Nanosonics
Annual Report 2014

Plain-text annual report

ANNUAL REPORT NANOSONICS LIMITED ABN 11 095 076 896 Contents Financials at a glance Nanosonics 2014 highlights Chairman’s letter CEO’s report US regional highlights Europe regional highlights Asia Pacific regional highlights trophon® EPR: innovative technology delivering improved standards of care Clinical evidence Information on the directors, company secretaries and senior management Directors’ report Corporate governance statement Contents of the financial statements Auditor’s independence declaration Financial statements Notes to the financial statements Directors’ declaration Independent auditor’s report to the members Shareholder information Glossary Corporate directory and information for investors 2 4 6 8 11 12 13 14 16 18 22 53 58 59 60 64 103 104 106 108 109 Mission statement 1 We improve the safety of patients, clinics, their staff and the environment by transforming the way infection prevention practices are understood and conducted, and introducing innovative technologies that deliver improved standards of care. Company overview Nanosonics (ASX: NAN) is developing a portfolio of decontamination products designed to reduce the spread of infection. The Company owns intellectual property relating to a unique disinfection and sterilisation technology which can be suited to a variety of markets. Initial market applications are designed for the reprocessing of reusable medical instruments. The Company’s first product, the trophon® EPR, is designed to disinfect ultrasound transducers and is commercially available in Australia, New Zealand, the US, Europe and other markets. Nanosonics Ltd is headquartered in Sydney, Australia with offices in the US and Europe. 2 Financials at a glance The year in numbers Up 44.3% $21.5m $14.9m $12.3m Up 22.6% $20.1m $16.4m Up 63.5% $13.9m $13.5m $8.5m $7.5m 2012 2013 2014 2012 2013 2014 2012 2013 2014 TOTAL SALES GROSS PROFIT OPERATING EXPENSES NET LOSSES 2012 2013 2014 $4.7m $5.8m $2.6m Down 55.2% Sales by region Up 34% $17.7m $13.2m $10.2m Up 51% $2.3m $1.7m $1.5m Up >500% $1.6m $0.4m $0.2m 2012 2013 2014 2012 2013 2014 2012 2013 2014 NORTH AMERICA AUSTRALIA & NEW ZEALAND EUROPE & OTHER COUNTRIES nanosonics limited | annual report 20143 2014 $’000 2013 $’000 2012 $’000 2011 $’000 2010 $’000 2009 $’000 21,492 14,899 12,301 2,247 763 309 (7,571) (6,428) (4,799) (981) (284) (121) 13,921 8,471 7,502 1,266 479 188 1,666 1,709 1,498 150 – – – – 161 150 – – Revenue Operating revenue Less cost of sales Gross profit Other income Government grants received Other Expenses Operating expenses (excluding depreciation and amortisation) (19,141) (15,335) (12,634) (13,229) (8,827) (9,867) EBITDA (1,845) (5,366) (4,982) (11,963) (8,187) (9,529) Depreciation and amortisation (975) (1,044) (914) (1,010) (771) (419) EBIT Interest income Interest expense Operating loss before tax Net income tax benefit Operating loss after tax Cash assets (2,820) (6,410) (5,896) (12,973) (8,958) (9,948) 739 (555) 1,192 (517) 586 1,052 785 1,194 – – – – (2,636) (5,735) (5,310) (11,921) (8,173) (8,754) 31 (33) 631 707 – – (2,605) (5,768) (4,679) (11,214) (8,173) (8,754) Cash and cash equivalents 21,233 24,064 29,310 12,356 21,144 13,881 4 Nanosonics 2014 Highlights NEW AGREEMENT GE AND NANOSONICS ANNOUNCE NEW MARKETING AND SALES AGREEMENT FOR NORTH AMERICAN REGION HEALTHCARE INDUSTRY’S COMPANY OF THE YEAR NANOSONICS NAMED HEALTHCARE INDUSTRY’S COMPANY OF THE YEAR AT JANSSEN 2013 INDUSTRY EXCELLENCE AWARDS APPROVED SOUTH KOREA’S MINISTRY OF FOOD AND DRUG SAFETY APPROVES trophon EPR FOR USE NEW LEADERSHIP MICHAEL KAVANAGH COMMENCES AS CEO AND PRESIDENT FIRST UK HOSPITAL ADOPTS trophon® EPR LEADING UK HOSPITAL, KING’S MILL, ADOPTS trophon EPR AUSTRALIAN STUDY HIGHLIGHTS RISKS AUSTRALIAN STUDY HIGHLIGHTS RISKS OF CROSS INFECTION USING CONVENTIONAL DISINFECTION nanosonics limited | annual report 2014 5 GUIDELINES UPDATED NEW AMERICAN INSTITUTE OF ULTRASOUND IN MEDICINE (AIUM) GUIDELINES RECOMMEND “HYDROGEN PEROXIDE NANODROPLET EMULSION” (trophon EPR’S TECHNOLOGY) FOR EFFECTIVE HIGH LEVEL DISINFECTION WITHOUT TOXICITY trophon EPR RECEIVES AWARD IN GERMANY, trophon EPR RECEIVED MANAGEMENT & KRANKENHAUS AWARD 2014 IN LABOR AND HYGIENE CATEGORY STRATEGIC PARTNERSHIP NANOSONICS SIGNS STRATEGIC PARTNERSHIP WITH MIELE PROFESSIONAL TO DISTRIBUTE trophon EPR IN GERMANY TOP HOSPITAL USE 40 OF 50 US TOP HOSPITALS NOW USE trophon EPR STUDY PUBLISHED STUDY PUBLISHED IN JOURNAL OF INFECTION AND PUBLIC HEALTH SHOWS trophon EPR MET A RANGE OF MAJOR INTERNATIONAL STANDARDS FOR HIGH LEVEL DISINFECTION 6 Chairman’s letter Institute of Ultrasound (AIUM) released updated guidelines reinforcing stricter controls for HLD of ultrasound probes. The AIUM is recognised and respected by the health profession internationally and changes to guidelines from organisations such as this are an important step towards achieving our goal of establishing trophon EPR as the new global standard of care for HLD of ultrasound probes. Nanosonics, together with its global strategic partners including GE Healthcare, Toshiba and Miele Professional, is leveraging mounting clinical evidence to support high level disinfection technologies like trophon EPR and the rejection of traditional, toxic chemical methods. There were notable highlights in all markets throughout the year. As reported in August 2013, in North America, I am pleased to present, on behalf of the Board of the trophon EPR is now being marketed and sold by the Nanosonics, our 2014 Annual Report. Ultrasound Division of GE Healthcare and supported by a The past year has seen significant evolution of the substantial sales and marketing investment by GE Ventures. Company’s growth and performance, with a strong This realigned agreement has resulted in real momentum emphasis on our international markets. The Nanosonics in the North American market where sales increased team has strengthened globally and the Board recognises 34% for the period. The trophon EPR is now installed at the significant contribution of Mr Michael Kavanagh, 40 of the top 50 Hospitals in the US (US News & World the CEO and President, together with a number of new Report rankings). international appointments in our European markets. As recognition of healthcare acquired infections relating to This 2014 Annual Report highlights achievements in each ultrasound grows, audit compliance has become crucial. and every dimension of the Company’s activities which have Customers using the trophon EPR achieved successful resulted in a year of strong financial results and impressive audits with no known rejections from third party auditors achievements within our overall strategic plan. On a daily (The Joint Commission). This is an important endorsement basis we see confirmation of the growing awareness of the for our product. need for compliance with infection control guidelines and Market penetration is tracking well in Europe where we the increasing recognition that the automated trophon EPR have employed dedicated Country Managers to commence is now the emerging standard of care. market development in the UK, Germany and France. Sales The awareness of imaging-related healthcare acquired in the region showed a five fold increase over last year, infections continues to grow along with a global trend supported by the adoption of trophon EPR in the UK where towards strengthening requirements in guidelines for high Nanosonics has strategic partnerships with Toshiba and GE level disinfection (HLD). In May this year, the American Healthcare, as well as growing direct sales. nanosonics limited | annual report 20147 In March, a new strategic partnership for the German Our commitment is to leverage our technical capabilities, market with Miele Professional, a world leading authority our R&D pipeline and our evolving distribution network to and provider of medical disinfection and sterilisation drive shareholder value now and well into the future. The equipment, was announced. Miele launched the market for microbial control is a large and growing one and trophon EPR at the DGKH-congress (German Society of Nanosonics is well positioned to help our customers and Hospital Hygiene) in Berlin in March, and has now started partners meet the increasing demands for better infection broad market awareness and education programs across control with integrated solutions underpinned by strong the country. annuity revenue. Sales in Australia and New Zealand grew 51% driven by I take this opportunity to recognise the enormous efforts sales in leading corporate imaging centres as well as the and talent of the growing Nanosonics team and the public sector, and were supported by an underlying important contribution of our Board. Nanosonics has growth in sales of consumables as the installed base achieved many milestones during the year and a strong continued to grow. 2014 result. Well earned recognition of Nanosonics’ achievements came Finally, our success to date has been underpinned by when the Company was named the Australian healthcare our shareholders whose support and shared vision will industry’s Company of the Year for 2013 at the Janssen enable Nanosonics to continue on the path of innovation Industry Excellence Awards. and growth. The Company achieved its first global Environmental Management System (EMS) certification and is now certified to ISO14001-EMS, an important certification for healthcare organisations which require suppliers to demonstrate their commitment to the environment. This certification highlights the many environmental benefits associated with trophon EPR. Nanosonics continues to demonstrate world leading expertise across the full spectrum of its activities which is driving our increasing commercial success into multiple global markets. Mr Maurie Stang Chairman Sydney 21 August 2014 8 CEO’s report In light of anticipated changes to UK guidelines and new strategic partnerships, we’re looking forward to continued growth in the European region over the next year. Plans for expansion in Asia Pacific are beginning to take shape. Regulatory approvals were received for both Korea and Japan in the period and we are finalising commercialisation strategies for these markets. Japan is a significant market globally from an ultrasound perspective and hence represents an important opportunity for our technology. Throughout the year, market fundamentals have strengthened the outlook for our flagship product, the trophon EPR. These fundamentals are transforming our The 2014 financial year has been a period of strong sales business and, in the process, are creating an opportunity growth and global expansion for Nanosonics. This year we to establish trophon EPR as the global standard of care for laid the foundations to support our next phase of growth ultrasound disinfection. These fundamentals include: and accelerate our transition from an emerging company with proven technology to an internationally recognised leader in the field of infection control. Global sales momentum building • Growing awareness of imaging procedure Healthcare Acquired Infections (HAIs). • Trends towards stricter controls for high level disinfection (HLD) and for automation. Global sales were up 44.3% at the end of the year with all • Growing importance of risk mitigation. regions contributing towards this growth. Sales were up 34% in North America, 51% in Australia and New Zealand, and more than five fold in Europe and other countries. In the first quarter we announced an updated marketing and sales agreement with GE which included a significant • Mounting clinical evidence for trophon EPR adoption. • Growing recognition and adoption of trophon EPR. • Current toxic HLD solutions progressively being rejected by customers and regulators. investment by GE Ventures. Nanosonics is now working Growing awareness closely with GE Healthcare and GE Ventures to accelerate Awareness of HAIs associated with imaging is growing. An growth in the North American market which is a prime increasing number of clinical studies demonstrate that, with region for us. Momentum is also building in Europe where the appointment of dedicated Country Managers resulted in growing sales figures for the region. The increase in sales traditional methods of ultrasound probe disinfection, probes can remain contaminated with pathogens and pose a risk of cross infection. There have been reported cases of hepatitis B and hepatitis C infections being transmitted and, in both for the region was mainly due to adoption of trophon EPR in cases, improper ultrasound transducer disinfection was the UK where Nanosonics has strategic partnerships with pinpointed as a likely cause. Toshiba and GE Healthcare, as well as direct sales operations. In March we were delighted to announce a new strategic partnership with Miele Professional for the German market. Miele Professional is a world leading authority and provider of medical disinfection and sterilisation equipment. Trends towards stricter controls for HLD and for automation Guideline changes are key to establishing trophon EPR as the global standard of care. As the issue of poor infection control practices receives greater attention, moves to nanosonics limited | annual report 20149 strengthen and tighten global regulations and guidelines for • Chemicals traditionally used in manual disinfection are HLD are underway. suboptimal and may pose a risk of cross contamination. While a number of international healthcare authorities • Automated systems are more effective than manual already recommend automated reprocessing over methods, which are prone to human errors. manual methods, changes to the American Institute of Ultrasound (AIUM) guidelines reinforcing stricter controls for ultrasound probe disinfection were a significant highlight this year. • The superior efficacy of trophon EPR. We have included further details of the clinical evidence that emerged during the past year in this report. We plan to continue investing in this important aspect of our market Furthermore, in the UK, health board reviews of ultrasound growth strategy in FY15. decontamination procedures and guidelines in England, Scotland and Wales are under review. We expect the resulting changes to be positive for trophon EPR as they should also focus on implementing stricter, more effective controls. Growing importance of risk mitigation HAIs are a huge financial burden. With the cost of healthcare a major focus for governments, insurers and consumers worldwide, healthcare facilities are increasingly being required to publically report HAI-related data. As this trend continues, risk mitigation and audit compliance becomes increasingly recognized as an important factor in accountable healthcare models. In May, The Joint Commission (TJC), which is a third party auditor in the US, released a Quick Safety advisory highlighting improperly sterilised or high level disinfected medical equipment as one of the top five non-compliant accreditation requirements for 2013. On another very positive note for trophon EPR, I’m pleased to report that customers in the US have achieved uniform high Growing recognition and adoption of trophon EPR Our Strategic Growth Plan is tracking well. In the US, trophon EPR is now installed at 40 of the 50 top ranked hospitals (US News & World Report). Key to the plan is our strategic partnerships with global brands that position us to penetrate important markets. While our partnerships with GE in North America and Toshiba in the UK are now well established, in March we were delighted to sign a new agreement with Miele Professional in Germany. Working with these leading global brands is a real testimony to the innovation of the trophon EPR and validation of its market potential. Nanosonics received further recognition this year when we were named the Australian healthcare industry’s Company of the Year for 2013 at the Janssen Industry Excellence Awards while in Germany the trophon EPR received the M&K Award 2014 in the Labor and Hygiene category. Management & Krankenhaus is the leading publication for decision makers in the German health industry. compliance and no known rejections from TJC to date. Current toxic HLD solutions progressively being In essence, this validates that adoption of the trophon rejected by customers and regulators EPR provides high levels of assurance of compliance for There is a growing awareness of the occupational health our customers. Mounting clinical evidence Clinical evidence supporting adoption of trophon EPR is a key driver of changes to guidelines. During the past year, clinical evidence continued to mount and a number of risks for healthcare professionals using toxic chemicals to perform traditional ultrasound disinfection procedures. Consequently, customers and regulators are turning to safer alternatives such as the trophon EPR, which addresses the OHS risks posed by traditional chemical soaking methods. significant studies were published highlighting the efficacy Trend towards Point of Care adoption issues and OHS risks associated with traditional disinfection The toxic chemicals used in traditional disinfection methods practices. To summarise, these studies showed: involve soaking in chemicals and usually require a separate 10 room with ventilation. According to reports to TJC’s Office Focusing the varied activities of a global technology of Quality Monitoring, space issues are a contributing factor company like Nanosonics is crucial to our success. During preventing proper sterilisation or high level disinfection of the year, the Senior Leadership Team formalised a new medical equipment. One of the many benefits of trophon EPR is that it is safe and easy to use at the point of care. This not only saves space, it creates workflow efficiencies and eliminates transportation of probes, thus reducing the potential for probe damage. Operations Corporate Mission statement supported by five Core Corporate Objectives. These objectives are designed to provide a clear direction to support our business and are: Customer Experience, Product Innovation, Operational Excellence, People Engagement and Value Creation. Specific core strategies underpinning the objectives have also been developed and are now directing the three year growth plan for the Company. Operating expenses of $20.1 million and a net loss of $2.6 million represent a substantial reduction of about 55% that Outlook supports our path to profitability. R&D activity focused on refining and improving our product offering and identifying Looking forward, our aim is to consolidate and expand on the achievements of FY14 to create sustainable value new opportunities to leverage our platform technology into for shareholders. the second generation of products. The company has a I’m confident we have the foundations in place to achieve strong and growing intellectual property portfolio. Since our goals and support our growth strategies, and that our April 2013, the number of granted/accepted patents has device is uniquely positioned to take advantage of the more than doubled – from 47 to 95. tremendous opportunities that are presenting as the market Validation work with ultrasound probe manufacturers fundamentals strengthen. also progressed and the trophon EPR is now approved I would like to thank everyone in the Nanosonics team for for use with more than 600 probe models across 14 their dedication and efforts this year. This is an exciting manufacturers. This is an important selling point for our time for the company as we emerge as a fully-fledged product. In addition, the figure includes surface probes, international medical technology organisation. We remain which have the potential to become an important part of focused on the necessary activities as well as building our model as evidence emerges supporting the requirement company and shareholder wealth into the future. for disinfecting these devices. We continued to implement our strategic LEAN program to enable scalable manufacturing processes. In addition to achieving improved planning and visibility, we achieved 100% on time delivery throughout the year. Regulatory and Quality Assurance highlights for the year Michael Kavanagh included successful NRTL, KFDA and TüV recertification CEO and President audits as well as audits by Miele Professional and the Korean Ministry of Food and Drug Safety. In addition, in August we announced regulatory approval in Japan. Sydney 21 August 2014 Throughout the year we also expanded our global customer support and service capabilities into each of our international markets with service infrastructure now set up across all regions. nanosonics limited | annual report 2014US regional highlights 11 2014 was an exciting time in the US. The strategy of implementing trophon EPR with large hospital groups is paying off. Some key highlights this year include: • Amended contract executed with GE Healthcare to • The trophon EPR was presented at national trade continue as exclusive North America distributor with GE shows and more than 20 regional infection control funding the Nanosonics US Sales Force. scientific meetings. • GE Healthcare and GE Ventures sales and • Service and repair capability in Indianapolis completed marketing investment to accelerate the North American and operational. growth strategy. • trophon EPR installed at 40 of the top 50 Ob/Gyn best US hospitals.* Luminary US Institution, The Johns Hopkins Hospital, embraces trophon EPR “The trophon EPR has been the biggest thing to hit ultrasound since colour Doppler,” said the head of ultrasound radiology at The Johns Hopkins Hospital (JHM) following the introduction of trophon EPR. Headquartered in Baltimore, JHM is a $6.7 billion integrated global health enterprise and widely regarded as one of the world’s leading hospitals. It was ranked by U.S. News & World Report as the best overall hospital in America for 21 consecutive years (1991-2011), and was rated as the top institution in 2013. After an evaluation of ultrasound probe disinfection practices, the hospital’s Radiology Department decided to move away from chemical soaking methods and purchased 26 trophon EPR units to reprocess its intracavitary and surface transducers. “The amount of time and energy needed for chemical soaking was greatly impacting patient workflow to the point where I was pushing to hire a person to just HLD the transducers,” said Robert De Jong Jr., RDMS, RDCS, RVT, Radiology Technical Manager, Ultrasound. “The chemicals were also creating a separation between layers of the transducer, causing air to be introduced. This resulted in artefacts and degraded images. I have not had to replace a transducer for these issues since the switch to the trophon EPR.” The hospital has experienced other benefits such as eliminating much of the protective gear that was required for chemical soaking and being able to use the trophon EPR at the point of care. The latter means the department no longer needs a room dedicated to HLD. Word about the trophon EPR spread throughout the hospital and JHM now has more than 40 units across its radiology, obstetrics/gynaecology and emergency departments. “The reduced time waiting for the transducer to be ready has been a major plus and staff members love the ease of use of the trophon EPR. We’re now trying to ‘trophon’ every transducer after use, not just endocavitary,” said Mr De Jong. “Trophon was an answered prayer! It has solved so many HLD issues while offering more complete and safer protection for our patients and staff – in half the time.” * US News and World Report 12 Europe regional highlights Strategic partnerships with leading global brands is a key part of our global expansion strategy. Our partnership with Toshiba is reaping rewards and the Company now has a number of UK sites with multiple trophon EPRs installed. In March Nanosonics signed a strategic partnership with Miele Professional to distribute trophon EPR in Germany. Miele conducted a national launch in March and has started broad market awareness and education programs for trophon EPR across Germany. Other key highlights this year include: • The trophon EPR has now been adopted in a number • In Germany, of hospitals throughout the UK including key university trophon EPR hospitals in London and Cardiff. • Health board reviews are underway in England, Scotland and Wales to amend ultrasound decontamination procedures and guidelines following MHRA alerts*. The changes, which will be released in the foreseeable future, are expected to be positive for trophon EPR. received Management & Krankenhaus Award 2014. trophon EPR provides reassurance for staff and patients at King’s Mill Hospital Achieving clinical governance goals is just one of the benefits experienced by the ultrasound department at King’s Mill Hospital, UK following the installation of eleven trophon EPR units. Staff also reported feeling reassured that probes are now being ‘deep cleaned’ in-line with international best practice. “We like this disinfection process because it removes any user subjectivity, assuring staff that the disinfection process is reproduced perfectly each and every cycle,” said Clinical Lead Sonographer, Ann Allen. “It has also had a positive impact on patient confidence as they know the probe has been automatically reprocessed rather than manually cleaned.” The 600 bed King’s Mill Hospital has one of the UK’s most highly regarded ultrasound departments and turned to the trophon EPR when it was looking for a solution to high level disinfect its probes following two MHRA alerts*. An initial purchase of six units was quickly followed by a further five units. “The trophon EPR is extremely easy to use and fits well into our workflow,” said Mrs Allen. “It has not caused any extension in examination times, which is crucial in a busy ultrasound department. “While there is an additional cost required to implement the trophon EPR versus the alternative HLD wipe system we looked at, there are very significant cost savings year on year.” * The first MHRA (Medicines and Healthcare products Regulatory Agency alert advised users to appropriately decontaminate all types of reusable ultrasound probes while the second advised users ensure detergent and disinfectant wipes are compatible with the medical device to avoid damage to the plastic surfaces. Asia Pacific regional highlights 13 The Australian market for the trophon EPR continued to grow this year. Two significant studies coming out of Australia added to the mounting clinical evidence that will help us establish trophon EPR as the standard of care globally. Some key highlights this year include: • The trophon EPR was approved for use in South Korea • Named the healthcare industry’s Company of the following receipt of a product licence from the Korean Year for 2013. The Janssen 2013 Industry Excellence Food and Drug Administration (KFDA). Awards recognise excellence in the commercialisation • Nanosonics successfully passed its first Environmental of innovative healthcare solutions by Australian Management System (EMS) certification audit and is biotechnology companies. now certified to ISO14001-EMS. trophon EPR “offers the best disinfection procedure” One of the major benefits of the trophon EPR is that it delivers effective, high level disinfection of the entire ultrasound probe, including the shaft and handle. Some probe manufacturers advise against immersing the probe in liquid disinfectant, which Dr Andrew Ngu, Principal of East Melbourne Ultrasound, said may pose a risk of cross infection for patients. Dr Ngu, who is also President elect for the International Society of Ultrasound in Obstetrics and Gynaecology (ISUOG) and on the executive of the Australasian Society of Ultrasound in Medicine (ASUM), has been using the trophon EPR since February 2012. “Before trophon we were using various methods, one of which was soaking the probes in chemical solution,” Dr Ngu said. “It wasn’t very satisfactory as we could only disinfect part of the probe.” Dr Ngu co-authored a study which was presented at the ISUOG World Congress in October 2013. The study showed that more than 70% of manually disinfected probes still showed signs of contamination on the handles, with a large portion of the contaminants being well known pathogens including methicillin resistant Staphylococcus aureus (MRSA). In comparison, trophon EPR completely eliminated bacteria on the probe handles. “With the trophon EPR I can be assured that I’m giving patients the best service all round including, most importantly, the best disinfection procedure for probes,” Dr Ngu said. “The staff are also relieved they don’t have to do all the [protective equipment] procedures to protect themselves from the chemical solution. “It’s a very easy process to go through and we’re very happy with it. In fact, now we wouldn’t look at anything else.” 14 trophon® EPR: innovative technology delivering improved standards of care Nanosonics’ trophon EPR provides fast, automated high level disinfection of ultrasound probes. The fully enclosed system reduces the risk of chemical exposure and can be conveniently located at the point of care to improve clinic workflow. nanosonics limited | annual report 201415 Fast The trophon EPR product range Auto Fast automated high level Nanosonics has a range of consumables and accessories disinfection at point of care to meet the needs of customers and allow them to more Helps Protect Fully enclosed system limits exposure to harmful chemicals Consistent Quality assured consistency Traceability Best practice documentation solution Probe Friendly Probe friendly process. Compatible with more than 600 probe models Cost Efficient Integrates into HLD process at point of care and improves workflows Effective effectively provide and monitor the high level disinfection process. These products expand Nanosonics’ offering in the market and provide additional revenue streams from service contracts and consumables supply. trophon® Connect trophon Connect software is an audit and accreditation tool that enables disinfection data to be downloaded from the trophon EPR to a PC to provide fast, non-editable reports. trophon® Printer The trophon Printer delivers an easy-to-use traceability solution for quality system documentation requirements. The trophon Printer can print up to four labels per disinfection cycle based on the operator, site or procedure preferences and links the probe and disinfection procedure to the patient. trophon® Wall Mount and trophon® Cart Enables the trophon EPR to be mounted on a wall where there are space constraints or makes the device fully mobile for convenient point of care use. Clinically validated trophon EPR disinfects Chemical Indicators both probe shaft AND handle Environmentally Friendly Chemical Indicators validate each disinfection cycle by providing a qualitative colour change. Harmless oxygen and water by-products. Sonex™/NanoNebulant™ More than 70% recyclable components The trophon EPR uses cartridges of Nanosonics’ proprietary disinfectant liquid. Each cartridge is sealed and easy to insert into the trophon EPR. The device pierces the cartridge once the cartridge is inserted so the user does not come into contact with the liquid. Empty cartridges are recyclable. 16 Clinical evidence supporting adoption of trophon EPR continues to mount Changes to decontamination procedures and guidelines are an important factor in establishing trophon EPR as the new standard of care. These changes are starting to happen due to growing awareness of healthcare acquired infections (HAIs) related to imaging procedures and recognition of the risks associated with improperly sterilised or high level disinfected medical equipment. Most notable were the recent changes in the new guidelines from the American Institute of Ultrasound Medicine (AIUM). The guidelines reinforce stricter controls for high level disinfection of ultrasound probes and included the statement “a hydrogen peroxide nanodroplet emulsion might provide an effective high level disinfectant without toxicity”. Clinical evidence is another important factor in driving these changes. During the last year some significant findings were published highlighting the efficacy issues and OHS risks associated with traditional disinfection practices, as well as studies that further support the need to adopt automated high level disinfection in ultrasound imaging. 3210jum_online_Layout 1 9/19/13 8:45 AM Page 1799 Journal of Antimicrobial Chemotherapy Advance Access published February 4, 2014 J Antimicrob Chemother doi:10.1093/jac/dku006 ORIGINAL RESEARCH Susceptibility of high-risk human papillomavirus type 16 to clinical disinfectants Jordan Meyers1†‡, Eric Ryndock2†, Michael J. Conway2§, Craig Meyers2* and Richard Robison1 Evaluation of a Hydrogen Peroxide-Based System for High-Level Disinfection of Vaginal Ultrasound Probes Stephen Johnson, MD, Matthew Proctor, MD, Edward Bluth, MD, Dana Smetherman, MD, Katherine Baumgarten, MD, Laurie Troxclair, BS, Michele Bienvenu, BS 1Department of Microbiology and Molecular Biology, Brigham Young University, Provo, UT 84602, USA; 2Department of Microbiology and Immunology, Pennsylvania State College of Medicine, Hershey, PA 17033, USA *Corresponding author. Tel: 1-717-531-6240; Fax: 1-717-531-4600; E-mail: cmm10@psu.edu + + †Authors contributed equally. ‡Present address: Department of Medicine, Brigham and Woman’s Hospital, Boston, MA 02115, USA. §Present address: Department of Foundational Sciences, Central Michigan University, Mount Pleasant, MI 48859, USA. Received 7 October 2013; returned 18 November 2013; revised 31 December 2013; accepted 6 January 2014 D o w n l o a d e d f r o m h t t p : / / j a c . o x f o r d j o u r n a l s . o r g / b y J o n a t h a n B u r d a c h o n M a r c h 2 , 2 0 1 4 Objectives—Because of the complex process and the risk of errors associated with the glutaraldehyde-based solutions previously used at our institution for disinfection, our department has implemented a new method for high-level disinfection of vaginal ultra- sound probes: the hydrogen peroxide-based Trophon system (Nanosonics, Alexandria, New South Wales, Australia). The aim of this study was to compare the time difference, safety, and sonographers’ satisfaction between the glutaraldehyde-based Cidex (CIVCO Medical Solutions, Kalona, IA) and the hydrogen peroxide-based Trophon disinfection systems. American Journal of Infection Control 41 (2013) S67-S71 Objectives: Little to nothing is known about human papillomavirus (HPV) susceptibility to disinfection. HPV is esti- mated to be among the most common sexually transmitted diseases in humans. HPV is also the causative agent of cervical cancers and other anogenital cancers and is responsible for a significant portion of oropharyngeal can- cers. While sexual transmission is well documented, vertical and non-sexual transmission may also be important. Contents lists available at ScienceDirect American Journal of Infection Control Methods: Using recombinant HPV16 particles (quasivirions) and authentic HPV16 grown in three-dimensional organotypic human epithelial culture, we tested the susceptibility of high-risk HPV to clinical disinfectants. Infectious viral particles were incubated with 11 common clinical disinfectants, appropriate neutralizers were added to inactivate the disinfectant and solutions were filter centrifuged. Changes in the infectivity titres of j o u r n a l h o m e p a g e : w w w . a j i c j o u r n a l . o r g the disinfectant-treated virus were measured compared with untreated virus. American Journal of Infection Control Methods—The Institutional Review Board approved a 14-question survey adminis- tered to the 13 sonographers in our department. Survey questions addressed a variety of aspects of the disinfection processes with graded responses over a standardized 5- point scale. A process diagram was developed for each disinfection method with seg- mental timing analysis, and a cost analysis was performed. Assessing the risk of disease transmission to patients when there is a failure to follow recommended disinfection and sterilization guidelines Results: HPV16 is a highly resistant virus; more so than other non-enveloped viruses previously tested. The HPV16 quasivirions showed similar resistance to native virions, except for being susceptible to isopropanol, the triple phenolic and the lower concentration peracetic acid-silver (PAA-silver)-based disinfectant. Authentic virus and quasivirus were resistant to glutaraldehyde and ortho-phthalaldehyde and susceptible to hypochlorite and the higher concentration PAA-silver-based disinfectant. Original research article David J. Weber MD, MPH a, b,*, William A. Rutala PhD, MPH a, b a Department of Medicine, University of North Carolina at Chapel Hill, Chapel Hill, NC b Department of Hospital Epidemiology, UNC Health Care, Chapel Hill, NC Conclusions: We present the first disinfectant susceptibility data on HPV16 native virions, which show that com- monly used clinical disinfectants, including those used as sterilants in medical and dental healthcare facilities, have no effect on HPV16 infectivity. Policy changes concerning disinfectant use are needed. The unusually high resistance of HPV16 to disinfection supports other data suggesting the possibility of fomite or non-sexual trans- mission of HPV16. Results—Nonvariegated analysis of the survey data with the Wilcoxon signed rank test showed a statistical difference in survey responses in favor of the hydrogen peroxide- based system over the glutaraldehyde-based system regarding efficiency (P = .0013), ease of use (P = .0013), ability to maintain work flow (P = .026), safety (P = .0026), fixing problems (P = .0158), time (P = .0011), and overall satisfaction (P = .0018). The glutaraldehyde-based system took 32 minutes versus 14 minutes for the hydrogen peroxide-based system; the hydrogen peroxide-based system saved on average 7.5 hours per week. The cost of the hydrogen peroxide-based system and weekly maintenance pays for itself if 1.5 more ultrasound examinations are performed each week. Keywords: hospital sterilants, papillomavirus, cancer, glutaraldehydes, ortho-phthalaldehydes Conclusions—The hydrogen peroxide-based disinfection system was proven to be more efficient and viewed to be easier and safer to use than the glutaraldehyde-based system. The adoption of the hydrogen peroxide-based system led to higher satisfaction among sonographers. Key Words: Bronchoscopy Health care-associated infection Failure Endoscopy Introduction Medical devices that enter body tissues should be sterile, whereas devices that contact mucous membranes should be high-level disinfected between patients. Failure to ensure proper cleaning and sterilization or disinfection may lead to patient-to-patient transmission of pathogens. This paper describes a protocol that can guide an institution in managing potential disinfection and sterilization failures. Key Words—infection control; transvaginal ultrasound; ultrasound technology Copyright (cid:31) 2013 by the Association for Professionals in Infection Control and Epidemiology, Inc. Published by Elsevier Inc. All rights reserved. Due to the specific life cycle requirements of human papilloma- virus (HPV), infectious virus has been difficult to produce in labora- tories and an assay for infectious virus has only recently become available. The ability to produce infectious virus outside of host animals is a great benefit to basic research; it often requires less time and is more cost-effective. HPV has a life cycle stringently tied to differentiated epithelial tissue. This has required the devel- opment of special systems to make in vitro propagation possible. Because of the historical difficulty in producing high enough titres of infectious HPV particles and the lack of a suitable assay to test for infectivity, little to nothing is known about HPV susceptibility to E valuation of the female pelvis with ultrasound involves both transabdominal and transvaginal images for increased specificity and sensitivity. Because nondisposable invasive ultrasound probes are needed for transvaginal image acquisition, there is a potential for contamination of these instruments with blood, pathogens, or debris and, thus, cross-contamination in future patients. Each year in the United States, approximately 101 million medical procedures are performed, including approximately 10.8 million gastrointestinal endoscopies and approximately 440,000 bronchos- copies.1 All invasive procedures involve contact by a medical device or surgical instrument with a patient’s sterile tissue or mucous membranes. A major risk of all such procedures is the introduction of pathogens that can lead to infection. Failure to properly disinfect or sterilize equipment carries not only the risk associated with breach of host barriers but also a risk for person-to-person trans- mission (eg, hepatitis B virus, hepatitis C virus, Salmonella spp, Mycobacterium tuberculosis) and transmission of environmental pathogens (eg, Pseudomonas aeruginosa, non-tuberculous mycobac- teria, environmental fungi). Thus, achieving disinfection and sterili- zation through the proper cleaning of used medical devices followed by proper use of disinfectants and sterilization practices is essential for ensuring that medical and surgical instruments do not transmit infectious pathogens to patients.2,3 More than 45 years ago, Spaulding devised a rationale approach to disinfection and sterilization of patient care items or equip- ment.2-4 This classification scheme is so clear and logical that it has been retained and refined and continues to be used when planning methods for disinfection and sterilization. Spaulding divided medical devices into 3 categories (ie, critical, semicritical, noncrit- ical) based on the risk of infection involved in the use of the items. * Address correspondence to David J. Weber, MD, MPH, 2163 Bioinformatics, CB 7030, Chapel Hill, NC 27599-7030. E-mail address: dweber@unch.unc.edu (D.J. Weber). Publication of this article was supported by Advanced Sterilization Products (ASP). Conflicts of interest: W.A.R. reports income from ASP and Clorox, and D.J.W. reports income from Clorox. disinfection. Disinfectants have been tested against many import- ant viruses and these studies are important to public health as they provide information that can be used to reduce the preva- lence of infection, transmission and reinfection. Presently, hospi- tals’ and other healthcare institutes’ use of disinfectants to inactivate HPV is based on what is used for other viruses or simply on what someone thinks should be effective. Two systems (recombinant based and organotypic) have been developed to produce high amounts of infectious HPV particles in the labora- Critical devices are items that enter sterile tissue or the vascular tory. Infectivity can now be measured by using reverse transcrip- system and include surgical instruments, implants, and intravenous tion quantitative PCR (RT-qPCR) that detects the viral E1^E4 Items in this category should be or intra-arterial catheters. transcript. Detection of this transcript signals infectious particles purchased as sterile or should be sterilized by steam sterilization that were able to achieve cell entry and start their early viral (preferred). Semicritical items are those that come into contact with mucous membranes or nonintact skin and include gastroin- testinal endoscopes, bronchoscopes, laryngoscope blades and handles, and diaphragm fitting rings. These medical devices should be free of all microorganisms (ie, mycobacteria, fungi, viruses, and bacteria), although small numbers of bacterial spores may be present. The minimal requirement for semicritical items is high- level disinfection using US Food and Drug Administration-cleared, high-level chemical disinfectants. Noncritical items are those that come in contact with intact skin but not mucous membranes (eg, bedpans, blood-pressure cuffs, bed rails). Such items should be undergo low-level disinfection after use when shared by different patients. The Spaulding classification provides an excellent guide for disinfection and sterilization of medical devices, but it should be noted that the scheme is an oversimplification and that preventing transmission of infection by medical devices may require additional modifications.3,5 1 of 5 Multiple studies in many countries have documented lack of compliance with established guidelines for disinfection and steril- ization.3 Failure to comply with scientifically based guidelines has led to numerous outbreaks. Deficiencies leading to infection have occurred either from failure to adhere to scientifically based guidelines or misuse of the disinfection or sterilization processes.6-9 Patient notifications because of improper reprocessing of semi- critical (eg, endoscopes) and critical medical instruments have occurred regularly and generally involve single institutions but may also involve multiple institutions.10 Seoane-Vazquez et al reported # The Author 2014. Published by Oxford University Press on behalf of the British Society for Antimicrobial Chemotherapy. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com 0196-6553/$36.00 - Copyright (cid:31) 2013 by the Association for Professionals in Infection Control and Epidemiology, Inc. Published by Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.ajic.2012.10.031 Received January 8, 2013, from the Departments of Radiology (S.J., M.P., E.B., D.S., L.T., M.B.) and Infectious Disease (K.B.), Ochsner Clinic Foundation, and University of Queensland School of Medicine, Ochsner Clinical School (E.B.), New Orleans, Louisiana USA. Revision requested January 25, 2013. Revised manuscript accepted for publication February 19, 2013. Address correspondence to Edward I. Bluth, MD, Department of Radiology, Ochsner Clinic Foundation, 1514 Jefferson Hwy, New Orleans, LA 70121 USA. E-mail: ebluth@ochsner.org Abbreviations FDA, Food and Drug Administration doi:10.7863/ultra.32.10.1799 ©2013 by the American Institute of Ultrasound in Medicine | J Ultrasound Med 2013; 32:1799–1804 | 0278-4297 | www.aium.org nanosonics limited | annual report 2014 17 • A study evaluating contamination levels on ultrasound The study called for stricter disinfection standards which probes covered by a sheath and disinfected using wipes, require use of devices – such as the trophon EPR – or demonstrated a substantial persistence of potentially techniques that ensure high level disinfection of the pathogenic microorganisms. Human papilloma virus whole probe, handle included.6 (HPV) DNA was found on 7% of the probes (HPV can cause cervical and other cancers). Staphylococcus • Manual disinfection processes are often difficult to validate to ensure all critical process parameters are aureus on 4% and Chlamydia trachomatis, which can consistently met.7 also cause serious illness, were found on 2% of samples post decontamination.1 • A meta-analysis of studies involving wipes for disinfection has shown residual pathogenic bacterial contamination • Nurses with regular daily exposure to sterilising agents (including glutaraldehyde) during pregnancy, are more than twice as likely to undergo late spontaneous abortion compared to nurses who are not exposed to (12.9%) and viral contamination (1.0%) on transvaginal these chemicals.8 and transrectal transducers.2 • Manual disinfection of medical devices has been shown to lead to an increased risk of operator error if protocols are not followed correctly and poor protocol compliance can lead to an increased risk of transmission for patients.3 • An evaluation of the trophon EPR concluded that the trophon EPR was proven to be more efficient and viewed to be easier and safer to use than a glutaraldehyde-based method. The study showed that the trophon EPR process took 14 minutes (this figure includes related activities such as pre-cleaning the probe, wiping after disinfection • A case of hepatitis C infection was reported in a patient process and logging patient information) compared to 32 after a prostate biopsy. This follows another case of a fatal minutes for a glutaraldehyde-based disinfection system hepatitis B infection after an imaging procedure. In both and that the trophon EPR saved an average of 7.5 hours cases improper ultrasound transducer disinfection may per week.9 have been involved.4,5 • A peer-reviewed study published in the Journal of • A study found that more than 70% of manually Infection and Public Health reported on the performance disinfected probes still showed signs of contamination of the trophon EPR when tested against 21 different on the handles, with a large portion of the contaminants species of bacteria, fungi and viruses according being well known pathogens including methicillin to accepted international standards for high level resistant Staphylococcus aureus (MRSA). While handles disinfection. The study showed trophon EPR met all do not enter body cavities they can harbour pathogens standards for high level disinfection.10 and pose a risk of cross infection for patients. 1. M’Zali, F., et al (2014). “Persistence of Microbial Contamination on Transvaginal Ultrasound Probes despite Low-Level Disinfection Procedure.” PLoS One 9(4): e93368 2. Leroy, S. (2013). Infectious risk of endovaginal and transrectal ultrasonography: systematic review and meta-analysis. J Hosp Infect 83(2): 99-106. 3. Weber, D. J., Rutala W (2013). Assessing the risk of disease transmission to patients when there is a failure to follow recommended disinfection and sterilization guidelines. Am J Infect Control 41(5 Suppl): S67-71. 4. Ferhi, K., et al., Hepatitis C transmission after prostate biopsy. Case Rep Urol, 2013. 2013: p. 797248. 5. Medicines and Healthcare products Regulatory Agency (UK), Medical Device Alert Ref: MDA/2012/037, Issued: 28 June 2012 at 14:00. 6. McNally G, Ngu A, ISUOG World Congress, Sydney, Oct 2013. 7. S.Klett, P. Heeg. Stellungnahme zu den Publikationen von Herrn PD Dr G Schrader in Hygiene und Medizin, 2014. 8. Meyers, J., et al., J Antimicrob Chemother, 2014. 9. Johnson et al. J Ultrasound Med. 2013 Oct;32(10):1799-804. 10. Vickery et al., Evaluation of an automated high-level disinfection technology for ultrasound transducers. J Infect Public Health. 2013 Dec. 18 Information on the directors, company secretaries and senior management 1 2 3 4 5 1. Maurie Stang Non-Executive Chairman Since February 2008 he has been a director and Chairman of Chandler Macleod Group Limited (ASX:CMG). He has Mr Stang has been Non-Executive Director and Chairman been director of Macquarie Atla Roads Limited (ASX:MQA) since March 2007 and a member of the Board since since June 2010 and a director of Japara Healthcare November 2000. Limited (ASX:JHC) since April 2014. Mr Stang has more than two decades of experience building and managing companies in the healthcare and biotechnology industry in Australia and internationally. His strong business development and marketing skills have resulted in the successful commercialisation of intellectual property across global markets. He is a Non-Executive Director of Vectus Biosystems and has been Non-Executive Chairman of Aeris Environmental Ltd (ASX:AEI) since 2002. 2. Michael Kavanagh BSc, MBA (Advanced) CEO and President (from 21 October 2013) Mr Kavanagh joined Nanosonics as CEO and President effective 21 October 2013. He was a Non-Executive 4. David Fisher BRurSc (Hons), MAppFin, PhD, FFin Non-Executive Director Dr Fisher has been a member of the Board since July 2001. Dr Fisher is founding partner of Brandon Capital Partners, a leading Australian venture capital provider. He has more than 25 years’ of extensive operating experience in the biotechnology and healthcare industry in Australia and overseas. He held senior positions with Pharmacia AB (now part of Pfizer, Inc) and was CEO of Peptech Limited (now part of Cephalon Inc. (Nasdaq:CEPH). He was a director of Aeris Environmental Ltd (ASX:AEI) from May 2011 to July 2014. Director of the Board from 30 July 2012 to 20 5. Ron Weinberger BSc (Hons), PhD October 2013. President Technology Development/Commercialisation Mr Kavanagh has more than 20 years of international (from 21 October 2013) commercial experience in the healthcare market having Dr Weinberger joined the Company in August 2004 and held local, regional and global roles in medical device and was appointed as Executive Director in July 2008 then pharmaceutical industries. Before joining Nanosonics, he was Senior Vice President of Global Marketing for the major medical device company Cochlear Ltd, a position he held for more than 10 years. Mr Kavanagh has no other current and former directorships in the last three years. 3. Richard England FCA, MAICD Non-Executive Director Mr England joined the Board in February 2010. He is a chartered accountant and professional Non-Executive Director. Since 2002, Mr England has been a director and Chairman of Ruralco Holdings Limited (ASX:RHL). Managing Director and Chief Executive Officer in December 2011 with a period as acting CEO from May 2011. Since October 2013, he has been President of Technology Development/Commercialisation and is responsible for the direction of the Company’s technology development and commercialisation strategy. Dr Weinberger has more than two decades of experience in medical research and biotechnology. He is co-inventor of several of Nanosonics’ key technology patents. Dr Weinberger has not had any other directorships of listed companies in the last three years. nanosonics limited | annual report 20146 7 8 9 10 11 19 6. McGregor Grant BEc, CA, GAICD 9. Vincent Wang BSc, MSc, MBA Chief Financial Officer and Company Secretary Head of Global Support and Services Mr Grant joined Nanosonics in April 2011 and is Mr Wang has extensive experience in developing and responsible for the overall financial management of the implementing global service and support strategy, Company and, together with Mr Kavanagh, has joint establishing and managing customer support, technical responsibility for investor relations. Mr Grant has more service and service marketing functions in global medical than 18 years of business experience in a number device businesses. Before joining Nanosonics in May of senior roles in the medical device and healthcare 2011, Mr Wang led and managed Technical Services and industries located in Australia and the United States. Service Operations for Sonova Hearing Healthcare Group Previously Mr Grant worked for Coopers & Lybrand in and Cochlear Ltd respectively. Australia and Europe. 7. Gerard Putt BSc Chief Operations Officer Mr Putt joined Nanosonics full time in 2011 after 18 months on the Nanosonics advisory board. Mr Putt has more than 15 years of experience in the medical device industry as a leader of development, engineering, production and operations teams. He has particular experience in the implementation of new products into manufacturing and rapid scaling of production to international market needs. 8. Michael Potas BE (E&C) Head of Research, Design and Development 10. Ruth Cremin MSc Head of Quality and Regulatory Ms Cremin joined Nanosonics in July 2011 and has extensive regulatory affairs experience. Previously she worked at Cochlear as a Senior Regulatory Affairs Specialist for the Asia Pacific Region; at Pfizer Australia as a QA & Regulatory Officer and at Bio-Medical Research Ltd in Galway, Ireland as a Regulatory Affairs Associate. 11. Kirste Courtney BA Human Resources Manager Ms Courtney joined Nanosonics in 2008 and has more than 16 years of human resources experience having worked in a variety of industry sectors including chartered Mr Potas joined Nanosonics in August 2006 and has accounting, media, logistics and banking. more than 16 years’ experience in the development and commercialisation of new products and technologies. Since joining Nanosonics in 2006, Mr Potas has been instrumental in the research, design and development of the trophon EPR and associated core intellectual property. 20 Information on the directors, company secretaries and senior management (continued) 12 13 14 15 16 12. Ronald J Bacskai BSME, MBA (Hons) 15. Julien Laronze BBA, BA President and CEO, Nanosonics Inc. Country Manager – France Mr Bacskai joined Nanosonics in 2010 and is responsible Mr. Laronze joined Nanosonics in March 2014. He for leading Nanosonics’ business in the United States. has more than 15 years senior sales management and Mr Bacskai is an experienced executive having worked in executive level experience, with a proven track record multiple industries with a broad technical, marketing and in driving growth both domestically and internationally, sales, and technology commercialisation background. Mr in the medical technology industry with large and small Bacskai has significant experience as President, CEO and companies. Prior to joining Nanosonics, he held Sales board member of several public and private organisations Director positions with Sophysa and Edap-Tms. as well as serving on the advisory board of a speciality environmental firm. 13. Bryn Tudor-Owens BSc Country Manager – UK 16. Robert Waring BEc (Sydney), CA, FCIS, FFin, FAICD Company Secretary Mr Waring was appointed Company Secretary in October 2010 and held this position at the time of the Company’s Mr. Tudor-Owen has 20 years’ experience gained within IPO in May 2007. He is a director of corporate advisory the medical device industry. Prior to Nanosonics he firm, Oakhill Hamilton Pty Ltd. held senior positions with both GE Medical Systems and Cardinal Health for more than 15 years before more recently driving the UK startup operations of a German Healthcare SME. He joined Nanosonics in August 2012. 14. Ralf Schmähling BA (Hons) Country Manager – Germany Mr. Schmähling joined Nanosonics in September 2012. He has more than 12 years experience in various business, sales and marketing management and leadership functions within blue chip medical device companies. He has a successful track record on strategic and tactical sales execution in the German health care market. nanosonics limited | annual report 201421 22 Directors’ report Your directors submit their report together with the Consolidated Financial Report of the Group, being Nanosonics Limited and its subsidiaries, for the year ended 30 June 2014. Principal activities During the year the principal activities of the Group consisted of: • Manufacturing and distribution of the trophon® EPR ultrasound probe disinfector and its associated consumables and accessories; and • Research, development and commercialisation of infection control and decontamination products and related technologies. There have been no significant changes in the nature of these activities during the year. Operating and financial review Revenue from sales for the year amounted to $21,492,000 (2013: $14,899,000), an increase of $6,593,000 or $44.3%. Global sales were up with all regions contributing towards this growth. Sales were up 34% in North America, 51% in Australia and New Zealand, and fivefold in Europe and other countries. Other income amounted to $4,114,000 (2013: $2,690,000), which included the R&D tax refund of $1,516,000 (2013: $1,348,000); Export Market Development grant of $150,000 (2013: 150,000); reimbursement of costs by a distributor of $1,707,000 (2013: nil) and interest earned on cash investments of $739,000 (2013: $1,192,000). Operating expenditure for the year amounted to $20,116,000 (2013: $16,379,000), an increase of $3,737,000 or 22.8% driven by higher employment and related operating costs to support the growth of the business. Other expense for the year of $555,000 ($517,000) relates to borrowing costs on convertible notes. The consolidated loss after tax amounted to $2,605,000 (2013: $5,768,000), a substantial reduction of 55%. The Group ended the year with $21,233,000 of cash and equivalents (2013: $24,064,000). The Group has adequate cash to fund the operations of the business. Other information on the operations of the Group and its business strategies and prospects are discussed in the review of operations included in the CEO report and the regional reviews on pages 8 to 13 of this report. Significant changes in the state of affairs In the opinion of the directors, there were no significant changes in the state of affairs of the Group during the financial year under review and to the date of this report. Dividends – Nanosonics Limited The directors do not recommend the payment of a dividend for the financial year ended 30 June 2014. No dividends were proposed, declared or paid during the financial year (2013: Nil). The Company’s dividend policy in the future, the extent of future dividends and any franking of dividends will depend upon the profitability and the financial and taxation position of the Group at the relevant time. nanosonics limited | annual report 201423 Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2014 that has significantly affected, or may significantly affect: a. the Group’s operations in future financial years; b. the results of those operations in future financial years; or c. the Group’s state of affairs in future financial years. Likely developments and expected results of operations Comments on expected results of the operations of the Group are included in the review of operations on pages 8 to 13. Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is subject to meeting statutory environmental regulations. To demonstrate its commitment to meeting these regulations, the Group has put in place an Environmental Management system, which is currently certified to ISO14001. Directors During the year and to the date of this report, the Board of Nanosonics Limited comprised of Maurie Stang, David Fisher, Richard England, Michael Kavanagh, and Ron Weinberger. As at the date of this report, Nanosonics Limited has the following committees of the Board: Audit and Risk, Remuneration, Nomination, and R&D and Innovation. Details of members of the committees of the Board during the year are included on page 27. Information on the directors, company secretaries and senior management is a part of the Directors’ report and can be found on pages 18 to 20 of the Annual Report. Meetings of directors The number of directors’ meetings, including meetings of the committees, held during the year ended 30 June 2014, and numbers of meetings attended by each of the directors were as follows: Full meetings of directors Audit Meetings of committees Governance and Nomination Remuneration Held1 Attended Held1 Attended Held1 Attended Held1 Attended Maurie Stang Richard England David Fisher Ron Weinberger Michael Kavanagh 12 12 12 12 12 10 12 11 12 11 1 Represents the number of meetings that a director is eligible to attend. 3 3 3 2 3 3 2 2 2 2 2 2 4 4 4 3 3 4 4 3 24 Directors’ report (continued) Share-based payments Shares issued under the DESP and options granted under ESOP and GSOP during the year are detailed below. Shares issued During the year ended 30 June 2014, the Company issued a total of 1,835,108 (2013:2,005,800) new ordinary shares in Nanosonics Limited as detailed below. To the date of this report, the Company issued a total of 2,169,108 new ordinary shares as detailed below. No amount was unpaid on any of the shares so issued. Shares issued Share options exercised under Share Option Plans Total new shares issued during the year Share options exercised under Share Option Plans post balance date Total new shares issued and to the date of this report Number of shares issued 1,835,108 1,835,108 334,000 2,169,108 As at 30 June 2014 there were 263,823,826 (2013: 261,988,718) ordinary shares in Nanosonics Limited on issue. At the date of this report, there were 264,157,826 shares on issue. Further information on issued shares is provided in the Contributed equity and the Share-based compensation notes to the financial statements. Share options granted During the financial year and to the date of this report, the Company granted, for no consideration, 3,115,869 (2013: 3,023,929) unquoted options over unissued ordinary shares in Nanosonics Limited. Further information on the grants is provided below, in section 5 of the Remuneration report on pages 42 to 47 and in the Share-based compensation note to the financial statements. Share options granted Employee Share Option Plan (ESOP) General Share Option Plan (GSOP) Total new options granted during the year Employee Share Option Plan (ESOP) Total options granted to the date of this report Number of options granted 2,981,494 – 2,981,494 134,375 3,115,869 nanosonics limited | annual report 201425 Shares under option At the date of this report, there were 6,159,975 unissued ordinary shares of Nanosonics Limited under option as detailed below. As at 30 June 2014, there were 6,525,597 (2013: 5,418,625) unissued ordinary shares of Nanosonics Limited under option. Further information on the options is provided in the Share-based compensation note to the financial statements. Share option plan Employee Share Option Plan (ESOP) General Share Option Plan (GSOP) Total shares under option at 30 June 2014 Share options exercised under Share Option Plans post balance date Share options forfeited under Share Option Plans post balance date Share options issued under Employee Share Option Plan (ESOP) post balance date Total shares under option to the date of this report Number of shares under option 5,972,263 553,334 6,525,597 (334,000) (165,997) 134,375 6,159,975 The options entitle the holder to participate in a share issue of the Company provided the options are exercised on or after their vesting date and prior to their expiry date. No option holder has any right under the options to participate in any other share issue of the Company or any other entity. 26 Directors’ report (continued) Remuneration report - audited Table of contents Section Title Description Describes the scope of the Remuneration report and the individuals whose remuneration details are disclosed. Describes the role of the Board and the Remuneration Committee and the use of remuneration consultants when making remuneration decisions. Provides detail regarding the fees paid to Non-Executive Directors including all required disclosures. Outlines the Company’s remuneration strategy and principles applied to executive remuneration decisions and the framework used to deliver it including the performance and remuneration linkages, and all required executive remuneration disclosures. Provides detail regarding the Company’s employee equity plans including that information required by the Corporation Act and applicable accounting standards. Provides details regarding the contractual arrangements between the Company and the executives whose remuneration details are disclosed. Provides details of loans and other transactions with Key Management Personnel and their related parties. 1 2 3 4 5 6 7 Introduction Remuneration governance Non-executive director remuneration Executive remuneration Equity plan disclosures Employment agreements Key Management Personnel transactions 1.0 Introduction Nanosonics is an emerging medical technology company with operations in a number of locations. The Board has a strong growth focus and the executive remuneration policies are designed to direct behaviours towards achieving sustainable growth in shareholder value over the medium to long term. However, it must be understood that to attract, motivate and retain high performing executives and in the face of strong competition for talent, some flexibility in our approach is required. The Board’s executive remuneration strategy is to provide ‘fair and appropriate’ remuneration balanced on a risk and reward framework that supports its business strategy in the short and long term. Board and executive remuneration are reviewed independently on a regular basis. The last formal review was undertaken during the year ended 30 June 2014. The Board believes that Nanosonics’ approach to executive Key Management Personnel (KMP) remuneration is appropriately balanced to fairly reward and motivate an experienced executive team to deliver profitable business growth which meets the expectations of our shareholders. 1.1 Scope This Remuneration report sets out, in accordance with the relevant Corporations Act 2001 (Cth) (Corporations Act) and accounting standard requirements, the remuneration arrangements in place for Key Management Personnel of Nanosonics Limited (Nanosonics) during the financial year ended 30 June 2014 (2014 Financial Year). nanosonics limited | annual report 201427 1.2 Key Management Personnel Key Management Personnel have authority and responsibility for planning, directing and controlling the activities of Nanosonics and comprise the Non-Executive Directors, Executive Directors and Executive KMP. Details of the Key Management Personnel as at year end are set out in the table below. Name Title (at year end) Change in 2014 Financial Year Non-Executive Directors Maurie Stang Chairman Full year Member, Audit and Risk Committee Member, Remuneration Committee Member, Nomination Committee Member, R&D and Innovation Committee Appointed member, R&D and Innovation Committee, July 2014 Richard England Director Full year Chairman, Audit and Risk Committee Chairman, Remuneration Committee Chairman, Nomination Committee Chairman, Remuneration Committee from 16 October 2013 David Fisher Director Full year Member, Audit and Risk Committee Member, Remuneration Committee Member, Nomination Committee Chairman, R&D and Innovation Committee Appointed Chairman, R&D and Innovation Committee, July 2014 Executive Directors Michael Kavanagh Chief Executive Officer (CEO) and President, Managing Director Member, R&D and Innovation Committee Appointed 21 October 2013 (Non-executive Director from 30 July 2012 to 20 October 2013) Ron Weinberger Director and President, Technology Development /Commercialisation Member, R&D and Innovation Committee Chairman, Remuneration Committee to 15 October 2013 Appointed member, R&D and Innovation Committee, July 2014 Full year CEO and Managing Director from 19 December 2011 to 20 October 2013 Appointed member, R&D and Innovation Committee, July 2014 Executive KMP McGregor Grant Chief Financial Officer(CFO) and Company Secretary Gerard Putt Chief Operations Officer Full year Full year 28 Directors’ report (continued) 2.0 Remuneration governance This section of the Remuneration Report describes the role of the Board, the Remuneration Committee, and the use of Remuneration Consultants when making remuneration decisions. 2.1 Role of the Board and the Remuneration Committee The Board is responsible for Nanosonics’ remuneration strategy and policy. Consistent with this responsibility, the Board has established a Remuneration Committee which comprises a majority of independent Non-Executive Directors. The members of the Remuneration Committee over the 2014 Financial Year were Richard England, Maurie Stang, David Fisher and Michael Kavanagh (until 20 October 2013). The role and responsibilities of the Remuneration Committee is set out in its Charter, which was last revised and approved by the Board in July 2014. In summary the Remuneration Committee’s role is to: • Review and approve Nanosonics’ remuneration strategy and policy and ensure that appropriate processes and procedures are in place to assess the remuneration levels of the Board and executive KMP and all other employees across the Group; • Consider and propose to the Board the remuneration of the CEO and consider and approve the remuneration of all designated senior executives; • Review and approve Nanosonics’ incentive schemes, including amounts, terms and offer processes and procedures; and • Determine and approve equity awards in accordance with policy and shareholder approvals, including testing of vesting and termination provisions. The Remuneration Committee’s role and its interaction with the Board, internal and external advisors, are illustrated below: Reviews, applies judgement and, as appropriate, approves the Remuneration Committee’s recommendations. The Board The Remuneration Committee operates under the delegated authority of the Board. The Remuneration Committee The Remuneration Committee is empowered to source any internal resources and obtain external independent professional advice it considers necessary to enable it to make recommendations to the Board on the following: Remuneration policy, composition and quantum of remuneration components for Executive KMP, including STI performance targets Remuneration policy in respect of Non-Executive Directors Recruitment, retention and termination policies and practices Design features of employee and executive LTI Plan awards, including setting of performance and other vesting criteria External Consultants Internal Resources nanosonics limited | annual report 2014 29 Further information on the Remuneration Committee’s role, responsibilities and membership is contained in the Corporate Governance Statement on pages 53 to 57 of this Annual Report. The Remuneration Committee Charter can be viewed in the Corporate Governance section of Nanosonics’ website at www.nanosonics.com.au. 2.2 Use of remuneration consultants From 1 July 2011, all proposed remuneration consultancy contracts (within the meaning of section 206K of the Corporations Act 2001) are subject to prior approval by the Board or the Remuneration Committee in accordance with the Corporations Act 2001. During the year ended 30 June 2014, several remuneration consultancy contracts were entered into by Nanosonics and accordingly the disclosures required under section 300A (1) (h) of the Corporations Act 2001 are set out below. Advisor/Consultant FY2014 Service Provided Remuneration Consultant for the purposes of the Corporations Act 2001 Ian Crichton, Remuneration Consultant, CRA Plan Managers Pty Limited Benchmarking of CEO and President, Chairman and Non-Executive Director remuneration. Yes Key questions regarding use of remuneration consultants Did a remuneration consultant provide remuneration recommendations in relation to any of the Executive KMP for the financial year? How much was the remuneration consultant paid by the Company for remuneration related and other services? What arrangements did the Company make to ensure that the making of the remuneration recommendation would be free from undue influence by Executive KMP? Is the Board satisfied that the remuneration recommendation was free from any such undue influence? What are the reasons for the Board being so satisfied? No. Benchmark data and analysis provided only. CRA – Remuneration Services $21,585; Other Services $30,624. The Company made the following arrangements: • The company implemented a protocol to govern the procedure for procuring advice relating to KMP remuneration. The protocol contained a summary of the process for the engagement of remuneration consultants, the provision of information to the remuneration consultant, and the communication of remuneration recommendations. • The remuneration consultant agreed to adhere to the protocol procedures and was required to advise the Remuneration Committee whether or not it had been subjected to undue influence and provided a Statement of Independence. Yes, the Board is satisfied for the following reasons: • The protocol with respect to the procurement of remuneration related advice was adhered to, including with respect to engagement of the remuneration consultant, the provision of information to the remuneration consultant in the communication of the remit for remuneration recommendations; • At appropriate times, the remuneration consultant provided written confirmation that it had not been subjected to any undue influence; • The Chairman of the Remuneration Committee met with the Remuneration Consultant in the absence of Executive KMP. There were no concerns raised by the Remuneration Consultant with respect to any undue influence being exerted by the Executive KMP; and • The Remuneration Committee did not observe any evidence that undue influence had been applied. 30 Directors’ report (continued) 3.0 Non-executive Director remuneration 3.1 Non-executive Director remuneration philosophy Principle Comment Fees are set by reference to key considerations Fees for Non-Executive Directors are based on the nature of the directors’ work and their responsibilities, taking into account the nature and complexity of the Company and the skills and experience of the Director. In determining the level of fees, survey data on comparable companies are considered. Non-Executive Directors’ fees are recommended by the Remuneration Committee and determined by the Board. Shareholders approve the aggregate amount available for the remuneration of Non-Executive Directors. During the year the Remuneration Committee engaged a remuneration consultant to conduct a benchmarking study of Chairman and Non-Executive Director remuneration. Following this study the fees for the Non-Executive Directors were increased effective 1 January 2014 to ensure they remain reasonable and appropriate so as to attract and retain directors with the skills and experience commensurate with the requirements of the role. No increase in fees is proposed for the 2015 Financial Year. Remuneration is structured to preserve independence whilst creating alignment To preserve independence and impartiality, Non-Executive Directors are not entitled to any form of incentive payments and the level of their fees is not set with references to measures of Company performance. Aggregate Board Fees are approved by shareholders. The total amount of fees paid to Non-Executive Directors in the year ended 30 June 2014 is within the aggregate amount approved at a general meeting of the Company on 19 September 2006 of $500,000 a year. No increase in the pool limit is proposed. Flexibility in how fees are received Non-Executive Directors can elect how they wish to receive their total fees – i.e. as a contribution of cash, superannuation contributions or charitable donations. 3.2 Non-executive Director fees and other benefits Elements Board fees per annum – 20141 Post-employment benefits Superannuation Other benefits Equity instruments Other fees/benefits Details Board Chairman fee Board NED fee $145,000 $80,000 Superannuation contributions are included in the Board fees and are made at a rate of 9.25% of base fee (up to the Government’s prescribed maximum contributions limit) which satisfies the Company’s statutory superannuation contributions. The rate has been increased to 9.5% effective from 1 July 2014. Non-Executive Directors do not receive any performance related remuneration, options or performance shares. Options previously granted have either lapsed or been exercised. Non-Executive Directors are reimbursed for out-of-pocket expenses that are directly related to Nanosonics’ business. 1. Committee fees are not paid to the members of each Committee. nanosonics limited | annual report 201431 3.3 Non-Executive Director total remuneration Maurie Stang Richard England David Fisher Michael Kavanagh1 Total Year 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Fees Options Superannuation 111,362 90,000 66,613 60,000 66,613 60,000 18,043 55,450 262,631 265,450 – – – 879 – – – – – 879 10,301 8,100 6,162 5,400 6,162 5,400 1,669 4,991 24,294 23,891 Total 121,663 98,100 72,775 66,279 72,775 65,400 19,712 60,441 286,925 290,220 1. Includes remuneration paid to Mr Kavanagh until his appointment as an Executive Director on 21 October 2013. 4.0 Executive remuneration 4.1 Executive KMP remuneration Nanosonics’ executive remuneration strategy is designed to attract, retain and motivate its executives. Fixed remuneration components are determined having regard to the specific skills and competencies of the executive with reference to both internal and external relativities, particularly local market conditions. The ‘at risk’ components of remuneration are strategically directed to encourage management (and all participating executives) to strive for superior (risk balanced) performance by rewarding the achievement of targets that are challenging, clearly defined, understood and communicated and within the ambit of accountability of the relevant executive. 32 Directors’ report (continued) Executive KMP remuneration objectives are exemplified through three categories of remuneration, as illustrated below: Executive KMP Remuneration Objectives An appropriate balance of ‘fixed’ and ‘at-risk’ components. Attract, motivate and retain executive talent. The creation of reward differentiation to drive performance and behaviours. Shareholder value creation through equity components. Total Target Remuneration (TTR) is set by reference to the relevant market and internal relativities Fixed At risk Total Fixed Remuneration (TFR) Short-Term Incentives (STI) Long-Term Incentives (LTI) Fixed remuneration is set based on relevant market relativities, reflecting responsibilities, performance, qualifications, experience and location. STI performance criteria are set by reference to Company and Individual performance targets relevant to the specific position. LTI targets are linked to both Nanosonics group internal (Revenue) and external (relative Total Shareholder Return (TSR)) outperformance measures. Remuneration for each component will be delivered as: Base Salary plus any fixed elements related to local markets, including superannuation or equivalents. Part cash and part equity. The equity component is deferred for 1 year. The deferred equity component remains’ at risk until vesting. Equity is held subject to performance and service for 3 years from grant date. The equity is ‘at risk’ until vesting. Strategic intent and market positioning TFR will generally be positioned at the median (+/-) compared to relevant market based data considering expertise and performance in the role. Performance incentive is directed to achieving demanding growth targets. TFR + STI is intended to be positioned in 3rd quartile of relevant benchmark. LTI is intended to align executive KMP with long term growth strategy aligned with shareholders’ interests. TFR + STI + LTI is intended to be positioned in the 3rd quartile. TTR is intended to be positioned in the 3rd quartile compared to relevant market based comparisons. 4th quartile TTR may result if outperformance is achieved. This strategy is intended to ensure that top quartile remuneration is only received if the Company exceeds the performance objectives set by the Board. Total Target Remuneration (TTR) nanosonics limited | annual report 2014 33 4.2 Remuneration mix and timing of receipt 4.2.1 Remuneration mix Position CEO and President President, Technology Development/ Commercialisation2 TFR (Cash) STI (Cash and Equity) LTI (Equity) 100% 33.3% of Base Salary 33.3% of Base Salary1 100% 33% of Base Salary 33% of Base Salary Senior Executives (Executive KMP) 100% 25% of Base Salary 25% of Base Salary 1. In connection with the appointment of Mr Kavanagh as CEO and President, at the 2013 AGM shareholders approved the granting of 1,500,000 Performance Rights to Mr Kavanagh. Details of the vesting conditions associated with these Performance Rights are provided in Section 4.4.2 Long Term Incentives. 2. Effective 1 July 2014, the STI and LTI opportunity has been adjusted to 25% of Base Salary. 4.2.2 Remuneration – timing of receipt of the benefit The three complementary components of Executive KMP remuneration are ‘earned’ over multiple time ranges. This is illustrated in the following chart. Year 1 Year 2 Year 3 Year 4 Year 5 TFR Year 1 STI cash opportunity STI equity deferral LTI TFR Year 2 STI cash opportunity STI equity deferral LTI TFR Year 3 STI cash opportunity STI equity deferral LTI Each year, fixed remuneration and benefits are paid (monthly) and short term incentives are awarded based on achievement of annual performance targets set. A portion of any STI earned is ‘invested’ in service rights and deferred for a minimum of 12 months. Each year, a long term equity incentive is provided to eligible and invited executives. The LTI vests after three years if the specified conditions are satisfied. In this way executives are rewarded for short, medium and long term performance aligned to shareholder interests and expectations. 34 Directors’ report (continued) 4.3 Total Fixed Remuneration (TFR) explained Total Fixed Remuneration (TFR) includes all remuneration and benefits paid to an Executive KMP calculated on a Total Employment Cost (TEC) basis. Executive KMP TFR is tested regularly for market competitiveness by reference to appropriate independent and externally sourced comparable benchmark information. Usually, TFR adjustments are only made in response to individual performance (as measured), an increase in job roles, changing market circumstances or promotion. Any adjustment to Executive KMP remuneration is approved by the Board, based on recommendations by the CEO and President and the Remuneration Committee. 4.4 Variable ‘at risk’ remuneration explained As set out in Section 4.2, variable remuneration forms a significant portion of the CEO and President and other Executive KMP remuneration opportunity. Apart from being market competitive, the purpose of variable remuneration is to direct executives’ behaviours towards maximising Nanosonics’ short, medium and long term performance, as measured. The key aspects are summarised below. 4.4.1 Short Term Incentives (STI) Purpose The STI arrangements at Nanosonics are designed to reward executives for the achievements against annual performance targets set by the Board at the beginning of the performance period. The STI program is reviewed annually by the Remuneration Committee and approved by the Board. All STI awards to the CEO and President and other Executive KMP are approved by the Remuneration Committee and the Board. Performance targets The key performance objectives of Nanosonics are currently directed to achieving a PBT target complemented by the achievement of individual performance goals. The weighting between the PBT target and individual performance goals will depend on the responsibilities and scope of influence of the relevant executive. All targets are set having regard to prior year performance, market conditions and the Board approved budgets. The specific targets are not provided in detail due to their commercial sensitivity. Any anomalies or discretionary elements are approved and validated by the Board. Rewarding performance The actual STI awards for Executive KMP in 2014 are as set out in the table in Section 4.6.1. Payment of STI To ensure there is an appropriate retention element of STI and to reinforce alignment with shareholders there is a mandatory deferral of a portion of STI. The STI is delivered as follows: • 50% of STI paid in cash • 50% of STI delivered as Nanosonics Performance Rights deferred for one year The equity component will be determined based on the 5 day Volume Weighted Average Market Price of Nanosonics shares as at 31 August each year. As the STI amount awarded as equity has already been earned, there are no further performance measures attached to the Performance Rights. However, they are subject to service conditions until the vesting date. nanosonics limited | annual report 201435 4.4.2 Long Term Incentives (LTI) The LTI provides an annual opportunity for selected executives to receive an equity award deferred for three years that is intended to align a significant portion of an executives overall remuneration to shareholder value over the longer term. All LTI awards remain at risk and subject to clawback (forfeiture or lapse) until vesting and must meet or exceed the defined performance hurdles over the vesting period. Purpose To retain key executives and align their remuneration opportunity with shareholder value. Type of equity awarded Under the Nanosonics Long Term Incentive Scheme (LTIS) selected senior executives are offered Performance Rights (being options to acquire ordinary shares of Nanosonics Limited for a nil exercise price) under the terms of the Nanosonics Employee Share Option Plan (ESOP). See Section 5.1 for further details. Performance Rights do not carry any dividend or voting rights prior to exercise. Timing Grants are made each year after shareholder approval to issue securities to Directors has been obtained at the relevant AGM. LTI allocation The size of individual LTI grants for the CEO and President and other Executive KMP is determined in accordance with the Board approved remuneration strategy mix. See Section 4.2. The target LTI $ value for each executive once determined is then converted into a number of Performance Rights based on a valuation methodology determined at the grant date, as follows: Performance Rights allocated = LTI $ value divided by 5 day Volume Weighted Average Market Price of Nanosonics shares as at the date of the AGM each year. Performance hurdles Equity grants to the CEO and President and other Executive KMP are subject to both internal (Revenue) and external (relative Total Shareholder Return – TSR) Performance Conditions. CEO and President 2013 Long Term Incentive Scheme (2013 LTIS) At the 2013 AGM, shareholders approved the granting of 1,500,000 Performance Rights to Mr Kavanagh. The number of Performance Rights granted to Mr Kavanagh was determined at the Board’s discretion in connection with Mr Kavanagh’s appointment as CEO and President. The 1,500,000 Performance Rights granted to Mr Kavanagh was made in respect of the 2013 and 2014 LTIS grant years. Accordingly, no additional LTIS grant will be made to Mr Kavanagh in respect of the 2014 LTIS. Full details of the vesting conditions associated with the Performance Rights granted to Mr Kavanagh are included in the explanatory notes included with the Notice of the 2013 AGM (Resolution 10) and are summarised below. 36 Directors’ report (continued) CEO and President 2013 Long Term Incentive Scheme (2013 LTIS) – continued 2016 Performance Conditions Ranking of TSR vs. 2013 LTIS Comparator Group1 Revenue Hurdle Tranche 1: 25% of total Performance Rights granted (375,000) Tranche 2: 25% of total Performance Rights granted (375,000) Performance % of Performance Rights to vest(1) Revenue in Financial Year 2016 % of Performance Rights to vest(1) < 50th percentile 0% < $25.7 million 50th to 75th percentile 50% to 100% pro-rata $25.7 million At 75th percentile 100% $29.1 million $32.7 million 0% 25% 50% 75% $36.7 million 100% 2017 Performance Conditions Ranking of TSR vs. 2013 LTIS Comparator Group2 Revenue Hurdle Tranche 3: 25% of total Performance Rights granted (375,000) Tranche 4: 25% of total Performance Rights granted (375,000) Performance % of Performance Rights to vest1 Revenue in Financial Year 2017 % of Performance Rights to vest1 < 50th percentile 0% < $30.9 million 50th to 75th percentile 50% to 100% pro-rata $30.9 million At 75th percentile 100% $36.4 million $42.6 million 0% 25% 50% 75% $49.5 million 100% 1. TSR measurement period is 8 November 2013 to the date of the release of Nanosonics’ FY16 financial statements. 2. TSR measurement period is 8 November 2013 to the date of the release of Nanosonics’ FY17 financial statements. 3. Straight line interpolation will apply to incremental results. Service Conditions In addition to the above performance conditions, the Performance Rights will only vest if Mr Kavanagh remains in continuous employment with Nanosonics from the date of the grant to the respective vesting date of each Tranche. Special provisions, in accordance with company policies, may apply in the event of termination of employment or a change of control. nanosonics limited | annual report 201437 Other Executive KMP 2013 Long Term Incentive Scheme (2013 LTIS) A summary of the vesting conditions associated with the Performance Rights granted to other Executive KMP under the 2013 LTIS are summarised below. Ranking of TSR vs. 2013 LTIS Comparator Group1 Revenue Hurdle Tranche 1: 50% of total Performance Rights granted Tranche 2: 50% of total Performance Rights granted Performance % of Performance Rights to vest1 Revenue in Financial Year 2016 % of equity to vest1 < 50th percentile 0% < $25.7 million 50th to 75th percentile 50% to 100% pro-rata $25.7 million At 75th percentile 100% $29.1 million $32.7 million 0% 25% 50% 75% $36.7 million 100% 1. TSR measurement period is 8 November 2013 to the date of the release of Nanosonics’ FY16 financial statements. 2. Straight line interpolation will apply to incremental results. Service Conditions In addition to the above performance conditions, the Performance Rights will only vest if the Executive KMP remains in continuous employment with Nanosonics from the date of the grant to the respective vesting date of each Tranche. Special provisions, in accordance with company policies, may apply in the event of termination of employment or a change of control. Other Executive KMP 2012 Long Term Incentive Scheme (2012 LTIS) In August 2013, Performance Rights were granted to other Executive KMP under the 2012 LTIS with an FY15 revenue hurdle of $50.0 million or more and Net Profit After Tax hurdle of 12% of revenue or more. In addition to the performance conditions, the Performance Rights will only vest if the Executive KMP remains in continuous employment with Nanosonics from the date of the grant to the respective vesting date. 100% of the Performance Rights will vest once the performance hurdles and service conditions are achieved. 38 Directors’ report (continued) 4.5 Other remuneration elements and disclosures relevant to Executive KMP 4.5.1 Clawback In accordance with the ASX Corporate Governance Guidelines the Board has clear policies regarding the deferral of performance-based remuneration as set out in Section 4.4.1. Policies concerning the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity’s financial statements have not been determined, as yet. These policies will be developed as clear market trends emerge. 4.5.2 Securities trading restrictions Under the Nanosonics Limited Securities Trading Policy and in accordance with the Corporations Act 2001, securities granted under Nanosonics’ equity incentive schemes must remain at risk until vested, or until exercised if options or performance rights. It is a specific condition of grant that no schemes are entered into by an individual or their associates, that specifically protects the unvested value of shares, options or performance rights allocated. KMPs are not permitted to deal at any time in financial products such as options, warrants, futures or other financial products issued over Nanosonics’ securities by third parties such as banks and other institutions without the prior approval of the Board. An exception may apply where the securities form a component of a listed portfolio or index product. KMPs are not permitted to enter into transactions in products associated with the securities without the prior approval of the Board, which operate to limit the economic risk of their security holding in the Company (e.g. hedging arrangements). Nanosonics, as required under the ASX Listing Rules, has a formal policy setting down how and when employees, including KMPs of Nanosonics Limited, may deal in Nanosonics securities. A copy of the Company’s Securities Trading Policy is available on the Nanosonics website, www.nanosonics.com under Investor Centre, Corporate Governance. 4.5.3 Cessation of employment provisions The provisions that apply for STI and LTI awards in the case of cessation of employment are detailed in Section 6. 4.5.4 Change of control The provisions that apply for STI and LTI awards in the case of a change of control are detailed in Section 6. 4.5.5 Conditions of LTI grants The conditions under which LTI awards (Performance Rights) are granted are approved by the Board in accordance with the relevant scheme rules as summarised in Section 5. 4.6 Relationship between Nanosonics’ performance and Executive KMP remuneration As explained in Section 4.2, Nanosonics’ remuneration framework aims to incentivise executive KMP towards sustainable growth of the business and the creation of shareholder value in the short, medium and long term. nanosonics limited | annual report 201439 4.6.1 Short Term Incentives Executive KMP STI opportunity and actual 2014 STI awarded are set out in the table below: Executive KMP Position Maximum STI % of 2014 TFR1 STI awarded as a % of potential1 STI cash award in 2014 ($)2 Deferred equity STI award ($)3 % Forfeited4 Michael Kavanagh CEO and President, Managing Director Ron Weinberger President, Technology Development/Commercialisation McGregor Grant CFO and Company Secretary Gerard Putt Chief Operations Officer 43% 27% 23% 23% 100% 65,305 65,306 96% 49,104 49,104 97.5% 92.5% 35,751 35,751 26,551 26,551 – 4% 2.5% 7.5% 1. Relates to STI % both cash and deferred equity opportunity. The deferred equity will be awarded the following year. 2. Amounts included in the remuneration for the financial year represent the maximum cash STI opportunity related to the financial year based on the achievement of individual goals and satisfaction of specified performance criteria. The amount was finally determined on 8 August 2014 after performance reviews were completed and approved by the Board. 3. The equivalent number of Performance Rights to be awarded in the following year will be determined as set out in section 4.4.1 of the Remuneration Report. 4. The amounts forfeited are due to the performance criteria not being fully met in relation to the current financial year. Short Term Incentives have been accrued in respect of the 2014 financial year because the performance conditions set by the Board have been met. 4.6.2 Long Term Incentives Executive KMP are only entitled to a benefit under the current Company’s LTI scheme if both Revenue and relative Total Shareholder Return (TSR) targets are met. Revenue growth is considered a priority for Nanosonics at this stage of its development, in the opinion of the Board. Relative TSR is a generally accepted proxy for creation of shareholder value. The Board believes a balance between these two performance criteria is a sound guide to medium and long term performance. Revenue The table below summarises Nanosonics’ revenue for the financial years ended 30 June, 2012, 2013 and 2014. Financial year Revenue $’000 2014 2013 2012 21,492 14,899 12,301 A portion of the 2013 LTI grant to all Executive KMP, including the CEO and President, requires that revenues in FY16 equal or exceed $36.7 million for full vesting. A portion of the 2013 LTI grant for the CEO and President requires that revenues in FY17 equal or exceed $49.5 million for full vesting. This represents a 70.8% and 130.3% increase respectively relative to the 2014 Financial Year for the maximum opportunity to be realised. Momentum achieved in the 2014 Financial Year will need to continue into the 2015 Financial Year and beyond for these targets to be met. If they are met the Board believes an appropriate balance of results and benefit will have been achieved. Relative Total Shareholder Return Testing of performance against the relevant comparator group will only occur at the vesting date of each grant. To date, no equity grant subject to a TSR hurdle has vested. The TSR hurdle set and the relative vesting schedule meet contemporary market standards according to independent advice received by the Board. 40 Directors’ report (continued) 4.7 Executive remuneration tables Fixed Remuneration Variable Remuneration Total Proportion of Total Remuneration Short-term benefits Long-term benefits Total Short- term Equity Compensation Total Performance related Non- performance related2 Value of options and rights Salary and fees8 Non- monetary benefits Other Superannuation Year Other long term benefits8 Cash bonus6 Options and performance rights7 % Michael Kavanagh1 2014 267,446 2013 – – – 2014 290,923 39,459 Ron Weinberger – 13,094 20,903 301,443 65,305 232,933 298,238 599,681 50% – – – – – – – – – 17,885 30,473 378,740 49,104 147,533 196,637 575,377 2013 300,077 42,886 3,100 16,470 24,116 386,649 32,901 125,877 158,778 545,427 McGregor Grant3 2014 273,037 2013 270,892 Gerard Putt4 2014 214,575 2013 208,546 – – – – 506 17,775 22,933 314,251 35,751 107,373 143,124 457,375 527 16,470 13,909 301,798 29,751 173,075 202,826 504,624 – 17,775 17,819 250,169 26,551 59,737 86,288 336,457 231 16,470 21,031 246,278 24,227 79,424 103,651 349,929 % 0% – 0% 1% % 39% – 26% 23% 15% 23% 29% 34% 8% 18% 17% 23% – 34% 28% 16% 11% 18% 13% Total 2014 1,045,981 39,459 506 66,529 92,128 1,244,603 176,711 547,576 724,287 1,968,890 5% 32% 28% Total (restated)5 2013 779,515 42,886 3,858 49,410 59,056 934,725 86,879 378,376 465,255 1,399,980 15% 18% 27% 1. Includes remuneration paid to Mr Kavanagh since his appointment as an Executive Director on 21 October 2013. 2. Non-performance related remuneration relates to options granted as part of employment contracts subject to service conditions. 3. Mr Grant joined the Company on 28 April 2011 and in connection with his appointment, he was granted 1,000,000 options which vest in 4 tranches, subject to service conditions. 4. Mr Putt joined the Company on 27 April 2011 and in connection with his appointment, he was granted 400,000 options, which vest in 4 tranches, subject to service conditions. 5. The 2013 KMP remuneration disclosure was restated to exclude executives Michael Potas, Kirste Courtney and Vincent Wang who were previously included as one of the five named executives who received the highest remuneration in 2013. 6. The cash bonus is for the performance during the respective financial year based the criteria set out in Section 4.4.1. 2014 amounts represent the maximum cash STI opportunity related to the financial year based on the achievement of individual goals and satisfaction of specified performance criteria. Actual cash STI award is disclosed in Section 4.6.1. 7. The amount disclosed is the amount of the fair value of the options and rights recognised as an expense in each reporting period. The ability to exercise the options and rights are subject to vesting conditions. The fair values of the options and rights that are subject to non-market performance conditions are calculated at the date of the grant using Binomial Approximation model. The fair values of performance rights that are subject to TSR performance conditions are calculated at the date of the grant using the Monte-Carlo simulation model. 8. As disclosed in note 2 to the financial statements, the Group changed its accounting policy in respect of employee benefits with the adoption of AASB119 Employee Benefits. As a result of this change, annual leave is included in other long term benefits, previously shown as a short term employee benefit. Consistent with that change, cash compensated annual leave absences and accrual is now classified as other long term benefit in both current and prior periods. Other long term benefits include annual leave and long service leave benefits. nanosonics limited | annual report 201441 4.8 Executive remuneration tables – unaudited This table represents the value to the Executive KMP of cash paid and vested equity awards (intrinsic value) received during the year, and unvested equity awards (IFRS-2 value) granted during the financial year at risk. The LTI equity granted is a value determined under IFRS-2 which may or may not vest depending on future outcomes that are uncertain. Accordingly, this table incorporates data that could represent an accumulation of outcomes arising from multiple years. Short-term benefits Fixed Remuneration2 Incentives3 Past at-risk remuneration received Value of Performance Rights4 – – 73,940 27,963 52,433 – – – – 32,901 – 29,751 – 42,670 24,227 – Actual remuneration received during year Future at risk remuneration received during year STI (deferred as equity) LTI (Equity) granted 5 287,369 – 465,129 433,320 364,059 331,549 290,078 270,505 – – – 33,861 1,158,938 – 103,089 671,000 – 181,902 30,573 – – 150,093 24,865 – 1,237,592 – 169,043 1,406,635 – 1,594,022 920,532 86,879 27,963 1,035,374 89,299 671,000 Michael Kavanagh1 Ron Weinberger McGregor Grant Gerard Putt Total Total Year 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 287,369 – 391,189 372,456 311,626 301,798 247,408 246,278 1. Includes remuneration paid to Mr Kavanagh since his appointment as an Executive Director on 21 October 2013. 2. Base salary, non-monetary, other cash benefits received during the year (excludes Annual Leave and Long Service Leave accrual). 3. STI received as cash in respect of the 2013 Financial Year. Excludes cash STI accrued in respect of the 2014 Financial Year. 4. Intrinsic value at vesting date of options and performance rights issued in previous periods that vested during the year. 5. Accounting value of performance rights awarded during the year that are unvested and subject to vesting conditions (i.e. achievement of performance conditions and/or service conditions). 42 Directors’ report (continued) 5.0 Employee Share Scheme information This section provides: 1. A description of the Employee Share Schemes (ESS) Nanosonics uses to provide equity rewards to Nanosonics employees; 2. Disclosures required in relation to ESS grants provided to KMP; 3. Disclosures required about ESS instruments that Nanosonics has issued; and 4. Disclosures required in relation to Nanosonics’ shares and other ESS instruments held by KMP. 5.1 Employee Share Schemes operated by Nanosonics Plan Name Type of Instruments Purpose Details Nanosonics Deferred Employee Share Plan (DESP) Ordinary Shares Established in 2007 Date last approved by shareholders: 8 November 2013 Nanosonics Exempt Employee Share Plan (EESP) Established in 2007 Date last approved by shareholders: 8 November 2013 Nanosonics Employee Share Option Plan (ESOP) Options Established in 2007 Date last approved by shareholders: 8 November 2013 Nanosonics General Share Option Plan (GSOP) Established in 2007 Date last approved by shareholders: 8 November 2013 The purpose of the Share Plans is to provide eligible employees (including Executive Directors but excluding Non-Executive Directors) with performance incentives through opportunities to acquire beneficial ownership of shares in the Company and to access the taxation concessions available under the Income Tax Assessment Act. The DESP is also used for the settlement of shares on exercise of options in the Share Option Plans. The purpose of the Share Option Plans is to permit the Company, as part of its overall remuneration programs, to provide long- term incentives for employees (including Executive Directors), consultants and contractors to Nanosonics who deliver long- term shareholder returns. The Plans provide participants with an opportunity to acquire a beneficial ownership of shares in the Company and to access the taxation concessions available under the Income Tax Assessment Act. Since the DESP was last approved 673,697 shares (from the exercise of ESOP options) have been issued to the Plan. As at the date of this report 1,111,874 shares remain outstanding. No grants to date have been made under the EESP. Since the ESOP was last approved 2,402,899 options have been issued and 1,073,697 options exercised. As at the date of this report 5,656,641 options remain outstanding. Since the GSOP was last approved 261,666 options have been exercised. There have been no new issues. As at the date of this report 503,334 options remain outstanding. nanosonics limited | annual report 201443 5.2 ESS grants to KMP 5.2.1 Analysis of share-based payments granted as remuneration Details of the vesting profiles for the year and as at 30 June 2014 of the Options and Performance Rights granted as remuneration to each Executive KMP are set out below: Options/Performance Rights Vesting in future years Number vested during the year % vested during the year Number lapsed/ forfeited during the year Number vested to date % lapsed/ forfeited Balance at year end Intrinsic value at year end 2015 2016 2017 2018 Description Grant Date Expiry Date Exercise Price Number granted Michael Kavanagh 2013 LTIS Tranche 1 Nov-13 30-Sep-16 $0.00 375,000 2013 LTIS Tranche 2 Nov-13 30-Sep-16 $0.00 375,000 2013 LTIS Tranche 3 Nov-13 30-Sep-17 $0.00 375,000 2013 LTIS Tranche 4 Nov-13 30-Sep-17 $0.00 375,000 2013 LTIS Tranche 1 Nov-13 30-Sep-16 $0.00 67,409 2013 LTIS Tranche 2 Nov-13 30-Sep-16 $0.00 67,409 – – – – – – – – – – – – – – – – – – Ron Weinberger 2013 Deferred STI Apr-13 01-Apr-14 $0.00 38,726 38,726 100% 38,726 2012 LTIS Nov-12 30-Sep-15 $0.00 1,220,000 – – 2012 Deferred STI Nov-12 01-Oct-13 $0.00 29,881 29,881 100% 29,881 Options Jul-10 19-Jul-14 $0.56 200,000 68,000 34% 200,000 2013 LTIS Tranche 1 Mar-14 30-Sep-16 $0.00 47,888 2013 LTIS Tranche 2 Mar-14 30-Sep-16 $0.00 47,889 – – – – – – McGregor Grant 2013 Deferred STI Apr-13 01-Apr-14 $0.00 35,578 35,578 100% 35,578 2012 LTIS Aug-13 30-Sep-15 $0.00 145,307 – – – 2012 Deferred STI Nov-12 01-Oct-13 $0.00 26,478 26,478 100% 26,478 Options May-11 28-Apr-16 $0.85 1,000,000 333,333 33% 833,334 2013 LTIS Tranche 1 Mar-14 30-Sep-16 $0.00 39,514 2013 LTIS Tranche 2 Mar-14 30-Sep-16 $0.00 39,515 – – – – – – Gerard Putt 2013 Deferred STI Apr-13 01-Apr-14 $0.00 29,357 29,357 100% 29,357 2012 LTIS Aug-13 30-Sep-15 $0.00 119,898 – – – 2012 Deferred STI Nov-12 01-Oct-13 $0.00 21,189 21,189 100% 21,189 Options May-11 27-Apr-16 $0.85 400,000 133,333 33% 333,334 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 375,000 296,250 375,000 296,250 375,000 296,250 375,000 296,250 67,409 53,253 67,409 53,253 – – 375,000 375,000 375,000 375,000 67,409 67,409 – 1,220,000 963,800 1,220,000 – – – – – – – – – 200,000 46,800 47,888 37,832 47,889 37,832 – – 145,307 114,793 145,307 – – – 1,000,000 – 166,666 – – – – – – 39,514 31,216 39,515 31,217 – – 119,898 94,719 119,898 – 400,000 – – 66,666 47,888 47,889 39,514 39,515 44 Directors’ report (continued) 5.2.2 Exercise of options granted as remuneration During the financial year, the following shares were issued on the exercise of options previously granted as part of remuneration to Key Management Personnel: Richard England Ron Weinberger McGregor Grant Gerard Putt Total Number of shares 50,000 68,607 62,056 50,546 231,209 Amount paid per share ($) 0.55 Total amount paid ($) 27,500 – – – – – – 27,500 Net market value ($) 14,750 57,276 51,763 42,132 165,921 There are no amounts unpaid on the shares issued as a result of the exercise of the options in prior years. 5.2.3 Analysis of movement in options The movement in number and value during the financial year of Options and Performance Rights over ordinary shares of Nanosonics Limited held by Key Management Personnel is detailed below. Balance at start of the year Granted in year Exercised in year Forfeited in year Balance at end of the year Number Value ($)1 Number Value ($)1 Number Value($)2 Number Richard England Michael Kavanagh Ron Weinberger McGregor Grant Gerard Putt Total 50,000 15,075 – – 50,000 14,750 – – 1,500,000 1,158,938 – – 1,488,607 767,761 134,818 103,089 68,607 58,028 1,062,056 531,773 241,084 181,902 62,056 52,433 450,546 224,865 198,927 150,093 50,546 42,670 3,051,209 1,539,474 2,074,829 1,594,021 231,209 167,881 – – – – – – Value ($)2 Number Value ($)1 – – – – 1,500,000 1,158,938 – 1,554,818 836,989 – 1,241,084 683,102 – 598,927 350,093 – 4,894,829 3,029,121 1. The ‘fair value’ of options granted in the year is the fair value of the options calculated as grant date using the Black-Scholes model and derived applying the valuation methodology prescribed under IFRS-2. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in years 30 June 2012 to 30 June 2015). 2. The value of options exercised and forfeited during the year is calculated as the market price of shares of the company on the ASX as at close of trading on the date the options were exercised or forfeited after deducting the price paid or payable to exercise the option. nanosonics limited | annual report 2014 45 5.3 Fair value of share-based compensation The following factors and assumptions were used in determining the fair value on grant date of options and performance rights granted to directors and Key Management Personnel under ESOP which were unexpired on 30 June 2014, including those granted during the period: Option/ Performance Rights Description Options Options 2012 LTIS 2012 LTIS 2013 LTIS Tranche 1 - CEO 2013 LTIS Tranche 2 - CEO 2013 LTIS Tranche 3 - CEO 2013 LTIS Tranche 4 - CEO 2013 LTIS Tranche 1 - Other KMP 2013 LTIS Tranche 2 - Other KMP Vesting Conditions Service Condition Service condition FY15 Revenue, net profit after tax and service FY15 Revenue, net profit after tax and service Relative TSR performance and service FY16 Revenue and service Relative TSR performance and service FY17 Revenue and service Relative TSR performance and service condition FY16 Revenue and service Grant date Expiry date Share price at grant date($) Exercise price ($) Valuation Model Estimated volatility Risk free interest rate Fair Value of option($) Aug-10 19-Jul-14 0.54 0.56 Binomial 74.87% 4.77% 0.31 May-11 28-Apr-16 0.80 0.85 Binomial 73.62% 5.14% 0.50 Nov-12 30-Sep-15 0.55 – Binomial 45.46% 2.58% 0.55 Aug-13 30-Sep-15 0.78 – Binomial 45.49% 2.35% 0.78 Nov-13 30-Sep-16 0.85 – Monte Carlo 45.00% 3.00% 0.68 Nov-13 30-Sep-16 0.85 – Binomial 45.00% 3.00% 0.85 Nov-13 30-Sep-17 0.85 – Monte Carlo 45.00% 3.20% 0.71 Nov-13 30-Sep-17 0.85 – Binomial 45.00% 3.20% 0.85 Mar-14 30-Sep-16 0.80 – Monte Carlo 45.00% 2.68% 0.63 Mar-14 30-Sep-16 0.80 – Binomial 45.00% 2.68% 0.80 46 Directors’ report (continued) 5.4 KMP equity interests In accordance with the Corporations Act (section 205G (1)), Nanosonics is required to notify the interests (shares and rights to shares) of directors to the ASX. In the interests of transparency and completeness of disclosure we have provided this information for each director (as required under the Corporations Act) and all other Executive KMP. Equity interests as at 30 June 2014 Non-Executive Directors Maurie Stang Richard England David Fisher Executive Directors Michael Kavanagh Ron Weinberger Other Executive KMP McGregor Grant Gerard Putt Nanosonics Limited ordinary shares1 Options over Nanosonics Limited ordinary shares Total intrinsic value of NAN securities as at year end ($)2/3 28,402,424 128,301 812,705 150,000 68,607 77,056 69,046 – – – 1,500,000 1,554,818 1,241,084 598,927 22,437,915 101,358 642,037 1,303,500 1,171,306 251,331 211,699 1. 2. 3. Includes the number of Nanosonics shares issued to Executives under the DESP. The intrinsic value of Nanosonics shares calculated as at the closing NAN price on 30 June 2014 times the number of shares. The intrinsic value of options calculated as at the closing NAN price on 30 June 2014 less the applicable exercise price times the number of options. Equity interests as at the date of this report Nanosonics Limited ordinary shares1 Options over Nanosonics Limited ordinary shares Non-Executive Directors Maurie Stang Richard England David Fisher Executive Directors Michael Kavanagh Ron Weinberger Other Executive KMP McGregor Grant Gerard Putt 1. Includes the number of Nanosonics shares issued to Executives under the DESP. Refer to Section 4.5.2 regarding Securities Trading Restrictions. 28,402,424 128,301 812,705 150,000 120,607 77,056 69,046 – – – 1,500,000 1,354,818 1,241,084 598,927 nanosonics limited | annual report 2014 47 5.5 KMP Share movement The numbers of shares in the Company held during the financial year by Key Management Personnel, including their personally-related parties, are set out below. Non-Executive Directors Maurie Stang Richard England David Fisher Executive Directors Michael Kavanagh Ron Weinberger Other Executive KMP McGregor Grant Gerard Putt Balance at start of the year Received during the year on the exercise of options Other net changes during the year Balance at end of the year 28,402,424 78,301 812,705 100,000 859,672 15,0001 18,5001 – 50,000 – – 68,607 62,056 50,546 – – – 28,402,424 128,301 812,705 50,000 (859,672) – – 150,000 68,607 77,056 69,046 1. This represents shareholding of a close family member of the KMP. 48 Directors’ report (continued) 6.0 Employment agreements 6.1 CEO and President The following sets out the key terms of the employment agreement for the CEO and President, Michael Kavanagh. Length of contract Ongoing employment contract until notice is given by either party. Fixed Remuneration $410,000 p.a., inclusive of superannuation and reviewed annually. Increased to $430,000 p.a., inclusive of superannuation effective 1 July 2014. Short-term Incentive 33.3% of Base Salary Long-term Incentive 33.3% of Base Salary. LTI arrangements in respect of 2013 and 2014 are described in section 4.4.2 Notice periods In order to terminate the employment arrangements, is required to provide Nanosonics with 9 months written notice. Nanosonics must provide with 9 months written notice. Resignation On resignation, unless the Board determines otherwise: • All unvested STI or LTI benefits are forfeited; and • All vested but unexercised STI or LTI benefits are forfeited after 30 days following cessation of employment. Termination on notice by Nanosonics Nanosonics may terminate employment by providing 9 months’ written notice or payment in lieu of the notice period based on fixed remuneration. Upon termination on notice by Nanosonics, unless the Board determines otherwise: Change of control Termination for serious misconduct • All unvested STI or LTI benefits are forfeited; and • All vested but unexercised STI or LTI benefits are forfeited after 30 days following cessation of employment. In the event of a takeover or change in control of Nanosonics Limited, any unvested Performance Rights will vest on a pro-rata basis based on the most current financial reports available at the time a change of control occurs, unless otherwise determined by the Board. The pro-rata period will be calculated from the grant date to the change of control date. Performance Rights that vest following a change of control will not generally be subject to restrictions on dealings. Nanosonics may immediately terminate employment at any time in the case of serious misconduct, and Mr Kavanagh will be only be entitled to payment of fixed remuneration up to the date of termination. On termination without notice by Nanosonics in the event of serious misconduct all unvested STI or LTI benefits will be forfeited. The treatment of any vested but unexercised STI or LTI benefits will be at the discretion of the Board. Statutory Entitlements Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. Post-employment Restraints Mr Kavanagh will be restrained for a period of up to 24 months after termination of his employment by either party from being engaged in any of the following activities: • Engaging with clients of Nanosonics with a view to obtaining the custom of those clients in a business that is the same as or similar to Nanosonics’ business; • • Interfering with the relationship between Nanosonics, its customers, employees, agents, contractors or suppliers; Inducing or assisting in the inducement of any employee, agent or contractor of Nanosonics to leave their employment or terminate their contract; or • Carrying-on or becoming in any way involved in any trade or business that is in competition with Nanosonics. nanosonics limited | annual report 201449 6.2 Other Executive KMP The following sets out details of the employment agreements relating to other Executive KMP. The terms for all other Executive KMP are similar, but do on occasion, vary to suit different needs. Length of contract Ongoing employment contract until notice is given by either party. Notice periods In order to terminate the employment arrangements, either Nanosonics or the Executive KMP are required to provide the other party with written notice as summarised below: • Ron Weinberger: 6 months • McGregor Grant: 4 months • Gerard Putt: 3 months Resignation On resignation, unless the Board determines otherwise: • All unvested STI or LTI benefits are forfeited; and • All vested but unexercised STI or LTI benefits are forfeited after 30 days following cessation of employment. Termination on notice by Nanosonics Nanosonics may terminate employment by providing the relevant written notice or payment in lieu of the notice period based on fixed remuneration. On termination on notice by Nanosonics, unless the Board determines otherwise: Change of control • All unvested STI or LTI benefits are forfeited; and • All vested but unexercised STI or LTI benefits are forfeited after 30 days following cessation of employment. In the event of a takeover or change in control of Nanosonics Limited, any unvested Performance Rights will vest on a pro-rata basis based on the most current financial reports available at the time a change of control occurs, unless otherwise determined by the Board. The pro-rata period will be calculated from the grant date to the change of control date. Performance Rights that vest following a change of control will not generally be subject to restrictions on dealings. Termination for serious misconduct Nanosonics may immediately terminate employment at any time in the case of serious misconduct, and the Executive KMP will only be entitled to payment of fixed remuneration up to the date of termination. On termination without notice by Nanosonics in the event of serious misconduct, all unvested STI or LTI benefits will be forfeited. The treatment of any vested but unexercised STI or LTI benefits will be at the discretion of the Board. Statutory Entitlements Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. Post-employment Restraints All Executive KMP will be restrained for a period of up to 24 months after termination of their employment by either party from being engaged in any of the following activities: • Engaging with clients of Nanosonics with a view to obtaining the custom of those clients in a business that is the same as or similar to Nanosonics’ business. • • Interfering with the relationship between Nanosonics, its customers, employees, agents, contractors or suppliers. Inducing or assisting in the inducement of any employee, agent or contractor of Nanosonics to leave their employment or terminate their contract. • Carrying-on or becoming in any way involved in any trade or business that is in competition with Nanosonics. 50 Directors’ report (continued) 7.0 Key Management Personnel transactions 7.1 Loans to Key Management Personnel and their related parties During the financial year and to the date of this report, the Group made no loans to directors and other Key Management Personnel and none were outstanding as at 30 June 2014 (2013: Nil). 7.2 Other transactions with Key Management Personnel Certain directors and Key Management Personnel, or their personally-related entities, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company in the 2013 and 2014 Financial Years. The terms and conditions of the transactions were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions with unrelated entities on an arms-length basis. Directors and Key Management Personnel Maurie Stang Maurie Stang Maurie Stang Maurie Stang Related entities Transactions Gryphon Capital Pty Ltd Director fees and services received Novapharm Research (Australia) Pty Ltd Services received Ramlist Pty Ltd Rent of premises Regional Healthcare Group Pty Ltd Products purchased, services received and products sold Richard England Angleterre Pty Ltd and Domkirke Pty Ltd Director fees and services received The aggregate amounts of each of the above types of transactions with directors and key management personnel of the Group were: Amounts recognised as revenue Products and services sold Amounts recognised as expenses Products purchased and services received Rent of premises 2014 $’000 2013 $’000 1,812 1,056 357 184 553 185 The aggregate amounts of assets and liabilities relating to the above types of transactions with directors and key management personnel of the Group were: Assets Current receivables Liabilities Current liabilities 2014 $’000 450 18 2013 $’000 53 150 nanosonics limited | annual report 2014 51 Indemnifying officers or auditor During the financial year, the Company paid insurance premiums to insure the directors and secretary and Key Management Personnel of the Company and its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their positions or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. The directors have not included in this report the amount of the premium paid in respect of the insurance policy, as such disclosure is prohibited under the terms of the contract. No indemnities have been given or insurance premiums paid, during or since the financial year, for any person who is or has been an auditor for the Group. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) and where noted ($’000) under the option available to the Company under ASIC CO 98/100. The Company is an entity to which the class order applies. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. The Board of directors has considered the position and, in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of the non-audit services by the auditor, if any, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: a. all non-audit services have been reviewed by the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor; and b. none of the services undermines the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. The auditor of the Group, UHY Haines Norton and its related practice firms did not provide any non-audit services during the year. 52 Directors’ report (continued) Officers of the Company who are former audit partner of UHY Haines Norton There are no officers of the company who are former audit partners of UHY Haines Norton. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is included on page 59 of this report. Auditor UHY Haines Norton continues in office as auditor in accordance with section 327 of the Corporations Act 2001. This report, which includes the review of operations (on pages 8 to 13) and the Information on the directors, company secretaries and senior management (on pages 18 to 20), is made and signed in accordance with a resolution of directors, pursuant to section 298 (2)(a) of the Corporations Act 2001, on 21 August 2014. Richard England Director Sydney 21 August 2014 nanosonics limited | annual report 2014Corporate governance statement 53 The Board of directors of Nanosonics Limited is committed of directors’ attendances at meetings of the Board are to ensuring that its policies and practices reflect good shown in the Directors’ report contained in the corporate governance consistent with the ASX Listing Company’s Annual Report. Rules and the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (2nd Edition). The Company has commenced work on implementing the recommendations in the March 2014 Amendments (3rd Edition). This Corporate Governance Statement sets out Nanosonics Limited’s key corporate governance principles and practices and was approved by the Board on 28 July 2014. A copy is available on the Company’s website at http://www. nanosonics.com.au/Investor-Centre/Corporate-Governance. Principle 1 – Lay solid foundations for management and oversight Role of the Chairman The Chairman is responsible for leading the Board, its meetings and directors, so that all directors are able to contribute effectively, all matters are properly considered and there is clear decision-making. The Chairman has ultimate responsibility for corporate governance. Role of the Board Under the leadership of the Chairman, the role of the Board is to provide strategic guidance to the Company and to provide effective oversight of its management for the benefit of all stakeholders. The Board acts on behalf of shareholders and is accountable to the shareholders for the overall strategy, governance and performance of the Company. The Board retains ultimate authority over the management of the Group; however day-to-day management of the Group’s affairs and the implementation of its strategies are formally delegated by the Board to the CEO and President (Managing Director) and senior executives. The respective roles and responsibilities of the Board and senior executives, and how they are separate, are set out in detail in the Company’s Board Charter. Roles of senior executives The Company sets responsibilities and performance expectations for all senior executives, including executive directors, as described in Information on directors, company secretaries and senior management and in the remuneration report in the Company’s Annual Report. The Nanosonics Performance and Development Program requires individual appraisals by a director at least annually for all senior executives, including executive directors but excluding the CEO and President, who is assessed by the Non-Executive Directors. In accordance with that program, individual appraisals of the performance of all senior executives were undertaken by the CEO and President during the year. Committees of the Board The Board is assisted by committees, which are responsible for aspects of the operation of the Group and which act by examining relevant matters and making recommendations to the Board. The Board may establish additional committees to assist it in carrying out its responsibilities. The Board may also delegate specified responsibilities to ad-hoc committees. The directors must be satisfied that the members of a committee are competent and will exercise their delegated functions in accordance with directors’ duties. Currently there are four committees of the Board: the Nomination Committee, the Audit and Risk Committee, the Remuneration Committee and the R&D and Innovation Committee. Details of directors’ attendances at meetings of the committees are shown in the Directors’ report contained in the Company’s Annual Report. Principle 2 – Structure the board to add value The Board currently consists of three Non-Executive The Board meets regularly in accordance with an agreed Directors and two executive directors. schedule and special meetings are held as required. Details 54 Corporate governance statement (continued) The role of the Chairman is separate from that of the Chief as Managing Director of Aeris Environmental Ltd where Executive Officer. Mr Stang is the non-executive Chairman. • Mr Maurie Stang is non-executive Chairman: appointed director 14 November 2000. • Dr David Fisher is an independent non-executive director: appointed director 30 July 2001. • Mr Richard England is an independent non-executive director: appointed director 5 February 2010. • Mr Michael Kavanagh is an executive director and CEO • Mr England is considered to be an independent director. The Board is considering opportunities to appoint additional suitably qualified and experienced independent directors. At the time when the Company has appointed other independent directors, the Board will also consider its opportunities to appoint an independent chairman. and President: appointed non-executive director 30 July Nomination Committee 2012 and became an executive director on 21 October 2013. • Dr Ron Weinberger is an executive director and the The members of the Nomination Committee are: Mr Richard England (Chairman), Dr David Fisher, and Mr Maurie Stang. The Committee comprises a majority of independent President Technology Development / Commercialisation: directors and is chaired by an independent director. appointed as an executive director 2 July 2008. The Nomination Committee is appointed by the Board to Details of each director, including their qualifications and experience, are set out in the Information on the directors, company secretaries and senior management on pages 18 to 20 of the Annual Report and on the Nanosonics website, www.nanosonics.com.au. Directors’ independence Directors’ independence is assessed according to the provisions set out in the Company’s Board Charter and in the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (2nd Edition). Accordingly: assist the Board to discharge its responsibilities in relation to: • The composition, structure and operation of the Board and ensuring the Board is comprised of individuals who are best able to discharge their responsibilities as Directors; and • Ensuring the Company meets the requirements of the ASX Diversity Guidelines. A copy of the Nomination Committee Charter is available on the Company’s website. Selection and appointment of directors The Nomination Committee is responsible for the • Mr Stang is not considered to be an independent identification and selection of suitable candidates for director as: he is a founder of the Company; he held appointment as a director. The Committee assesses executive office in the Company until March 2007; he potential directors to ensure the Board includes an is a major shareholder of the Company; and he is a appropriate mix of skills to allow the Board to maximise its director and/or shareholder of companies with which effectiveness and contribution to the Company. Selection the Company had significant transactions during criteria include relevant experience and qualifications, the year (refer to the Directors report included in the availability, communication capabilities, community Annual Report). standing and integrity. After assessment, candidates are • Mr Kavanagh is not considered to be an independent recommended to the Board by the Committee. director as he is an executive of the Company. • Dr Weinberger is not considered to be an independent director as he is an executive of the Company. • Dr Fisher is considered to be an independent director, except that he served as interim executive director for the period 14 December 2007 to 16 June 2008. For the period 9 May 2011 to 29 March 2013 Dr Fisher served Induction, education and access of directors Every new director receives an appointment letter accompanied by: • Director’s Deed of Access; • Director’s Handbook (containing Company policies and charters); and • Induction training. nanosonics limited | annual report 201455 Directors and the Board have the right, in connection with of this, the Company is committed to maintaining a culture their duties and responsibilities, to obtain independent where all directors, staff, contractors and consultants to the professional advice at the Company’s expense. Subject Company are encouraged to raise concerns about poor and/ to prior approval from within the Board, which will not or unacceptable practices and misconduct. reasonably be withheld, a director may have direct access to any employee or contractor of the Group and seek any information from any employee in order to perform his or her responsibilities. Board performance evaluation The Company has a Whistleblower Policy to provide a process through which staff, contractors and consultants to the Company can express serious concerns and report misconduct. The Whistleblower policy is available on the Company’s website. The Board requires that each director has the appropriate Diversity competencies to fulfil their role and that they perform effectively in their respective role and on the Board. The Nomination Committee is responsible for recommending a framework for the assessment and evaluation of the performance of each director individually, of each committee and of the Board as a whole. The performance of the Board and each of the Board committees is reviewed annually with the most recent being completed in October 2013. Principle 3 – Promote ethical and responsible decision-making Code of Conduct All directors, officers, employees, advisors, consultants and contractors of the Group are expected to act with integrity and objectivity and to maintain the highest possible ethical standards which have been formalised and set out in the Nanosonics believes that the pursuit of diversity in the workplace increases its ability to attract, retain and develop the best talent available, creates an engaged workforce, delivers the highest quality services to its customers, enhances individual work-life balance, encourages personal achievement, improves co-operation and assists in the optimisation of organisational performance. Diversity in the workplace mirrors the diversity of the broader community, encompassing age, gender, ethnicity, cultural and other personal factors. The Company respects the diversity of all employees, consultants and contractors, and cultivates an environment of fairness, respect and equal opportunity. A copy of Nanosonics’ Diversity policy is available on the Company’s website. Set out below are the diversity objectives established by the Board. Company’s Code of Conduct and Ethics which is available • Hiring: The Board will ensure that appropriate on the Company’s website. Securities trading policy The Company has a Securities Trading Policy, which applies to all Designated Persons, comprising its directors, officers, employees, advisors, consultants and contractors and such other persons as the Board nominates. Designated Persons may only deal in the Company’s securities in accordance with the policy and the Company regularly reviews share trading reports and its share register to ensure compliance with the policy. A copy of the Securities Trading Policy is available on the Company’s website. Whistleblower policy The Company recognises its responsibilities to conduct its business in accordance with both Australian and internationally accepted practices and procedures. As part selection criteria, based on diverse skills, experience and perspectives, are used when recruiting new staff and directors. • Job specifications, advertisements, application forms and contracts will not contain any direct or inferred discrimination. • Training: All internal and external training opportunities will be based on merit, and Company and individual needs. The Board will consider senior management training and executive mentoring programmes to develop skills and experience to prepare employees for senior management and Board positions. • Career Advancement: All decisions associated with career advancement, including promotions, transfers, and other assignments, will meet the Company’s needs, and be determined on skill and merit. 56 Corporate governance statement (continued) • Work Environment: The Company will ensure that processes, key personnel and cost. The Committee then all officers, employees, consultants and contractors provides the Board with its recommendation. In line with have access to a work environment that is free from current professional standards the external auditor is harassment and unwanted conduct in relation to required to rotate after 5 years and cannot return as auditor personal circumstances or characteristics. Directors, for a further 2 years. managers and supervisors will ensure that complainants It is the external auditor’s role to provide an independent or reports of sexual, racial or other harassment are treated seriously, confidentially and sympathetically by opinion that the Company’s financial reports are true and fair and comply with the Australian Accounting Standards and the Company. the Corporations Act 2001. The Board assesses annually the above diversity objectives and Company’s progress in achieving these objectives. As at 30 June 2014, women represented 36% (2013: 33%) Principle 5 – Make timely and balanced disclosure of the Group’s workforce, 31% in key executive positions The Company has a Continuous Disclosure and Shareholder (2013: 36%) and 0% at Board level (2013: 0%) Communications Policy to ensure compliance with the Principle 4 – Safeguard integrity in financial reporting Audit and Risk Committee disclosure requirements of the ASX Listing Rules and to ensure individual accountability at senior executive level for that compliance. In determining whether information should be disclosed, the Board takes into consideration the needs and interests of the Group’s shareholders and The members of the Audit and Risk Committee are: other stakeholders in the context of the Board’s obligations Mr Richard England (Chairman), Dr David Fisher and under the Corporations Act 2001 and the ASX Listing Rules. Mr Maurie Stang. The Committee comprises only Non- ASX announcements are prepared directly when the Board Executive Directors and has a majority of independent or executive management becomes aware of information directors. The Committee Chairman is an independent required to be disclosed to the market. director who is appropriately qualified and financially literate A copy of the Continuous Disclosure and Shareholder and who is not Chairman of the Board. Communications Policy is available on the The purpose of the Audit and Risk Committee is to assist Company’s website the Board to discharge its responsibilities in relation to the oversight and monitoring of: • Corporate reporting processes, including the financial reporting process; • External audit; • Risk management and internal control; Principle 6 – Respect the rights of shareholders The Company recognises and respects the rights of shareholders and seeks to facilitate the effective exercise of those rights within the limitations of the continuous • Compliance with laws, regulations, internal policies and disclosure provisions of the ASX Listing Rules. Nanosonics’ industry standards; and policy for communication with shareholders and • Activities to prevent, deter, detect and report on fraud. encouraging their participation at general meetings is A copy of the Audit and Risk Committee Charter is available contained in the Company’s Continuous Disclosure and on the Company’s website. External auditors The Audit and Risk Committee is responsible for selecting and recommending the appointment of the external auditor. The Committee considers a number of criteria in appointing the external auditor, such as audit approach, governance Shareholder Communications Policy. The Company encourages shareholder participation, particularly attendance of the general meetings of the Company. The external auditor attends the annual general meeting and is available to answer shareholder questions about the conduct of the audit of the Company and the nanosonics limited | annual report 201457 preparation and content of the auditor’s report on the of material business risks to mitigating controls so that financial statements of the Company. the performance of the Company’s enterprise risk and The Company ensures relevant corporate information is complete and available in a timely manner on its website: www.nanosonics.com.au. Measures include: • Placing all announcements to the market on the Company website after they have been released to the ASX. • Posting webcasts or recordings of teleconferences to the website. • Including at least the last three years’ financial data on the website. • Providing updates and reports to shareholders by email. Shareholders and prospective shareholders are welcome, by prior appointment, to speak with executive managers responsible for investor relations and to view the Company’s operations. Principle 7 – Recognise and manage risk The Company has established and documented an enterprise risk management program for the oversight and compliance programs can be monitored continuously. Management reports to the Board on the effectiveness of the Company’s management of its material business risks with the most recent report being provided in July 2014. The CEO and President and Chief Financial Officer have jointly confirmed to the Board that the declaration provided in the Annual Report in accordance with section 295A of the Corporations Act 2001 is founded upon sound systems of internal control and that the systems are operating effectively in all material respects in relation to financial reporting risks. Principle 8 – Remunerate fairly and responsibly The Company’s remuneration philosophy and policies are set out in the Remuneration Report in the Annual Report. The Remuneration Committee oversees remuneration policies and strategies to ensure that performance is rewarded in a manner that is competitive and appropriate for the results delivered. management of the Company’s material business risks. The Remuneration Committee Audit and Risk Committee is responsible for overseeing and The members of the Remuneration Committee are: Mr monitoring risk and compliance management. A summary Richard England (Chairman), Dr David Fisher and Mr of the Audit and Risk Committee’s responsibilities in relation Maurie Stang. The Committee is chaired by an independent to risk and compliance are included in the Audit and Risk director and has a majority of independent directors. Committee Charter. The purpose of the Remuneration Committee is to assist the Nanosonics’ enterprise risk management system is based Board to discharge its responsibilities by: on the International Risk Standard AS/NZS ISO 31000:2009 and is complemented by an internal control program based upon the principles set out in the Australian Compliance Standard AS 3806:2006. • Recommending appropriate remuneration policies to the Board and monitoring their implementation; • Establishing systems designed to enhance the performance of individual employees and Directors of Nanosonics has developed a common risk language the Company and of the Company as a whole; through which it considers internal risks such as those • Fairly and responsibly rewarding executives and other arising from financial and human resource management employees having regard to the performance of the and external risks such as those arising from dealings with Company, the performance of the executive or employee key stakeholders and macro environmental issues such and the general pay environment; and as regulatory changes or economic events beyond the • Recommending to the Board a system of performance Company’s control. In assessing material business risks, appraisal for Directors and the Board of the Company each identified risk is individually assessed in terms of as a whole. the likelihood of the risk event occurring and the potential consequences in the event that the risk event was to occur. During the year the Company implemented an electronic A comprehensive summary of the Company’s remuneration strategy together with details of securities trading restrictions are set out in the Remuneration Report in the risk and compliance system, which facilitates linking Annual Report. 58 Contents of the financial statements For the year ended 30 June 2014 Auditor’s independence declaration Financial statements Notes to the financial statements 1. Corporate information 2. Summary of significant accounting policies 3. Financial risk management 4. Critical accounting estimates and judgments 5. Segment information 6. Other income 7. Loss before income tax expense 8. Taxation 9. Current assets – Cash and cash equivalents 10. Current assets – Trade and other receivables 11. Current assets – Inventories 12. Current assets – Other 13. Non-current assets – Property plant and equipment 14. Non-current assets – Intangible assets 15. Non-current assets – Other 16. Current liabilities – Trade and other payables 17. Current liabilities – Deferred revenue 18. Employee provisions 19. Borrowings 20. Convertible notes 21. Contributed equity 22. Reserves 23. Dividends 24. Capital and leasing commitments 25. Auditor’s remuneration 26. Information relating to subsidiaries 27. Related party disclosures 28. Notes to the cash flow statements 29. Loss per share 30. Share-based compensation 31. Parent entity information 32. Events subsequent to reporting date Directors’ declaration Independent auditor’s report to the members 59 60 64 64 64 75 80 81 82 82 83 84 84 86 86 87 88 88 88 88 89 89 90 90 91 91 91 92 92 93 95 96 96 102 102 103 104 nanosonics limited | annual report 2014Auditor’s independence declaration 59 60 Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2014 Continuing operations Sale of goods and services Cost of sales Gross profit Other income Operating expenses Staffing costs Intellectual property Quality & regulatory management Business development Premises, plant & equipment External consultants & advisors Other operating costs Total operating expenses Other expense Borrowing costs Operating loss before income tax Income tax benefit (expense) Net loss after income tax expense attributable to owners of the parent entity Other comprehensive income Items that may be reclassified subsequently to profit or loss Exchange difference on foreign currency translation Income tax on items of other comprehensive income Total items that may be reclassified subsequently to profit or loss Total other comprehensive income Total comprehensive income for the period attributable to owners of the parent entity (Loss) per share for losses attributable to ordinary shareholders of the company Basic (loss) per share Diluted (loss) per share Notes 5 6 7 20 8 29 29 2014 $’000 21,492 (7,571) 13,921 4,114 12,005 594 298 1,094 1,635 1,534 2,956 20,116 555 (2,636) 31 2013 $’000 14,899 (6,428) 8,471 2,690 9,177 459 247 988 1,567 1,861 2,080 16,379 517 (5,735) (33) (2,605) (5,768) (7) – (7) (7) 38 – 38 38 (2,612) (5,730) Cents (1.0) (1.0) Cents (2.2) (2.2) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. nanosonics limited | annual report 2014Consolidated statement of financial position As at 30 June 2014 61 Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Other non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Derivative financial instruments Deferred revenue Employees provisions Borrowings Total current liabilities Non-current liabilities Employees provisions Borrowings Convertible notes Total non-current liabilities Total liabilities Net assets Equity Contributed equity Option premium on convertible notes Reserves Accumulated loss Total equity Notes 9 10 11 12 13 14 15 16 3 17 18 19 18 19 20 21 20 22 2014 $’000 21,233 5,712 4,237 440 31,622 1,778 – 144 1,922 33,544 3,000 – 308 1,521 6 4,835 159 18 8,097 8,274 13,109 20,435 74,410 376 3,691 (58,042) 20,435 2013 $’000 24,064 4,199 2,909 488 31,660 1,812 37 144 1,993 33,653 3,002 198 209 783 6 4,198 183 24 7,541 7,748 11,946 21,707 74,068 376 2,700 (55,437) 21,707 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 62 Consolidated statement of changes in equity For the year ended 30 June 2014 Option premium on convertible note Note 20 $’000 Employee equity benefits reserve Note 22 $’000 Foreign currency translation reserve Note 22 $’000 Accumulated losses Total equity $’000 $’000 376 1,775 (11) (49,669) 26,003 Contributed equity Note 21 $’000 73,532 – – – 381 (48) 203 – – – – – – – – – – – 898 74,068 376 2,673 – – – – 342 – – – – – – – – – 998 – 38 38 – – – 27 – (7) (7) – – (5,768) (5,768) – 38 (5,768) (5,730) – – – 381 (48) 1,101 (55,437) 21,707 (2,605) (2,605) – (7) (2,605) (2,612) – – – 1,340 At 30 June 2012 Loss for the period Other comprehensive income Total comprehensive income (loss) Transactions with owners in their capacity as owners Shares issued Transaction costs Share-based payment At 30 June 2013 Loss for the period Other comprehensive income Total comprehensive income (loss) Transactions with owners in their capacity as owners Shares issued Share-based payment At 30 June 2014 74,410 376 3,671 20 (58,042) 20,435 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. nanosonics limited | annual report 2014 Consolidated statement of cash flows For the year ended 30 June 2014 63 Cash flows from operating activities Receipts from customers (inclusive of GST) Receipts from government grants (inclusive of refundable R&D tax offset) Payments to suppliers and employees (inclusive of GST) Interest received Income taxes paid Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Net cash used in investing activities Cash flow from financing activities Notes 6 28 Net proceeds from issue of shares and exercise of options Repayment of borrowings Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of year 9 2014 $’000 23,027 1,666 (28,020) 727 6 (2,594) (479) (479) 342 (6) 336 (2,737) 24,064 (94) 21,233 2013 $’000 14,025 1,498 (21,086) 1,096 (39) (4,506) (1,359) (1,359) 536 (6) 530 (5,335) 29,310 89 24,064 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 64 Notes to the financial statements For the year ended 30 June 2014 1. Corporate information The financial report on pages 60 to 102 covers Nanosonics Limited as a consolidated entity consisting of Nanosonics Limited (the Company) and its subsidiaries (the Group). Nanosonics Limited is a publicly listed company, limited by shares, incorporated and domiciled in Australia and listed on the Australian Securities Exchange (ASX code NAN). The Company’s registered office and principal place of business is: Unit 24, 566 Gardeners Road Alexandria, NSW 2015 Australia A description of the nature of the Group’s operations and its principal activities is included in the review of operations on pages 8 to 13 and in the Directors’ report on page 22, both of which are not part of this financial report. The financial report was authorised for issue in accordance with the resolution of the directors on 21 August 2014. 2. Summary of significant accounting policies a. Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards, and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis and do not take into account changes in money values, except for derivative financial instruments, which have been measured at fair value. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest one thousand dollars ($’000) unless otherwise stated. b. Compliance with IFRS The financial report of Nanosonics Limited also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). c. New accounting standards and interpretations 1) Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2013: • AASB 10 Consolidated Financial Statements, AASB 127 Separate Financial Statements • AASB 11 Joint Arrangements, AASB 128 Investments on Associates and Joint Ventures • AASB 12 Disclosure of Interests in Other Entities • AASB 13 Fair Value Measurement • AASB 119 Employee Benefits (revised 2011) • AASB 2012-2 Amendments to AASB 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities • AASB 2012-5 Improvements to AASBs 2009-2011 Cycle • AASB 2012-9 Withdrawal of interpretation 1039 • AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements • AASB CF 2013-1 Australian Conceptual Framework nanosonics limited | annual report 201465 The effect of the adoption of the above standards or interpretations or other amendments applied for the first time are disclosed below: • AASB 119 Employee Benefits – The revised standard introduced changes to accounting for defined benefit plans, termination benefits and definition of short term employee benefits. The distinction between short-term and other long- term employee benefits is now based on whether the benefits are expected to be settled wholly within 12 months after the reporting date. Consequential amendments were also made to other standards via AASB 2011-10. The adoption of this standard by the Group impacted the measurement of annual leave obligations. The effect of change in the annual leave expense and provision as previously reported in 2013 is not material. • AASB 13 Fair Value Measurement – AASB 13 establishes a single source of guidance for all fair value measurements. AASB 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to measure fair value under Australian Accounting Standards. AASB 13 defines fair value as an exit price. As a result of the guidance in AASB 13, the Group reassessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk for fair value measurement of liabilities. AASB 13 also requires additional disclosures. Application of AASB13 has not materially impacted the fair value measurements of the Group. Additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in note 3. • AASB 2011-4 Amendments to Australian Accounting Standards and revised Corporations Regulations 2M.3.03 – Transfer of Individual KMP disclosures to the Remuneration Report. The amendments removed the individual Key Management Personnel (KMP) disclosures about equity holdings, loans and other transactions with KMP from the notes to the financial statements and were transferred to the Remuneration Report. Comparative information is not required for these items in the Remuneration Report. Accordingly, individual KMP disclosures are now included in the Remuneration report on page 26 to 50. Adoption of the other standards affected the disclosures but did not have a material impact on the financial statements of the Group. 2) Accounting Standards and Interpretations issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting period ended 30 June 2014, are outlined below: Standards effective 1 Jan 2014, applicable to the Group by 1 July 2014 • AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities. AASB 2012-3 adds application guidance to AASB 132 to address inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement. When AASB 2012-3 is first adopted for the year ending 30 June 2015, there will be no impact on the entity as this standard merely clarifies existing requirements in AASB 132. • AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosure for Non-Financial Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less cost of disposal. When these amendments are adopted for the first time, they are unlikely to have any significant impact to the Group given that they are largely of the nature of clarification of existing requirements. 66 • Annual improvements 2010-2012 Cycle – Annual Improvements to IFRSs 2010-2012 Cycle. Annual Improvements to IFRSs 2010-2012 Cycle is a collection of amendments to IFRSs in response to eight issues addressed during the 2010-2012 cycle for annual improvements to IFRSs. The amendments have not yet been adopted by the AASB. Among the items addressed by this standard, the following are relevant to the Group: – IFRS 2 – Clarifies the definition of ‘vesting conditions’ and ‘market condition’ and introduces the definition of ‘performance condition’ and ‘service condition’. The group is yet to assess the effect if any of this amendment on its accounting of share-based payments. – IFRS 8 – Requires entities to disclose factors used to identify the entity’s reportable segments when operating segments have been aggregated. An entity is also required to provide reconciliation of total reportable segments’ assets to the entity’s total assets. – IAS 16 & IAS 38 – Clarifies the determination of accumulated depreciation does not depend on the selection of valuation technique and that it is calculated as the difference between the gross and net carrying amounts. – IAS 24 – Defines a management entity providing KMP services as a related party of the reporting entity. The amendments added an exemption from the detailed disclosure requirements in paragraph 17 of IAS 24 for KMP services provided by a management entity. Payments made to a management entity in respect of KMP services should be separately disclosed. • Annual Improvements 2011-2013 Cycle – Annual Improvements to IFRSs 2011-2013 Cycle. Annual Improvements to IFRSs 2011-2013 Cycle is a collection of amendments to IFRSs in response to four issues addressed during the 2011-2013 cycle. Among other improvements, the amendments clarify that an entity should assess whether an acquired property is an investment property under IAS 40 Investment Property and perform a separate assessment under IFRS 3 Business Combinations to determine whether the acquisition of the investment property constitutes a business combination. The amendments have not yet been adopted by the AASB. • AASB 1031 Materiality – The revised AASB 1031 is an interim standard that cross-references to other Standards and the Framework (issued December 2013) that contain guidance on materiality. AASB 1031 will be withdrawn when references to AASB 1031 in all Standards and Interpretations have been removed. Unless otherwise stated above, the adoption of the above standards is not expected to have a significant effect on the way the Group accounts for and presents its financial results. Standards to be applied by the Group beyond 1 July 2014 • Amendments to IAS 16 and IAS 38 – Clarification on the Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38), effective I January 2016, applicable 1 July 2016. IAS 16 and IAS 38 both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset. The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances. • IFRS 15 Revenue from Contracts with Customers, effective 1 January 2017, applicable 1 July 2017. IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201467 – Step 1: Identify the contract(s) with a customer. – Step 2: Identify the performance obligations in the contract. – Step 3: Determine the transaction price. – Step 4: Allocate the transaction price to the performance obligations in the contract. – Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. • AASB 9 Financial Instruments, effective 1 January 2018, applicable 1 July 2018. AASB 9 includes requirements for the classification and measurement of financial assets. It was further amended by AASB 2010-7 and AASB 2012-6 to reflect amendments to the accounting for financial liabilities. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The Group has not yet assessed the full impact of the above standards that will be applied by the Group beyond 1 July 2014. d. Basis of consolidation The consolidated financial statements comprise the financial statements of Nanosonics Limited (‘Company’ or ‘parent entity’) and its subsidiaries as at 30 June each year. Nanosonics Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain or a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de- consolidated from the date that control ceases. Information on subsidiaries is contained in note 26 to the financial statements. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Transactions eliminated on consolidation In preparing the consolidated financial statements, all inter-company balances and transactions between entities in the Group, including any unrealised profits or losses, have been eliminated in full. e. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the Managing Director and CEO, who is the Group’s chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. f. Foreign currency (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Nanosonics Limited’s functional and presentation currency. 68 (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities are recognised in profit or loss as part of the fair value gain or loss. (iii) Group companies The functional currency of the overseas subsidiaries is as follows: • Nanosonics Europe GMBH is Euro; and • Nanosonics Inc. is US dollars. The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that statement of financial position • income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and • all resulting exchange differences are recognised in other comprehensive income – foreign currency translation reserve. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is reclassified to profit or loss, as part of the gain or loss on sale where applicable. g. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, taking into account defined terms of payment and excluding taxes or duty. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised for the major business activities as follows: (i) Sale of goods Revenue is recognised when the significant risks and rewards of ownership have been transferred to the distributor or end customer. Sales are recorded based on the prices specified in the sales contracts net of any discounts and returns at the time of sale. No element of financing is deemed to be present as the sales are made with credit terms which are consistent with practices in each market. (ii) Sale of services Revenue from trophon® EPR maintenance and repairs are recognised as services are rendered. Revenue from service contracts are recognised as services are rendered over the service period, typically over one year. Unearned service revenue is deferred and recognised as liability in the Statement of financial position. (iii) Interest income Interest income is recognised on a time proportion basis using the effective interest method. h. Government grants Grants from government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with the attached conditions. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201469 i. Income tax and other taxes The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses and on the assumption that no adverse change will occur in income tax legislation enabling the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Tax consolidation Nanosonics Limited and its wholly-owned Australian controlled entity, Saban Ventures Pty Limited, are part of a tax consolidated group. The head entity, Nanosonics Limited, and the controlled entity in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Nanosonics Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Goods and services tax (GST), Value added tax (VAT) Revenues, expenses and assets are recognised net of the amount of associated GST or VAT as applicable, unless the GST/ VAT incurred is not recoverable from the taxation authority, in which case, the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST/VAT receivable or payable. The net amount of GST/ VAT recoverable from, or payable to, the taxation authority is included with other current receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST/VAT components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows. j. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Group as a lessee Finance leases that transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease 70 liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Group as a lessor Leases in which the Group does not transfer all the risks and benefits of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. k. Borrowing costs Borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. l. Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments presented at market value that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. m. Inventories Raw materials, starting components, consumable stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Costs of purchased inventory are determined to be actual costs on a batch basis, after including import duties, taxes (other than those subsequently recoverable by the entity), transport, handling and other costs directly attributable to the acquisition of the inventory, and after deducting rebates and discounts. Costs of work in progress and finished goods comprise purchased materials at cost, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. n. Financial assets Classification Financial assets are classified at initial recognition as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group’s financial assets include cash and short-term deposits, trade and other receivables, and derivative financial instruments. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. All of the Group’s cash term investments are captured in this category. Cash term investments, which are highly liquid irrespective of their maturity dates, are classified as current assets, as they may not necessarily be held for their full term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade receivables generally have 30 to 60 days credit terms. Loans and receivables are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non-current assets. Receivables are disclosed in trade and other receivables (note 10) in the statement of financial position. Derivative financial instruments are classified as held for trading unless they are designated as effective hedging instruments. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201471 Recognition and derecognition All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial assets. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade dates. i.e. the date that the Group commits to purchase or sell the asset. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Subsequent measurement Receivables and held-to-maturity investments are carried at amortised cost using the effective interest method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The losses arising from impairment are recognised in the statement of profit or loss. Receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Investments in controlled entities are carried in the Company’s financial statements at the lower of cost and recoverable amount. Impairment of financial assets For financial assets carried at amortised cost, at each reporting date, the Group assesses whether there is objective evidence that a financial asset is impaired. For trade receivables, collectability is reviewed on an on-going basis. An impairment exists if one or more events that has occurred since the initial recognition of the assets (an incurred “loss event”) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or group of debtors is experiencing significant financial difficulty, default or delinquency in payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If any such evidence exists, the amount of any impairment loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in the statement of profit or loss. Receivables together with the associated allowance are written off when there is no realistic prospect of future recovery. If in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment were recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to other expense in the statement of profit or loss. o. Derivative financial instruments and hedge accounting The Group uses derivative financial instruments, i.e. forward currency contracts, to hedge its foreign currency risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The fair values of forward currency contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles. Any gains or losses arising from changes in the fair value of derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income. For the purposes of hedge accounting, hedges are classified as: • fair value hedges, when they hedge the exposure to changes in the fair value of a recognised asset or liability; or • cash flow hedges, when they hedge the exposure to variability in cash flows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. 72 Hedges that meet the strict criteria for hedge accounting are accounted as follows: • For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss. • For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged and the derivative is remeasured to fair value. Gains and losses from both are taken to profit or loss. p. Convertible notes Convertible notes are compound financial instruments which are separated into liability and equity components based on the terms of the contract. On issuance of the convertible note, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note. The equity component is initially recognised at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of the convertible notes is measured at amortised cost using the effective interest method. The equity component is not remeasured. Interest related to the financial liability is recognised in profit or loss. On conversion, the financial liability is reclassified to equity and no gain or loss is recognised. q. Property, plant and equipment All property, plant and equipment is stated at historical cost less depreciation and/or accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate assets is derecognised when it is replaced. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. Production tooling used to manufacture component parts qualifies as property, plant and equipment when the Company expects to use it during more than one period. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. All assets have limited useful lives and are depreciated using the straight line method over their estimated useful lives, or in the case of leasehold improvements, over the estimated useful life or lease term, whichever is shorter, taking into account residual values. The assets’ residual values, useful lives and depreciation methods are reviewed prospectively and adjusted if appropriate at least annually. Depreciation is expensed. The depreciation rates or useful lives used for each class of assets are as follows: Depreciation of property, plant and equipment Laboratory fit-out Laboratory and manufacturing equipment Office furniture and equipment Computer equipment and software Leasehold improvements Service, test and demonstration equipment 2014 6 years 5 years 7 years 3 years Lease 2-3 years 2013 6 years 5 years 7 years 3 years Lease 2-3 years r. Intangible assets (i) Research and development Research and development expenditure is expensed as incurred except that costs incurred on development projects, relating to the design and testing of new or improved products, are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises directly attributable costs, including costs of materials and services. Other development expenditures that do not meet these criteria are recognised nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201473 as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development expenditure which has a finite life is recorded as an intangible asset from the point at which the asset is ready for use and amortised on a straight-line basis over the period during which the related benefits are expected to be realised. (ii) Patents and Trademarks The costs of registering and protecting patents and trademarks are expensed as incurred. s. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. Intangible assets are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash- generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses of continuing operations, including impairment on inventories, are recognised in the income statement in expense categories consistent with the function of the impaired asset. t. Trade and other payables Trade and other payables are carried at amortised cost. These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid and arise when the Group becomes obliged to make future payment in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 60 days of recognition. u. Provisions Provisions for legal claims, service warranties and other obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reasonably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used is to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. An increase in the provision due to the passage of time is recognised as interest expense. Provision for warranties Provision is made in respect of the Group’s estimated liability on all products under warranty at balance date. The provision is measured at current values estimated to be required to settle the warranty obligation. The initial estimate of warranty- related costs is revised annually. The provision is included in Current liabilities – trade and other payables in the statement of financial position. v. Employee benefits Wages, salaries and annual leave and sick leave Liabilities for employee benefits, including wages, salaries and non-monetary benefits, and accumulating annual and other leave, represent present obligations resulting from employees’ services provided to reporting date. Employee benefits have been measured at the amounts expected to be paid when the liability is settled and are recognised in the provision for employee benefits. Sick leaves are recognised when the leave is taken and are measured at the rates paid or payable. Long service leave The liability for long-service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity that match as closely as possible, the estimated future cash outflows. 74 Bonuses The Group recognises a liability and an expense for bonuses. The Group recognises a provision where contractually obliged and where there is a past practice that has created a constructive obligation. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement or end of employment contract date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Share-based compensation Share-based compensation benefits are equity-settled transactions provided to employees via the Nanosonics share-based compensation plans. Information relating to the plans is set out in note 30 to the financial statements. Share option plans The assessed fair value on the date options are granted is independently determined using the appropriate valuation model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. General Share Option Plan (GSOP) The assessed fair values of options granted under the GSOP are expensed in full in the month in which they are granted with a corresponding increase in a share based payments reserve as part of shareholders’ equity, except where the options are granted as part of a capital raising programme, in which case no cost is recognised. Employee Share Option Plan (ESOP) The fair value of options and performance rights granted under the ESOP is recognised as an employee benefit expense with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for share-based payments at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The statement of profit or loss expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of the period. No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting are conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the expense had the terms had not been modified. If the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. Deferred Employee Share Plan (DESP) The issue price of DESP shares granted during the year is calculated as the 5-day weighted average market price of shares of the Company on the Australian Securities Exchange as at close of trading on the date the shares are granted. The fair value of DESP shares granted is taken to be the issue price. The assessed fair values of DESP shares are expensed in full in the month in which they are granted with a corresponding increase in equity, except if they are granted with a vesting condition, in which case the fair value of DESP shares granted is apportioned on a straight line monthly basis over the period between grant date and the date on which the shares all vest. At the end of a period the Company assesses the probability of achievement of a benefit, being the percentage probability that employees will achieve at least the fair value of the unvested shares. The value of DESP shares with vesting conditions expensed in any period is calculated as that portion of the fair value applicable to the period factored by the probability of achievement and a share based payments reserve is created as part of shareholders’ equity. w. Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. x. Earnings per share (i) Basic earnings per share Basic earnings per share (“EPS”) is calculated by dividing the net profit or loss attributable to equity holders of the Company for the reporting period, by the weighted average number of ordinary shares of the Company outstanding during the financial year. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201475 (ii) Diluted earnings per share Diluted EPS adjusts the figures used in the determination of basic EPS to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. y. Current versus non-current classification The Group presents assets and liabilities in statement of financial position based on current/non-current classification. An asset is current when it is: • Expected to be realised or intended to be sold or consumed in normal operating cycle • Held primarily for the purpose of trading • Expected to be realised within twelve months after the reporting period, or • Cash or cash equivalents unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current. A liability is current when it is: • Expected to be settled in normal operating cycle • Held primarily for the purpose of trading • Due to be settled within twelve months after the reporting period, or • There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period The Group classifies all other liabilities as non-current. Deferred tax asset and liabilities, if recognised, are classified as non-current assets and liabilities. 3. Financial risk management The Group is exposed to financial risks, predominantly interest rate risk, foreign currency risk and credit risk and it has a financial risk management program which seeks to minimise potential adverse effects on financial performance. The Board provides written principles for investment of the Group’s cash reserves, so as to ensure operational liquidity whilst optimising interest earnings from a mix of instruments with one or more of Australia’s four main banks. The Group held the following financial instruments and their classification: Financial assets Loans and receivables Trade and other receivables Other financial assets Cash and cash equivalents Total Financial assets Financial liabilities Fair value through profit or loss Derivative financial instruments Other financial liabilities Trade and other payables Convertible notes Borrowings Total Financial liabilities Notes 10 9 16 20 19 2014 $’000 5,712 21,233 26,945 2013 $’000 4,199 24,064 28,263 – 198 2,104 8,097 24 10,225 2,553 7,541 30 10,322 76 a. Interest rate risk exposures Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to interest rate risk is noted below: Net financial assets (liabilities) 6,013 15,214 (8,115) 8.06% 0.00% 2014 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Weighted average interest rate Financial liabilities Trade and other payables Convertible notes Borrowings Total financial liabilities Weighted average interest rate 2013 Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Total financial assets Weighted average interest rate Financial liabilities Trade and other payables Derivative financial instruments Convertible notes Borrowings Total financial liabilities Weighted average interest rate Fixed interest rate maturing in: Floating interest rate $’000 1 year or less $’000 Over 1 to 5 years $’000 More than 5 years $’000 Non-interest bearing $’000 Notes Total $’000 Fixed interest rate maturing in: Floating interest rate $’000 1 year or less $’000 Over 1 to 5 years $’000 More than 5 years $’000 Non-interest bearing $’000 Notes Total $’000 9 10 16 20 19 9 10 16 3 20 19 6,013 15,220 – – 6,013 15,220 0.21% 3.73% 5,477 18,587 – – – – 5,477 18,587 3.34% 4.20% – – – – – 8,097 18 8,115 – – – – – – – 7,541 24 7,565 – – 6 6 – – – 6 6 – – – – – – – – – – – – – – – – – – – – – – 21,233 5,712 5,712 5,712 26,945 – – 2,104 – – 2,104 8,097 24 2,104 10,225 – – 3,608 16,720 – – – – – – – – – – – – – 24,064 4,199 4,199 – – 4,199 28,263 – – – 2,553 2,553 198 – – 198 7,541 30 2,751 10,322 – – 1,448 17,941 Net financial assets (liabilities) 5,477 18,581 (7,565) 8.06% 6.01% nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014 77 Interest rate sensitivity The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant: 2014 2013 Increase /decrease in basis points Effect on profit before tax and other comprehensive income $’000 + 25 – 25 + 75 – 100 57 (57) 200 (266) b. Foreign currency risk exposures Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue or expense is denominated in different currency from the Group’s functional currency) and the Group’s net investments in foreign subsidiaries. The Group enters into foreign currency forward contracts to mitigate its foreign currency risk on its trade receivables. The Groups’ exposure to foreign currency risk at the reporting date comprised: Cash and cash equivalents Trade and other receivables Trade and other payables Euro €’000 104 178 (88) 194 2014 USD $’000 4,580 4,125 (525) 8,180 2013 GBP £’000 152 223 (83) 292 Euro €’000 22 16 (27) 11 USD $’000 695 3,503 (174) 4,024 Foreign currency sensitivity The following table demonstrates the sensitivity to a reasonable possible change in the US dollar, Euro and Sterling pound against the Australian dollar, with all other variables held constant: Effect on profit before tax and other comprehensive income $’000 Change in USD rate 2014 2013 3% – 8% 3% – 7% 245 (654) 121 (282) Change in EUR rate 3% – 10% 4% – 9% Effect on profit before tax and other comprehensive income €’000 Effect on profit before tax and other comprehensive income £’000 Change in GBP rate 6 (19) – (1) 3% – 6% – – 9 (18) – – 78 c. Operational risk Operational risk is the risk of direct and indirect loss arising from a wide variety of causes associated with company processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Company’s operations. An objective of the Company is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of control to address operational risk is assigned to the Audit and Financial Risk Management Committee. This responsibility is supported by the development of standards for the management of operational risk in the following areas: • • requirements for appropriate segregation of duties, including the independent authorisation of transactions; requirements for the reconciliation and monitoring of transactions; • compliance with regulatory and other legal requirements; • documentation of controls and procedures; • requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • development of contingency plans; • training and professional development; • ethical and business standards; and • risk mitigation, including insurance where this is effective. d. Credit risk Credit risk arises from holdings in cash and cash equivalents, trade receivables, and derivative financial instruments. The Group invests only in deposits and floating rate notes offered by Australia’s four main banks. The Company has limited number of customers. The Company, by policy, performs customer credit assessment prior to entering into a distribution agreement or sales and routinely assesses the financial strength of its customers and reviews distribution agreements. As a result, the Company believes that its accounts receivable credit risk exposure is mitigated and has not experienced significant write-downs in its accounts receivable balances. As of 30 June 2014, GE Healthcare and Regional Healthcare, combined, accounts for over 91% of the trade receivables (2013: GE Healthcare and Regional Healthcare, combined, accounts for over 99% of the trade receivables). The credit risk arising from derivative financial instruments is not significant. The maximum exposure to credit risk as at the reporting date is the carrying amount of the financial assets as set out above. The carrying amount is determined according to the Group’s accounting policies. e. Liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Surplus funds are invested in short and medium term instruments which are tradeable in highly liquid markets. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201479 Maturity profile Following is the contractual maturity profiles of undiscounted cash flows from financial liabilities: On demand $’000 Less than 3 months $’000 3 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000 Total $’000 2014 Trade and other payables Borrowings Convertible notes Total financial liabilities 2013 Trade and other payables Borrowings Derivative financial instruments Convertible notes Total financial liabilities – – – – – – – – – 2,104 2 – 2,106 2,553 2 198 – 2,753 – 6 450 456 – 6 – – 6 – 19 8,850 8,869 – 28 – 9,300 9,328 – – – – – – – – – 2,104 27 9,300 11,431 2,553 36 198 9,300 12,087 Fair values Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the financial statements 2014 $’000 2013 $’000 Notes Carrying amount Fair value Carrying amount Fair value Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Fair value through profit and loss Derivative financial instruments Not measured at fair value Other financial liabilities Trade and other payables Convertible notes Borrowings 9 10 16 20 19 21,233 5,712 26,945 21,233 5,712 26,945 24,064 4,199 28,263 24,064 4,199 28,263 – – (198) (198) (2,104) (8,097) (24) (2,104) (8,097) (24) (2,553) (7,541) (30) (2,553) (7,541) (30) (10,225) (10,225) (10,322) (10,322) 80 The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate fair values: • Cash and cash equivalents, trade and other receivables, trade and other payables approximate their carrying amounts largely due to the short term maturities of these instruments. • The Group enters into derivative financial instruments with various counterparties principally with Australia’s major banks. Derivatives valued using valuation techniques with market observable inputs are mainly foreign exchange forward contract. The valuation technique is described below. Fair value hierarchy The Group uses the following hierarchy above for determining and disclosing the fair value of financial instruments by valuation technique: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. • Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. • Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. The valuation techniques used in measuring Level 2 fair values: Type Valuation technique Derivative financial instruments – foreign exchange forward contracts Market comparison technique: The fair values are based on bank quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments. As at 30 June 2014, the Group did not hold any derivative financial instruments carried at fair value (2013: derivative financial liability $198,000). Foreign exchange forward contracts 30 June 2014 Foreign exchange forward contracts 30 June 2013 $’000 – (198) Level 1 $’000 – – Level 2 $’000 – (198) Level 3 $’000 – – 4. Critical accounting estimates and judgments The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates and requires management to exercise judgment in the process of applying the Group’s accounting policies. Estimates and associated assumptions and judgments affect the recognised amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities and are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of certain assets and liabilities are: Provision for warranty The Group has recognised a provision in accordance with the accounting policy describe in note 2. The Group has made assumptions in relation to the values estimated to be required to settle the warranty obligation on all products under warranty at balance date. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201481 Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating the fair value for share based payment transactions requires determining the most appropriate valuation model, which is depended on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share based-payment transactions are disclosed in note 30 to the financial statements. Recognition of deferred tax assets Deferred tax assets are only recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax asset that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Details of the unrecognised deferred tax assets on unused tax losses and non-refundable R&D tax offset are disclosed in note 8 to the financial statements. 5. Segment information The Group has identified its operating segments based on the internal reports that are reviewed and used by the Managing Director and CEO (the chief operating decision maker) in assessing performance and in determining the allocation of resources. The Group operates in a single operating segment, being the healthcare equipment segment. Types of products and services The principal products and services of the healthcare equipment segment are the manufacture and commercialisation of infection control and decontamination products and related technologies. Major customers The Group has a number of customers to which it provides products and services. The most significant customer accounts for 82% (2013: 88%) of external revenue. The next most significant customer accounts for 8.4% of external revenue (2013: 7%). Geographical information Geographically, the Group operates in the global markets. Australia is the home country of the parent entity. Revenue from external customers by geographical location is detailed below. North America Australia and New Zealand Europe and other countries Total revenue Revenues above are allocated based on the country in which the customer is located. The analysis of the location of non-current assets is as follows: North America Australia and New Zealand Europe and other countries Total assets 2014 $’000 17,665 2,267 1,560 21,492 2014 $’000 10 1,903 9 1,922 2013 $’000 13,165 1,497 237 14,899 2013 $’000 17 1,962 14 1,993 Non-current assets for this purpose consist of property, plant and equipment, intangible assets and other non-current assets. Assets and capital expenditure are allocated based on where the assets are located. 82 6. Other income Government grants Interest income Other income Total Government grants comprise 2014 $’000 1,666 739 1,709 4,114 2013 $’000 1,498 1,192 – 2,690 • payments under the Export Market Development Grant scheme, • 45% research and development refundable tax offset received during the year. There were no unfulfilled conditions or other contingencies attaching to these grants. The Group did not benefit directly from any other form of governmental assistance. Other income includes reimbursement of cost by a distributor of $1,707,000. The related costs are included in the operating expenses. 7. Loss before income tax expense The loss from ordinary activities before income tax includes: 2014 $’000 2013 $’000 Expenses Staffing costs broken into : Salaries and wages Superannuation and social security contribution Workers compensation costs Other employee benefits and staffing costs Share based payments Less: Staffing costs included in cost of sales Total staffing costs Depreciation and amortisation Research and development costs Rental expenses relating to operating leases Bad debts provision (reversal) Inventories provision / write off Unrealised loss (gain) on foreign exchange forward contracts Realised loss (gain) on foreign exchange forward contracts Net foreign exchange losses (gains) No development costs were capitalised during the year (2013: Nil). 10,118 1,001 98 2,677 997 (2,886) 12,005 975 4,103 576 5 536 – 32 414 7,859 849 112 2,126 898 (2,667) 9,177 1,044 3,167 537 (1) 197 198 40 (221) nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014 8. Taxation (a) Income tax expense Operating loss from ordinary activities The prima facie income tax benefit applicable to the operating loss is calculated at 28.3% (2013:30%) Non-assessable income Research and development tax offset received during the year Other deductible items Non-deductible items: Research and development expense Equity based benefits Entertainment Other temporary differences Deferred tax benefit not recognised Non-refundable research and development tax offset Adjustment in respect of current income tax of previous years 2014 $’000 2,636 745 455 307 (1,231) (282) (1) (270) (277) (1,459) 1,641 126 83 2013 $’000 5,735 1,721 404 – (950) (157) (13) 10 1,015 (1,048) – – Income tax benefit (expense) reported on the Consolidated statement of profit or loss and other comprehensive income 31 (33) (b) Deferred tax assets The potential deferred tax assets in a controlled entity, which is a company, arising from tax losses, non-refundable tax offsets and timing differences are only recognised when it is probable that future taxable amounts will be available to utilise those tax losses and temporary differences. Unrecognised deferred tax assets include: Estimated tax losses carried forward Non-refundable R&D tax offset Estimated tax losses carried forward: 2014 $’000 2013 $’000 16,241 1,375 17,616 16,157 – 16,157 Beginning of the year unrecognised tax losses carried forward 53,856 50,201 Adjustment in respect of unrecognised tax losses carried forward from previous year Tax losses for the year Estimated non-refundable R&D tax offset at the end of the year 281 – 54,137 3,438 273 3,382 53,856 – The potential future income tax benefit of tax losses carried forward and non-refundable R&D tax offset will only be obtained if: (i) the Company and the Group derive future assessable income of a nature and an amount sufficient to enable the benefit to be realised (ii) the Company and the Group continue to comply with the conditions for deductibility imposed by the law; and (iii) no changes in tax legislation adversely affect the Company and the Group is realising the benefit. 84 9. Current assets – Cash and cash equivalents Cash at bank and on hand Deposits on call Short term deposits 2014 $’000 5,705 308 15,220 21,233 2013 $’000 972 1,005 22,087 24,064 Cash term investments which are highly liquid irrespective of their maturity dates are classified as current assets at market value as they may not necessarily be held by the Company for their full term. The Group’s exposure to interest rate risk is discussed in note 3. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. 10. Current assets – Trade and other receivables Trade receivables net of allowance for impairment loss GST receivable VAT receivable Interest and other receivables 2014 $’000 5,338 59 204 111 2013 $’000 3,972 91 18 118 5, 712 4,199 Trade receivables by geographic region were as follows: Carrying amount North America Australia and New Zealand Europe and other countries Maximum exposure to credit risk for trade receivable by type of counterparty was as follows: Distributors Others 2014 $’000 4,382 472 484 5,338 Carrying amount 2014 $’000 5,310 28 5,338 2013 $’000 3,846 97 29 3,972 2013 $’000 3,944 28 3,972 nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201485 Past due but not impaired <30 days $’000 30-60 days $’000 >60 days $’000 28 2 1 1 As at 30 June 2014, the aging analysis of trade receivables is as follows: 2014 2013 Total $’000 5,338 3,972 Neither past due nor impaired $’000 5,295 3,964 14 5 2013 $’000 3,878 53 33 An analysis of the credit policy of trade receivables that are neither past due nor impaired is as follows: External financial ratings at least 1A from Dun & Bradstreet Other customers: Four or more years trading history with the Group Less than four years of trading history with the Group 2014 $’000 4,826 453 16 Information about the Group’s exposure to foreign currency risk in relation to trade and other receivables is provided in note 3. Due to the short-term nature of the receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. Collateral is not held as security, nor is it the Group’s policy to transfer (on-sell) receivables to special purpose entities. As at 30 June 2014, trade receivables with a nominal value of $5,000 (2013: Nil) were considered impaired. 5,295 3,964 The movement in allowance for impairment in respect of trade and other receivables during the year was as follows: At 1 July 2012 Increase for the year Utilised Unused amount reversed At 30 June 2013 Increase for the year Utilised Unused amount reversed At 30 June 2014 $000 1 _ – (1) – 5 – – 5 86 11. Current assets – Inventories Raw materials and stores – at net realisable Work in progress – at cost Finished goods – at net realisable value 2014 $’000 2,211 737 1,289 4,237 2013 $’000 1,854 673 382 2,909 Write-downs of inventories to net realisable values during the year ended 30 June 2014 amounted to $536,000 (2013:$197,000). The expense has been included in other operating costs in profit or loss. Roll forward of provision for inventories: Beginning balance Provided during this year Utilised during this year Ending balance 12. Current assets – Other Prepaid expenses Prepaid foreign income tax Service work in progress 2014 $’000 147 536 (326) 357 2014 $’000 388 31 21 440 2013 $’000 485 197 (535) 147 2013 $’000 475 10 3 488 nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201487 13. Non-current assets – Property plant and equipment Laboratory fit out Laboratory equipment Office furniture & equipment Leasehold improvements Manufacturing equipment Service, test & demo equipment Computer equipment & software Capital Work in Progress Total Year ended 30 June 2013 Opening net book amount Additions Retirement and others Depreciation charge Foreign currency translation effect (net) Closing net book amount at 30 June 2013 At 30 June 2013 Cost Accumulated depreciation Net book amount at 30 June 2013 13 – – 65 27 – 118 14 – 149 6 – 674 88 159 838 290 275 – 1,468 97 1,345 – – – – – (3) (26) (49) (138) (300) (283) (205) – (1,004) – – – – – 2 1 3 10 66 83 17 462 716 361 97 1,812 343 351 817 882 1,546 1,462 1,057 97 6,555 (333) (285) (734) (865) (1,084) (746) (696) – (4,743) 10 66 83 17 462 716 361 97 1,812 Year ended 30 June 2014 Opening net book amount Additions Retirement and others Depreciation charge Foreign currency translation effect (net) Closing net book amount at 30 June 2014 At 30 June 2014 – 7 10 – – 66 32 – 83 98 – 17 58 – 462 96 716 601 361 179 97 17 1,812 1,081 – (177) – (3) (29) (41) (37) (250) (353) (225) – – – (177) (938) – – – – – – – 69 140 38 308 787 315 114 1,778 Cost or fair value 343 383 915 940 1,642 1,804 1,235 114 7,376 Accumulated depreciation Net book amount at 30 June 2014 (336) (314) (775) (902) (1,334) (1,017) (920) – (5,598) 7 69 140 38 308 787 315 114 1,778 88 14. Non-current assets – Intangible assets Development Costs At cost Accumulated amortisation Net book value 2014 $’000 201 (201) – 2013 $’000 201 (164) 37 Development costs relate to the trophon® EPR project and are carried at cost less accumulated amortisation. The intangible asset has been assessed as having a finite life and is amortised using the straight line method over a period of 5 years. Amortisation of $37,000 (2013:$40,000) is included in depreciation and amortisation expense in the statement of profit or loss. 15. Non-current assets – Other Refundable deposits and bonds Total 16. Current liabilities – Trade and other payables Trade payables Other payables Provision for warranty Total Roll forward of provision for warranty: Beginning balance Provided during this year Utilised during this year Balance as at 30 June 2014 $’000 144 144 2014 $’000 575 1,529 896 3,000 2014 $’000 449 701 (254) 896 2013 $’000 144 144 2013 $’000 1,302 1,251 449 3,002 2013 $’000 368 638 (557) 449 The Group has recognised a provision for warranty in accordance with the accounting policy describe in note 2. The Group has made assumptions in relation to the values estimated to be required to settle the warranty obligation on all products under warranty at balance date. 17. Current liabilities – Deferred revenue Beginning balance Deferred during the year Released to profit or loss Ending balance 2014 $’000 209 616 (517) 308 2013 $’000 91 416 (298) 209 nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201418. Employee provisions Provision for bonuses Provision for annual leave Provision for long service leave Total Employee provisions – current Provision for bonus Provision for annual leave Provision for long service leave Total Employee provisions – non-current Provision for long service leave Total 89 2013 $’000 157 607 202 966 157 607 19 783 183 183 2014 $’000 723 690 267 1,680 723 690 108 1,521 159 159 The provision for long service leave includes all unconditional entitlements where employees have completed the required period of service and also where employees are entitled to pro-rata payments in certain circumstances. Superannuation commitments The Company makes contributions to superannuation plans for the benefit of eligible employees. The Company has a legally enforceable obligation to make these contributions under the auspices of the Superannuation legislation and related guidelines proclaimed by the federal government. The contributions are made as a fixed percentage of salary. 19. Borrowings Finance lease obligations Current portion Non-current portion Total 2014 $’000 2013 $’000 24 6 18 24 30 6 24 30 90 20. Convertible notes Non-current liabilities Convertible notes at amortised value Equity Option premium on convertible notes 2014 $’000 2013 $’000 8,097 7,541 376 376 On 28 June 2012, the Company issued unsecured Tranche A convertible note of $4,000,000 and Tranche B convertible note of $3,500,000 which matures 4 years after the issue date. The convertible notes bear 6% interest per annum on a simple interest basis calculated on each anniversary of the issue date. No interest repayment will be made to the noteholder in the first two years but the interest will accrue and form part of the face value of the note but will not bear any further interest. After that period, the noteholder may elect whether to receive interest in cash or to have such interest accrue and form part of the Face Value (but this will not bear further interest). The convertible notes may be converted at any time up until the Maturity Date at $0.75 per share, subject to certain adjustments. The effective interest on convertible notes is 7.364%. As at 30 June 2014, the amortised value of convertible notes recognised in non-current liabilities including accrued interest amounted to $8,097,000 (2013: $7,541,000) and borrowing costs related to the convertible notes amounted to $555,000 (2013: 517,000). 21. Contributed equity Share capital 263,823,826 ordinary fully paid shares (2013: 261,988,718 ) Movements in ordinary shares on issue At 30 June 2012 Share options exercised Share issued At 30 June 2013 Share options exercised Shares issued At 30 June 2014 Number of shares $’000 259,982,918 73,532 1,287,604 718,196 203 333 261,988,718 74,068 1,835,108 – 342 – 263,823,826 74,410 All ordinary shares are fully paid. Ordinary shares carry one vote per share and entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. On a show of hands, every ordinary shareholder present at a meeting in person or by proxy is entitled to one vote and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. At 30 June 2014 there were 6,525,597 (2013: 5,418,625) options to acquire one ordinary share each outstanding, of which 1,705,668 (2013: 1,397,002) had vested and were exercisable. Information relating to the Company’s employee share-based payment schemes, including details of shares and options issued, options exercised and options lapsed during the financial year, as well as options outstanding at the end of the financial year, is set out in note 30. Capital Management Management controls the capital of the Group to ensure that the Group can fund its operations and continue as a going concern. The Group’s capital includes ordinary share capital and financial liabilities supported by financial assets. There are no externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of share issues. There have been no changes in the strategy adopted by management to control the capital of the Group since the prior year. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201422. Reserves Employee equity benefits reserve Foreign currency translation reserve Balance 30 June Employee equity benefits reserve Balance 1 July Share-based payment (ESOP) Share-based payment (GSOP) Balance 30 June 91 2013 $’000 2,673 27 2,700 2013 $’000 1,775 804 94 2,673 2014 $’000 3,671 20 3,691 2014 $’000 2,673 940 58 3,671 The employee equity benefits reserve is used to record the value of share based payments provided to employees, including KMP, as part of their remuneration. Refer to note 30 for further details of these plans. Foreign currency translation reserve Balance 1 July Exchange difference on foreign currency translation during the year Balance 30 June 2014 $’000 (27) 7 20 2013 $’000 (11) 38 (27) The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. 23. Dividends No dividends were proposed, declared or paid during the financial year and to the date of this report (2013: Nil). 24. Capital and leasing commitments Future operating lease commitments not provided for in the financial statements and payable: Within one year One year or later and no later than five years The Group does not have any non-cancellable capital expense commitments. 2014 $’000 2013 $’000 473 105 578 462 189 651 Finance lease and hire purchase commitments Within one year After one year but not more than 5 years Total minimum lease payments Less finance charges Present value of minimum lease payments 2014 2013 $’000 $’000 $’000 $’000 Minimum payments Present value of payments Minimum payments Present value of payments 8 19 27 3 24 6 18 24 – 24 8 28 36 6 30 6 24 30 – 30 92 25. Auditor’s remuneration Audit services Audit and review of financial reports Total remuneration for audit services Non-audit services Assurance related services Audit of regulatory returns Total remuneration for assurance related services Total remuneration for non-audit services 2014 $’000 56,000 56,000 – – – 2013 $’000 52,000 52,000 – – – 26. Information relating to subsidiaries The consolidated financial statements of the Group include: Name of controlled entity Principal activities Nanosonics Europe GmbH Saban Ventures Pty Limited Nanosonics Inc. Provision of sales and customer support services to Nanosonics Limited in Germany Owner of the registered intellectual property of the Group Provision of sales and customer support services to Nanosonics Limited in USA Country of incorporation Class of shares Germany Ordinary Equity Holdings 2014 100% 2013 100% Australia Ordinary 100% 100% USA Ordinary 100% 100% Parent entity The parent entity within the Group is Nanosonics Limited which is based and listed in Australia. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014 93 27. Related party disclosures Note 26 provides the information about the Group’s structure including the details of the subsidiaries and the parent entity. (a) Transactions with related parties Certain directors and Key Management Personnel, or their personally-related entities, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. Details of the type of transactions that were entered into with directors and KMP are as follows: Directors and Key Management Personnel Related entities Transactions Maurie Stang Maurie Stang Maurie Stang Maurie Stang Gryphon Capital Pty Ltd Director fees and services received Novapharm Research (Australia) Pty Ltd Services received Ramlist Pty Ltd Rent of premises Regional Healthcare Group Pty Ltd Products purchased, services received and products sold Richard England Angleterre Pty Ltd and Domkirke Pty Ltd Director fees and services received The following transactions occurred with related parties: Key Management Personnel – Other directors’ interests Sales of goods and services Sale of products to related parties Purchases of goods Purchases of goods and services from related parties Other transactions Rent of premises and equipment from related parties (b) Outstanding balances arising from sales/purchases of goods and services The following balances are outstanding at the reporting date in relation to transactions with related parties: Key Management Personnel – Other directors’ interests Current receivables (supply of goods and services) Current payables (purchases of goods and services) 2014 $’000 450 18 There were no provisions for doubtful debts relating to the outstanding balances from related parties (2013: Nil) and there were no expenses recognized during the period in respect of doubtful debts from related parties. 2014 $’000 2013 $’000 1,812 1,056 357 184 553 185 2013 $’000 53 37 94 (c) Guarantees No guarantees were provided during the year under review and none were in effect at the year-end between the Company and its subsidiaries (2013: Nil). (d) Terms and conditions The terms and conditions of the transactions were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions with unrelated entities on an arms-length basis. All other transactions were made on normal commercial terms and conditions and at market rates, except that there are no fixed terms for the repayment of loans between the parties. Outstanding balances are unsecured and are repayable in cash. (e) Directors and key management personnel compensation Director fees Short-term employee benefits Long-term benefits Termination benefits Share based payments Total compensation Total compensation includes total remuneration for executive and non-executive directors of the parent entity Group and Company 2014 $’000 262,631 1,262,657 182,951 – 2013 (Restated) $’000 265,450 913,138 132,357 – 547,576 379,255 2,255,815 1,690,200 1,461,983 835,647 The 2013 KMP remuneration disclosure was restated to exclude executives who were previously included as among the five named executives who received the highest remuneration in 2013, whose roles and responsibilities were determined to have not met the definition of KMP. Accordingly, the 2013 Directors and KMP compensation as previously reported of $2,347,711 was restated to $1,690,200. In addition, annual leave is now included in other long term benefits (previously shown as short term employee benefit). Options and performance rights were granted to KMP as part of their compensation. Details of options and performance rights provided as remuneration and shares issued on exercise of such options, together with the terms and conditions of the options, can be found in Sections 4 to 5 of the Remuneration Report on pages 31 to 47. (f) Loans to directors and key management personnel During the financial year and to the date of this report, the Group made no loans to directors and key management personnel and none were outstanding at the year ended 30 June 2014 (2013: Nil). nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201428. Notes to the cash flow statements (a) Reconciliation of cash Cash and cash equivalents 95 2014 $’000 21,233 2013 $’000 24,064 For the purpose of the Statement of cash flows, cash includes cash on hand and at bank, deposits on call and short term deposits, net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the Statement of cash flow is reconciled to the related items in the statement of financial position as follows: (b) Reconciliation of operating loss after income tax to net cash provided by operating activities Operating loss after income tax Adjustment for : Depreciation and amortisation Share based payments expense Borrowing costs on convertible notes Unrealised foreign exchange loss (gain) Changes in assets and liabilities (Increase) / decrease in receivables (Increase) / decrease in inventories (Increase) / decrease in other current assets (Increase) / decrease in other non-current assets Increase / (decrease) in derivative financial instruments Increase /(decrease) in trade and other payables Increase /(decrease) in provisions Increase / (decrease) in other current liabilities Increase / (decrease) in current tax liabilities Net cash used in operating activities (c) Credit standby arrangements unused Borrowing facilities 30 June 2014 30 June 2013 2014 $’000 (2,605) 975 997 555 119 (1,573) (1,752) 51 – (198) (728) 717 854 (6) 2013 $’000 (5,768) 1,044 898 517 (70) (1,171) (512) (285) (3) 238 130 (151) 623 4 (2,594) (4,506) Facility Limit $’000 256 256 Facility used by $’000 50 74 Facility available at $’000 206 182 96 29. Loss per share (a) Basic loss per share Loss attributable to ordinary shareholders of the Company (b) Diluted loss per share Loss attributable to ordinary shareholders of the Company (c) Losses used in calculating loss per share 2014 Cents (1.0) (1.0) 2013 Cents (2.2) (2.2) Net loss after income tax expense attributable to shareholders (2,605) (5,768) (d) Weighted average number of shares used For basic earnings per share For diluted earnings per share 263,072,467 261,201,368 263,072,467 261,201,368 (e) Information concerning options granted Options granted under the Nanosonics Employee Share Option Plan and the Nanosonics General Share Option Plan are considered to be potential ordinary shares and have been excluded from the calculation of diluted loss per share as the effect would have been anti-dilutive. Details relating to the options are set out in note 30 to these financial statements. 30. Share-based compensation The Company’s share based compensation schemes comprise option plans and share plans. Options have been granted under the option plans. Shares have been granted under the Deferred Employee Share Plan. To the date of this report no shares have been granted under the Exempt Employee Share Plan. (a) Option plans The Nanosonics Employee Share Option Plan (ESOP) and the Nanosonics General Share Option Plan (GSOP) were established in 2007 and last approved by the shareholders in the 2013 Annual General Meeting (AGM) on 8 November 2013. Under the plans, participants are granted options for no consideration. Options may only be excercised on or after any vesting dates specified by the Board at the time of offer. The exercise price of options is determined by the Board at the time of issue. Participation in the plans is at the Board’s discretion and no individual has a contractual right to participate in a plan or to receive any guaranteed benefits. General Share Option Plan (GSOP) The General Share Option Plan is designed to provide incentive, recognition and reward for non-employees, usually consultants and contractors, who create long-term value for the Company. No share options were issued under the GSOP during the financial year (2013: 536,038 issued). nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 201497 Employee Share Option Plan (ESOP) The Employee Share Option Plan is designed to provide the deferred equity component of the short-term incentive and long-term incentives for employees (including executive directors) to deliver long-term shareholder returns. All employees and directors are eligible to participate in the ESOP at the invitation of the Board. The maximum number of options able to be on issue under the ESOP during any five-year period is 5% of the total number of shares on issue. 2,981,494 share options were issued under the ESOP during the financial year (2013: 2,487,891 issued). (b) Exercise of options Options are granted under the plans for no consideration and options carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share that ranks equally with any other share on issue in respect of dividends and voting rights. The exercise prices of all options issued to the date of this report were fixed on the dates the options were granted. Details are provided in section (c) of this note. (c) Reconciliation of outstanding share options and performance rights The number and weighted average exercise price (WAEP) of share options and performance rights under the share option plans were as follows: Number of Options Unexpired options as at 1 July Granted during the year Exercised during the year Forfeited during the year Expired during the year Unexpired options as at 30 June Number of holders as at 30 June ESOP GSOP All Option Plans 2014 2013 2014 2013 2014 2013 Number of options and rights WAEP ($) Number of options and rights WAEP ($) Number of options and rights WAEP ($) Number of options and rights WAEP ($) Number of options and rights Number of options and rights 4,603,625 0.35 3,330,719 0.54 815,000 0.55 427,550 0.56 5,418,625 3,758,269 2,981,494 – 2,487,891 – – – 536,038 0.45 2,981,494 3,023,929 (1,573,442) 0.13 (1,173,016) 0.16 (261,666) 0.53 (114,588) 0.15 (1,835,108) (1,287,604) (39,414) – (41,969) – – – – – – – – – (34,000) 0.35 (39,414) (75,969) – – – – 5,972,263 0.24 4,603,625 0.35 553,334 0.57 815,000 0.55 6,525,597 5,418,625 20 68 5 6 25 74 98 Set out below are details of unexpired options granted under the plans as at 30 June 2014: Option Plan Exercise price Grant date Assessed fair value at grant date Expiry date Number at start of the year Number granted during the year Number exercised during the year Number forfeited during the year Number at end of the year Number vested and exercisable at end of year GSOP $0.55 Jan-10 $0.30 05-Jan-14 50,000 ESOP $0.56 Aug-10 $0.31 19-Jul-14 500,000 $0.78 Oct-10 $0.49 01-Oct-14 100,000 $0.56 Mar-11 $0.63 19-Jul-14 200,000 $0.92 Mar-11 $0.58 23-Feb-15 30,000 $0.85 May-11 $0.50 28-Apr-16 1,400,000 $0.53 Nov-11 $0.38 21-Nov-15 195,000 $0.00 Jun-12 $0.49 01-Apr-15 13,537 $0.00 Nov-12 $0.55 30-Sep-15 1,220,000 $0.00 Nov-12 $0.55 01-Oct-13 544,191 $0.51 Nov-12 $0.27 24-Nov-16 195,000 $0.52 Dec-12 $0.20 21-Nov-16 275,000 $0.00 Apr-13 $0.45 01-Apr-14 695,897 (50,000) (166,000) – (200,000) – – – – – – – – – 334,000 334,000 100,000 100,000 – – 30,000 30,000 – 1,400,000 1,166,668 (80,000) (6,768) – – 6,769 115,000 50,000 – 1,220,000 (533,745) (10,446) – (40,000) (91,666) – – 183,334 155,000 25,000 – – – – – – – – – – – – – $0.00 Aug-13 $0.78 30-Sep-15 $0.00 Nov-13 $0.68 30-Sep-16 $0.00 Nov-13 $0.85 30-Sep-16 $0.00 Nov-13 $0.71 30-Sep-17 $0.00 Nov-13 $0.85 30-Sep-17 $0.00 Mar-14 $0.63 30-Sep-16 $0.00 Mar-14 $0.80 30-Sep-16 – – – – – – – 712,970 442,409 442,409 375,000 375,000 316,847 316,859 (666,929) (28,968) – – – – – – – – – – – – – – – 712,970 442,409 442,409 375,000 375,000 316,847 316,859 – – – - – – – – – – – – GSOP ESOP ESOP ESOP GSOP ESOP ESOP ESOP GSOP GSOP ESOP ESOP ESOP ESOP ESOP ESOP ESOP ESOP Total 5,418,625 2,981,494 (1,835,108) (39,414) 6,525,597 1,705,668 (d) Fair value of options and performance rights granted The assessed fair value on the date options were granted was independently determined using an appropriate option valuation model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. Terms and condition of the options and performance rights granted and the inputs to the valuations of options and performance rights granted and not expired to 30 June 2014 included: nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014 99 Option type Vesting Conditions Exercise price Grant date Expiry date Estimated share price at grant date Valuation model Expected price volatility of the company’s shares Expected dividend yield Risk-free interest rate Assessed fair value at grant date Granted during the year: ESOP (a) ESOP (b) ESOP (c) ESOP (d) ESOP (e) ESOP (f) ESOP (g) FY15 Revenue, net profit after tax and service condition Relative TSR performance and service condition FY16 Revenue, net profit after tax and service condition Relative TSR performance and service condition FY17 Revenue, net profit after tax and service condition Relative TSR performance and service condition FY16 Revenue, net profit after tax and service condition $0.00 Aug-13 30-Sep-15 $0.78 Binomial 45.49% 0% 2.35% $0.78 $0.00 Nov-13 30-Sep-16 $0.85 Monte Carlo 45.00% 0% 3.00% $0.68 $0.00 Nov-13 30-Sep-16 $0.85 Binomial 45.00% 0% 3.00% $0.85 $0.00 Nov-13 30-Sep-17 $0.85 Monte Carlo 45.00% 0% 3.20% $0.71 $0.00 Nov-13 30-Sep-17 $0.85 Binomial 45.00% 0% 3.20% $0.85 $0.00 Mar-14 30-Sep-16 $0.80 Monte Carlo 45.00% 0% 2.68% $0.63 $0.00 Mar-14 30-Sep-16 $0.80 Binomial 45.00% 0% 2.68% $0.80 Granted in prior periods and unexpired at report date: ESOP Service Condition until first exercise date of each tranche $0.56 Aug-10 19-Jul-14 $0.54 GSOP Not applicable $0.78 Oct-10 01-Oct-14 $0.80 $0.92 Mar-11 23-Feb-15 $0.93 $0.85 May-11 28-Apr-16 $0.80 $0.53 Nov-11 21-Nov-15 $0.63 Black & Scholes Black & Scholes Black & Scholes Black & Scholes Black & Scholes 74.87% 0% 4.77% $0.31 77.58% 0% 4.95% $0.49 80.48% 0% 5.15% $0.58 73.62% 0% 5.14% $0.50 73.09% 0% 3.44% $0.38 $0.00 Jun-12 01-Apr-15 $0.49 Binomial 49.04% 0% 2.43% $0.49 $0.00 Nov-12 30-Sep-15 $0.55 Binomial 45.46% 0% 2.58% $0.55 $0.51 Nov-12 24-Nov-16 $0.56 Binomial 54.96% 0% 2.71% $0.27 $0.52 Dec-12 21-Nov-16 $0.49 Binomial 53.13% 0% 2.87% $0.20 ESOP Service Condition until first exercise date of each tranche ESOP Service Condition until first exercise date of each tranche GSOP Service Condition until first exercise date of each tranche ESOP (a) ESOP Service Condition until first exercise date of each tranche FY15 Revenue, net profit after tax and service condition GSOP Service Condition until first exercise date of each tranche GSOP Service Condition until first exercise date of each tranche Options marked as per below were granted to key management personnel. Further information is included in section 5 of the Remuneration report. a. 2012 LTIS granted to key management personnel b. 2013 LTIS - Tranche 1 granted to the CEO and the Executive Director c. 2013 LTIS - Tranche 2 granted to the CEO and the Executive Director d. 2013 LTIS - Tranche 3 granted to the CEO e. 2013 LTIS - Tranche 4 granted to the CEO 2013 LTIS - Tranche 1 granted to other key management personnel and senior employees f. g. 2013 LTIS - Tranche 2 granted to other key management personnel and senior employees 100 (e) Recognition of expense of options granted General Share Option Plan (GSOP) The assessed fair values of options granted under the GSOP are expensed in full in the month in which they are granted and a share based payments reserve is created as part of shareholders’ equity, except where the options are granted as part of a capital raising program, in which case no cost is recognised. Employee Share Option Plan (ESOP) Options granted under the ESOP require the holder to be an employee of the Company at the time the options are exercised, except that they may be exercised, if vested, up to 30 days after voluntary termination of employment. The assessed fair value of ESOP options granted is apportioned on a straight line monthly basis over the period between grant date and the date on which the options all vest. At the end of a period the Company assesses the probability of achievement of a benefit, being the percentage probability that employees will achieve a benefit if the options are exercised. The value of ESOP options expensed in any period is calculated as that portion of the assessed fair value applicable to the period factored by the probability of achievement and a share based payments reserve is created as part of shareholders’ equity. (f) Employee share plans The Company has two Employee Share Plans, being the Exempt Employee Share Plan (“EESP”) and the Deferred Employee Share Plan (“DESP”). The EESP and DESP was established in 2007 and last approved at a general meeting of shareholders on 8 November 2013. Shareholder approval was also granted to enable the Company to grant financial assistance under both the EESP and the DESP in accordance with the Corporations Act 2001. Exempt Employee Share Plan (“EESP”) The EESP enables eligible employees, including directors, to acquire up to $1,000 worth of Nanosonics shares each year on a tax-exempt basis in accordance with enabling tax legislation. As a contemporary company the Board believes allowing employees to acquire equity in the Company on tax-preferred terms should be encouraged. No shares have been issued under the EESP to the date of this report. Nanosonics Deferred Employee Share Plan (“DESP”) The DESP allows invited eligible employees, including directors, to receive Nanosonics shares as a bonus or incentive or as remuneration sacrifice and, subject to certain conditions, not to pay tax for up to 10 years on the benefit in accordance with enabling tax legislation. The DESP is designed to allow the Company to meet contemporary executive equity incentive practices. No shares were issued under the DESP during the financial year. (g) Shares granted During the financial year there were no shares directly granted under the DESP. Details of shares granted under the DESP to the date of this report are set out below. Share Plan Share issue price Grant date Assessed fair value at grant date Closing share price on grant date Number granted DESP DESP DESP DESP 0.2880 23 March 2009 0.4251 0.4251 0.9080 26 June 2009 26 June 2009 3 May 2011 0.2880 0.4251 0.4251 0.9080 Total Employee Shares granted to date 0.2950 0.4100 0.4100 0.9080 336,424 176,400 75,000 102,403 690,227 Share issued on the exercise of zero-priced options granted to employees as part of their performance bonus or short term incentive has been issued to the DESP. No shares have been granted to the date of this report under the EESP. (h) Fair value of shares granted The issue price for shares granted is calculated as the 5-day weighted average market price of shares of the Company on the Australian Securities Exchange as at close of trading on the date the shares were granted. The fair value of shares granted is taken to be the issue price. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014101 (i) Recognition of expense of shares granted Deferred Employee Share Plan (DESP) The assessed fair values of shares granted under the DESP are expensed in full in the month in which they are granted, except if they are granted with a vesting condition, in which case the fair value of DESP shares granted is apportioned on a straight line monthly basis over the period between grant date and the date on which the shares all vest. At the end of a period, the Company assesses the probability of achievement of a benefit, being the percentage probability that employees will achieve at least the fair value of the unvested shares. The value of DESP shares expensed in any period is calculated as that portion of the fair value applicable to the period factored by the probability of achievement. A share based payments reserve is created as part of shareholders’ equity. (j) Shares on issue under employee share plans Number of Shares 2014 2013 2014 2013 2014 2013 DESP EESP All Share Plans Employee Shares on issue as at 1 July 779,053 305,483 Granted during the year – – Issued on exercise of zero-priced options during the year Issued on share purchase plan allotment during the year 1,207,442 626,416 – 7,548 Withdrawn during the year (861,026) (160,394) Forfeited during the year Employee Shares on issue as at 30 June 1,125,469 779,053 Number of holders as at 30 June 40 37 – – – – – – – – (k) Expenses arising from share-based compensation transactions Options issued under ESOP Options issued under GSOP Shares issued under DESP Total share-based compensation – – – – – – – – 779,053 305,483 – – 1,207,442 626,416 – 7,548 (861,026) (160,394) – – 1,125,469 779,053 40 37 2014 $’000 940 57 – 997 2013 $’000 804 94 – 898 102 31. Parent entity information As at and throughout the financial year ended 30 June 2014, the parent entity of the Group was Nanosonics Limited. Set out below is the supplementary information about the parent entity. Financial position of parent entity at year end Current assets Total assets Total current liabilities Total liabilities Total equity of the parent entity comprising of: Contributed Equity Convertible Notes Share option reserve Accumulated losses Total equity Result of parent entity Profit or loss for the year Total comprehensive income (loss) Hire purchase commitment For acquisition of Manufacturing equipment Contingent liabilities The parent entity had no contingent liabilities. 2014 $’000 31,157 33,147 4,567 12,855 74,410 376 3,502 (57,996) 20,292 (2,448) (2,448) 2013 $’000 31,335 33,385 3,964 11,926 74,068 376 2,562 (55,547) 21,459 (5,819) (5,819) 24 30 32. Events subsequent to reporting date No other matter or circumstance has arisen since 30 June 2014 that has significantly affected, or may significantly affect: a. the Group’s operations in future financial years; b. the results of those operations in future financial years; or c. the Group’s state of affairs in future financial years. nanosonics limited | annual report 2014Notes to the financial statements (continued)For the year ended 30 June 2014Directors’ declaration 103 In the directors’ opinion: 1. the financial statements and notes set out on pages 60 to 102 are in accordance with the Corporations Act 2001, including: a. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and b. giving a true and fair view of the Company’s and Group’s financial position as at 30 June 2014 and of their performance for the financial year ended on that date; and 2. there are reasonable grounds to believe that the Company and its subsidiaries will be able to pay their debts as and when they become due and payable. The directors have been given the declarations by the Managing Director and CEO and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of directors. Richard England Director Sydney 21 August 2014 104 Independent auditor’s report to the members nanosonics limited | annual report 2014Independent auditor’s report to the members (continued) 105 106 Shareholder information The shareholder information set out below was applicable as at 12 August 2014. A. Equity security holders Twenty largest holders of quoted equity securities Ordinary shares Mr Maurie Stang1 Mr Bernard Stang Citicorp Nominees Pty Limited National Nominees Limited J P Morgan Nominees Australia Limited Mr Steve Kritzler HSBC Custody Nominees (Australia) Limited Link Traders (Aust) Pty Ltd Asia Union Investments Pty Ltd BNP Paribas Noms Pty Ltd Dr Harry Hirschowitz Armada Trading Pty Ltd Bennelong Resources Pty Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited Bevan Holdings Pty Ltd Hofbauer Nominees Pty Ltd Nan Employee Share Plan Managers Pty Limited Moore Family Nominee Pty Ltd Bentale Pty Ltd Total top 20 holders Total all other holders Total shares on issue 1 Includes indirect holdings of 116,368 shares. Unquoted equity securities Options on issue General Share Options to take up unissued ordinary shares Employee Share Options to take up unissued ordinary shares Total options on issue Number of quoted shares held 28,402,424 27,713,255 26,169,408 25,006,402 23,198,503 10,651,439 8,337,727 3,252,381 3,000,000 2,256,243 2,010,000 2,000,000 1,500,000 1,491,521 1,295,489 1,229,317 1,200,000 1,111,874 1,044,315 1,025,000 171,895,298 92,262,528 264,157,826 Percentage 10.75% 10.49% 9.91% 9.47% 8.78% 4.03% 3.16% 1.23% 1.14% 0.85% 0.76% 0.76% 0.57% 0.56% 0.49% 0.47% 0.45% 0.42% 0.40% 0.39% 65.07% 34.93% 100% Number of options over ordinary shares Number of holders 503,334 5,656,641 6,159,975 4 24 28 nanosonics limited | annual report 2014 Shareholder information (continued) 107 B. Distribution of equity securities Analysis of numbers of ordinary shares and options by size of holding: 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Holders Quoted ordinary shares Unquoted options 341 974 647 1,259 190 3,411 – – 1 15 12 28 There were 141 holders of less than a marketable parcel of 599 ordinary shares. C. Substantial holders Substantial holders in the Company are shown below: Mr Maurie Stang1 Mr Bernard Stang Citicorp Nominees Pty Limited National Nominees Limited J P Morgan Nominees Australia Limited 1 Includes indirect holdings of 116,368 shares. Number of ordinary shares Percentage 28,402,424 10.75% 27,713,255 10.49% 26,169,408 25,006,402 23,198,503 9.91% 9.47% 8.78% D. Voting rights The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and on a poll each share shall have one vote. (b) Options Options have no voting rights. 108 Glossary AASB AGM AIUM ANZ ASIC ASUM ASX BBSW CEO CFO Australian Accounting Standards Board Annual General Meeting American Institute of Ultrasound Australia and New Zealand Australian Securities and Investments Commission Australasian Society for Ultrasound in Medicine Australian Securities Exchange Limited Bank bill swap reference rate Chief Executive Officer Chief Financial Officer Company Nanosonics Limited Date of this report 21 August 2014 DESP EESP EMS EPS ESOP Deferred Employee Share Plan Exempt Employee Share Plan Environmental Management System Earnings Per Share Employee Share Option Plan Financial Year Year to 30 June Fiscal Year Year to 30 June FY Financial year, eg. FY2014 is the financial year ended 30 June 2014 Glutaraldehyde Organic compound used as a disinfectant and sterilizing agent in medical and dental settings, as well as other uses. Group GSOP GST HAI HLD HPV IAS IASB IFRS ISO 13485 ISO 14001 Nanosonics Limited and its wholly owned subsidiary companies General Share Option Plan Goods and Services Tax Healthcare Acquired Infection High Level Disinfection – involves the complete elimination of all microorganisms in or on an instrument, except for small numbers of bacterial spores Human papilloma virus International Accounting Standards International Accounting Standards Board International Financial Reporting Standards Quality Management System for Medical Devices – Requirements for Regulatory Purposes Environmental Management System – An international standard developed by the International Organisation for Standardisation through dedicated technical committees representing approximately 150 countries around the world. Its purpose is to enable organisation of any type or size to develop and implement a policy committing it to prevention of pollution, compliance with legal and other requirements and continual improvement. ISUOG KFDA KMP International Society for Ultrasound in Obstetrics and Gynecology Korean Food and Drug Administration Key management personnel LEAN Program Program designed to maximize customer value LTI LTIS M&K MHRA MRSA while minimizing waste. Long Term Incentives Long Term Incentive Scheme Management & Krankenhaus, the leading publication for decision makers in the German health industry Medicines and Healthcare Products Regulatory Agency (MHRA) Methicillin resistant staphylococcus aureus, a bacterium resistant to broad-spectrum antibiotics NanoNebulant™ The biocide used in Nanosonics’ technological NED NRTL OHS PBT process Non-executive Director Nationally Recognised Testing Laboratory Occupational Health & Safety Profit before tax Q1, 2, 3, or 4 3-monthly periods beginning 1 July, 1 October, 1 January and 1 April respectively R&D Research and Development Reporting period Year to 30 June 2014 STI TEC TFR TJC TSR TTR Short Term Incentives Total Employment Cost Total Fixed Remuneration The Joint Commission, an independent, non-for- profit organisation, that accredits and certifies more than 20,500 health care organisations and programs in the United States of America Total Shareholder Return Total Target Remuneration trophon® The brand representing Nanosonics’ range of infection control solutions designed specifically for healthcare settings trophon® EPR The brand of Nanosonics’ device specifically designed to disinfect intracavity and surface ultrasound probes. See also www.trophon.com.au TÜV UK VAT WAEP TÜVs are German organisations that validate product safety and provide certification for international standards such as ISO9001. United Kingdom Value Added Tax Weighted Average Exercise Price nanosonics limited | annual report 2014Corporate directory and information for investors Nanosonics Limited ABN 11 095 076 896 incorporated 14 November 2000 109 Directors Maurie Stang Richard England David Fisher Michael Kavanagh Ron Weinberger Company Secretaries McGregor Grant Robert Waring Registered Office Unit 24, 566 Gardeners Road Alexandria NSW 2015 Australia Ph: +61 2 8063 1600 European Office Nanosonics Europe GmbH Falkenried 88. House A D-20251 Hamburg Germany Ph: +49 40 468 56885 Share Register Computershare Investor Services Pty Ltd GPO Box 2975 Melbourne, VIC 3001 Australia Ph: +61 3 9415 4088 Ph: 1300 555 159 (within Australia) www.au.computershare.com/au/contact Investor/Media Relations Buchan Consulting Ph: +61 3 9866 4722 Ph: 1300 557 010 (within Australia) McGregor Grant – Company Secretary Ph: +61 2 8063 1600 Email: info@nanosonics.com.au Auditor UHY Haines Norton Level 11, 1 York Street Sydney NSW 2000 Australia Legal Advisors Shelston IP Level 21, 60 Margaret Street Sydney NSW 2000 Australia Baker & McKenzie AMP Centre Level 27, 50 Bridge Street Sydney NSW 2000 Australia Dibbs Barker Level 8, Angel Place 123 Pitt Street Sydney NSW 2000 Australia Bankers ANZ Banking Group Limited, Level 17, 242 Pitt Street Sydney NSW 2000 Australia National Australia Bank Limited Level 36, 100 Miller Street North Sydney NSW 2060 Australia Deutsche Bank AG, Eppendorfer Landstrasse 70 Hamburg 20249 Germany PNC 1015 S Bethlehem Pike Ambler PA 19002 USA Stock Exchange Listings Nanosonics Limited shares are listed on the Australian Securities Exchange ASX code: NAN Industry Group: Healthcare Equipment & Services 2014 Annual General Meeting The 2014 AGM of Nanosonics Limited will be held: At 11.00am on Friday 7th November 2014 Level 3, Sydney Harbour Marriott Hotel 30 Pitt Street Sydney Website Address www.nanosonics.com.au Nanosonics Limited Unit 24, 566 Gardeners Road Alexandria NSW 2015 Australia T +61 2 8063 1600 E info@nanosonics.com.au www.nanosonics.com.au NANOSONICS LIMITED ABN 11 095 076 896 

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