55,,553388 TToottaall $$000000 21,397 179 2211,,557766 (618) (618) (543) (543) ((11,,223366)) ((11,,008866)) - - -- (1,313) (1,206) ((22,,551199)) 4,945 44,,332277 9,229 88,,668866 5,538 55,,553388 20,084 1199,,005577 On 31 March 2021, the Group tested whether goodwill has suffered any impairment. For the purpose of impairment testing, goodwill is allocated to the Group’s Wound Care business, at which goodwill is monitored for internal management purposes. The recoverable amount is determined based on value in use calculations using the method of estimating future cash flows and determining a discount rate in order to calculate the present value of the cash flows (2020: the recoverable amount was determined by using fair value less cost of disposal). A discounted cash flow (“DCF”) model has been based on five-year forecast cash flow projections. The budget for the year ending 31 March 2022 was the basis for the first year’s projections and projections for subsequent years have been based on the Group’s long-term outlook. Other key assumptions are as follows: Discount rate post tax Terminal growth rate Revenue growth rate p.a. Gross margin % 22002211 10.0% 2.5% 25%-64% 72%-82% No impairment was identified for the Wound Care business as a result of this review, nor under any reasonable possible change, in any of the key assumptions described above. The estimated recoverable amount of the Wound Care business exceeds its carrying value of $17.4 million. The projected EBITDA for the Wound Care business is forecast to become positive and increase significantly over the forecast period. 49 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1166.. TTrraaddee aanndd ootthheerr ppaayyaabblleess 1188.. IInntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss ((ccoonnttiinnuueedd)) Trade and other payables are initially recognised at fair value plus directly attributable transaction costs and subsequently at amortised cost. Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. Bank Loan Trade payables Accrued expenses Other payables TToottaall ttrraaddee aanndd ootthheerr ppaayyaabblleess 22002211 $$000000 740 1,977 27 22,,774444 22002200 $$000000 1,201 3,079 30 44,,331100 Trade payables generally have terms of 30 days and are interest free. Trade payables of a short-term duration are not discounted. The accrued expenses include chargeback and rebates accrual and distribution charges. Carrying amounts of interest-bearing liabilities are equivalent to their fair values, as they are at floating rates. 1177.. EEmmppllooyyeeee bbeenneeffiittss (i) Short term employee benefits Liabilities for wages and salaries, including non-monetary benefits and accumulating annual leave that is expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The obligations are presented as other payables and accruals in the statement of financial position if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. (ii) Defined contribution plans Obligations for contributions to defined contribution plans are expensed as the related service is provided. 1188.. IInntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss Interest bearing liabilities are initially recognised at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit and loss over the period of the borrowings using the effective interest method. Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Interest-bearing loans and borrowings Deferred consideration TToottaall iinntteerreesstt bbeeaarriinngg lliiaabbiilliittiieess –– ccuurrrreenntt Interest-bearing loans and borrowings Deferred consideration TToottaall iinntteerreesstt bbeeaarriinngg lliiaabbiilliittiieess –– nnoonn--ccuurrrreenntt 22002211 $$000000 - 9,952 99,,995522 - - -- 22002200 $$000000 841 21,682 2222,,552233 1,119 - 11,,111199 At the reporting date, the weighted average interest rate of interest-bearing loan is 6.50% p.a. (2020: 6.06% p.a.). The balance of the deferred consideration incurs interest compounding annually from 1 July 2020 at a rate equal to the Wall Street Journal prime rate plus 3%. On 1 May 2020, the Group renegotiated the terms of its existing borrowing with Hollister. As a result, the final repayment date has been moved to 31 March 2022 and the Group repaid approximately $10 million being 50% of the balance outstanding as at 30 April 2020 including the accrued interest. Additionally, the Group was released from its obligation to maintain 30% of its Wound Care customer receipts on escrow, as security to Hollister. 50 Total interest-bearing loans and borrowings included secured liabilities of $1,718,982 in 2020, which is no longer utilised as of 31 March 2021. The bank facility is secured by all present and after acquired property of the Group. As at 31 March 2021, the Group’s Credit Plus facility had a limit of $1,326,121 (2020: $1,761,468), of which $1,326,121 (2020: $42,486) was unused and $nil (2020: $1,718,982) was used, secured by assets owned by the Group. Refer The Group cancelled its overdraft facility of $2,000,000 and its committed cash advance facility of $4,000,000 during the reporting period, as these were no longer required. i) Unused lines of credit to Note 14. ii) Fair value 1199.. RRiigghhtt ooff uussee aasssseettss As at 1 April 2020 Additions Depreciation Modification adjustment AAss aatt 3311 MMaarrcchh 22002211 Balance 1 April 2019 Addition Modification adjustment* Depreciation Rent incentives Make good provision (refer to Note 14) BBaallaannccee 3311 MMaarrcchh 22002200 2200.. LLeeaassee lliiaabbiilliittiieess As at 1 April 2020 Additions Modification Adjustment Interest expenses Lease payments AAss aatt 3311 MMaarrcchh 22002211 Current Non-current TToottaall PPrrooppeerrttiieess EEqquuiippmmeenntt PPrrooppeerrttiieess EEqquuiippmmeenntt PPrrooppeerrttiieess EEqquuiippmmeenntt $$000000 2,154 4,431 (721) 87 55,,995511 $$000000 2,411 285 (244) (409) (35) 146 22,,115544 $$000000 2,063 4,431 87 409 (708) 66,,228822 566 5,716 66,,228822 $$ 000000 21 (21) - - -- - 1 - - - - 1 -- - - -- $$000000 49 (29) 2211 $$000000 22 (23) TToottaall $$000000 2,175 4,431 (742) 87 55,,995511 TToottaall $$000000 2,460 285 (243) (438) (35) 146 22,,117755 TToottaall $$000000 2,085 4,431 87 410 (731) 66,,228822 566 5,716 66,,228822 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1166.. TTrraaddee aanndd ootthheerr ppaayyaabblleess Trade and other payables are initially recognised at fair value plus directly attributable transaction costs and subsequently at amortised cost. Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. 22002211 $$000000 740 1,977 27 22,,774444 22002200 $$000000 1,201 3,079 30 44,,331100 Trade payables Accrued expenses Other payables TToottaall ttrraaddee aanndd ootthheerr ppaayyaabblleess 1177.. EEmmppllooyyeeee bbeenneeffiittss (i) Short term employee benefits Trade payables generally have terms of 30 days and are interest free. Trade payables of a short-term duration are not discounted. The accrued expenses include chargeback and rebates accrual and distribution charges. Liabilities for wages and salaries, including non-monetary benefits and accumulating annual leave that is expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The obligations are presented as other payables and accruals in the statement of financial position if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. (ii) Defined contribution plans Obligations for contributions to defined contribution plans are expensed as the related service is provided. 1188.. IInntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss Interest bearing liabilities are initially recognised at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit and loss over the period of the borrowings using the effective interest method. Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Interest-bearing loans and borrowings Deferred consideration TToottaall iinntteerreesstt bbeeaarriinngg lliiaabbiilliittiieess –– ccuurrrreenntt Interest-bearing loans and borrowings Deferred consideration TToottaall iinntteerreesstt bbeeaarriinngg lliiaabbiilliittiieess –– nnoonn--ccuurrrreenntt 22002211 $$000000 - 9,952 99,,995522 22002200 $$000000 841 21,682 2222,,552233 - - -- - 1,119 11,,111199 At the reporting date, the weighted average interest rate of interest-bearing loan is 6.50% p.a. (2020: 6.06% p.a.). The balance of the deferred consideration incurs interest compounding annually from 1 July 2020 at a rate equal to the Wall Street Journal prime rate plus 3%. On 1 May 2020, the Group renegotiated the terms of its existing borrowing with Hollister. As a result, the final repayment date has been moved to 31 March 2022 and the Group repaid approximately $10 million being 50% of the balance outstanding as at 30 April 2020 including the accrued interest. Additionally, the Group was released from its obligation to maintain 30% of its Wound Care customer receipts on escrow, as security to Hollister. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 1188.. IInntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss ((ccoonnttiinnuueedd)) Bank Loan Total interest-bearing loans and borrowings included secured liabilities of $1,718,982 in 2020, which is no longer utilised as of 31 March 2021. The bank facility is secured by all present and after acquired property of the Group. i) Unused lines of credit As at 31 March 2021, the Group’s Credit Plus facility had a limit of $1,326,121 (2020: $1,761,468), of which $1,326,121 (2020: $42,486) was unused and $nil (2020: $1,718,982) was used, secured by assets owned by the Group. Refer to Note 14. The Group cancelled its overdraft facility of $2,000,000 and its committed cash advance facility of $4,000,000 during the reporting period, as these were no longer required. ii) Fair value Carrying amounts of interest-bearing liabilities are equivalent to their fair values, as they are at floating rates. 1199.. RRiigghhtt ooff uussee aasssseettss As at 1 April 2020 Additions Depreciation Modification adjustment AAss aatt 3311 MMaarrcchh 22002211 Balance 1 April 2019 Addition Modification adjustment* Depreciation Rent incentives Make good provision (refer to Note 14) BBaallaannccee 3311 MMaarrcchh 22002200 2200.. LLeeaassee lliiaabbiilliittiieess As at 1 April 2020 Additions Modification Adjustment Interest expenses Lease payments AAss aatt 3311 MMaarrcchh 22002211 Current Non-current TToottaall PPrrooppeerrttiieess $$000000 EEqquuiippmmeenntt $$ 000000 2,154 4,431 (721) 87 55,,995511 21 - (21) - -- PPrrooppeerrttiieess $$000000 EEqquuiippmmeenntt $$000000 2,411 285 (244) (409) (35) 146 22,,115544 49 - 1 (29) - - 2211 PPrrooppeerrttiieess $$000000 EEqquuiippmmeenntt $$000000 2,063 4,431 87 409 (708) 66,,228822 566 5,716 66,,228822 22 - - 1 (23) -- - - -- TToottaall $$000000 2,175 4,431 (742) 87 55,,995511 TToottaall $$000000 2,460 285 (243) (438) (35) 146 22,,117755 TToottaall $$000000 2,085 4,431 87 410 (731) 66,,228822 566 5,716 66,,228822 51 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2200.. LLeeaassee lliiaabbiilliittiieess ((ccoonnttiinnuueedd)) As at 1 April 2019 Addition Modification adjustment Interests Lease payments AAss aatt 3311 MMaarrcchh 22002200 Current Non-current TToottaall PPrrooppeerrttiieess $$000000 EEqquuiippmmeenntt $$000000 2,411 285 (244) 126 (515) 22,,006633 193 1,870 22,,006633 49 1 2 (30) 2222 22 - 2222 TToottaall $$000000 2,460 285 (243) 128 (545) 22,,008855 215 1,870 22,,008855 NZ IFRS 16 distinguishes between leases and service contracts on the basis of whether the use of an identified asset is controlled by the customer. Control is considered to exist if the customer has the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that asset. All leases are accounted for by recognising a right-of-use asset and a lease liability except for: • Leases of low value assets; and • Leases with a term of 12 months or less. Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group’s incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they are dependent on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate. On initial recognition, the carrying value of the lease liability may also include: • amounts expected to be payable under any residual value guarantee; • the exercise price of any purchase option granted in favour of the Group if it is reasonably certain to exercise that option; • any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised. Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for: • lease payments made at or before commencement of the lease; • initial direct costs incurred; and • the amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset. Subsequent to initial measurement, lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2200.. LLeeaassee lliiaabbiilliittiieess ((ccoonnttiinnuueedd)) When the Group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at a revised discount rate. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised. In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. When the Group renegotiates the contractual terms of a lease with the lessor, the accounting depends on the nature of the modification: • if the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modification is accounted for as a separate lease in accordance with the above policy. • in all other cases where the renegotiated increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modification date, with the right-of-use asset being adjusted by the same amount. • if the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reflect the partial of full termination of the lease with any difference recognised in profit or loss. The lease liability is then further adjusted to ensure its carrying amount reflects the amount of the renegotiated payments over the renegotiated term, with the modified lease payments discounted at the rate applicable on the modification date. The right-of-use asset is adjusted by the same amount. For contracts that both convey a right to the Group to use an identified asset and require services to be provided to the Group by the lessor, the Group has elected to account for the entire contract as a lease, i.e. it does allocate any amount of the contractual payments to, and account separately for, any services provided by the supplier as part of the contract. Nature of leasing activities (in the capacity as lessee) The Group leases two properties in the jurisdictions in which it operates. In some jurisdictions it is customary for lease contracts to provide for payments to increase each year by inflation and in others to be reset periodically to market rental rates. The Group also leases certain items of plant and equipment. As standard industry practice, the Group’s property leases are subject to market rent reviews. A 1% increase in these payments would result an additional $5,000 outflow compared to the current period’s cash outflow. For short term or low-value leases, payments made are recognised in profit or loss on a straight-line basis over the term of the lease. These leases are not recognised in the Group’s consolidated statement of financial position. NNoonn--ccaanncceellllaabbllee ooppeerraattiinngg lleeaassee rreennttaallss aarree ppaayyaabbllee aass ffoolllloowwss:: Less than one year Between one and five years 22002211 $$000000 22002200 $$000000 8 12 28 - 2211.. SShhaarree ccaappiittaall (i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (ii) Preference share capital Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Group’s option, and any dividends are discretionary. Dividends thereon are recognised as distributions within equity upon approval by the Group’s shareholders. Preference share capital is classified as a financial liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognised as an interest expense in profit or loss as accrued. 53 Annual Report 2021 | AROA22002200 $$000000 2288,,888899 - 464 -- 2299,,335533 TToottaall 2,753,314 32,332 22,,778855,,664466 602,407 366,474 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2211.. SShhaarree ccaappiittaall ((ccoonnttiinnuueedd)) (ii) Preference share capital (continued) SShhaarree ccaappiittaall aatt bbeeggiinnnniinngg ooff tthhee yyeeaarr Reclassification of financial liabilities at FVTPL to equity Shares issued from IPO Shares issued from Share Plan and Option Plan SShhaarree ccaappiittaall aatt eenndd ooff tthhee yyeeaarr 22002211 $$000000 2299,,335533 33,833 30,554 3,576 9977,,331166 ## ooff sshhaarreess AAtt 11 AApprriill 22002200 Issue of share capital BBaallaannccee 3311 MMaarrcchh 22002211 Issue of share capital Conversion of Series C(2) & C(3) shares Converted to ordinary shares Impact of share split Issue of share capital post IPO BBaallaannccee 3311 MMaarrcchh 22002211 SSeerriieess CC pprreeffeerreennccee sshhaarreess SSeerriieess BB pprreeffeerreennccee sshhaarreess 257,715 - 225577,,771155 798,088 - 779988,,008888 SSeerriieess AA pprreeffeerreennccee sshhaarreess 1,079,610 - 11,,007799,,661100 - - - - - - OOrrddiinnaarryy sshhaarreess 617,901 32,332 665500,,223333 602,407 366,474 (257,715) (798,088) (1,079,610) 2,135,413 - - - -- - - -- - - -- 296,320,398 296,320,398 651,489 651,489 330000,,772266,,441144 330000,,772266,,441144 Ordinary shares During the reporting period, 602,407 (2020: 32,332) ordinary shares were on issue prior to IPO in July 2020 (i.e. pre- split shares). Upon IPO, all preference shares were converted to ordinary shares and all shares were split at the ratio of 75:1. The impact of splitting upon IPO was an increase in the number of ordinary shares by 296,320,398. Post IPO, additional 651,489 ordinary shares were issued as a result of options being exercised during the year. Unissued and unpaid ordinary shares reserved for issue under the employee share ownership plan is nil shares (2020: 140,095 shares). All classes of shares All ordinary, Series A preference and Series B preference shares carry equal voting rights and have the right to an equal share in dividends authorised by the board (except for unpaid or partially paid ordinary shares issued under the employee share ownership plan). All preference shares All preference shares were converted to ordinary shares during the reporting period. Warrants There are no share warrants outstanding as of the reporting date. Options There are 3,488,750 vested options and 8,381,025 unvested options as of the reporting date. Refer to Note 22. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2222.. SShhaarree bbaasseedd ppaayymmeennttss rreesseerrvvee Share ownership plan The Group offered selected employees in 2014 the opportunity to participate in an employee share ownership plan (ESOP). During the reporting period, all shares were fully exercised or forfeited. No shares remained unvested or outstanding as of 31 March 2021. Share option plan During the year ended 31 March 2019 the Group offered selected employees the opportunity to participate in a Share Option Plan. This is an offer of options to acquire ordinary shares. Under the terms of the plan, a parcel of options were issued to employees with an weighted average exercise price. The grant of share options is split into four tranches, with the first tranche vesting immediately on the date of grant. The Company’s board has discretion to allow employees to exercise all or part of the options if a) the employee is no longer employed on a vesting date; or b) the employee ceases to be employed before the termination date but the employee has not yet exercised the options. The fair value of the options has been measured using the Revenue Ruling 59-60 and standard practice. Revenue Ruling 59-60 outlines the standard of value, approach, methods, and factors to be considered in valuing shares of the stock of the closely held entity similar to the Company. Revenue rulings are public administrative rulings by the Internal Revenue Service in the United States Department of the Treasury of the United States federal government. See Note 5 for the expenses recognised in profit or loss. The share based payments reserve comprises the fair value of the employee share purchase plan before its classifications to share capital upon settlement. The grant date fair value of equity-settled share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non- market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Key valuation assumptions for the share option plan are: Share Option issued on 24 July 2020 PPaarraammeetteerrss AAssssuummppttiioonnss Valuation date Grant date Beginning stock price The Group's stock price was assumed to be $0.75 at the Valuation Date per management’s guidance Risk free rate Volatility The risk-free rate was based on the rate of treasury securities with the same term as the estimated time for the projection period. The volatility (standard deviation) was estimated based on an analysis of the historical and implied volatility for the Group’s guideline publicly traded competitors. Dividend yield The dividend yield was assumed to be nil. 55 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2222.. SShhaarree bbaasseedd ppaayymmeennttss rreesseerrvvee ((ccoonnttiinnuueedd)) 2222.. SShhaarree bbaasseedd ppaayymmeennttss rreesseerrvvee ((ccoonnttiinnuueedd)) Share option plan (continued) Share Option issued on 28 September 2020 PPaarraammeetteerrss AAssssuummppttiioonnss Valuation date Grant date Beginning stock price The Group's stock price was based on the publicly traded share price at the valuation date. Risk free rate Volatility The risk-free rate was based on the rate of treasury securities with the same term as the estimated time for the projection period. The volatility (standard deviation) was estimated based on an analysis of the historical and implied volatility for the Group’s guideline publicly traded competitors. Dividend yield The dividend yield was assumed to be nil. Balance as at 1 April Share based payment expense Employee shares exercised Forfeiture of shares BBaallaannccee aass aatt 3311 MMaarrcchh a) Share ownership plan Summary of shares granted under the share ownership plan 22002211 $$000000 995511 2,011 (807) (25) 22,,113300 22002200 $$000000 770022 418 (169) -- 995511 Opening balance Granted during the period Exercised during the period Impact of share split Forfeited during the period CClloossiinngg bbaallaannccee Vested and exercisable as at 31 March Balance as at 1 April Granted during the year Exercised during the year Forfeited during the year AAss aatt 3311 MMaarrcchh Vested and exercisable as at 31 March 22002211 22002211 22002200 22002200 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn 11.86 - 11.56 13.15 -- -- ## ooff ooppttiioonnss 100,296 - (99,188) (1,108) -- AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn 11.83 - 11.27 - 1111..8866 ## ooff ooppttiioonnss 105,470 - (5,174) - 110000,,229966 -- 1111..8866 110000,,229966 Shares outstanding at the end of the year have the following expiry dates: GGrraanntt ddaattee EExxppiirryy ddaattee 1 April 2014 1 October 2014 1 April 2015 1 October 2015 1 April 2016 1 October 2016 TToottaall 31 March 2024 30 September 2024 31 March 2025 30 September 2025 31 March 2026 30 September 2026 SShhaarree ooppttiioonnss 22002211 - - - - - - -- SShhaarree ooppttiioonnss 22002200 48,123 6,281 12,450 20,316 6,820 6,306 110000,,229966 56 b) Aroa Biosurgery share option plan (the “Option Plan”) – prior to IPO Under the Option Plan prior to IPO, the Company granted directors, key management and certain employees, options to subscribe for ordinary shares since 2017. The opening balance of share options and the share options exercised during the period are prior to the 75:1 share split, which took effect upon the initial public offering. Summary of options granted under the Option Plan – prior to IPO 22002211 22002200 22002211 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ 7.42 7.47 - - - ## ooff ooppttiioonnss 131,695 (79,434) 3,867,314 - - 00..1100 33,,991199,,557755 22002200 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ 7.34 7.63 7.34 - 7.34 77..4422 SShhaarree ooppttiioonnss 3311 MMaarrcchh 22002211 2,009,275 472,500 1,437,800 - 33,,991199,,557755 ## ooff ooppttiioonnss 128,211 40,016 (32,332) - (4,200) 113311,,669955 SShhaarree ooppttiioonnss 3311 MMaarrcchh 22002200 91,679 9,450 25,064 5,502 113311,,669955 0.10 1,660,200 7.42 49,112 Share options outstanding at the end of the year have the following expiry dates: GGrraanntt ddaattee EExxppiirryy ddaattee 1 October 2018 1 July 2019 1 December 2019 14 February 2020 TToottaall 30 September 2028 30 June 2029 30 November 2029 13 February 2030 c) Aroa Biosurgery share option plan (the “Option Plan”) – on and after IPO During the reporting period, the Group offered the executive employees and directors new share options upon the listing of the Group in July 2020. Additionally, certain employees received share options on 29 September 2020. Grants under the Option Plan comprised 8 million share options with various vesting conditions including non-market service conditions, market conditions and non-market performance conditions. The exercise price and the number of share options referred below represent amounts and numbers post the 75:1 share split, which took effect upon the initial public offering. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2222.. SShhaarree bbaasseedd ppaayymmeennttss rreesseerrvvee ((ccoonnttiinnuueedd)) b) Aroa Biosurgery share option plan (the “Option Plan”) – prior to IPO Under the Option Plan prior to IPO, the Company granted directors, key management and certain employees, options to subscribe for ordinary shares since 2017. The opening balance of share options and the share options exercised during the period are prior to the 75:1 share split, which took effect upon the initial public offering. Summary of options granted under the Option Plan – prior to IPO Opening balance Granted during the period Exercised during the period Impact of share split Forfeited during the period CClloossiinngg bbaallaannccee Vested and exercisable as at 31 March 22002211 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ 7.42 - 7.47 - - 00..1100 22002211 ## ooff ooppttiioonnss 131,695 - (79,434) 3,867,314 - 33,,991199,,557755 22002200 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ 7.34 7.63 7.34 - 7.34 77..4422 22002200 ## ooff ooppttiioonnss 128,211 40,016 (32,332) - (4,200) 113311,,669955 0.10 1,660,200 7.42 49,112 Share options outstanding at the end of the year have the following expiry dates: GGrraanntt ddaattee EExxppiirryy ddaattee 1 October 2018 1 July 2019 1 December 2019 14 February 2020 TToottaall 30 September 2028 30 June 2029 30 November 2029 13 February 2030 SShhaarree ooppttiioonnss 3311 MMaarrcchh 22002211 2,009,275 472,500 1,437,800 - 33,,991199,,557755 SShhaarree ooppttiioonnss 3311 MMaarrcchh 22002200 91,679 9,450 25,064 5,502 113311,,669955 c) Aroa Biosurgery share option plan (the “Option Plan”) – on and after IPO During the reporting period, the Group offered the executive employees and directors new share options upon the listing of the Group in July 2020. Additionally, certain employees received share options on 29 September 2020. Grants under the Option Plan comprised 8 million share options with various vesting conditions including non-market service conditions, market conditions and non-market performance conditions. The exercise price and the number of share options referred below represent amounts and numbers post the 75:1 share split, which took effect upon the initial public offering. 57 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2222.. SShhaarree bbaasseedd ppaayymmeennttss rreesseerrvvee ((ccoonnttiinnuueedd)) Summary of options granted under the Option Plan – on and after IPO Opening balance Granted during the period – 24 July grant Granted during the period – 29 September grant Forfeited during the period CClloossiinngg bbaallaannccee Vested and exercisable at 31 March 22002211 22002200 22002200 22002211 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ - ## ooff ooppttiioonnss - 0.81 6,177,000 1.45 1,873,200 1.45 (100,000) 00..9933 77,,995500,,220000 0.82 1,828,550 AAvveerraaggee eexxeerrcciissee pprriiccee ppeerr ooppttiioonn NNZZ$$ - - - - -- -- ## ooff ooppttiioonnss - - - - -- -- Share options – on and after IPO outstanding at the end of the year have the following expiry dates: 2255.. FFiinnaanncciiaall rriisskk mmaannaaggeemmeenntt GGrraanntt ddaattee EExxppiirryy ddaattee 24 July 2020 29 September 2020 TToottaall 2233.. EEaarrnniinnggss ppeerr sshhaarree 23 July 2025 28 September 2025 SShhaarree ooppttiioonnss SShhaarree ooppttiioonnss 3311 MMaarrcchh 22002211 6,177,000 1,773,200 77,,995500,,220000 3311 MMaarrcchh 22002200 - - -- Earnings per share has been calculated based on shares and share options issued at the respective measurement dates. NNuummeerraattoorr Loss for the year after tax (“N”) in $000 DDeennoommiinnaattoorr Weighted average number of ordinary shares used in basic EPS (“D1”) Effects of: Employee share options * Preference shares Period end number of shares used in diluted EPS (“D2”) Basic earnings per share (N/D1 x 100) Diluted earnings per share (N/D2 x 100) 22002211 22002200 (19,209) (5,958) 300,401 2,802 functional currency, expressed in NZ dollars. 12,563 - 300,401 CCeennttss (6.39) (6.39) 159 2,164 2,802 CCeennttss (212.63) (212.63) * As employee share options are anti-dilutive, these were not included in the calculation of diluted earnings per share above. 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2244.. RReellaatteedd ppaarrttiieess (iii) Subsidiaries Interests in subsidiaries are set out in Note 1. (iv) Key management compensation Key management includes Directors (Executive and Non-Executive) and the senior leadership team. The compensation paid for and payable to key management for directorship services is disclosed within the Corporate Governance & Statutory section of the Annual Report. The total key management compensation excluding Director fees is $4,394,656 (2020: $1,490,262) (inclusive of the value of all benefits). The total Director fees excluding share based payments are $389,001 (2020: $295,135). The share based payment expense relating to the Directors is $304,846 (2020: $57,264) The compensation paid for key management includes share based payment of $1,255,278 (2020: $238,073). (v) Year end balances There were no related party receivables and related party payables at year end (2020: $nil). (vi) Transactions with related parties There were no other related party transactions during the year. The Group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks and aging analysis for credit risk. Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control risk exposures within acceptable parameters whilst optimising the return on risk. Market risk Foreign exchange risk The Group is exposed to currency risk on sales, purchases and liabilities that are denominated in a currency other than the respective functional currency of the Company, being NZ dollars (NZD). The currency risk arises primarily with respect to sales, expenses and the deferred consideration due to Hollister in US dollars (USD). After allowing for natural hedges for exposure in USD and retention of USD proceeds with the bank account, the Group uses forward foreign exchange contracts to manage its estimated foreign currency exposure in respect of forecasted revenue receipts from international customers. Refer to Note 26 (i) and (ii). The Group has certain net monetary assets/(liabilities) that are exposed to foreign currency risk. As at the reporting date, the Group had forward foreign exchange contracts in place to reduce its foreign exchange risk exposure. The table below summarises the Group’s net exposure at reporting date to foreign currency risk, against its respective Exposure to foreign currency risk 22002211 Cash and cash equivalents Trade and other receivables Financial assets at FVTOCI Trade and other payables Interest-bearing loans and borrowings Foreign currency forwards (sell foreign currency) Foreign currency swaps (buy foreign currency) NNeett eexxppoossuurree UUSSDD $$000000 4,809 1,457 1,107 (861) (6,956) - 2,300 11,,885566 AAUUDD $$000000 EEUURR $$000000 (55) - - - - - - 46 - - - - - - ((5555)) 4466 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2244.. RReellaatteedd ppaarrttiieess (iii) Subsidiaries Interests in subsidiaries are set out in Note 1. (iv) Key management compensation Key management includes Directors (Executive and Non-Executive) and the senior leadership team. The compensation paid for and payable to key management for directorship services is disclosed within the Corporate Governance & Statutory section of the Annual Report. The total key management compensation excluding Director fees is $4,394,656 (2020: $1,490,262) (inclusive of the value of all benefits). The total Director fees excluding share based payments are $389,001 (2020: $295,135). The share based payment expense relating to the Directors is $304,846 (2020: $57,264) The compensation paid for key management includes share based payment of $1,255,278 (2020: $238,073). (v) Year end balances There were no related party receivables and related party payables at year end (2020: $nil). (vi) Transactions with related parties There were no other related party transactions during the year. 2255.. FFiinnaanncciiaall rriisskk mmaannaaggeemmeenntt The Group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks and aging analysis for credit risk. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control risk exposures within acceptable parameters whilst optimising the return on risk. Foreign exchange risk The Group is exposed to currency risk on sales, purchases and liabilities that are denominated in a currency other than the respective functional currency of the Company, being NZ dollars (NZD). The currency risk arises primarily with respect to sales, expenses and the deferred consideration due to Hollister in US dollars (USD). After allowing for natural hedges for exposure in USD and retention of USD proceeds with the bank account, the Group uses forward foreign exchange contracts to manage its estimated foreign currency exposure in respect of forecasted revenue receipts from international customers. Refer to Note 26 (i) and (ii). The Group has certain net monetary assets/(liabilities) that are exposed to foreign currency risk. As at the reporting date, the Group had forward foreign exchange contracts in place to reduce its foreign exchange risk exposure. The table below summarises the Group’s net exposure at reporting date to foreign currency risk, against its respective functional currency, expressed in NZ dollars. Exposure to foreign currency risk 22002211 Cash and cash equivalents Trade and other receivables Financial assets at FVTOCI Trade and other payables Interest-bearing loans and borrowings Foreign currency forwards (sell foreign currency) Foreign currency swaps (buy foreign currency) NNeett eexxppoossuurree UUSSDD $$000000 4,809 1,457 1,107 (861) (6,956) - 2,300 11,,885566 AAUUDD $$000000 EEUURR $$000000 - - - (55) - - - ((5555)) - 46 - - - - - 4466 59 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2255.. FFiinnaanncciiaall rriisskk mmaannaaggeemmeenntt ((ccoonnttiinnuueedd)) 22002200 Cash and cash equivalents Trade and other receivables Financial assets at FVTOCI Trade and other payables Interest-bearing loans and borrowings Foreign currency forwards (sell foreign currency) Foreign currency swaps (buy foreign currency) NNeett eexxppoossuurree UUSSDD $$000000 895 2,332 581 (1,451) (13,003) 4,350 11,950 55,,665544 AAUUDD $$000000 - - - (110) - - - ((111100)) EEUURR $$000000 - 24 - - - - - 2244 The following significant exchange rates applied during the year: NZD/USD AAvveerraaggee rraattee 22002211 0.6711 AAvveerraaggee rraattee 22002200 0.6477 CClloossiinngg rraattee 22002211 0.6989 CClloossiinngg rraattee 22002200 0.5997 Sensitivity analysis – underlying exposures A 5% weakening/strengthening of the NZ dollar against the US dollar at 31 March 2021 would have increased/decreased equity and the net result for the period by the amounts shown below. Based on historical movements a 5% increase or decrease in the NZ dollar is considered to be a reasonable estimate. This analysis assumes that all other variables remain constant. US dollar The Group’s net result and equity for the period would have been $140,000 lower on a 5% weakening of the NZ dollar (2020: $159,000 lower), and $126,000 higher on a 5% strengthening of the NZ dollar as at 31 March 2021 (2020: $144,000 higher). Interest rate risk The Group’s cash flow interest rate risk arises from borrowings at floating rates and/or fixed rates as at the reporting date. The exposure of the Group’s borrowings to interest rate changes and the contractual repricing dates at the reporting date are as follows: 3 months or less 3 - 12 months 1 - 2 years TToottaall iinntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss 22002211 $$000000 - 9,952 - 99,,995522 22002200 $$000000 252 22,271 1,119 2233,,664422 Sensitivity analysis If interest rates on borrowings had been 100 basis points higher during the year, the Group’s net result and equity would have been $109,346 lower (2020: $183,666 lower). A 100 basis points decrease in interest rates would have an equal but opposite effect. 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2255.. FFiinnaanncciiaall rriisskk mmaannaaggeemmeenntt ((ccoonnttiinnuueedd)) 22002200 Cash and cash equivalents Trade and other receivables Financial assets at FVTOCI Trade and other payables Interest-bearing loans and borrowings Foreign currency forwards (sell foreign currency) Foreign currency swaps (buy foreign currency) NNeett eexxppoossuurree UUSSDD $$000000 895 2,332 581 (1,451) (13,003) 4,350 11,950 55,,665544 AAUUDD $$000000 - - - - - - (110) ((111100)) EEUURR $$000000 24 - - - - - - 2244 The following significant exchange rates applied during the year: NZD/USD AAvveerraaggee AAvveerraaggee rraattee 22002211 0.6711 rraattee 22002200 0.6477 CClloossiinngg rraattee 22002211 0.6989 CClloossiinngg rraattee 22002200 0.5997 Sensitivity analysis – underlying exposures A 5% weakening/strengthening of the NZ dollar against the US dollar at 31 March 2021 would have increased/decreased equity and the net result for the period by the amounts shown below. Based on historical movements a 5% increase or decrease in the NZ dollar is considered to be a reasonable estimate. This analysis assumes that all other variables remain constant. The Group’s net result and equity for the period would have been $140,000 lower on a 5% weakening of the NZ dollar (2020: $159,000 lower), and $126,000 higher on a 5% strengthening of the NZ dollar as at 31 March 2021 US dollar (2020: $144,000 higher). Interest rate risk reporting date. The Group’s cash flow interest rate risk arises from borrowings at floating rates and/or fixed rates as at the The exposure of the Group’s borrowings to interest rate changes and the contractual repricing dates at the reporting date are as follows: 3 months or less 3 - 12 months 1 - 2 years Sensitivity analysis TToottaall iinntteerreesstt bbeeaarriinngg llooaannss aanndd bboorrrroowwiinnggss 22002211 $$000000 9,952 - - 99,,995522 22002200 $$000000 252 22,271 1,119 2233,,664422 If interest rates on borrowings had been 100 basis points higher during the year, the Group’s net result and equity would have been $109,346 lower (2020: $183,666 lower). A 100 basis points decrease in interest rates would have an equal but opposite effect. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2255.. FFiinnaanncciiaall rriisskk mmaannaaggeemmeenntt ((ccoonnttiinnuueedd)) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as from the Group's receivables due from customers. Only major banks are accepted for cash and deposit balances. Payment and delivery terms are agreed to within each of the respective customers licensing and distribution agreements. Aging of payments due from customers are monitored on a regular basis, with any overdue amounts being settled immediately after notification. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised in Note 26. The Group does not see any foreseeable losses on trade receivables over the next 12 months. The Group does not hold any collateral as security. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The tables below analyse the Group's financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, including interest payments in respect of financial liabilities. LLeessss tthhaann 33 mmoonntthhss 33--1122 mmoonntthhss BBeettwweeeenn 11 aanndd 22 yyeeaarrss OOvveerr 22 yyeeaarrss TToottaall ccoonnttrraaccttuuaall ccaasshh fflloowwss TToottaall CCaarrrryyiinngg aammoouunnttss AAtt 3311 MMaarrcchh 22002211 NNoottee $$000000 $$000000 $$000000 $$000000 $$000000 $$000000 FFiinnaanncciiaall lliiaabbiilliittiieess Trade and other payables Lease liabilities Interest bearing liabilities TToottaall 16 20 18 2,744 158 205 33,,110077 - 792 9,952 1100,,774444 - 931 - 993311 - 6,395 - 66,,339955 2,744 8,276 10,157 2211,,117777 2,744 6,282 9,952 1188,,997788 LLeessss tthhaann 33 mmoonntthhss 33--1122 mmoonntthhss BBeettwweeeenn 11 aanndd 22 yyeeaarrss OOvveerr 22 yyeeaarrss TToottaall ccoonnttrraaccttuuaall ccaasshh fflloowwss TToottaall CCaarrrryyiinngg aammoouunnttss AAtt 3311 MMaarrcchh 22002200 NNoottee $$000000 $$000000 $$000000 $$000000 $$000000 $$000000 FFiinnaanncciiaall lliiaabbiilliittiieess Trade and other payables Lease liabilities Interest bearing liabilities Derivative financial liabilities Financial liabilities at FVTPL TToottaall 16 20 18 27 11 4,310 56 1,020 80 - 55,,446666 - 284 24,534 306 - 349 1,179 - - 2255,,112244 - 11,,552288 - 2,199 - - - 22,,119999 4,310 2,888 26,733 386 - 3344,,331177 4,310 2,085 23,642 386 6,827 3377,,225500 Capital adequacy The Board’s aim is to maintain a strong capital base to sustain future development of the business and to maintain investor and creditor confidence. The shareholder funds raised to date including IPO gives the Group a sufficient capital base to continue to grow the business. 61 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2266.. FFiinnaanncciiaall iinnssttrruummeennttss bbyy ccaatteeggoorryy (i) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Group become a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the other financial liability category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management, are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. (ii) Non-derivative financial assets The Group initially recognises financial assets at amortised cost on the date that they are originated. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, assets at amortised cost. AAtt 3311 MMaarrcchh 22002211 AAsssseettss aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Cash and cash equivalents Term Deposit Trade and other receivables Financial assets at FVTOCI TToottaall aasssseettss aatt aammoorrttiisseedd ccoosstt//FFVVTTOOCCII AAtt 3311 MMaarrcchh 22002211 LLiiaabbiilliittiieess aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Trade and other payables Lease liabilities Interest-bearing loans and borrowings TToottaall lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt//FFVVTTPPLL AAsssseettss aatt aammoorrttiisseedd ccoosstt NNoottee $$000000 AAsssseettss aatt FFaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee $$000000 9 9 12 10 15,381 20,000 7,188 - 4422,,556699 - - - 1,584 11,,558844 LLiiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt NNoottee $$000000 LLiiaabbiilliittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss $$000000 16 20 18 2,744 6,282 9,952 1188,,997788 - - - -- TToottaall $$000000 15,381 20,000 7,188 1,584 4444,,115533 TToottaall $$000000 2,744 6,282 9,952 1188,,997788 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2266.. FFiinnaanncciiaall iinnssttrruummeennttss bbyy ccaatteeggoorryy (i) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Group become a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the other financial liability category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management, are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. (ii) Non-derivative financial assets The Group initially recognises financial assets at amortised cost on the date that they are originated. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, assets at amortised cost. AAtt 3311 MMaarrcchh 22002211 AAsssseettss aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Cash and cash equivalents Term Deposit Trade and other receivables Financial assets at FVTOCI TToottaall aasssseettss aatt aammoorrttiisseedd ccoosstt//FFVVTTOOCCII AAtt 3311 MMaarrcchh 22002211 LLiiaabbiilliittiieess aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Trade and other payables Lease liabilities Interest-bearing loans and borrowings TToottaall lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt//FFVVTTPPLL AAsssseettss aatt aammoorrttiisseedd ccoosstt NNoottee $$000000 AAsssseettss aatt FFaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee $$000000 9 9 12 10 NNoottee 16 20 18 15,381 20,000 7,188 - 4422,,556699 2,744 6,282 9,952 1188,,997788 LLiiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt $$000000 LLiiaabbiilliittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss $$000000 1,584 11,,558844 - - - - - - -- TToottaall $$000000 15,381 20,000 7,188 1,584 4444,,115533 TToottaall $$000000 2,744 6,282 9,952 1188,,997788 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2266.. FFiinnaanncciiaall iinnssttrruummeennttss bbyy ccaatteeggoorryy ((ccoonnttiinnuueedd)) AAtt 3311 MMaarrcchh 22002200 NNoottee $$000000 AAsssseettss aatt aammoorrttiisseedd ccoosstt AAsssseettss aatt FFaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee $$000000 AAsssseettss aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Cash and cash equivalents Trade and other receivables Financial assets at FVTOCI TToottaall aasssseettss aatt aammoorrttiisseedd ccoosstt//FFVVTTOOCCII 9 12 10 3,850 6,940 - 1100,,779900 - - 969 996699 LLiiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt LLiiaabbiilliittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss TToottaall $$000000 3,850 6,940 969 1111,,775599 TToottaall AAtt 3311 MMaarrcchh 22002200 LLiiaabbiilliittiieess aass ppeerr ccoonnssoolliiddaatteedd SSttaatteemmeenntt ooff FFiinnaanncciiaall PPoossiittiioonn Trade and other payables Lease liabilities Interest-bearing loans and borrowings - current Interest-bearing loans and borrowings - non current Financial liabilities at fair value through profit or loss TToottaall lliiaabbiilliittiieess aatt aammoorrttiisseedd ccoosstt//FFVVTTPPLL (i) Derivative financial assets NNoottee $$000000 $$000000 $$000000 16 20 18 18 11 4,310 2,085 22,523 1,119 - 3300,,003377 - - - - 6,827 66,,882277 4,310 2,085 22,523 1,119 6,827 3366,,886644 The Group had foreign exchange swaps contracts of $2,300,000 (2020:$11,950,000) with the following amounts recognised in the Statement of Financial Position in relation to foreign exchange currency contracts. DDeerriivvaattiivvee ffiinnaanncciiaall aasssseettss Derivatives not designated as hedging instruments Swap foreign exchange contracts DDeerriivvaattiivvee aasssseettss aatt eenndd ooff tthhee yyeeaarr (ii) Derivative financial liability 22002211 $$000000 22002200 $$000000 31 3311 1,188 11,,118888 The Group had no foreign exchange forward contracts as at March 2021 (2020: $4,350,000). The following amount was recognised in Statement of Financial Position in relation to foreign exchange currency contracts. Derivative financial liability Derivatives not designated as hedging instruments Forward foreign exchange contracts DDeerriivvaattiivvee lliiaabbiilliittyy aatt eenndd ooff tthhee yyeeaarr 22002211 $$000000 22002200 $$000000 - -- 386 338866 63 Annual Report 2021 | AROANOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 2277.. IInntteerreesstt iinn JJooiinntt OOppeerraattiioonn In March 2019, the Group and Hydrofera LLC entered into an unincorporated agreement to promote, market and sell the parties' wound care products to customers in North America. The principal place of business of the joint operation is in the United States and the joint operation brand name is “Appulse”. As per the "Shared Sales Force Agreement", the property held in Appulse will be owned and held by the Group and Hydrofera in the proportion of their participating interest. The Group has 42% participating interest. Both parties are responsible only for its liabilities and obligation as set out in the agreement. Therefore, the parties have a joint operation as they have rights to the assets and obligations for the liabilities relating to the arrangement. During the reporting period, the Group and Hydrofera agreed to dissolve the joint operation. The Group has recognised all expenses and associated liabilities in the consolidated accounts as they relate to the reporting period. 2288.. EEvveennttss aafftteerr tthhee rreeppoorrttiinngg ddaattee There have been no significant events subsequent to reporting date which required disclosure in or adjustment to the consolidated financial statements. 2299.. RReessttaatteemmeennttss ffoorr rreeccllaassssiiffiiccaattiioonn No material restatements for reclassification for the reporting period. 3300.. OOtthheerr DDiisscclloossuurreess a. Reconciliation of loss after income tax to cash flow from operating activities PPrrooffiitt//((lloossss)) aafftteerr ttaaxx AAdddd ((ddeedduucctt)) nnoonn--ccaasshh iitteemmss:: Depreciation of property, plant and equipment Depreciation of lease (Gain)/loss on disposal of assets Amortisation of intangibles Share based payments Foreign exchange loss - deferred consideration Interest - deferred consideration Interest – lease liabilities Foreign currency translation Fair value adjustment on financial liabilities at FVTPL Non-Capitalised IPO costs MMoovveemmeenntt iinn wwoorrkkiinngg ccaappiittaall:: Movement in provisions Movement in tax receivable Movement in trade and other receivables Movement in inventory Movement in trade and other payables Movement in right of use assets Movement in interest payables NNeett ccaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess 64 22002211 $$000000 (19,209) 1,092 742 4 1,215 1,985 (1,742) 1,478 406 (30) 8,014 1,607 4 412 (489) 632 (298) (830) ((55,,000077)) 22002200 $$000000 ((55,,995588)) 11,,008800 443388 ((2255)) 11,,220066 441188 22,,663355 22,,772299 112288 ((887788)) 11,,000066 44 ((336633)) ((11,,667755)) ((11,,332277)) 22,,227722 3366 ((6666)) 11,,666600 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 3300.. OOtthheerr DDiisscclloossuurreess ((ccoonnttiinnuueedd)) b. Reconciliation cashflow from financing activities Interest bearing Interest Financial Deferred Lease Paid up Transaction Total bearing liabilities at consideration liabilities Cost share capital loans and loans and borrowings borrowings- – Current Non current fair value through profit or loss Note 18 $000 Note 18 $000 Note 11 $000 Note 18 $000 Note 20 $000 Note 21 $000 $000 $000 (840) 840 (1,119) (6,827) (21,682) (2,084) (29,353) (61,905) 1,119 (19,804) 10,637 731 (34,951) 4,329 (37,099) - - - - - - - - - - - - - - - - - 33,833 (8,030) 828 - - - - - - (33,833) (807) (4,518) (411) - - - - - - 1,241 (148) - - - - - - - - - - - - - - - - 1,241 (148) - (807) (4,518) (411) (8,030) - 1,629 (4,329) (1,873) ((99,,995522)) ((66,,228822)) ((9977,,331166)) -- ((111133,,555500)) Deferred consideration Lease liabilities Paid up share capital Total Note 11 $000 Note 18 $000 Note 20 $000 Note 21 $000 $000 (23,183) - (28,889) (53,187) (5,821) 6,799 546 (296) 384 Interest bearing loans and borrowings – Interest bearing loans and borrowings- Non current Financial liabilities at fair value through profit or loss Current Note 18 $000 (684) (156) Note 18 $000 (431) (688) - - - - - - (1,006) - - - - - - (2,635) (2,663) - - - - - - - - (2,533) (97) (168) (168) - - - - - (2,635) (2,663) (2,533) (97) (1,006) - - - - - - - - - - - - - - - - AAtt 11 AApprriill 22002200 Cash flow Non-cash flow: FX on deferred consideration Interest - deferred consideration Conversion of liability to Share based payments equity Lease Interest on lease payments Fair value adjustment on financial liabilities at FVTPL Allocation of Transaction cost AAtt 3311 MMaarrcchh 22002211 AAtt 11 AApprriill 22001199 Cash flow Non-cash flow: FX on deferred consideration Interest - deferred consideration Share based payments Lease Interest on lease payments Fair value adjustment on financial liabilities at FVTPL AAtt 3311 MMaarrcchh 22002200 ((884400)) ((11,,111199)) ((66,,882277)) ((2211,,668822)) ((22,,008844)) ((2299,,335533)) ((6611,,990055)) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 3300.. OOtthheerr DDiisscclloossuurreess ((ccoonnttiinnuueedd)) b. Reconciliation cashflow from financing activities Interest bearing loans and borrowings – Current Interest bearing loans and borrowings- Non current Financial liabilities at fair value through profit or loss Deferred consideration Lease liabilities Paid up share capital Transaction Cost Total Note 18 $000 Note 18 $000 Note 11 $000 Note 18 $000 Note 20 $000 Note 21 $000 $000 $000 (840) 840 (1,119) 1,119 (6,827) (19,804) (21,682) 10,637 (2,084) (29,353) 731 (34,951) - 4,329 (61,905) (37,099) - - - - - - - - - - - - - - - - - - - - - - - 33,833 - - - (8,030) 828 - - 1,241 (148) - - - - - - - - - - - (4,518) (411) - - - - - (33,833) (807) - - - - 1,241 (148) - (807) (4,518) (411) (8,030) - - - - - - - 1,629 (4,329) (1,873) ((99,,995522)) ((66,,228822)) ((9977,,331166)) -- ((111133,,555500)) Interest bearing loans and borrowings – Current Interest bearing loans and borrowings- Non current Financial liabilities at fair value through profit or loss Deferred consideration Lease liabilities Paid up share capital Total Note 18 $000 Note 18 $000 Note 11 $000 Note 18 $000 Note 20 $000 Note 21 $000 $000 (684) (156) (431) (688) - (23,183) - (28,889) (53,187) (5,821) 6,799 546 (296) 384 - - - - - - - - - - - - - - - - - (1,006) (2,635) (2,663) - - - - - - - (2,533) (97) - - - (2,635) (2,663) (168) (168) - - - (2,533) (97) (1,006) ((884400)) ((11,,111199)) ((66,,882277)) ((2211,,668822)) ((22,,008844)) ((2299,,335533)) ((6611,,990055)) AAtt 11 AApprriill 22002200 Cash flow Non-cash flow: FX on deferred consideration Interest - deferred consideration Conversion of liability to equity Share based payments Lease Interest on lease payments Fair value adjustment on financial liabilities at FVTPL Allocation of Transaction cost AAtt 3311 MMaarrcchh 22002211 AAtt 11 AApprriill 22001199 Cash flow Non-cash flow: FX on deferred consideration Interest - deferred consideration Share based payments Lease Interest on lease payments Fair value adjustment on financial liabilities at FVTPL AAtt 3311 MMaarrcchh 22002200 65 Annual Report 2021 | AROA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the year ended 31 March 2021 3300.. OOtthheerr DDiisscclloossuurreess ((ccoonnttiinnuueedd)) c. Foreign currency transactions 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 of monetary assets and liabilities denominated in foreign currencies at reporting date exchange rates are recognised profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined and are recognised in Other Comprehensive Income (except on impairment in which case foreign currency differences that have been recognised in Other Comprehensive Income are reclassified to profit or loss). d. Goods and services tax (GST) Revenues and expenses have been recognised in the financial statements exclusive of GST except that irrecoverable GST input tax has been recognised in association with the expense to which it relates. All items in the Statement of Financial Position are stated exclusive of GST except for receivables and payables which are stated inclusive of GST. e. Capital commitments As at 31 March 2021, the Group had equipment capital commitments of $611,000 (2020: $261,000). f. Contingent liabilities As at 31 March 2021, the Group had no significant contingent liabilities (2020: $nil). 66 ADDITIONAL INFORMATION AROA BIOSURGERY LIMITED (NZ Company no. 1980577 / ARBN 638 867 473) AROA BIOSURGERY IS A NEW ZEALAND COMPANY Aroa Biosurgery Limited is a company incorporated in New Zealand and principally governed by New Zealand law, rather than Australian Law. In Australia the Company is registered with ASIC as a foreign company with the Australian Registered Body Number 638 867 473. As the Company is not established in Australia, its general corporate activities (apart from any offering of securities in Australia and certain reporting and disclosure obligations) are not regulated under the Corporations Act by ASIC but instead are regulated in New Zealand by New Zealand law including the Companies Act, Financial Markets Conduct Act 2013, Financial Markets Conduct Regulations 2014 and by the New Zealand Financial Markets Authority and Registrar of Companies. ORDINARY SHARES On 31 March 2021 and as at the date of this Annual Report, the Company only has one class of shares on issue, being ordinary shares in the Company, each conferring to the registered holder the right to one vote on any resolution. These shares are listed on the ASX (ASX Code: ARX). The total number of ordinary shares in the Company on issue as at 31 March 2021 was 300,726,414 shares and the total number of ordinary shares in the Company on issue as at 10 June 2021 was 300,726,414 shares. The distribution of shareholdings as at 10 June 2021 was as shown in the table below: Size of shareholding Number of holders % 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over TOTAL 970 1,380 603 755 135 3,843 Number of ordinary shares 626,621 3,947,223 4,858,869 20,968,086 270,325,615 25.24 35.91 15.69 19.65 3.51 100.00 300,726,414 % 0.210 1.310 1.620 6.970 89.890 100.00 The number of shareholdings held in less than marketable parcels is 279, representing 90,972 shares. UNISSUED SHARES As at 31 March 2021, there were 11,869,775 options (representing the same number of unissued ordinary shares) held by 42 holders under the Option Plan. Refer to the Remuneration Report and Note 22 to the Consolidated Financial Statements for further details of the employee options outstanding. Options do not carry a right to vote. SHARES ISSUED ON EXERCISE OF OPTIONS The following ordinary shares of the Company were issued during the year ended 31 March 2021 on the exercise of options granted under the Option Plan. Date options exercised May 2020 June 2020 December 2020 Average exercise price (NZ$) Number of shares issued17 $0.10 $0.10 $0.10 4,837,425 206,325 693,900 17Shares issued prior to Admission have been reflected on a post split basis at the ratio of 75:1 67 Annual Report 2021 | AROATWENTY LARGEST SHAREHOLDERS The names and holdings of the 20 largest registered shareholders in the Company as at 10 June 2021 were: Total units ordinary shares on issue as Holding as a % of total at the date above Shareholder name Mr Brian Ward & Mrs Tracey Ward 18 Movac Fund 3 LP Citicorp Nominees Pty Limited Phil McCaw 19 National Nominees Limited J P Morgan Nominees Australia Pty Limited Richard Abbott HSBC Custody Nominees (Australia) Limited Washington H Soul Pattinson and Company Limited Aspire NZ Seed Fund Ltd Sparkbox Investments Ltd K One W One (No 3) Ltd 33,125,800 18,679,050 17,856,411 16,722,425 16,075,659 13,774,374 11,579,775 8,293,333 7,499,800 7,491,000 7,312,050 5,882,550 BNP Paribas Nominees Pty Ltd 5,051,704 BNP Paribas Noms Pty Ltd BNP Paribas Noms Pty Ltd Sharon Bryant Mesynthes Nominees Ltd20 Custodial Services Limited Mark Ritcher Nancy Yopp Total Top 20 Holders Total Securities 4,835,542 4,819,950 4,815,198 4,580,250 4,120,200 4,120,200 3,913,842 200,890,889 300,726,414 11.02% 6.21% 5.94% 5.56% 5.35% 4.58% 3.85% 2.76% 2.49% 2.49% 2.43% 1.96% 1.68% 1.61% 1.60% 1.60% 1.52% 1.37% 1.37% 1.30% 66.802% 18Brian Ward holds his interest through Arawai No. 2 Trust, of which he is one of 3 trustees and a beneficiary. 19Phil McCaw holds his interest through McSyth Capital Investment Trust, of which he is one of 3 trustees and a beneficiary. Mr McCaw is also a principal of Movac, a substantial shareholder in the Company. Mr McCaw sits as one member of an investment committee of 6 with respect to the Movac Funds, however Mr McCaw has withdrawn from the investment committee with respect to decisions regarding any shares in the Company held by the Movac Funds. Accordingly, Mr McCaw does not control the voting or disposal of those shares and does not have a relevant interest in those shares. 20As Directors of Mesynthes Nominee Limited, Jim McLean and Phil McCaw have an interest in the shares held by Mesynthes Nominee Limited on bare trust for certain AROA employees until payment is received for such shares. 68 TAKEOVERS AND SUBSTANTIAL HOLDINGS While the ASX Listing Rules apply to the Company, certain provisions of the Corporations Act do not. The Company is not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act dealing with the acquisition of its shares (including takeovers and substantial holdings). The New Zealand position under the Takeovers Code (as set out in the Takeovers Regulations 2000) and the Financial Markets Conduct Act 2013 is broadly comparable to the Australian position in relation to the regulation of takeovers. The New Zealand takeovers regime, not the Australian takeovers regime, will apply to the Company as a foreign company. A 20% threshold applies (under which a person is prevented from increasing the percentage of voting rights held or controlled by them in excess of that threshold or from becoming the holder or controller of an increased percentage of voting rights if they already hold or control more than 20% of the voting rights), subject to certain “compliance options” (including full and partial offers, 5% creep over 12 months in the 50% to 90% range, and acquisitions with shareholder approval). Compulsory acquisitions are permitted by persons who hold or control 90% or more voting rights in a company. Under New Zealand law, there is no requirement for a shareholder of the Company to issue a substantial holding notice of holdings above 5%, and because the Company is a New Zealand company the Corporations Act provisions regarding substantial shareholder notices do not apply to the Company. However, a shareholder may voluntarily disclose such information if it chooses to do so and a number of New Zealand companies listed on ASX experience shareholders lodging notices similar to a substantial shareholder notice that is required under the Corporations Act notwithstanding there is no requirement to do so. Separately, the Company has undertaken to ASX that it will inform the market immediately on becoming aware of a person becoming a Substantial Holder, a movement of at least 1% of shares in which the Substantial Holder has a relevant interest and a person ceasing to be a Substantial Holder. SUBSTANTIAL SHAREHOLDERS Set out below is, to the best of the Company’s knowledge, details relating to all Substantial Holders in the Company as at 10 June 2021. Shareholder name Total units ordinary shares on issue as Holding as a % of total at 10 June 2021 Mr Brian Ward & Mrs Tracey Ward 21 33,125,800 Movac Fund 3 LP Citicorp Nominees Pty Limited Phil McCaw 22 National Nominees Limited 18,679,050 17,856,411 16,722,425 16,075,659 11.02% 6.21% 5.94% 5.56% 5.35% RESTRICTED SECURITIES AS AT 10 JUNE 2021 Information relating to restricted securities, or securities subject to voluntary escrow, as at 10 June 2021 is set out below: Number of securities Class of securities Date the escrow period ends 118,047,131 21,393,225 13,250,325 Fully paid ordinary shares (12 months voluntary escrow) 23 July 2021 Fully paid ordinary shares (24 months voluntary escrow) 23 July 2022 Fully paid ordinary shares (36 months voluntary escrow) 23 July 2023 21Brian Ward holds his interest through Arawai No. 2 Trust, of which he is one of 3 trustees and a beneficiary. 22Phil McCaw holds his interest through McSyth Capital Investment Trust, of which he is one of 3 trustees and a beneficiary. Mr McCaw is also a principal of Movac, a substantial shareholder in the Company. Mr McCaw sits as one member of an investment committee of 6 with respect to the Movac Funds, however Mr McCaw has withdrawn from the investment committee with respect to decisions regarding any shares in the Company held by the Movac Funds. Accordingly, Mr McCaw does not control the voting or disposal of those shares and does not have a relevant interest in those shares. 69 Annual Report 2021 | AROAEMPLOYEE REMUNERATION Remuneration and other benefits (excluding non-cash share based payments) of NZ$100,000 or more received by employees of the Group (excluding Non-Executive Directors) in their capacity as employees during the financial year ended 31 March 2021 were as follows: Remuneration range (NZ$) Number of employees 100,000 110,001 120,001 150,001 160,001 170001 180,001 190,001 250,001 260,001 300,001 410,001 540,001 to to to to to to to to to to to to to 110,000 120,000 130,000 160,000 170,000 180,000 190,000 200,000 260,000 270,000 310,000 420,000 550,000 6 3 3 3 2 2 2 2 1 2 1 1 1 19 granted patents, 18 pending applications & 3 applications filed 70 70 GENERAL DISCLOSURE OF INTERESTS BY DIRECTORS AROA maintains an interests register in accordance with the Companies Act. The following are general disclosures of interest (pursuant to section 140(2) of the Companies Act) noted in the interests register for the period 1 April 2020 to 31 March 2021. Details on share dealings in the Company by the Directors during that period are set out in the Remuneration Report. Name James McClean Brian Ward Steven Engle Interest Director, Mesynthes Nominees Limited Director, Information Tools Limited Director, Prevar Limited Director, R J Hill Laboratories Limited Director, Green Edge Limited Non-Executive Chairman, Prescient Therapeutics Limited (ASX: PTX) Director, Author-IT Labs Limited, Author-IT Holdings Limited, Authorit Software Corporation Limited and Author-IT Software Corporation Resigned as CEO of Cohbar Inc Sole Proprietor, Averigon Philip McCaw Director, Mesynthes Nominee Limited Director, Toha Foundry Limited Director, Author-IT Limited and Authorit Software Corporation Limited Director, Kaynemaile Ltd Director, Shift72 Limited Director, Nutcracker Limited Director, Movac Limited Director, Movac Fund 4 Custodial Limited Director, Movac Fund 5 Custodial Limited Director, Movac Fund 5 General Partner Limited Director, Movac Fund 4 General Partner Limited Director, CAVOM Nominee No 1 Limited Director, Movac Fund 4 Custodial Limited Director, Calcium Investments Limited Director, Calcium Investment Trustee Limited Director, PJM Management Limited None Director, Volpara Health Technologies Limited (ASX: VHT) Director, Surf Lakes Holdings Limited Director, DIT AgTech Limited John Pinion John Diddams USE OF COMPANY INFORMATION AROA did not receive notice from any Director, requesting to use company information received in his capacity as a director of any Group company, which would not otherwise have been available to him. 71 Annual Report 2021 | AROAON-MARKET BUY-BACK There is no current on-market buy-back for the Company’s shares. USE OF CASH AND READILY CONVERTIBLE ASSETS The Company confirms that in the period from Admission to 31 March 2021, it used the cash and assets (in a form readily convertible to cash) that it had at the time of Admission in a manner consistent with the Company’s business objectives. Use of funds Prospectus Estimate NZ$m Actual Funds Used NZ$m Actual as a % of Estimate Notes Investment in sales and marketing $5.0 $1.8 36% Investment in additional manufacturing capacity, investment in new products, plant and equipment and other general corporate capital expenditure Working capital, other operating costs Repayment of borrowings Offer costs Total Notes $5.0 $0.8 16% $5.0 $13.1 $3.8 $31.9 $2.1 $0.0 $3.9 $8.6 42% 0% 103% 27% 1 2 3 4 5 1. 2. 3. 4. 5. Commencement of new sales and marketing initiatives including the hire of over 20 direct sales personnel in Q4 FY21. Preliminary costs of manufacturing expansion in H2 FY21. Net operating cash outflows for Q2, Q3 & Q4 FY21, excluding cash outflows relating to the investment in sales & marketing. Maturing 31 March 2022. Remains unchanged from Q3 FY21. Includes cash outflows prior to IPO. Remains unchanged from Q3 FY21. DONATIONS No Group company made any donations during in the year ended 31 March 2021. SUBSIDIARY COMPANY INFORMATION The persons listed below held office as directors of the Company’s subsidiaries as at 31 March 2021. None of those persons receives any remuneration or other benefits for their role as a director of a Company subsidiary. No entries were made in the interests register of any Company subsidiary during the year ended 31 March 2021. Company Directors Mesynthes Nominee Limited (NZBN 9429 041 350 003) Jim McLean, Phil McCaw Aroa Biosurgery Incorporated (Delaware File number 6560549) Brian Ward, John Pinion 72 GLOSSARY Term Description Admission Admission of the Company to the ASX’s official list AROA or the Company Aroa Biosurgery Limited NZCN 1980577, ARBN 638 867 473 ASIC ASX CEO CFO Australian Securities and Investments Commission Australian Securities Exchange Chief Executive Officer Chief Financial Officer Companies Act Companies Act 1993 (NZ) Corporations Act Corporations Act 2001 (Cth, Australia) EBIT EBITDA ECM Executives FDA FY Group IPO Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation Extracellular matrix Brian Ward (Managing Director and CEO) and James Agnew (CFO and Joint Company Secretary) The Food and Drug Administration of the US Financial Year The group of companies comprising AROA, Aroa Biosurgery Incorporated (Delaware File number 6560549) and Mesynthes Nominee Limited (NZBN 9429 041 350 003) The Company’s initial public offering in July 2020 of 60,000,000 shares in the Company at a price of A$0.75 per share Key Management The Board has determined that the key management personnel of the Group are the Directors and James Agnew (CFO and Joint Company Secretary) NZD NZ GAAP NZ IFRS Option Plan Prospectus Share Plan New Zealand Dollar New Zealand Generally Accepted Accounting Practice New Zealand Equivalents to International Financial Reporting Standards The AROA Share Option Plan Prospectus dated 22 June 2020 in respect of the IPO The AROA Employee Incentive Share Plan Substantial Holder Has the meaning given to it in the Corporations Act TELA Bio TELA Bio, Inc US USD The United States of America United States Dollar 73 Annual Report 2021 | AROACORPORATE DIRECTORY ARBN 638 867 473 NZCN: 1980577 Chairman and Non-Executive Director Jim McLean Non-Executive Directors Steve Engle Phil McCaw John Pinion John F Diddams Chief Executive Officer and Managing Director Brian Ward Company Secretaries James Agnew Tracy Weimar Registered Office and Address for Service 64 Richard Pearse Drive Mangere Auckland 2022 Telephone: +64 9 869 3035 Auditor BDO Auckland Level 4, BDO Centre 4 Graham Street Auckland 1010 Banker Bank of New Zealand Deloitte Centre 80 Queen Street Auckland 1010 Share Registry Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 74 74 Unlocking regenerative healing for everybody AROA BIOSURGERY LIMITED | ASX: ARX WWW.AROABIO.COM 75 Annual Report 2021 | AROA

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