Infection Prevention. For Life. N A N O S O N I C S L I M I T E D A N N U A L R E P O R T 2 0 1 9 SOCIETY LEADERSHIP EXPANSION 2019 ANNUAL REPORT NAN0056 Nansonics UPDATED Annual Report Covers _FINAL.indd 3 26/8/19 4:19 pm 01 Overview and Mission 02 Financial highlights 04 Chairman’s letter 06 CEO’s report 12 Regional highlights 17 Environment, Social and Governance (ESG) trophon®2 24 26 The Board 28 The Executive Team 30 Directors’ report 56 Auditor’s independence declaration Financial statements 57 93 Directors’ declaration 94 Independent auditor’s report to the members 100 Shareholder information 102 Glossary 104 Corporate directory and information for investors Nanosonics (ASX: NAN) has developed a unique automated disinfection technology, which is the first major innovation in high level disinfection for ultrasound probes in more than 20 years. This proprietary technology is being successfully introduced around the world, transforming the way infection prevention practices are understood and applied within the healthcare environment and is becoming the new standard of care as it safely and effectively addresses the issues involved with traditional ultrasound probe disinfection practices. The strategic growth agenda for Nanosonics includes expanding the adoption of trophon® in those markets where trophon is already represented, expanding global presence and expanding the product portfolio through significant investment in research and development to bring new infection prevention products to market. OverviewContents To 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. 01 Our MissionNanosonics Annual Report 2019 Continued strong growth and strategic expansion $’000 Revenue Gross profit 2019 2018 2017 2016 2015 2014 2013 2012 84,324 60,698 67,507 42,796 22,214 21,492 14,899 12,301 2011 2,247 62,816 45,291 50,155 32,166 15,313 13,921 8,471 7,502 1,266 2010 763 479 Research and development expenses (11,375) (9,882) (9,486) (7,297) (4,902) (4,103) (3,167) (3,135) (3,627) (2,369) EBITDA EBIT 17,642 5,861 14,110 950 (4,732) (1,845) (5,366) (4,982) (11,963) (8,187) 15,502 4,362 12,866 (359) (5,795) (2,820) (6,410) (5,896) (12,973) (8,958) Operating profit/(loss) before tax 16,830 5,583 13,852 136 (5,465) (2,636) (5,735) (5,310) (11,921) (8,173) Net income tax (expense)/benefit (3,228) 168 12,306 (14) 5 31 (33) 631 707 — Operating profit/(loss) after tax 13,602 5,751 26,158 122 (5,460) (2,605) (5,768) (4,679) (11,214) (8,173) Cash and cash equivalents 72,180 69,433 62,989 48,841 45,724 21,233 24,064 29,310 12,356 21,144 $84.3m 67.5 60.7 42.8 22.2 32.1 15.3 $62.8m 50.2 45.3 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 REVENUE ($M) GROSS PROFIT ($M) $72.2m 69.4 63.0 48.8 45.7 2015 2016 2017 2018 2019 $16.8m 13.9 2017 0.1 2016 5.6 2018 2019 2015 (5.5) PBT ($M) $2.6m1 15.1 6.2 2017 2018 2019 1.9 2016 2015 (4.7) FREE CASH FLOW ($M) CASH AND CASH EQUIVALENTS 1. Cash flow for the year was impacted by an increase in trade and other receivables of $11,087,000 due to aligning payment terms with a key distributor with our standard payment terms and the timing of sales and payments by that distributor, and an increase in inventory of $5,082,000 associated with the launch of trophon2. 02 Financial highlights Nanosonics Annual Report 2019 03 It is my pleasure to report on Nanosonics’ robust progress across its business, technical and corporate objectives. Today your company is truly global in both its capabilities and horizons with over 286 team members and activities across Asia Pacific, the Americas, Europe and the Middle East. The past year has seen significant and successful investment in our Research and Development (R&D) programs, management, manufacturing and an ever growing engagement with customers and trade partners across the globe. The launch of our next generation trophon®2 and growth of our installed base reflects the strong focus on our core business, whilst our world leading R&D team develop new solutions for our future growth and expansion. During the year, sales increased strongly by 39% to $84.3 million. Whilst the investment in growth continues, Nanosonics’ operating profit before tax of $16.8 million has meant that the Company’s platform from which future investments in growth can be made, has also continued to strengthen. Importantly, these strong results, as well as the positive sentiment regarding the Company’s future, are reflected in the significant shareholder value that has been generated throughout the year. Our capital management is regularly reviewed and considering the significant global healthcare challenges associated with infection prevention and the resulting opportunities for the development and introduction of innovative solutions, investment in the long-term strategic growth agenda of the Company is considered the best use of the Company’s free cash flow and capital reserves at this time. It is pleasing to see that trophon2, the next generation trophon technology, has been launched successfully in key global markets for Nanosonics and feedback from our customers has been very positive. Closer to home, I was also proud to see trophon2 win a prestigious Good Design Award Gold Accolade in July 2019 in recognition of its outstanding design and innovation. For the second consecutive year, Nanosonics also won an award at The Premier’s NSW Export Awards, taking out the Health and Biotechnology category award in October 2018. In August 2019, Nanosonics’ innovation program was recognised as being amongst the most innovative in Australia and New Zealand, ranking seventh in the Australian Financial Review Boss, Most Innovative Companies Health Industry List. 04 Chairman’s letter The Company recognises the importance and value of diversity on the Board, and has appointed an external recruitment agency to undertake a process with the aim of appointing an additional Director with relevant industry and technical experience during FY20. The fundamentals for adoption have continued to strengthen with a number of new studies and guidelines supporting the need for high level disinfection of ultrasound probes used in both critical and semi-critical procedures. We expect this to underpin future growth in the trophon category, and that this will be supported by the introduction of new products to build the Nanosonics portfolio of segment leading technologies in the infection control space. Finally, I would like to thank our outstanding global team led by our CEO, Michael Kavanagh, who continue to deliver for our shareholders. Your Company is at an important stage of its strategic growth agenda where it is continuing to invest in global expansion and the development of innovative solutions for a world market demanding innovation to solve many intractable problems. After another successful year delivering on our promise of ‘Infection Prevention. For Life’, I look forward to working with the Board, management and wider team on continuing to execute our strategic agenda to deliver long-term growth in shareholder value and an ongoing contribution to advancing healthcare delivery. Mr Maurie Stang Chairman 27 August 2019 The Company continues to make a positive impact on healthcare delivery for the global communities in which it operates. This combines not only the impact of the trophon ecosystem but also our support for new and improved guidelines and standards. trophon is a global solution for reducing cross-contamination between patients and reducing the spread of Healthcare Associated Infections (HAIs). HAIs remain a widespread and largely preventable occurrence that have an enormous impact, not only on patients and their families, but on our hospitals and care facilities resources and the communities in which they operate. HAIs are the most frequently occurring adverse event in healthcare worldwide with a prevalence of 7.6% amongst hospitalised patients in high-income countries 1. In Australia, a recent study has shown hospital HAI prevalence rates range from 5.7% to 17.0%, with a median of 9.2% 2. Nanosonics’ trophon technology has a presence of more than 20,000 globally installed devices, resulting in approximately 70,000 cycles every day – with each cycle contributing to mitigating against the spread of potentially fatal HAIs. Nanosonics recognises the importance of its commitment to its Environmental, Social and Governance (ESG) principles and this is reflected in the depth of the disclosures in this year’s ESG report. The ESG-related activities that Nanosonics reports against demonstrate that Nanosonics is a Company that drives great shareholder value by doing good in the communities in which it operates, and for all the stakeholders it represents. We recognise and appreciate the “social licence” that supports our growth as an emerging global leader in infection control. Our processes are environmentally conscious and our products represent significant environmental benefits over any available alternatives. We have several active programs of giving to a variety of causes and our staff are supported to participate in volunteer programs in the Australian community. Finally, we respect the need for governance and accountability and these are built into the very fabric of our activities. Research and development is a core focus for Nanosonics and its current innovation program and investment is without precedent in the Company’s history. We invested $11.4 million during the year on innovative research and development, enhancing our core technologies, as well as progressing the development of new platforms which potentially address large scale new opportunities. We continue to enhance our trophon ecosystem of products and services in new and innovative ways, including through intelligent data management solutions designed to help our customers improve the way they meet their own increasingly demanding compliance obligations. The Nanosonics team continues to grow, and its expertise strengthen. We are now a team of 286 located in Australia, the United States, Canada, Europe, and Japan, representing an increase of 61 people during the year. Whilst the Company continues to grow rapidly, the culture remains strong, healthy and entrepreneurial. I am pleased to welcome four new executives to the management team who will guide the Company on its next phase of growth, including Regional Presidents in Asia Pacific and Europe/Middle East to drive further growth in those regions. I would like to recognise the outstanding work and commitment of our Board who have applied themselves to every dimension of your company’s strategic growth. FY19 also saw the addition of a new Director, and I was very pleased to announce recently the appointment of Mr Geoff Wilson to the Nanosonics Board. Geoff brings with him considerable finance, audit and risk management experience, as well as current and deep experience in important Asia Pacific markets where Nanosonics operates. On behalf of the Board, management and shareholders, I also thank our longstanding Director and contributor to the Board, Mr Richard England, who will step down effective 31 August 2019. We thank Richard for his significant contribution to the Nanosonics story, and I wish to acknowledge the valuable guidance and insight he has provided in his capacity as Chair of the Audit & Risk Committee for a number of years, during which the Company experienced both high growth and radical change. References 1. Currie K, et al. Understanding the patient experience of health care–associated infection: A qualitative systematic review. Am J Infect Control. 2018;46(8):936-42 2. Russo PL, et al. The prevalence of healthcare associated infections among adult inpatients at nineteen large Australian acute-care public hopsitals: a point prevalence survey. Antimicrob Resist Infect Control. 2019(8) 05 Nanosonics Annual Report 2019 20,930 17,740 14,160 10,130 6,250 2015 2016 2017 2018 2019 GLOBAL INSTALLED BASE The trophon installed base continued to grow strongly throughout FY19. Globally the installed base grew 18% from 17,740 units at the end of FY18 to 20,930 units by 30 June 2019. 06 I am very pleased to report that throughout the 2019 financial year, Nanosonics has continued to go from strength to strength delivering excellent growth in our core trophon business while making significant investments in our long-term strategy of establishing the organisation as a globally recognised leader in infection prevention. There were significant achievements across all aspects of our business, including strong growth in the trophon installed base, up 18% to 20,930 units. This means that more than 70,000 patients every day or approximately 18 million patients every year are protected from the risk of cross-contamination because their probe has been decontaminated using trophon. During the year, the second generation trophon2 was also successfully launched and was the recipient of the Gold Award at the Australian Good Design Awards. Geographically, Nanosonics expanded into a number of new markets, including the Nordics, Spain, Portugal, Switzerland and Israel. Market development efforts in Japan continued with the establishment of a Nanosonics entity in Japan, the publication of the first pivotal study in Japan demonstrating probe contamination, and the recent signing of an agreement with GE Healthcare Japan, as well as the recent Japanese regulatory approval of trophon2. Importantly, large investments in our product expansion strategy were made with key milestones met throughout the year towards the targeted introduction of the next significant new product for the end of FY20, subject to regulatory approval. CEO’s report The following provides an outline of some of the key highlights during FY19 relating to each of these core areas. 1. Customer Experience 2. Product Innovation Investments in our people, organisational design and capability were also an important feature of FY19. Four new executives were appointed to the Executive team, including Regional Presidents for Asia Pacific and recently Europe, as well as strengthening our marketing and operational capabilities with the addition of a new Chief Marketing Officer, Chief Strategy Officer and Chief Operating Officer. Our total number of employees grew to 286. This investment in our organisational capability and capacity underpins the long-term strategic growth agenda for the organisation. Total sales for the year were $84.3 million, up 39% on prior corresponding period. These sales reflect capital revenue of $32.8 million which was up 28% on prior corresponding period and revenue associated with consumables and service of $51.5 million which was up 47% on prior corresponding period, reflecting the continuing strong growth in the installed base which supports the important annuity revenue profile of the business. Significant investments in our growth strategy were made throughout the year resulting in a 15.5% growth in total operating expenses to $49.2 million, including $11.4 million in Research and Development (R&D). Operating profit before tax grew by over 200% on the prior year to $16.8 million and the cash balance as at June 30 2019 was $72.2 million. This underpins planned ongoing investment in the growth of the business associated with product and geographical expansion, together with infrastructure investment, to further expand our capability and capacity. Nanosonics is working towards becoming a globally recognised leader in the research, development, manufacture and commercialisation of infection prevention solutions. Our strategic growth agenda is focused on five core areas, namely: Our Customer Experience objective is focused on establishing our offerings as new standards of care globally and providing customers with a convenient and consistent experience with our products and brand. Strong growth in the trophon installed base During FY19, the trophon installed base grew 18% to 20,930 which is a growth of over 10,000 units in the last three years alone. This growth is expected to continue with strengthening international fundamentals for adoption, growing awareness and an acceptance of the risk of cross-contamination with ultrasound probes. In North America alone, the trophon installed base has grown to 18,570 and can be found in all luminary healthcare institutions. The ongoing growth in the installed base is supported through numerous educational initiatives supported or run by Nanosonics. Market expansion During the year Nanosonics expanded its international distribution agreement with GE Healthcare to cover the Nordics, Spain and Portugal. New distribution agreements were also entered into in Switzerland, Israel and Kuwait. Market development efforts in Japan continued with the establishment of a Nanosonics entity in Japan, the publication of the first pivotal study in Japan demonstrating probe contamination, and the recent signing of an agreement with GE Healthcare Japan, as well as the recent Japanese regulatory approval of trophon2. The appointment of new Regional Presidents for Europe and Asia Pacific strengthens the ongoing expansion aspirations in each of these regions. 1. Customer Experience New French guidelines 2. Product Innovation 3. Operational Excellence 4. People Engagement 5. Value Creation In Quarter 4 of FY19, the French Ministry of Health released anticipated guidelines supporting the requirement of high level disinfection. More than 70,000 patients every day or approximately 18 million patients every year are protected from the risk of cross-contamination. Our Product Innovation objective relates to being an innovator in the field of infection prevention through the identification of unmet customer needs, resulting in the development and commercialisation of customer centric solutions that can become new standards of care. Launch of trophon2 Our new trophon2 technology was successfully introduced into manufacturing and launched in North America, Europe and Australia. This new innovation brings a range of new market leading benefits to customers across safety, efficacy, traceability and simplicity. Investment in R&D Product expansion is a core element of our strategic growth agenda and during FY19 our investment in R&D grew to $11.4 million. The Research, Design and Development team grew across a range of engineering and science disciplines. Nanosonics aims to bring to market an expanded product portfolio internationally and intends to continue its investment in R&D to build a pipeline of new potential product opportunities. It is anticipated that the first new non-trophon related product will be brought to market by the end of FY20, subject to regulatory approval. Strengthening our IP position Nanosonics recognises the importance of its IP portfolio in maintaining its sustainable competitive advantage. Our patent portfolio continued to make strong progress in FY19 with 12 applications successfully passing examination to proceed to allowance or grant. Patents were granted in the US, Europe (United Kingdom, Germany and France), Canada and Australia, among others. The portfolio has continued to expand with four PCT (international) applications and four provisional applications for new inventions being filed. Importantly, Nanosonics also enjoys IP protection over subject matter related to its ongoing consumables revenue out to 2029, and has an active program of IP development and filings which will continue to ensure our technology is protected into the future. 07 Nanosonics Annual Report 2019 3. Operational Excellence 4. People Engagement Our Operational Excellence objectives focus on structuring, resourcing and operating our organisation in a way that is disciplined but agile through scalable, compliant and performance-focused processes. Our People Engagement objective focuses on attracting and retaining the best people, ensuring they are engaged and empowered to work towards the attainment of our mission and corporate objectives. The Nanosonics team grew with the addition of 61 new employees. Nanosonics benefits from a diverse workforce that brings a range of experience, skill and capability to the organisation. During FY19 we conducted our first employee engagement survey – ‘Our Voice’ – which measured two important employee engagement and cultural assessment parameters, namely: • Passion and Engagement measuring organisational commitment/ job satisfaction and intention to stay • Progress measuring understanding of, and alignment with, organisation objectives as well as employee attitudes towards change, innovation and job satisfaction Result Overall the organisation scored highly for both Passion and Engagement and Progress, resulting in scores greater than 10% higher than industry average. 30 nationalities are represented across the organisation and over 30% of senior management roles are held by women. Nanosonics also runs intern programs across many key universities and with many partners. These programs run across a number of functional areas and disciplines, in particular engineering and science. Importantly, four new executives joined the Nanosonics leadership team, including Regional Presidents for both Asia Pacific and Europe/Middle East, a Chief Marketing Officer and a Chief Operating Officer. Each of the new executives is continuing to reshape their respective areas of responsibilities to deliver on our short-term objectives as well as setting the foundations for the next phase of our growth. Investments in our global operational infrastructure During the year, the organisation continued to invest in its operational capacity and capability through the structured implementation of a new IT infrastructure, an upgrade of our ERP system to manage our geographical expansion, as well as growth in our regional sales and service organisation. New disciplines were also introduced into the organisation, including clinical trial design and management, expansion of our microbiology laboratories and capabilities, as well as Lean Manufacturing and New Product Introduction (NPI). 08 CEO’s report 5. Value Creation SHAREHOLDER RETURN Market Capitalisation ($ million) $2,000 $1,500 $1,000 $500 0 Specifically in FY20 our focus will be on: • Continuing to grow the installed base in North America with expectations that FY20 adoption will be similar to FY19. • Increasing our sales infrastructure across Europe to drive increasing growth in trophon adoption as fundamentals of adoption have strengthened in particular across the United Kingdom, Germany and France. Share Price 6.00 5.00 4.00 • Continued market education and development in Japan to establish local guidelines to strengthen local fundamentals for adoption. • Driving upgrades/replacements of 3.00 older trophon® EPR units to trophon2. • Launching the first new product by the end of FY20 (subject to regulatory approval) • Continued investment in R&D to support our ongoing product expansion aspirations. • Continuing to build our people, infrastructure, capability and capacity to support our strategic growth agenda. 2.00 1.00 0 June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 June 2018 June 2019 Closing Share Price Market Capitalisation Our Value Creation objective is focused on creating sustainable shareholder value through the delivery of long-term sustainable growth and returns. Positive returns are generated through the successful implementation of our growth strategies as they pertain to growing the Installed Base which delivers an ongoing stream of annuity revenue, geographical expansion and investment in product expansion. Significant achievements across all these growth drivers were delivered in FY19. Over the last five years shareholder value has grown at a Cumulative Annual Growth Rate of 48%. In the last 12 months Nanosonics was one of the top performers in the ASX 200 with a market capitalisation growth of over 70%. FY20 outlook In FY20 the company is focused on three core areas: 1. Establishing trophon as standard of care Through ongoing customer education, establishing the trophon technology as the standard of care for the high level disinfection of all semi-critical ultrasound probes in those markets where trophon is currently represented. 2. Geographic expansion Expanding and investing into new markets and driving awareness about the importance of high level disinfection of ultrasound probes, strengthening the fundamentals for adoption through the support of the development of new guidelines. It is expected that our active ongoing investment in growth will result in FY20 operating expenses of approximately $67 million, including approximately $15 million, in R&D. Importantly in July 2019, our distribution agreement with GE Healthcare in the USA changed to a Capital Reseller model. This change will result in a material increase in both sales and margin from consumables in North America, the full impact of which will come into effect from the second half FY20. I would like to thank the Nanosonics team and our distribution partners for their considerable efforts throughout the year plus their belief in our mission to improve the safety of patients, clinics, their staff and the environment by transforming the way infection prevention practices are understood and conducted. Because of them over 70,000 patients each day or approximately 18 million patients every year are protected from the risk of cross-contamination because the ultrasound probe used on them was high level disinfected using trophon. Through their efforts this number increases daily. I would also like to thank our shareholders for their ongoing support and belief in the Nanosonics’ vision of becoming a globally recognised leader in infection prevention. 3. Product expansion Developing and commercialising new products focusing on unmet needs in infection prevention. Michael Kavanagh CEO and President 09 Nanosonics Annual Report 2019 Expanding global presence Geographical expansion is key to the Company’s strategic growth agenda. Nanosonics distributes its products in 21 countries, either through direct operations or via distributor partners. Norway Partnership in place with GE Healthcare United Kingdom Nanosonics direct operation in place and growing. England, Scotland, Wales and Northern Ireland have guidelines Ireland Distribution partner in place with local guidelines for high level disinfection established Spain Partnership in place with GE Healthcare Portugal Partnership in place with GE Healthcare France Nanosonics partnership with GE Healthcare with supporting local direct operations. New guideline for high level disinfection announced in Q4 FY19 Germany Nanosonics direct operations in place and growing with new guidelines recently introduced. Key luminary sites now adopting Mexico Distributor partnership in place and marketing activities underway North America Nanosonics direct operation with over 62 employees. GE Healthcare also a distributor and Capital Reseller agreements in place with all major ultrasound companies. trophon becoming standard of care with 18,570 units across >5,000 hospitals and clinics 10 Denmark Partnership in place with GE Healthcare Sweden Partnership in place with GE Healthcare Finland Partnership in place with GE Healthcare South Korea Japan Regulatory approval in place. Exploring distributor partnership for market entry Clinical studies underway as part of market development and Nanosonics Japan K.K. established. Distribution agreement with GE Healthcare Japan established China Market assessment study underway Kuwait Distributor partnership in place and marketing activities underway Saudi Arabia Exploring distributor partnership for market entry Qatar Distributor partnership in place and marketing activities underway Hong Kong Distributor partnership in place and marketing activities underway Israel Distributor partnership in place and marketing activities underway Singapore Distributor partnership in place and marketing activities underway Australia and New Zealand Distributor partnerships in place. Achieved approximately 75% market penetration 11 Nanosonics Annual Report 2019 North America Following the successful trophon2 launch in Q1 FY19, our device continued its strong growth during FY19, growing from 15,620 units to 18,570 units. This represents 46% of the estimated market potential of 40,000 units 1. The trophon device is now installed in over 5,000 hospitals and clinics, including the top 100 US hospitals. In North America, every day more than 57,000 patients are protected from the risk of cross-contamination by trophon technology, a number that is increasing daily. Fundamentals for ongoing adoption of trophon continue to strengthen Regulations and guidelines requiring high level disinfection of semi-critical ultrasound probes have existed for some time in North America. However, as identified in an important National Survey conducted in 2018, there is a widespread lack of understanding and awareness of what procedures confer semi-critical status on an ultrasound probe in particular procedures where surface vs endocavitary probes are used. If a surface probe can come into contact with broken skin, mucous membranes, sterile tissue or the vascular system, then that probe is considered as semi-critical or critical. This means these surface probes require a minimum of high level disinfection between patients. Examples of common procedures that fall into this category include ultrasound-guided biopsies and wound scans. A national survey on this topic was published in the American Journal of Infection Control during 2018.2 The survey of infection preventionists across the US revealed significant variation in practice for surface ultrasound probe reprocessing. The majority of respondents were from hospital settings, with 96% reporting high level disinfection for endocavitary ultrasound probes, while only 59% were performing high level disinfection for biopsies, 39% for injections and 33% for central line placements. The study concluded there is an urgent need to review policies and ensure best practice for patient safety. Driven by these survey results and observations in their own practice, a group of infection prevention experts identified a range of knowledge gaps in this emerging area.3 The group brought together clinical evidence and federal guidelines into a set of practical tools to help facilities review and standardise their ultrasound probe reprocessing practices. Teamwork: Helping to spread the trophon message at APIC were: (Front row) Lia Moshkanbaryans, Lynn Mollenauer, Donna Fiorentino, Hope Hurd, Gina Cummings, Keith Korby and Mitch Hansen. (Back row) Jon Burdach, Tim Benkovic, Kevin Markham, Ken Shaw, Michael Kavanagh, and Chris Proctor. 12 Regional highlights TROPHON INSTALLED BASE 18,570 15,620 12,400 8,700 5,000 2015 2016 2017 2018 2019 During FY19, trophon continued to be adopted as the new standard of care with the installed base increasing by 19% – growing from 15,620 units to 18,570 units. This represents 46% of the estimated market potential of 40,000 units.1 Four tools were developed to help ultrasound users and infection prevention professionals address this need across all departments using ultrasound in their facilities. The Ultrasound Infection Prevention Toolkit was launched in 2018, and is available for download online. The tools are editable to help users meet their local and facility requirements in line with existing evidence-based guidelines and standards in the US. Initiatives are now in place focusing on educating customers on the survey results and potential risks of cross-infection for patients if surface probes are not properly reprocessed. Partnerships with ultrasound OEMs continue to grow successfully Capital reseller agreements are now in place with all major ultrasound companies in North America, with sales through this channel growing at double digit rates. In this model the ultrasound manufacturers are able to sell the trophon capital equipment. Once the unit is sold, Nanosonics is responsible for in-service (setup) of the unit, customer training and the ongoing provision of consumables and service. The majority of these companies now include trophon in their trade displays at major ultrasound meetings, demonstrating to customers the importance of probe decontamination and the trophon solution as the recommended standard of care. New GE agreement starts FY20 A new three-year capital reseller agreement with GE Healthcare commenced on 1 July 2019, providing GE Healthcare with capital reseller rights as part of Nanosonics’ global ultrasound OEM program. This change will result in a material increase in both sales and margin from consumables, the full impact of which will be realised from second half FY20. Positioning for scalable growth We continue to make significant investments in North America in terms of staff, service and distribution functions. During the year, we expanded our Indianapolis facility by 50% which provides the necessary infrastructure to support the ongoing growth that is being experienced. Our North American team now numbers 62 across sales, clinical applications, marketing, service and operations. Plans are in place to continue to expand this team throughout FY20 to drive and support our ongoing growth. Independent expert: Associate Professor Ruth Carrico was one of two experts who were on hand to explain the Ultrasound Infection Prevention Toolkit at APIC 2019. References 1. 2. Carrico, R. M., et al. (2018). “Ultrasound probe use and reprocessing: Results from a national survey among U.S. infection preventionists.” Am J Infect Control 46(8): 913-920. 3. Internal estimate based on historic regional estimates of the installed base of ultrasound consoles and those associated with procedures where high level disinfection may be required. Ultrasound Infection Prevention Toolkit (2018). Available at: https://www.ultrasoundinfectionprevention.org/ 13 Nanosonics Annual Report 2019 Europe and the Middle East MES business model The Managed Equipment Service (MES) business model introduced two years ago continues to support ongoing growth for the installed base which increased by 30% during FY19. Under the MES program, trophon capital equipment owned by Nanosonics is placed in hospitals. The facility pays an all-inclusive price for consumables in return for the use of the fully maintained capital equipment. Every hospital trust in Wales now has a trophon installed base due to the MES program and the numbers continue to expand across Scotland and England. Infrastructure expansion During the year Nanosonics moved to a larger facility to support the growing local business. In addition, the number of local employees continued to grow, and further resource expansion is planned for FY20. France Following the successful launch of trophon2 during FY19, updated reprocessing guidelines for the appropriate disinfection of endocavitary ultrasound probes were issued in March 2019 by the French Ministry of Health. The recommendations were developed by a multidisciplinary group of experts, led by the President of the SF2H (French Society of Hospital Hygiene) and are presented as a nine-part compendium which is available on the Ministry’s website. In contrast to prior Ministry of Health statements, the recommendations now require that endocavitary ultrasound probes undergo intermediate level disinfection even if a sheath is used. The term “intermediate level disinfection” in France is functionally equivalent to high level disinfection in other parts of the world and refers to processes that are bactericidal, mycobactericidal, virucidal and fungicidal. Nanosonics has a distribution agreement with GE Healthcare in France and as result of these new guidelines, a number of joint education initiatives have commenced which are expected to be a driver for trophon growth throughout FY20. Throughout FY19 the fundamentals for adoption of trophon strengthened through increasing awareness of the importance of high level disinfection of ultrasound probes, the introduction of new guidance from the French Ministry of Health, an expanded European presence through new distribution agreements with GE Healthcare for the Nordics and Spain and Portugal, plus new distributor partnerships in Switzerland, Israel and Kuwait. The timing of these growth drivers primarily came into effect in the second half FY19. A Regional President for EMEA has been appointed and will commence in September 2019 and plans are in place to expand our direct operations, in particular in the UK and Germany, to leverage the strengthening fundamentals, growing sales pipeline and managing through what is a complex capital sales process. United Kingdom Increased educational awareness and disinfection guidelines continue to boost trophon adoption in the United Kingdom. New guidance placing increasing importance on high level disinfection The BMUS and Society and College of Radiographers have issued guidance requiring appropriate disinfection or sterilisation of ultrasound probes which draws on best practice infection prevention guidance for ultrasound probes published by NHS Wales and Scotland, as well as more recent guidance from the Health Service Executive of Ireland and the joint guidance from the Australasian College of Infection Prevention and Control and Australasian Society for Ultrasound in Medicine. All of these guidelines highlight the importance of high level disinfection for all semi-critical ultrasound probes between patients to reduce the risk of cross-contamination. Importantly, healthcare facilities are now seeing the need to high level disinfect all semi-critical probes, including surface probes, as awareness grows on what ultrasound procedures confer semi- critical status on probes. Nanosonics Study Day in the United Kingdom with expert speakers: (left to right) Wayne Spencer, Authorising Engineer Decontamination, Spencer Nickson Ltd; Karren Staniforth, Clinical Scientist, Infection Prevention and Control, Nottingham University Hospitals; Claire Jones-Manning; Bryn Tudor-Owen, Nanosonics. Country Manager, UK and Ireland; Dr Peter Cantin, Consultant Sonographer, University Hospitals Plymouth NHS Trust; and Liz Collins, Clinical Lead Infection Prevention, University Hospitals of Leicester NHS Trust. 14 Regional highlights TROPHON INSTALLED BASE 880 730 490 300 240 2015 2016 2017 2018 2019 trophon adoption grew 25% in Europe/ Middle East, driven mainly by the Managed Equipment Services business model in the United Kingdom and direct sales. Germany The trophon2 was successfully launched in Germany during FY19. trophon2 introduced a number of new capabilities to meet some specific German market requirements, such as the ability to provide detailed reports on all process parameters for each individual cycle. The key luminary site, University Hospital Frankfurt, upgraded all their trophon EPR devices to trophon2. One of the largest hospitals in Europe, the Charité Universitätsmedizin in Berlin, has also commenced adoption. The sales process in Germany can be lengthy, involving a trial period first followed by appointment of an internal hospital project manager and committee recommendation before the budgeting process begins. Throughout FY19 a number of successful hospital trials took place, resulting in trophon being now in budget approval process. The pipeline grew and continues to grow through this process. To support the sales process and leverage increasing awareness of the importance of bactericidal, mycobactericidal, fungicidal and virucidal disinfection, which is functionally equivalent to high level disinfection, the German team was expanded in FY19, and plans are in place for further expansion across sales and service throughout FY20. As part of the access strategy to the important market of private practitioners in Germany, Nanosonics has signed a distributor agreement with Co-Med. Co-Med is Germany´s largest association of dealers specialised in selling and servicing medical devices and medical technology with over 50 partners across Germany. New European markets A new agreement was established with GE Healthcare for distribution in two Nordic countries, Denmark and Finland, and the Iberian peninsula of Spain and Portugal. A new distribution agreement was also entered into for Switzerland. Middle East Distribution agreements are now active for Lebanon, Israel and Kuwait. 15 Nanosonics Annual Report 2019 Asia Pacific TROPHON INSTALLED BASE 1,480 1,390 1,270 1,130 1,010 2015 2016 2017 2018 2019 The Asia Pacific installed base is mainly associated with Australia/New Zealand where the market penetration is approximately 75% and growing. Market expansion in Asia Pacific is becoming a greater priority as part of the strategic growth agenda for the organisation. To support this, a Regional President for Asia Pacific has been appointed. During the year, in addition to growing the trophon business in the already highly penetrated Australia/New Zealand market, important market development milestones were achieved in Japan and a market assessment study for China has commenced. No data or regulations exist about residual bacterial contamination of transvaginal ultrasound probes in Japan and currently gynaecologists use probe covers and simple dry paper towel cleaning with or without low level disinfection. The study outcomes were presented at the Japanese Society of Obstetrics and Gynecology (JSOG) in Nagoya during April 2019 and have been submitted for publication in the Journal of Medical Ultrasonics. China In late FY19, a Chinese market assessment commenced with visits to large hospitals, the Chinese Centre for Disease Control and regulatory authorities. Based on preliminary assessment, it is believed a significant opportunity for trophon may exist in China and the next stages of the market entry strategy will be conducted throughout FY20. Australia/New Zealand trophon is already the standard of care in Australia with an estimated market penetration of 75%. Sales continue to be driven by the previous release of a joint guideline between the Australian Society of Ultrasound in Medicine (ASUM) and the Australasian College for Infection Prevention and Control (ACIPC). This guideline emphasises the need to high level disinfect all probes used in semi-critical procedures (surface and intracavity). Japan Market development efforts in Japan continued with the establishment of a Nanosonics Japanese entity, the publication of the first pivotal study in Japan demonstrating probe contamination, and the recent signing of an agreement with GE Healthcare Japan, as well as the recent Japanese regulatory approval of trophon2. Importantly, the Japanese clinical study has demonstrated significant ultrasound probe contamination. The study investigated the level of bacterial contamination on transvaginal ultrasound probes following standard probe cleaning. Of the contamined probes, over 50% were found to harbour potentially pathogenic bacteria, including methicillin resistant Staphylococcus aureus (MRSA). Big impression: trophon is now available for sale in Japan and was recently exhibited at a conference. 16 Regional highlights Our commitment to ESG Nanosonics’ mission is to improve the safety of patients, clinics, their staff and the environment by transforming the way infection prevention practices are understood and conducted, and introducing innovating technologies that deliver improved standards of care. Nanosonics recognises that to achieve this goal we must seek simultaneously to understand and minimise our environmental impacts; meet our social responsibilities to our employees, customers and the broader community; and maintain high standards of corporate governance. This year, as the Company has continued to grow, we have further developed our framework for ESG disclosure. We have undertaken our first materiality analysis to identify the environmental, social and governance topics which are most material for the Company and its key stakeholders. These will inform our business strategy and new product development priorities as well as guiding the content of this ESG report. Our work has been guided by the leading frameworks for ESG disclosure which have been developed over the past decade. Nanosonics is proud to offer technology that protects over 70,000 patients every day from the risk of a healthcare associated infection from ultrasound procedures, reducing the burden on the healthcare system in the communities in which we operate. Further, the adoption of Nanosonics’ technology means healthcare staff at thousands of customer sites are no longer exposed to the toxic chemicals previously used for ultrasound probe reprocessing. As our geographic footprint extends in North America, Europe, the Middle East and Asia Pacific, we are extending these benefits to more and more patients and healthcare staff. Michael Kavanagh CEO and President 17 Environmental, Social and Governance (ESG)Nanosonics Annual Report 2019 Corporate governance and ESG The Board is committed to ensuring that its policies and practices reflect good corporate governance consistent with the Australian Securities Exchange (ASX) Listing Rules and the ASX Corporate Governance Principles and Recommendations. The Corporate Governance Statement sets out Nanosonics’ key corporate governance principles and practices, and the extent to which the Company has followed the recommendations set by the ASX Corporate Governance Council during the 2018/19 reporting period. The Board and the Executive Team have responsibility for ensuring that ESG is integrated across the Company’s operations, and that ESG reporting is balanced, fair and accurate. The Board is supported in this by the Audit & Risk Committee and its three other committees: the Nomination Committee, the Remuneration & People Committee, and the R&D and Innovation Committee. Nanosonics’ corporate governance framework is elaborated in its policies: • Code of Conduct and Ethics • Securities Trading Policy • Clawback Policy • Anti-Bribery and Anti-Corruption Policy • Speak Up Policy • Environmental Policy • Privacy Policy • Diversity Policy • Continuous Disclosure and Shareholder Communications Policy • Share Ownership Policy Nanosonics’ approach to strong corporate governance includes adherence to all applicable local and international laws, regulations and standards. Stakeholder engagement Nanosonics’ key stakeholders are those groups, organisations or individuals who are potentially significantly affected by the Company’s operations, products or services; or whose actions can reasonably be expected to affect the ability of the Company to implement its strategies or achieve its objectives. Nanosonics seeks to engage effectively with key stakeholders on topics relevant to them so as to understand and respond to their needs and concerns, and to inform them about Nanosonics’ products and services. Nanosonics has identified its key stakeholders and areas of interest. These are set out in the table below. Key stakeholders identified by Nanosonics Customers, including distributors, resellers and ultrasound probe manufacturers Suppliers Selected key ESG areas of interest for Nanosonics’ stakeholders • Public health and infection prevention • Price • Product safety • Ease of use • Fit within and streamline the clinical workflow • Legal compliance • Ethical business practices Investors/shareholders • Financial performance (revenue and profitability) Employees Government and regulatory authorities • Competitors in the market • Nanosonics’ pipeline of new products • FDA and other regulatory approvals • ESG issues and risk management • Gender equality • Diversity • Training and education • Safe and rewarding workplace • Product efficacy, safety and quality • WHS compliance • Ethical marketing • Tax strategy Healthcare professionals and patients in hospitals in medical centres • Reduction in healthcare associated infection through infection prevention technology • Ethical marketing • WHS compliance • Pipeline of new products solving unmet needs in infection prevention Community and key opinion leaders • Infection prevention • Ethical marketing • WHS compliance • Pipeline of new products solving unmet needs in infection prevention 18 Environmental, Social and Governance (ESG) Materiality assessment Potential material topics identified by Nanosonics In accordance with recognised frameworks for ESG reporting, Nanosonics has undertaken a comprehensive materiality assessment based on indicative responses provided by management on behalf of the Company’s stakeholders. The intention is that in the near term, representatives of the Company’s stakeholder groups will also provide responses. The process was guided by an external consultant and comprised the following steps: • Setting the context considering industry, • Addressing an unmet need in patient care • Business ethics • Business strategy, including strategic partnerships/relationships • Collaboration/partnerships • Competitiveness in the market • Compliance with laws, including modern slavery and conflict minerals • Contributions to the community • Consultation with customers on product development • Consultation with infection control peak bodies environmental, social and regulatory trends • Customer education • Analysis of annual, sustainability and • Diversity, equal opportunity and non-discrimination other relevant reports from benchmark companies, and the assessment frameworks of ESG rating agencies • Identification of topics that have already been identified by Nanosonics through recent reports, briefings, presentations and other mechanisms • Consideration of ESG topics listed in GRI and SASB standards The following list of potential material topics was compiled through this process. Topics were assessed according to their importance to Nanosonics’ key stakeholders and their impact on the Company, economy, society and the environment. This ESG report focuses on the priority topics that have been identified. • Economic value generated and distributed (as described by GRI) • Enhancing customer experience • Ensuring traceability • Entering new markets • Ethical marketing • Fair trading and competition • Labour, environmental and social practices in the supply chain • Political contributions • Product safety and quality • Regulation and relationships with regulatory bodies • Talent recruitment and retention • Tax strategy • Training and education • Work, health and safety 19 Nanosonics Annual Report 2019 Providing access to new technologies for infection prevention and better patient care Nanosonics has developed a novel high level disinfection technology, trophon, to address the critical and unmet needs of the many and increasing number of patients who undergo ultrasound procedures every day. Ultrasound diagnosis technology continues to grow as an important medical diagnostic and therapeutic procedure throughout the world. For example, ultrasound is used routinely in obstetrics and gynaecology, radiology, cardiology, critical care and the operating theatre, along with many other specialty areas of care. Healthcare associated infections (HAIs) are a significant healthcare issue worldwide and are considered the most frequent adverse event in healthcare.1 HAIs cause significant patient morbidity and mortality and are a large burden upon the healthcare system, the economy and broader society. As reusable medical devices, ultrasound probes present a potential source of cross-infection in hospitals and medical practices where pathogenic organisms can be spread from one patient to another. Studies have linked the increased use of ultrasound procedures to an increased incidence of cross-infection.2 Risk of cross-contamination with ultrasound probes is well established: • 0.9-9% of barrier sheaths and condoms leak 3 • A meta-analysis has shown that 12.9% of tranducers are contaminated with pathogenic bacteria following routine disinfection 4 • HPV, a known cause of cervical cancer, has been found on up to 7.5% of transvaginal ultrasound transducers following routine disinfection 5 • A fatal case of Hepatitis B and non-fatal case of Hepatitis C have been attributed to improper ultrasound transducer disinfection 6,7 • Ultrasound transducer handles are not routinely disinfected and can harbour harmful pathogens, including MRSA 8 • Six-year population-level study demonstrates increased risk of infection and antibiotic prescriptions following semi-critical ultrasound procedures 2 Pathogenic bacteria, viruses and fungi can survive on the surface of ultrasound probes for extended periods if the probes are not cleaned and disinfected effectively. If ultrasound probes are not correctly disinfected, there is a risk of transmission of potentially harmful infectious agents such as multi-drug resistant bacteria, blood borne viruses (e.g. hep B, HIV) or sexually transmitted infections such as chlamydia, gonorrhoea or human papillomavirus. Higher risk ultrasound procedures such as those where the ultrasound may contact broken skin, mucous membranes or sterile tissue require a minimum of high level disinfection. The sensitive electronics in ultrasound probes mean they cannot generally undergo sterilisation in a steam autoclave and thus must be addressed though low temperature methods such as high level disinfection. Many high level disinfection processes involve the use of potentially hazardous chemicals which can pose a health risk to patients and staff through direct contact or inhalation. References 1. Currie, K., et al. (2018). "Understanding the patient experience of health care–associated infection: A qualitative systematic review." American Journal of Infection Control 46(8): 936-942. 2. Scott D, Fletcher E, Kane H, et al. Risk of infection following semi-invasive ultrasound procedures in Scotland, 2010 to 2016: A retrospective cohort study using linked national datasets. Ultrasound. 2018;26(3):10. 3. Vickery K, Gorgis VZ, Burdach J, et al. Evaluation of an automated high-level disinfection technology for ultrasound transducers. J Infect Public Health. 2014;7(2):153-60. 4. Leroy S. Infectious risk of endovaginal and transrectal ultrasonography: systematic review and meta-analysis. J Hosp Infect. 2013;83(2):99-106. 5. Ma ST, Yeung AC, Chan PK, et al. Transvaginal ultrasound probe contamination by the human papillomavirus in the emergency department. Emerg Med J. 2013;30(6):472-5. 6. Ferhi K, Roupret M, Mozer P, et al. Hepatitis C transmission after prostate biopsy. Case Rep Urol. 2013;2013:797248. 7. Medicines and Healthcare products Regulatory Agency (MHRA). Medical Device Alert. Reusable transoesophageal echocardiography, transvaginal and transrectal ultrasound probes (transducers) Document: MDA/2012/037. 2012. 8. Ngu A, McNally G, Patel D, et al. Reducing Transmission Risk Through High-Level Disinfection of Transvaginal Ultrasound Transducer Handles. Infect Control Hosp Epidemiol. 2015;36(5):1-4. 20 Environmental, Social and Governance (ESG) Nanosonics’ patented trophon technology provides a new and effective way to achieve high level disinfection of ultrasound probes which does not damage the sensitive probe surface, nor expose patients, staff or the environment to dangerous chemicals. It works by generating a sonically activated, supercharged hydrogen peroxide (H2O2) mist within the chamber. The probe is held in the chamber where the mist accesses all surfaces of the probe and its handle, killing bacteria, mycobacteria, viruses and fungi. Additionally, trophon has been demonstrated to inactivate forming Clostridium difficile spores in laboratory tests and has also been demonstrated to be effective in inactivating the cancer-causing human papillomavirus. The trophon reprocessing standard contributes to the efficient workflow of the hospital or medical centre through a fast seven-minute cycle. Digital traceability RFID technology (AcuTrace™) captures and records operator, probe and cycle data to meet customer compliance requirements. Nanosonics produces a range of accessories and consumable products across the reprocessing cycle. These include companion wipes facilitating the cleaning of organic material, microbial load, gel and other soils on the surface of probes before the high level disinfection process delivered by the trophon device, probe covers and connectivity solutions and services to allow customers to manage their reprocessing records. Nanosonics’ strategy for geographic expansion of access to its technology To meet the increasing global demand for access to Nanosonics’ technology, the Company is actively expanding the geographic footprint of its trophon sales and marketing activities globally through direct and distributor channels. Nanosonics is the market leader in a number of critical and influential global markets, setting the standard of care in Australia/New Zealand and North America. The Company’s global footprint also spans Europe, Asia Pacific including Japan, and the Middle East. It has an active R&D program, including the further evolution of the trophon2 technology and the development of new products for infection prevention in the clinical setting. Nanosonics has a dedicated team of clinical and microbiology specialists focused on ongoing research contributing to increasing knowledge, understanding and education in fields relevant to infection prevention for existing and new technologies. Research and development expenditure continued to increase year on year to $11.4 million in FY19; an increase of 15% over the previous year (2018: $9.9 million). Innovation to deliver improved standards of patient care Ensuring product safety, quality and reliability Innovation is at the core of Nanosonics’ business strategy and day-to-day operations. The cutting edge technology used in trophon has disrupted the disinfection market and was the first major innovation in ultrasound probe high level disinfection for more than 20 years. Nanosonics consults closely with customers in the development of new products and the further development of existing product lines, responding to the needs of patients and healthcare providers. Nanosonics protects it unique technology through coverage by 14 patent families. Most are active through to 2025 and in many cases beyond, including patents relating to the consumables which go out to 2029. It has an active program to continue to protect the IP in its technology. Nanosonics has a large research and development team based in Australia with activities across mechanical, electrical, systems and software engineering, microbiology and chemistry. Nanosonics is vigilant about the safety of its products from the R&D phase through to their use in the care of patients, and the final disposal of products and recycling of parts. Patients and staff are protected throughout the probe disinfection process. The trophon delivers nebulised hydrogen peroxide within a sealed chamber. The hydrogen peroxide is supplied and added to the chamber in a sealed cartridge and is ultimately broken down into harmless water and oxygen following the disinfection process. Nanosonics conducts extensive laboratory testing to validate the effectiveness of its products. The trophon technology goes beyond the minimum subset of microorganisms mandated by the regulatory authorities to have efficacy against a broad range of infectious pathogens. Nanosonics’ ISO 13485 compliant Quality Management System is vitally important to its continuing success in the production of advanced high level disinfection technology. TROPHON IS PROVEN EFFECTIVE AGAINST A WIDE RANGE OF MICROORGANISMS Vegetative bacteria Carbapenem-resistant Escherichia coli Enterococcus hirae Methicillin-resistant Staphylococcus aureus Neisseria gonorrhoeae Pseudomonas aeruginosa Staphylococcus aureus Vancomycin-resistant Enterococcus Mycobacteria Mycobacterium terrae Mycobacterium avium Bacterial endospores Bacillus cereus Bacillus subtilis subsp. spizizenii Geobacillus stearothermophilus Fungi Candida albicans Aspergillus (niger) Viruses Adenovirus Hepatitis C virus surrogate (Bovine viral diarrhea virus) Human hepatitis B virus surrogate (Duck hepatitis B virus) Human immunodeficiency virus Human papillomavirus (HPV16 and HPV18) Poliovirus Chlamydia Chlamydia trachomatis 21 Nanosonics Annual Report 2019 In the past year Nanosonics’ workforce increased by 27% to 286 employees globally to meet the needs of the growing business. 286 employees globally 205 62 19 Other North America Australia Total LOCATION/NUMBER OF EMPLOYEES (30 JUNE 2019) Nanosonics’ workforce increased 27% women represented 36% 30% in senior management positions (2018: 29%) 17% at Board level (2018: 17%) 22 Engaging our people in an inclusive, safe and healthy workplace This year the Company completed its first employee engagement survey, “Your Voice: Make it Heard”. The completion rate was 84.9% (industry average being 72%) and it contained a number of important insights as well as confirming a high level of employee satisfaction and engagement. Nanosonics’ Diversity Policy encourages diversity at all levels of the organisation as a means of facilitating an appropriate mix of skills and talent to conduct its business. It 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. Subject to the size and operations of the Company, the Board is committed to setting appropriate measurable objectives for the long-term goal of improving gender representation across all levels of the organisation. During the year, the Company made progress against its FY19 diversity objectives relating to hiring (appointing a dedicated talent acquisition manager who applied defined selection criteria for all roles in line with the Company’s anti-discrimination principles), training (two female senior executives were provided financial support and workplace flexibility), career advancement (female senior manager attended mentoring program to assisting career development) and the work environment (bullying and harassment training for all staff) which were set. As at 30 June 2019, women represented 36% (2018: 35%) of Nanosonics’ workforce, 30% in senior management positions (2018: 29%) and 17% at Board level (2018: 17%). Nanosonics defines senior management for this purpose as those who directly report to the CEO and those positions that report to the CEO’s direct reports. There have been 10 Internships/Graduate roles during the reporting period; four female and six male. There are 30 nationalities represented across the organisation. Nanosonics supports its employees to further develop their professional capabilities in order to extend their roles in the Company. To date there are four female staff undertaking professional leadership development or higher level tertiary education in management. Nanosonics is an equal opportunity employer and remunerates women and men equally. Gender pay equality is achieved through a formal process of salary benchmarking all roles according to the role and the industry. Management is held accountable for ensuring pay equity outcomes from the formal remuneration review process. The Company has a WHS Committee which oversees the Company’s WHS safety metrics and goals. In FY19, 100% of staff received relevant WHS training, which included laboratory safety training, chemical awareness training, and education and support focused on active prevention strategies to prevent repetitive strain injuries and musculoskeletal disorders. There were 12 minor incidents reported in the period (all of which were closed) and no time was lost due to any workplace injury. The Company’s diversity objective for FY20 are as follows: • The pay for a specific job type and level will be the same regardless of gender or cultural background taking relevant experience and skills into consideration • Target 30% women at Board level and improve the current 30% for senior management • Integrate diversity principles into the Company’s recruitment framework by incorporating a diversity statement on all job advertisements globally and ensuring training for all hiring managers on diversity awareness, recognising unconscious bias, inclusive job description writing and best practice recruitment activities • Seek to ensure the Company has a balanced selection of final round candidates, taking into account the principles of diversity (as described in the Company’s Diversity Policy), for all Board and senior management roles, and seek to ensure there is diversity in the selection panel for each • Target that 50% of all interns who are offered positions with the Company from the Nanosonics University Program are women • Continue to implement programs that prepare selected high potential females to take on senior roles within the business both in operational and specialist support areas Environmental, Social and Governance Ensuring a culture of ethical behaviour Anti-competitive behaviour Nanosonics’ response to climate change Nanosonics’ Code of Conduct and Ethics sets out the obligations placed on all of its directors, executives, employees, advisors, contractors and consultants. They are expected to act with integrity and objectivity and to maintain the highest possible ethical standards in the Company’s interactions with its stakeholders and the environment in which the Company operates. Nanosonics does not tolerate any form of harassment or discrimination against personnel, customers, suppliers or other third parties. Bribery and corruption Like all industry participants, Nanosonics’ activities could potentially expose the Company and staff to the risk of bribery and corruption. Nanosonics conducts business in an ethical and honest way and considers the risk to be low. Nanosonics’ Anti-bribery and Anti-corruption Policy applies “zero tolerance” to acts of bribery and corruption by Nanosonics staff and third party representatives. There were no reports of bribery and corruption notified in 2018/19. Speak Up policy Staff who raise a concern about possible bribery and corruption, fraudulent, illegal or other behaviour by other Nanosonics staff, that is contrary to the Company’s policies, may raise their concern through line management. Where this is not suitable, they may contact a Speak Up Investigation Officer or access the Nanosonics Speak Up Portal. All concerns will be investigated while protecting the complainant from personal or financial disadvantage. During the year, there were no concerns reported in accordance with the policy. Privacy and data security Nanosonics is committed to protecting the privacy of personal and third party information and complies with the Privacy Act 1988 and other applicable legislation in all countries where it operates. It follows a Privacy Policy covering the collection, storage and use of personal information concerning individuals and formal contractual arrangements with third parties. There have been no breaches of this policy reported in 2018/19. Political contributions Nanosonics makes no political contributions. Nanosonics acts fairly and honestly when competing in the market. It complies with the anti-competitive behaviour provisions of the Australia Competition and Consumer Act and other applicable legislation in all countries where it operates. In particular it maintains high standards regarding the quality of the information it provides about its products and their use through advertising and product labelling. Our supply chain Nanosonics’ trophon technology is assembled and tested ready for market at its site in Lane Cove West, Sydney. The component structural and electronic parts and accessories are sourced from local and international suppliers. The hydrogen peroxide responsible for the trophon disinfection process is safely contained in cartridges which fit inside the trophon chamber ready for use. Nanosonics recognises the growing pressure from stakeholders and regulators to extend its watch on its social and environmental impacts to take account of its supply chain. The Australian Modern Slavery Act 2018 became effective on 1 January 2019 requiring businesses, including Nanosonics, to report annually on their efforts to identify and address any slavery risks in their operations and supply chains. Nanosonics’ first report will be due by the end of 2020 and work has commenced to identify how risks of modern slavery practices may be present in its operations and supply chains. Protecting the environment Nanosonics is committed to minimising its impact on the environment at all stages throughout the life cycle of its products. This is elaborated on in its Environment, Health, Safety and Sustainability Policy. Nanosonics is responsible for a very low level of natural resource consumption, including energy and water in the production and use of its products. It has minimal impact on the environment through emissions or the disposal of waste. Nanosonics leases accommodation at Lane Cove which includes supply of electricity through renewable sources and water and these are not metered separately. Nanosonics ensures minimum environmental impact during operation of the trophon. Hydrogen peroxide used is broken down following the disinfection process to water and oxygen. Extensive leak testing is undertaken to ensure safety of the environment as well as patients and staff. The science of climate change is unequivocal and recent reports of the Intergovernmental Panel on Climate Change have emphasised the imperative to limit the further increase in the global average surface temperature to below 2.0°C, preferably below 1.5°C. This is being incorporated into international practice through the Paris Agreement on Climate Change to which Australia is a signatory. Nanosonics does not belong to one of the industry sectors identified as facing the highest climate change risks. Nevertheless it recognises that there are transition risks such as regulatory, supply chain, and transportation risks which may impact future operations. It continues to be mindful of emerging government policies and advances in scientific understanding which may indicate emerging climate change risks or opportunities for Nanosonics. Whilst its operations make only a very small contribution to greenhouse gas emissions, Nanosonics utilises energy from solar panels on the roof of its Lane Cove premises. Contributions to the community As a good corporate citizen, Nanosonics seeks to make contributions to the communities in which it operates which go beyond its specific contributions to patient care and the economic value distributed through payments to employees, shareholders, government and suppliers. Nanosonics encourages and supports employees to undertake charity events and fundraising initiatives throughout the year by providing entry fees, raffle prizes, and often matching amounts raised. It also supports workplace giving via a Corporate Citizen Program which enables employees to select a charity and have donations automatically deducted from their remuneration. Financial performance The Company’s strong financial performance, reported elsewhere in this Annual Report, provides an indication of the direct economic value generated for the communities in which the Company operates. Economic value is also distributed through its operating costs, employee wages and benefits and payments to the government (i.e. taxes). 23 Nanosonics Annual Report 2019 trophon® – the reprocessing standard for ultrasound probe high level disinfection Ultrasound imaging is one of the most widely used and rapidly growing global diagnostic tools. With the ever-increasing challenges in the fight against the spread of Healthcare Associated Infections (HAIs), trophon is the global standard in ultrasound probe high level disinfection and reprocessing. More than 70,000 patients a day are now protected from the risks of cross-contamination with trophon’s powerful automated disinfection technology. Why high level disinfection is important To reduce the risk of cross-infection, many global guidelines, standards and Ministry of Health directives now recommend the high level disinfection of ultrasound probes used in semi-critical procedures. This includes both intracavitary (internal examination) procedures and surface ultrasound procedures (external examination) involving non-intact skin. Studies have demonstrated that traditional methods of disinfection, such as soaking in chemicals, spraying or wiping, are inefficient, environmentally unsound and ineffective. Nanosonics’ trophon technology is clinically proven to inactivate an extended range of clinically infectious pathogens, including multi-drug resistant bacteria, blood borne viruses (Hep B, HIV) or sexually transmitted infections such as chlamydia, gonorrhoea or human papillomavirus. Unlike other reprocessing methods, with trophon there is no exposure to harmful chemistries. This means while patients are protected from ultrasound probe cross-infection risk, clinic staff and the environment are protected from hazardous and toxic chemicals. trophon: safe and easy to use Point of care ultrasound has become a cornerstone in the diagnosis and treatment of patients in the emergency department, intensive care and obstetrics and gynaecology in both hospitals and private clinics. This significantly broadens the scope for trophon usage and is a major benefit that we are leveraging as we look to drive increased penetration and expansion across markets. The fully enclosed system means trophon can be placed at the point of care where examinations are carried out. This maximises patient throughput and cost effectiveness. Together, with its range of consumables and accessories, trophon is ideally positioned to meet high level disinfection requirements at the point of care. Why trophon is so effective: sonicated hydrogen peroxide The trophon system uses a proprietary hydrogen peroxide disinfectant that is sonically activated to create an ultrafine mist. Free radicals in the mist have superoxidative properties enabling the disinfectant to act quickly and destroy pathogens. These fine mist particles are so small they can get into the shadowed areas created by crevices, grooves and imperfections on the probe surface. The probe compatible solution Having a high level disinfection system that is validated for use on their ultrasound probes is an important consideration for healthcare providers. Nanosonics works collaboratively with probe manufacturers to carry out extensive probe compatibility testing. More than 1,000 surface and intracavity ultrasound probes from all major and many specialist probe manufacturers are approved for use with trophon. 24 Reduces risk Delivers protection for patients, without exposing staff and the environment to toxic and dangerous chemicals. Improves clinical workflow efficiency Streamlines set-up, can be customised to clinic workflows and has extensive probe compatibility with more than 1,000 probes approved for use with trophon. Increases compliance Enhances and simplifies user experience, delivering automated high level disinfection at the press of a button. Increases audit-readiness Digital traceability RFID technology (AcuTrace™) records operator, probe and cycle data to capture and demonstrate user compliance. Data connectivity AcuTrace™ PLUS activation allows trophon2 to integrate into a hospital IT system. trophon®2 trophon from a customer perspective trophon now has thousands of customers around the world in North America, Europe, the Middle East and Asia Pacific. This is having a fundamental and positive impact on healthcare facilities as trophon is helping to reduce cross-contamination risks while seamlessly improving workflows to deliver the best standard of care. Here are some of the trophon benefits experienced by our customers. Lisa Antsy, Manager of Medical Reprocessing at Grand River Hospital in Ontario, Canada. “We chose the trophon system because it stood out from the rest. We like the efficacy of the product and the fact that it’s proven to kill high-risk, cancer-causing HPV.” Claire Jones-Manning, Decontamination Lead, University Hospitals of Leicester NHS Trust which is one of biggest and busiest NHS Trusts in the country, with 15,000 staff serving one million residents. “When I started as the Decontamination Lead for the University Hospital of Leicester NHS Trust, staff were using a wipe system to clean the transvaginal probes. This system cannot be validated as an effective cleaning and decontamination system. As this is a manual process that relies on human factors, we were not happy to validate the probe had been cleaned effectively. trophon gives me the assurance of decontamination as you have both the print out and the Chemical Indicator. trophon is simple to use and for the clinic, it’s given us standardisation. The seven- minute disinfection cycle is not a problem as this releases time to care for patients in a busy clinic. Also this has given visual reassurance to all patients as they can see the machine in the clinics and see the staff removing the probe before use. We have written trophon use into our decontamination policy as best practice and we are looking at other areas of ultrasound probe use to ensure they are providing a safe, validated standard of decontamination to all their probes.” University Hospital Frankfurt is the largest hospital in the German state of Hesse and has 32 clinics and 20 research institutes. It has more than 4,500 employees who treat around 270,000 patients each year. The hospital has a number of trophon2 devices across various clinics and departments. The Deputy Head of Purchasing at the University Hospital Frankfurt is Mr Axel Kudraschow. “My wish was very clear: to use a safe, automated, validated disinfection process, which can be used directly at the place of use and enables the user of ultrasound probes to always be able to use a safely disinfected ultrasound probe with short process times. Of course, the topic of patient safety is essential for the users, meaning to ensure the maximum protection of patients through perfect hygiene within a reprocessing process. This is especially important for ultrasound probes, which can always come into contact with the skin, even in sensitive areas. The subject of patient safety was and is the driving force alongside all other benefits. Furthermore, the safe documentation of the ultrasound probe disinfection was an important requirement for us, because everything that happens in medicine must be well described. trophon offers a good solution for demonstrating that the probes have been disinfected with high efficiency. Another important aspect was the ability to process ultrasound probes from all major manufacturers with this device.” Sylvia Ford, MS, RN, CIC Infection Prevention Nurse 2 at The University of Kansas Health System (TUKHS), USA. “The ability to provide high level disinfection that is able to kill HPV at the point-of-care is absolutely phenomenal. It’s a huge time saver and supports safe device reprocessing.” Raleigh White, CRA, RT(R), MA, Director of Imaging Services at Hutchinson Regional Medical Center in Kansas, USA During Raleigh White’s 25-year career, he’s had several Joint Commission surveyors observe the hospital’s trophon high level disinfection processes and he’s been told repeatedly that trophon high level disinfection is the “gold standard” for maintaining patient and user safety by reducing the risks of cross-contamination between patients and reducing the spread of Healthcare Acquired Infections (HAIs). “Everyone found the new trophon2 systems easy to operate and required very little training because the units are so intuitive.” Steven Tucker, MD, FACOG, President and Medical Director of Advanced Menstrual Care Center in Townson, Maryland, USA “In the private office setting, it’s important for me to be able to provide high-quality ultrasound capabilities to my patients. This, coupled with my commitment to quality and safety, necessitates that I use trophon2, as it is the only option there is for complete patient safety and full compliance. I no longer needed to be concerned about unknowingly contributing to the transmission of cross-infections.” 25 Nanosonics Annual Report 2019 Board Steven Sargent BBus, FAICD, FTSE Non-Executive Director, Deputy Chairman and Lead Independent Director Mr Sargent joined the Nanosonics Board in July 2016. He had a 22-year career with General Electric and has extensive global experience across a range of industries, including financial services and healthcare. He was Vice President and Officer of GE, a member of GE’s Corporate Executive Council and CEO of GE Australia NZ. Mr Sargent is currently a Director of Origin Energy, Chairman of OFX Group, a Director of the Great Barrier Reef Foundation and Chairman of The Origin Foundation. Previously, Mr Sargent was a Director of Veda Group, a Director of Bond University and a Director of the Business Council of Australia. David Fisher BRurSc (Hons), MAppFin, PhD, FFin, GAICD Non-Executive Director Dr Fisher has been a member of the Board since July 2001. Dr Fisher is a founding partner of Brandon Capital Partners, a leading Australian venture capital provider. He has more than 35 years’ 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. Marie McDonald BSc (Hons), LLB (Hons) Non-Executive Director Ms McDonald joined the Nanosonics Board in October 2016, bringing with her a strong background in corporate and commercial law, having practised for many years as a partner at Ashurst. Ms McDonald was Chair of the Corporations Committee of the Business Law Section of the Law Council of Australia (2012 to 2013) and was a member of the Australian Takeovers Panel from 2001 to 2010. Ms McDonald is currently a Non-executive Director of CSL Limited, Nufarm Limited and the Walter and Eliza Hall Institute of Medical Research. 26 Richard England FCA, MAICD Non-Execuive Director Mr England joined the Board in February 2010. He is a chartered accountant and professional Non-executive Director. Mr England has been a Director of Japara Healthcare Limited (ASX:JHC) since April 2014 and a Director and Chairman of QANTM Intellectual Property Ltd (ASX:QIP) from August 2016. Mr England was appointed a Non-executive Director of Bingo Industries Limited in March 2017. He was a Director and Chairman of Ruralco Holdings Limited (ASX:RHL) from 2002 to September 2016 and Atlas Arteria (ASX: ALX), formerly Macquarie Atlas Roads Limited, from June 2010 to November 2018. Michael Kavanagh BSc, MBA (Advanced) CEO, President and Managing Director Mr Kavanagh joined Nanosonics as CEO and President effective October 2013. He was a Non- executive Director of the Board from July 2012 to October 2013. Mr Kavanagh has more than 26 years of international commercial experience in the healthcare market, having held local, regional and global roles in medical device and 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. In the last three years Mr Kavanagh has held no other directorships. Geoff Wilson Maurie Stang ACID, BCom, ICCA, CPA, US CPA Non-Executive Chairman Non-Executive Director Mr Wilson joined the Board in July 2019. He has a breadth of local and international executive leadership and director experience together spanning more than 37 years, including many years with KPMG in Australia, Hong Kong and the USA. He has a strong background in finance, audit and risk management, as well as in Asia Pacific markets. Mr Wilson is currently a Director of TOLL Holdings Limited, HSBC Bank Australia Limited, Future Generation Global Investment Company Limited, ipSCAPE, and Sydney Symphony Limited. He is also an Ambassador for the Australian Indigenous Education Foundation. Mr Stang has been Non-executive Director and Chairman since March 2007 and a member of the Board since November 2000. 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. Nanosonics Annual Report 2019 2727 Executive Team McGregor Grant BEc, CA, GAICD David Morris Leanne Baxendale Steven Farrugia Michael Kavanagh BBus, BAppSc, GAICD BCom, MAHRI BE, PhD Chief Financial Officer and Company Secretary Chief Strategy Officer and Regional President Asia Pacific Head of People and Culture Chief Technology Officer McGregor joined Nanosonics in April 2011 and is responsible for the overall financial management of the Company, the IT function and, together with Michael Kavanagh, has joint responsibility for investor relations. He has more than 23 years’ business experience in a number of senior roles in the medical device and healthcare industries located in Australia and the United States, and previously worked for Coopers & Lybrand (now PwC) in Australia and Europe. David was a member of the Cochlear executive team for more than 14 years where he held a number of executive positions, including Senior Vice President of Strategy and Business Development, Global President for the Cochlear Bone Anchored Solutions Business based in Sweden and Chief Strategy Officer. Most recently, David was Chief Executive Officer and Managing Director for Monash IVF Group Limited. 28 Leanne joined Nanosonics in March 2017. She has extensive experience in the People and Culture field gained from her work as an executive level strategic business partner in a wide range of national and international workplaces. Her key areas of experience include people and culture strategies, alignment and engagement strategies, high performance culture development, capability building and change management. Leanne combines her energetic approach and business acumen with her passion for people and culture to help drive commercial outcomes. Steven joined Nanosonics as Senior Vice President, Design and Development, in September 2016 and was appointed to the role of CTO in February 2018. He has over 21 years’ experience leading the development of medical devices. Prior to Nanosonics, Steven held a range of senior executive roles with ResMed, including VP of Technology and VP of Product Development. He is an inventor of almost 300 granted and pending patents and is an Adjunct Professor of Engineering at The University of Sydney. In addition to Design and Development, Steven is responsible for the Regulatory Affairs function of the Company. BSc, MBA (Advanced) CEO, President and Managing Director Michael joined Nanosonics as CEO and President effective October 2013. He was a Non-executive Director of the Board from July 2012 to October 2013. Michael has more than 26 years of international commercial experience in the healthcare market, having held local, regional and global roles in medical device and 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. Rod Lopez Ronan Wright MBA, BEng (Hons), GAICD Chief Operating Officer Regional President Europe / Middle East / Africa (EMEA) Ronan will join Nanosonics on 9 September 2019 and has more than 20 years’ experience in the infection prevention market. Previously he worked with Wassenburg, a global leader in endoscopy reprocessing. Most recently he was the Vice President of Global Sales and a Board member. Prior to that, Ronan was the Managing Director of Wassenburg Ireland and Business Unit Director at Wassenburg Medical B.V. Rod is an international operations executive with over 20 years of experience, having held critical roles in companies such as Cochlear and GM Holden. During his 13-year tenure at Cochlear, Rod held transformative roles such as Global Head of Manufacturing and Chair of the Operational Excellence Strategy Group. At GM Holden, Rod held senior management roles such as Launch/ Operations Manager of Holden’s $400m HFV6 engine plant, and Global Customer Liaison Manager. Rod is also an award-winning academic with continuing Adjunct Faculty appointments for over 12 years with MGSM, AGSM and the University of Sydney Business School. Ken Shaw BSc Finance Regional President for the United States, Canada and Latin America Ken joined Nanosonics in September 2017 as Regional President for the United States, Canada and Latin America. He has more than 20 years’ experience in the healthcare, medical devices and consumer products industries. Most recently Ken was the President for Amoena GmbH and prior to that he held general management roles at BSN Medical, Medicom, Energizer and Pfizer. Renee Salaberry MBA, GAICD Chief Marketing Officer Renee joined Nanosonics in January 2019. She is a highly experienced international marketer having launched and developed brands for major global clients including Pfizer, Nestle, and GE Healthcare. Renee has held senior executive roles including Executive Vice President and Worldwide Strategy Director for one of the world’s largest advertising agencies, Leo Burnett based in Chicago, and as Worldwide Chief Strategy Officer for the Publicis Healthcare Communications Group based in Paris. Renee was Strategic Planning Director for Saatchi & Saatchi Health, APAC. She has held marketing and finance roles for Merck, Sharp & Dohme and the Commonwealth Bank. Most recently, Renee was Head of Marketing for Abbott Nutrition, ANZ. Nanosonics Annual Report 2019 29 Directors’ report Your Directors submit their report together with the Consolidated Financial Report of Nanosonics Limited and its subsidiaries (the Group or Nanosonics), for the year ended 30 June 2019, and the Auditor’s Report thereon. Principal activities During the year the principal activities of the Group consisted of: – Manufacturing and distribution of the trophon® 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. Review of operations and financial results Revenue for the year amounted to $84,324,000 (2018: $60,698,000), an increase of $23,626,000 or 39%. North American revenue increased by $22,105,000 or 41% to $76,511,000, reflecting a 29% increase in capital revenue and a 50% increase in consumables and service revenue. Revenue in Europe and Middle East increased by $819,000 or 27% to $3,802,000, with capital revenue increasing by 21% and consumables and service revenue increasing by 30%. Revenue in Asia Pacific amounted to $4,011,000, an increase of 21% or $702,000 compared with the previous year, with capital revenue increasing by 29% and consumables and service increasing by 20%. Gross profit increased by 39% to $62,816,000 compared with $45,291,000 in the prior period. Gross margin as a percentage of sales was 74.5% compared with 74.6% in the previous year. Selling, general and administration expenses (SG&A) were $37,805,000 (2018: $32,689,000). The increase in SG&A of $5,116,000 was mainly to support the increased sales in North America and market expansion activities in Europe and other markets, expansion of internal operational capacity and capabilities including the hiring of new executives to support a growing global organisation, and the transition of a distributor to a new agreement from 1 July 2019. Research and Development expenses (R&D) for the year were $11,375,000, an increase of over 15% compared with $9,882,000 in 2018. This increase is in-line with the Company’s commitment to strategic investment in R&D targeted at design and development activities associated with a novel solution aimed at addressing unmet needs in the infection prevention field, as well as the ongoing development of the trophon technology. Other income for the period amounted to $24,000 (2018: $93,000). Other gains amounted to $1,842,000 (2018: $1,549,000) and comprised mainly of net gain in foreign currency. Finance income amounted to $1,571,000 (2018: $1,279,000) which related to interest earned on cash and cash equivalents. Finance expense for the year of $243,000 related to interest on leases and the financing component on cash received in advance on customer contracts, Finance expense in 2018 amounted to $58,000 and related interest on leases. Income tax expense for the period was $3,228,000 and compares with an income tax benefit of $168,000 in 2018. Following an assessment of the Group’s Canadian and UK operations, it has been determined that taxable profits will be generated by the Canadian and UK subsidiaries against which carried forward tax losses and deductible temporary differences will be realised. Accordingly, previously unrecognised deferred tax assets in relation to the Canadian and UK entities were recognised as a non-current asset to the extent of available future taxable profits in the near term. Further information on the income tax expense and movements on net deferred tax assets are detailed in note 3. The consolidated profit after tax amounted to $13,602,000 (2018: $5,751,000). The Group ended the year with $72,180,000 (2018: $69,433,000) in cash and cash equivalents, an increase of $2,747,000. The cash and cash equivalents balance provides a strong balance sheet for the Company to continue executing on its growth strategies. Cash flow for the year was impacted by an increase in trade and other receivables of $11,087,000 due to aligning payment terms with a key distributor with our standard payment terms and the timing of sales and payments by that distributor, and an increase in inventory of $5,082,000 associated with the launch of trophon2. Further information on the operations of the Group and its business strategies and prospects are included in the CEO’s report and the Regional highlights on pages 6 to 16 of this Annual Report. Material business risks Nanosonics has a risk management framework to identify, assess and appropriately manage risks. Details of the risk management framework are set out in the 2019 Corporate Governance Statement, which is available on the Company’s website. Nanosonics’ material business risks and how they are addressed are outlined below. These are risks that may materially adversely affect the Group’s business strategy, financial position or future performance. It is not possible to identify every risk that could affect the Group’s business, and the actions taken to mitigate these risks cannot provide absolute assurance that risk will not materialise. Other risks besides those detailed below or in the financial statements could also adversely affect Nanosonics’ business and operations, and the material business risks below should not be considered an exhaustive list of potential risks that may affect Nanosonics. 30 Directors’ report Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk Significant distribution customer Research and Development and commercialisation Competition Intellectual Property The Group’s key distribution customer accounts for approximately 54% of the Group’s revenue (see note 2.2 of the financial statements), the majority of which is in United States, Nanosonics’ largest market. Nanosonics is aware of the need to continue to closely manage its key distribution customer, including closely managing any changes in its commercial and contractual relationship with that distributor as the parties transition to a new agreement which came into effect from 1 July 2019. Nanosonics currently has a platform technology, trophon, and recognises the need to expand its product portfolio by creating new products. Development and subsequent commercialisation of any new product requires a significant amount of investment (time, money and resource commitment) and is necessarily uncertain. New products are also likely to require a range of regulatory approvals. The potential for increased competition exposes Nanosonics to the risk of losing market share. Nanosonics is also exposed to the risk of medical and technological advancement by competitors where alternative products or methods are developed and commercialised that will impact the rate of adoption of trophon, cause trophon to lose existing market share, or render trophon obsolete. The Company relies heavily on its ability to maintain and protect its intellectual property (IP) including registered and unregistered IP. Nanosonics recognises the potential risk of litigation for alleged infringement by Nanosonics, the need to prosecute third party infringers of Nanosonics’ IP, the expiry of Nanosonics’ registered IP, and the risk of being unable to register the underlying subject matter or processes in any new products. Supply chain Regulation The Group is highly aware of managing risks in the supply chain, particularly its dependence on critical suppliers for the supply of key materials which carries the risk of delay and disruption. Certain materials are available from sole suppliers, and regulatory requirements could make substitution costly and time-consuming. The Group operates in a highly regulated industry. Medical devices are subject to strict regulations of various regulatory bodies where the products are sold, and those regulations differ throughout the countries in which the Company operates and also change. Regulatory bodies perform regular audits of Nanosonics’ manufacturing sites as well as its third party suppliers and failure to satisfy regulatory requirements presents significant risks, including potentially compromising the Company’s ability to sell products, and/or result in an adverse event such as a The Group has further strengthened its own direct operations in North America and now has significant direct sales operations in place which continue to grow and can be scaled further. The Group also has its own operations in its other key markets. The Group continues to invest in infrastructure in the North American market to assist the business to scale, as well as research and development with a view to diversifying its product portfolio. To manage these risks, the Company has a clearly defined framework to support the processes covering product ideation, development and subsequent commercialisation and has made the development of additional technologies a key strategic priority and investment. Nanosonics also engages with a range of experts in relevant fields, as well as customers, to determine the focus of its R&D efforts. To address this risk, the Company has invested in R&D for the second generation of trophon, trophon2, which was released to the market during the period, and continues to invest heavily in product diversification. The trophon2 is now sold in a number of key markets, and regulatory approvals continue to be obtained in new markets. Nanosonics seeks appropriate patent, design and trade mark protection and manages any identified IP risks. Along with internal personnel to manage IP opportunity and risk, Nanosonics works closely with specialists and advisors internationally to monitor and manage its IP opportunities and risks. The trophon, for example, is covered by 14 patent families. Most are active through to 2025 and in many cases beyond, including patents relating to the consumables which do not expire until 2029. The Group has an active program to continue to protect the IP in its technology, as well as develop other barriers to entry. Nanosonics ensures that its projects, products and related activities include an appropriate assessment of any third party IP profile against its own IP profile. The Group regularly monitors its suppliers and their performance, and seeks to enter into agreements, where appropriate, to mitigate any supply risk. Inventories are managed in sufficient quantities for continued product supply in the short term. The Group has a highly developed worldwide Quality Management System to manage this risk, and invests in highly qualified personnel. Nanosonics monitors the changing regulatory landscape in the countries in which it operates, and ensures that its operations adjust to any changes which apply to it. 31 Nanosonics Annual Report 2019 Directors’ report Risk Financial Product liability Personnel Description and potential consequences Strategies used by Nanosonics to mitigate the risk The Group is exposed to foreign currency risk and credit risk in light of the international nature of its operation. These risks are managed through its internal financial risk management policy. The Company seeks external advice as appropriate. Further information is available in note 8 to the financial statements. The Company recognises the risk that its products (or their use) may cause damage to a third party given the nature of the product and the industry the Company operates in. The Group has product liability insurance and operates a strict Quality Assurance system across all aspects of the design, manufacture and release of products to market. Nanosonics recognises that providing a safe and rewarding working environment is critical to its sustainability. Further, the Company operates in a competitive market in relation to attracting and retaining key talent, including scientific and engineering talent. The Company has programs in place both for WHS and the attraction and retention of talent. Cyber security and IT Nanosonics recognises the increasing risk associated with cyber security and the potential impact on the Company’s operations. A cyber security incident could lead to a breach of privacy, loss and/or corruption of commercially sensitive data, and/or a disruption of critical business processes. This may adversely impact customers and the Company’s business activities. The Company also recognises the need to ensure operations can continue in the event of a disaster impacting its critical IT systems. Nanosonics has a cyber security strategy and disaster recovery plan which it continues to implement with a view to safeguarding the business against these risks. Significant changes in the state of affairs In the opinion of the Directors, other than the matters described above and in the review of operations included in the CEO’s report and Regional highlights on pages 6 to 16 of this report, 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 2019. No dividends were proposed, declared or paid during the financial year (2018: Nil). The Board reviews the dividend policy regularly. The Company’s dividend policy in the future will depend upon the profitability and the financial position and the capital allocation priorities of the Group at the relevant time. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2019 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 in the review of operations included in the CEO’s report and Regional highlights on pages 6 to 16 of this report. 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 statutory environmental regulations. The Board believes that the Group has adequate processes in place to manage its environmental regulatory obligations and is not aware of any breach of those environmental regulations as they apply to the Group. Further information is set out in the Environmental, Social and Governance disclosures on pages 17 to 23 to this Annual Report. Directors and Company Secretary During the year, the Board of Nanosonics Limited comprised Maurie Stang, David Fisher, Richard England, Michael Kavanagh, Steven Sargent and Marie McDonald. Geoff Wilson joined the Board as an independent Non-executive Director on 17 July 2019. During the year and to the date of this report, McGregor Grant is the Company Secretary. Mr Rob Waring was a Co-Company Secretary until 19 July 2018. As at the date of this report, Nanosonics Limited has the following committees of the Board: Audit and Risk, Remuneration and People, Nomination, and R&D and Innovation. Details of members of the committees of the Board during the year are included and on page 36 in the Remuneration report. Information on the Directors, Company Secretary and the executive team is a part of the Directors’ report and can be found on page 36 in the Annual Report. 32 Directors’ report Meetings of Directors The number of Directors’ meetings, including meetings of the committees, held during the year ended 30 June 2019, and numbers of meetings attended by each of the Directors were as follows: Meetings of committees Full meetings of Directors Audit and Risk Nomination Remuneration & People R&D and Innovation 2 Held Attended Held Attended Held Attended Held Attended Held Attended 10 10 10 10 10 10 10 10 10 10 10 10 4 4 4 4 4 4 4 1 4 4 4 1 4 4 1 2 2 2 2 2 2 2 2 2 2 2 2 1 5 5 5 5 5 5 5 5 5 1 5 5 5 1 3 3 3 3 3 3 3 2 1 3 3 2 1 3 Maurie Stang Richard England David Fisher Steven Sargent Marie McDonald Michael Kavanagh 1. Attended in part or in full in ex-officio capacity. 2. In addition to the R&D and Innovation Committee meeting held during the year, R&D matters were considered on a regular basis at Board meetings. Share-based payments Shares issued and performance rights and options granted under the share-based compensation plans during the year are detailed below. Shares issued During the year ended 30 June 2019 and to the date of this report, the Company issued a total of 622,200 (2018: 1,612,124) new ordinary shares in Nanosonics Limited. These shares were issued pursuant to the exercise of performance rights under the share-based compensation plans. No amount was unpaid on any of the shares issued. As at 30 June 2019, there were 299,967,279 (2018: 299,345,079) ordinary shares in Nanosonics Limited on issue. At the date of this report, there were 299,967,279 shares on issue. Further information on issued shares is provided in the Contributed equity and the share-based payments note to the financial statements. Share options granted During the financial year and to the date of this report, the Company granted, under the terms and conditions of the Nanosonics Omnibus Equity Plan for no consideration, 498,134 (2018: 760,994) unquoted performance rights and 1,392,296 (2018: 840,978) unquoted share options over unissued ordinary shares in Nanosonics Limited. Further information on the grants is in share-based payments note 4.3 to the financial statements. Shares under option At the date of this report, there were 4,003,629 unissued ordinary shares of Nanosonics Limited under option as detailed below. As at 30 June 2019, there were 4,003,629 (2018: 3,259,953) unissued ordinary shares of Nanosonics Limited under option. Further information on the options is provided in the share-based payments note to the financial statements. Share-based compensation plan Omnibus Equity Plan Employee Share Option Plan Total shares under option at 30 June 2019 and to the date of this report Number of shares under option 3,618,841 384,788 4,003,629 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. 33 Nanosonics Annual Report 2019 During the year, the auditor of the Group, Ernst & Young provided certain other services in addition to its statutory duties. These activities were conducted in accordance with the Company’s Auditor Independence Policy, and in the Company’s view did not compromise their independence. Details of amounts paid or payable to the auditor of the Group in relation to audit and non-audit services are disclosed in note 10.5 to the financial statements. Officers of the Company who are former audit partners of Ernst & Young There are no officers of the Company who are former audit partners of Ernst & Young. Auditor’s independence declaration A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act is included on page 94 of this report. Auditor The previous auditor, UHY Haines Norton, resigned effective from the conclusion of the AGM meeting on 3 November 2017. Ernst & Young was appointed auditor effective from 3 November 2017 and continues in office as auditor in accordance with section 327 of the Corporations Act. Corporate Governance The Company’s Corporate Governance Statement and the ASX Appendix 4G are released to ASX on the same day the Annual Report is released, and the Corporate Governance Statement and Corporate Governance Manual can be found on the Company’s website at http:// www.nanosonics.com.au/Investor-Centre/Corporate-Governance Remuneration The Remuneration Report forms part of this Director’ Report. The Directors’ report, which includes the review of operations in the CEO’s report and the Regional highlights (on pages 6 to 16), the Information on the Board and the Executive Team (on pages 26 to 29) and the Remuneration Report (on pages 35 to 54), is made on 27 August 2019 and signed in accordance with a resolution of Directors, pursuant to section 298(2) of the Corporations Act. Richard England Director, Sydney 27 August 2019 Directors’ report Indemnifying officers or auditor During the financial year, the Company paid insurance premiums to insure the Directors and secretary and KMP 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. To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 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. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest thousand dollars ($’000) (where rounding is applicable) and where noted ($’000) under the option available to the Company under ASIC Instrument 2016/191. The Company is an entity to which that Instrument 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 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. 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 as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate of the Company or jointly sharing risks and rewards. 34 Remuneration report – audited Letter from the Chair of the Remuneration & People Committee Dear Shareholders, On behalf of the Remuneration & People Committee and the Board, I am pleased to present the Remuneration Report for the year ended 30 June 2019. The 2019 Financial Year was another successful year for the Company. Record sales and operating income before tax were achieved, and significant progress was made in the development of new products. Over the course of the year, this progress was reflected in the Company’s share price which has increased by 78% during FY19 – a reflection of our team’s progress against its strategic agenda. During the year the Company implemented a simpler remuneration framework aimed at providing a clear line of sight between Company performance and remuneration outcomes, as well as driving deep alignment between the interests of employees and shareholders. The Remuneration & People Committee will regularly review the Company’s remuneration framework to assure its fitness for purpose in a constantly changing business context. With that in mind, we expect to see further refinements to encourage alignment with shareholder experience during the 2020 Financial Year, including the introduction of new Employee Share Purchase Plans. The Company has introduced a policy requiring a minimum level of share ownership by Non-executive Directors and Executive Key Management Personnel to further ensure full alignment with our shareholders. In the second half of the year, the executive capability of the business has been enhanced by the appointment of four new Executives, including Regional Presidents in Asia Pacific and Europe/Middle East. All four individuals have deep experience in the medical device industry. The executive remuneration outcomes are detailed in Section 4 of this Report and show that the overall achievement of FY19 Short-Term Incentive was at 80.3%, reflecting a solid performance against the Company and Individual Performance Objectives that were set by the Board. During the year, the Remuneration & People Committee engaged a consultant, Laurie Wood at HR Ascent Pty Ltd, to provide benchmarking data to assist the Committee review the remuneration of the Non-executive Directors, which has remained unchanged since 1 July 2016. Three peer groups were considered, being healthcare sector companies, all industries (excluding finance and resources) with a similar market cap, and the ASX 200 (excluding finance and resources). As a result of this review, and taking into consideration the increased workload of the Board, the Board considered it appropriate to increase annual base fees to $100,000, with the Chairman’s fee increased to $225,000, and the Deputy Chairman’s fee increased to $135,000. Adjustments were also made to increase the Committee Chair fees to $20,000, as well as introduce a fee for Committee membership of $10,000 for each member. Overall, I believe these increases are appropriate, reflective of the market and are commensurate with the continued growth and increasing complexity of the business. Further, the total amount of fees paid to Non-executive Directors is within the aggregate amount approved at a general meeting of the Company on 4 November 2016 of $1,000,000 a year. In addition, HR Ascent Pty Ltd conducted a benchmarking in relation to the CEO & President’s remuneration. Following this review, the Board approved an increase of the CEO & President’s base salary from $620,000 p.a inclusive of superannuation to $700,000 p.a. plus statutory superannuation. The business has a strong and positive culture. The Board believes this is a function of a number of factors, including the high quality of the Company’s leaders, as well as the balanced and fair approach to remuneration. This was reflected in the results of Nanosonics Global Engagement Survey which was conducted for the first time in August 2018 where the Company scored 16% above industry average in relation to “believing in Company mission”. On behalf of the Committee, I look forward to seeing more positive results when the survey is conducted again in August 2019. Steve Sargent Chairman, Remuneration & People Committee Contents The Remuneration Report for the year ended 30 June 2019 (2019 Financial Year or FY19) forms part of the Directors’ Report. Except as otherwise noted, it has been prepared in accordance with the Corporations Act 2001 (Cth) (the Act) and in compliance with AASB124 Related Party Disclosures, and audited as required by section 308(3C) of the Act. The report is divided into the following Sections: 1 People covered by this report 2 Remuneration philosophy and link to business strategy 3 Executive remuneration framework and overview of incentive plans 4 Executive remuneration outcomes 5 Statutory disclosures 6 Executive service agreements 7 Remuneration governance 8 Non-executive Director remuneration 9 Key Management Personnel transactions 35 Nanosonics Annual Report 2019 Remuneration report – audited 1.0 PEOPLE COVERED BY THIS REPORT This report covers Key Management Personnel (KMP) which are defined as those who have the authority and responsibility for planning, directing and controlling the activities of Nanosonics. During the year the definition of KMP was reviewed and it was determined that the individuals identified in the table below were considered to be the KMP of the Company. Name Position 1 Non-executive Directors Change in 2019 Financial Year Maurie Stang Steven Sargent Richard England David Fisher Marie McDonald Executive Director Michael Kavanagh Executive KMP Chairman; Chairman, Nomination Committee; Member, Remuneration & People Committee; Member, R&D and Innovation Committee Deputy Chairman; Lead Independent Director; Chairman, Remuneration & People Committee; Member, R&D and Innovation Committee; Member, Nomination Committee Director; Chairman, Audit and Risk Committee; Member, Remuneration & People Committee; Member, Nomination Committee Director; Chairman, R&D and Innovation Committee; Member, Audit and Risk Committee; Member, Nomination Committee Director; Member, Audit and Risk Committee; Member, Remuneration & People Committee; Member, Nomination Committee Chief Executive Officer & President (CEO&P) and Managing Director; Member, R&D and Innovation Committee McGregor Grant Chief Financial Officer (CFO) and Company Secretary Steven Farrugia Chief Technology Officer David Morris Chief Strategy Officer and Regional President, APAC Appointed Chief Strategy Officer and Regional President, APAC on 4 February 2019 Rod Lopez Chief Operating Officer Appointed Chief Operating Officer on 4 March 2019 Gerard Putt Chief Operations Officer Ceased being a KMP from 4 March 2019 Ken Shaw Regional President, North America It was determined that Mr Shaw was a KMP effective from 1 July 2018 1. Position held for full year and to the date of the Directors’ Report, unless otherwise stated. 2.0 REMUNERATION PHILOSOPHY AND LINK TO BUSINESS STRATEGY Nanosonics is a high growth medical technology company with operations in nine countries. Nanosonics’ executive remuneration strategy is designed to attract, retain and motivate a highly qualified and experienced group of executives. 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 should be understood that to attract, motivate and retain high performing executives and in the face of strong competition for talent, some flexibility in the Company’s approach is required. The Board believes that Nanosonics’ remuneration strategy is to provide ‘fair and appropriate’ remuneration based on a risk and reward framework that supports its business strategy in the short and long-term. A detailed explanation of the Company’s executive remuneration framework is provided in section 3. 36 Remuneration report – audited 3.0 EXECUTIVE REMUNERATION FRAMEWORK AND OVERVIEW OF INCENTIVE PLANS 3.1 Executive remuneration framework 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 remuneration 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 Total Shareholder Return outperformance measures. Base salary plus any fixed elements related to local markets, including superannuation or equivalents. TFR will generally be positioned at the median compared to relevant market based data taking into consideration expertise and performance in the roles. Delivery Part cash and part equity. The equity component is deferred for 1 year and remains ‘at risk’ until vesting. The resulting equity is held as restricted shares for a further year. Strategic intent and marketing positioning Performance incentives are directed to achieving demanding growth targets. TFR + STI is intended to be positioned competitively when compared to groups of similar companies. Equity is held subject to performance and service over a 3 year measurement period. The equity is ‘at risk’ until vesting. LTI is intended to align executive KMP with the Company’s long-term growth strategy and shareholders’ interests. Total remuneration is intended to be positioned competitively when compared to relevant market and internal relativities 3.2 Target remuneration mix The remuneration mix for each executive KMP is weighted to provide an appropriate balance between fixed and at-risk performance-based remuneration to ensure focus on short, medium and longer term performance. The Board considers that this approach aligns Executive KMP remuneration with shareholders’ interests and expectations. CEO&P Remuneration Mix 1 Total ($'000) Minimum Target Outperfomance 100% 48% 43% 12% 12% 28% 16% 16% 25% Other Executive KMP Remuneration Mix (Average) 1 Minimum Target Outperfomance 100% 64% 59% 9% 9% 18% 12% 12% 17% TFR Cash STI Deferred STI LTI 1. Based on FY19 remuneration details. 620 1,280 1,430 402 629 685 37 Nanosonics Annual Report 2019 Remuneration report – audited 3.3 Remuneration – timing of receipt of the benefit The three complementary components of executive KMP remuneration are ‘earned’ over multiple time ranges, as illustrated below. 2018 2019 2020 2021 2022 TFR STI cash STI equity deferral LTI TFR STI cash 2018 2019 2020 STI equity deferral Holding lock LTI TFR STI cash STI equity deferral Holding lock LTI Fixed At risk Each year, fixed remuneration and benefits are paid monthly. A Short-Term Incentive is awarded annually based on the achievement of annual performance targets with 50% of any STI earned paid up-front in cash and 50% paid as performance rights which are deferred for one year (except for the CEO’s 2018 performance rights of which 50% were deferred for one year and the other 50% were deferred for two years). Effective from the 2019 STI, the resulting shares must then be held as restricted shares for a further year (prior to 2019, the resulting shares were not subject to any restrictions). Each year, an equity Long-Term Incentive is awarded to executive KMP which vests after a three-year measurement period, if the specified conditions are satisfied. 3.4 Fixed Remuneration Total Fixed Remuneration (TFR) comprises base salary and superannuation. In addition to base salary, executives may receive benefits in line with local practice, such as health insurance and a car allowance. 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, an increase in job role, changing market circumstances or promotion. Any adjustment to executive KMP remuneration is approved by the Board, based on recommendations by the Remuneration & People Committee and the CEO&P. 3.5 Short-Term Incentive Purpose Performance conditions/measures To reward executives for the achievement against annual performance objectives set by the Board at the beginning of the performance period. The STI is dependent on meeting Company and Individual Performance Objectives as shown below. Company Performance Objectives X Individual Performance Objectives 4 weighted Objectives reviewed and set by the Board annually Did not achieve Payout Achieved some Threshold Target Maximum 50% 100% 120% Achieved most Over achieved some 91%-110% Over achieved most 110%-125% Payout 0% 1%-50% 51%-90% X Target STI % X Base salary = STI Min 0% Max 150% The Board has a general right to exercise discretion in relation to the satisfaction of the performance conditions. Opportunity CEO&P target opportunity is 50% of base salary with a maximum opportunity of 75% of base salary for outperformance. Other Executive KMP target opportunity is 30% of base salary with a maximum opportunity of 45% of base salary for outperformance. 38 Remuneration report – audited Delivery The STI is delivered as follows: – 50% of STI paid in cash; and – 50% of STI awarded as performance rights. After one year, the performance rights vest and are automatically exercised and then held in a holding lock as restricted shares for a further year. Allocation method The equity component will be determined based on the volume weighted average price of Nanosonics’ shares during the five days prior to and including the date of the announcement of the Company’s 2019 full year results and the five days following the announcement of those results. Dividends Performance rights do not carry any dividend or voting rights prior to exercise. Service condition Because the STI amount awarded as equity has already been earned, there are no further performance requirements attached to the performance rights. However, they are subject to service conditions until the vesting date. 3.6 Long-Term Incentive Purpose Opportunity To align a significant portion of executives’ overall remuneration opportunity with shareholder value over the longer term and provide a stimulus for the retention of executives within the Company. CEO&P maximum opportunity is 60% of base salary. Other Executive KMP maximum opportunity is 30% of base salary. Timing and delivery Grants are made each year after shareholder approval to issue securities to Directors has been obtained at the relevant AGM. Allocation method Performance conditions/ measures The LTI is delivered in the form of performance rights and options. A minimum of 20% of the LTI opportunity must be taken as performance rights and a minimum of 20% of the LTI opportunity must be taken as options. Each executive is able to elect the take the remaining 60% of the LTI opportunity as either performance rights or options. The target LTI $ value for each executive, once determined, is then converted into a number of performance rights and options based on a valuation/methodology determined by an independent consultant at the commencement of the performance period using the volume weighted average price (VWAP) of Nanosonics shares for a month from and including the date of the announcement of the Company’s full year results, as follows: – Performance Rights allocated = LTI $ value / Black Scholes value; and – Options allocated = LTI $ value / Binominal Approximation Option Pricing value. Equity grants to the Executive KMP are subject to performance conditions. Each year the Board considers the most appropriate performance measure to use in order to align executives’ incentives with shareholders’ expectations, taking into account the changing circumstances of the Company. For the 2018 LTI, the Board formed the view that share price growth will be primarily influenced by the continued expansion of the Company’s installed base, successful geographical expansion into new markets and its ability to develop and launch new products in the infection prevention market. Accordingly, an Absolute Compound Annual Growth Rate of Total Shareholder Return (Absolute CAGR TSR) hurdle was used with targets set by the Board, with an appropriate profit before tax gate (PBT Gate) as set out in section 3.6.1. The Absolute CAGR TSR for the 2018 LTI will be calculated based on the VWAP of the shares in the Company a month from and including the date of the release of the Company’s 30 June 2018 results compared to the VWAP of the shares in the Company in the month from (and including) the date of the announcement of the Company’s FY21 full year results. A summary of the components of the performance measures associated with the 2018, 2017, and 2016 LTI awards is set out below. LTI year Absolute CAGR TSR TSR-1 TSR-2 Performance measure 2018 2017 2016 100% — — — 50% 25% — 50% 25% EPS — — 50% Total 100% 100% 100% Further detail of the each of the performance measures is provided in sections 3.6.1 to 3.6.4. Equity grants are tested against the performance measures set. If the performance hurdles are not met at the vesting date, performance rights and options lapse. The Board has a general right to exercise discretion in relation to the satisfaction of the performance conditions. 39 Nanosonics Annual Report 2019 Remuneration report – audited Performance measurement period The performance measurement periods for the 2018, 2017 and 2016 Long-Term Incentive awards are summarised below. LTI year Measurement Period 2018 20 August 2018 to the date of the release of Nanosonics’ FY21 financial statements. 2017 24 August 2017 to the date of the release of Nanosonics’ FY20 financial statements. 2016 17 August 2016 to the date of the release of Nanosonics’ FY19 financial statements. Dividends Performance rights and options do not carry any dividend or voting rights prior to exercise. Service condition In addition to the performance conditions, performance rights and options will only vest if the Executive KMP remains in continuous employment with Nanosonics in their current or equivalent position from the date of the grant to the respective vesting date of each grant. 3.6.1 Absolute CAGR Total Shareholder Return For the 2018 LTIS the Board has set a PBT Gate. An assessment will be made at the end of the measurement period and if the average PBT of the Company for the three financial years of the measurement period is greater than the PBT of the Company in the financial year ending 30 June 2018, the gate will open. If the PBT Gate does not open, the performance condition will be deemed to have not been met, regardless of the Company’s performance against the Absolute CAGR TSR set out below. The purpose of the PBT Gate (calculated based on an average PBT over the three year measurement period) is to ensure that there is a baseline requirement to generate PBT over the measurement period, which takes into account additional investment in research and development and new product launch activity in a given year of the measurement period. Vesting of performance rights and options, subject to the Absolute CAGR TSR performance measure, is in the proportions summarised below. Absolute CAGR TSR of the Company Proportion of performance rights and options to vest Does not reach 10% Reaches 10% but does not reach 20% Reaches or exceeds 20% Straight line interpolation applies to the incremental results. 3.6.2 Relative Total Shareholder Return hurdle (TSR-1 and TSR-2) 0% 50% to 100% 100% For each of the 2017 and 2016 LTI awards, Two Relative Total Shareholder Return measures have been used (TSR-1 and TSR-2). The performance rights and options granted that are subject to the TSR-1 and TSR-2 hurdles will vest subject to Nanosonics’ relative TSR performance against the companies within the relevant TSR Comparator Groups over the performance measurement period. Details of the TSR Comparator Groups are set out in Section 3.6.4. Vesting of performance rights and options, subject to Relative TSR Performance measure, is in the proportions summarised below. TSR vs Comparator Groups 1 and 2 Proportion of performance rights and options to vest Below the 50th percentile 50th to 75th percentile At the 75th Percentile Straight line interpolation applies to the incremental results. 3.6.3 Earnings Per Share hurdle (EPS) 0% 30% to 100% (pro-rata) 100% The performance rights and options granted that are subject to an EPS hurdle will vest if Nanosonics achieves a target pre-tax Earnings Per Share (Pre-tax EPS), as pre-determined by the Board. For the 2016 LTI, the relevant year for determining achievement of the Pre-tax EPS hurdle is the financial year ending on 30 June 2019. Vesting of the performance rights and options, subject to achieving the Pre-tax EPS hurdle, is in the proportions summarised below. Achievement of Pre-tax EPS target Below 75% of target Pre-tax EPS 75% to 100% of target Pre-tax EPS Above 100% of target Pre-tax EPS Straight line interpolation applies to the incremental results. 40 Proportion of performance rights and options to vest 0% 75% to 100% (pro-rata) 100% Remuneration report – audited 3.6.4 Relative Total Shareholder Return Comparator Groups The Comparator Groups of companies that have been used in respect of the 2017 and 2016 LTI awards are summarised below. 2017 LTI 2017 Comparator Group 1 (TSR-1) ANN Ansell Limited API AXP CAJ CGS COH EHE ELX Australian Pharmaceutical Industries Limited AirXpanders, Inc. Capitol Health Limited CogState Limited Cochlear Limited Estia Health Limited Ellex Medical Lasers Limited GMV G Medical Innovations Holdings Limited IDX IPD JHC LHC NVC ONE ONT OSP PGC Integral Diagnostics Limited ImpediMed Limited Japara Healthcare Limited LifeHealthcare Group Limited National Veterinary Care Limited Oneview Healthcare plc 1300SMILES Limited Osprey Medical Inc. Paragon Care Limited PSQ PRY REG RHC RVA SIG SHL Pacific Smiles Group Limited Primary Health Care Limited Regis Healthcare Limited Ramsay Health Care Limited REVA Medical, Inc. Sigma Healthcare Limited Sonic Healthcare Limited SOM SomnoMed Limited VRT Virtus Health Limited HSO Healthscope Limited PME Pro Medicus Limited 2017 LTI Comparator Group 2 (TSR-2) Aconex Limited Afterpay Touch Group Limited Appen Limited Altium Limited IFM IRE ISD JHC Infomedia Limited IRESS Limited iSentia Group Limited Japara Healthcare Limited Australian Pharmaceutical Industries Limited MYX Mayne Pharma Group Limited MSB Mesoblast Limited MVF Monash IVF Group Limited PRY REG SIG SRX SPL TNE VRT Primary Health Care Limited Regis Healthcare Limited Sigma Pharmaceuticals Limited Sirtex Medical Limited Starpharma Holdings Limited Technology One Limited Virtus Health Limited MYO MYOB Group Limited WTC Wisetech Global Limited NTC NXT ELX FPH GID IMI IPD ITD LBT Netcomm Wireless Limited XRO Xero Limited Nextdc Limited Ellex Medical Lasers Limited RHT Resonance Health Limited Fisher & Paykel Healthcare Corporation RMD ResMed Inc. GI Dynamics, Inc. IM Medical Limited ImpediMed Limited ITL Health Group Limited LBT Innovations Limited RSH RVA SDI Respiri Limited REVA Medical, Inc. SDI Limited SOM SomnoMed Limited TSX:SV Simavita Limited M7T Mach7 Technologies Limited UBI Universal Biosensors Inc. MGZ Medigard Limited MLA Medical Australia Limited UCM Uscom Limited UNS Unilife Corporation Class Limited Estia Health Limited GBST Holdings Limited Hansen Technologies Limited Impedimed Limited 2016 LTI 2016 Comparator Group 1 (TSR-1) ACG AHZ ALT AMT ANN AXP AZV CLV CMP COH CYC DXB AtCor Medical Holdings Limited Admedus Limited Analytica Limited Allegra Orthopaedics Limited Ansell Limited AirXpanders, Inc. Azure Healthcare Limited Clover Corporation Limited Compumedics Limited Cochlear Limited Cyclopharm Limited Dimerix Limited 2016 LTI Comparator Group 2 (TSR-2) ACX APT APX ALU API CL1 EHE GBT HSN IPD ACX ALU API CL1 CSV EHE FPH GBT HSN Aconex Limited Altium Limited Australian Pharmaceutical Industries Limited Class Limited CSG Limited OIL OSP IPD IFM IRE ISD JHC Optiscan Imaging Limited Osprey Medical Inc. Impedimed Limited Infomedia Limited IRESS Limited iSentia Group Limited Japara Healthcare Limited NTC NXT REG SIG SPL TNE VRT Netcomm Wireless Limited Nextdc Limited Regis Healthcare Limited Sigma Pharmaceuticals Limited Starpharma Holdings Limited Technology One Limited Virtus Health Limited Estia Health Limited MYX Mayne Pharma Group Limited Fisher & Paykel HealthcareCorp Limited MSB Mesoblast Limited GBST Holdings Limited MVF Monash IVF Group Limited WTC Wisetech Global Limited Hansen Technologies Limited MYO MYOB Group Limited 41 Nanosonics Annual Report 2019 Remuneration report – audited 4.0 EXECUTIVE REMUNERATION OUTCOMES 4.1 Relationship between Nanosonics’ performance and Executive KMP remuneration Nanosonics’ remuneration framework is explained in section 3.1 and is aimed at rewarding executive KMP to achieve sustainable growth of the business and creation of shareholder value in the short, medium and long-term. The table below summarises the financial performance of the Company for FY15 – FY19 which is compared with short-term and long-term remuneration outcomes. Five-year performance history 2019 2018 2017 2016 2015 Earnings and cash flows Revenue ($’000) Profit/(loss) before tax ($’000) Net profit/(loss) after tax ($’000) Pre-tax basic earnings (loss) (Pre-tax EPS) (cents) Basic earnings (loss) per share (EPS) (cents) Free cash flow ($’000) Returns Share price as at 30 June ($) Relative TSR percentile ranking 3-year Absolute CAGR TSR % 7 STI award outcomes 84,324 16,830 13,602 5.61 4.54 2,625 60,698 5,583 5,751 1.87 1.92 6,196 67,507 13,852 26,158 4.66 8.79 15,143 5.62 3.16 2.54 tbd 1,2 94th/95th 3 85th/78th 4 36.9 23.0 47.6 42,796 136 122 0.05 0.04 1,943 2.19 91st 5 54.0 22,214 (5,465) (5,460) (2.03) (2.03) (4,732) 1.70 n/a 6 49.4 Executive KMP outcome (% of $ target) 80.3 63.1 87.4 98.3 100.0 LTI outcomes LTI vesting % LTI forfeit % 1. To be determined. tbd tbd 100.0 — 100.0 — 100.0 — — 8 100.0 8 2. Relates to the 2016 LTI, the vesting of which will be finally determined following the release of the FY19 financial results. Refer to Section 4.5 for additional information. 3. Relates to the 2015 LTI. Nanosonics was ranked in the 94th percentile of Comparator Group 1 and the 95th percentile of Comparator Group 2. 4. Relates to the 2013 LTI. Nanosonics was ranked in the 85th percentile in respect of the award made to the CEO&P and in the 78th percentile in respect of the award made to Other Executive KMP. 5. Relates to the 2012 LTI. 6. Not applicable. 7. 3-Year CAGR TSR shown for the 5 year performance period was calculated using the 30 June closing share price. 8. Relates to the 2012 LTI which was based on a revenue and a profit hurdle and did not vest. 42 Remuneration report – audited 4.2 Executive KMP remuneration received in FY19 – unaudited The figures in this table are different to the statutory disclosures in section 5, which are prepared in accordance with the accounting standards and therefore include the accounting value for all unvested deferred STI and LTI awards expensed in the year. The table below is provided voluntarily and represents the value to the Executive KMP of cash paid and vested equity awards (intrinsic value) received during the year. Termination payment Actual remuneration received during the year Fixed remuneration 1 Deferred STI Vested 3 Executive KMP LTI Vested 4 Cash STI 2 Michael Kavanagh McGregor Grant Steven Farrugia David Morris Rod Lopez Ken Shaw 5 Gerard Putt 6 Ron Weinberger 7 Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 620,000 530,400 385,000 351,767 362,632 294,311 175,266 — 123,050 — 116,105 111,961 46,026 43,782 38,054 33,053 — — — — 474,095 42,818 — 199,428 276,589 — 224,019 2,339,471 1,677,086 — 35,945 35,341 — 41,309 278,948 265,446 160,206 98,524 62,649 38,676 47,295 — — — — — — — 44,939 33,445 — 41,556 315,089 212,201 728,224 1,843,875 254,524 177,214 — — — — — — — — 185,375 146,227 — 247,205 1,168,123 2,414,520 — — — — — — — — — — — — — — — 322,845 — 322,845 1,624,535 2,584,760 748,199 611,439 447,981 327,364 175,266 — 123,050 — 516,913 — 465,687 491,602 — 876,934 4,101,631 4,892,098 1. Includes base salary, superannuation/pension and other cash and non-monetary benefits received during the year (excludes annual leave and long service leave accrual). 2. STI received as cash in respect of the previous financial year. 3. Deferred STI vested in FY19 was from the FY17 STI award (FY18 was from the FY16 STI award). The vested value is calculated as the number of vested securities multiplied by the closing share price of Nanosonics ordinary shares on the day of vesting, or if exercised during the period, the 5-day VWAP on the date of exercise. 4. LTI vested represents the value of LTI awards from previous periods that vested wholly or partially during the year. The vested value calculated as the number of vested securities multiplied by the closing share price of Nanosonics ordinary shares on the day of vesting. If the securities that vested during the year were also exercised, the value is based on share price on the date of exercise. 5. Mr Shaw became a KMP from 1 July 2019. 6. Mr Putt ceased being a KMP from 4 March 2019 and his remuneration includes amounts received to this date. 7. Dr Weinberger’s employment ended on 20 February 2018 and his remuneration included amounts received to that date. Dr. Weinberger’s FY18 STI incentive was forfeited in full on 20 February 2018. 43 Nanosonics Annual Report 2019 Remuneration report – audited 4.3 FY19 STI outcomes As explained in Section 3.5, Nanosonics’ STI is designed to reward executives for the achievement against annual performance objectives set by the Board at the beginning of the performance period and the payment of an STI is dependent on meeting Company and Individual Performance Objectives. The payout to each executive KMP for the 2019 Financial Year is summarised in the table below. Target STI (100%) $ Company Performance Objectives % Individual Performance Objective % 299,735 109,341 102,630 49,500 34,583 129,088 55,440 780,317 100.0 95.0 95.0 100.0 100.0 82.5 82.5 85 85 85 85 85 85 85 85 Executive KMP Michael Kavanagh McGregor Grant Steven Farrugia David Morris 1 Rod Lopez 2 Ken Shaw Gerard Putt 3 Total 1. Mr Morris joined Nanosonics on 4 February 2019. His target STI is pro-rated from this date. 2. Mr Lopez joined Nanosonics on 4 March 2019. His target STI is pro-rated from this date. 3. Mr Putt ceased being a KMP from 4 March 2019. His target STI is pro-rated up until this date. % 85.00 80.75 80.75 85.00 85.00 70.13 70.13 STI Achievement $ Cash $ Equity portion deferred $ Forfeited % 254,775 127,387 127,388 88,293 82,874 42,075 29,396 90,529 38,880 44,146 41,437 21,038 14,698 45,265 19,440 44,147 41,437 21,037 14,698 45,264 19,440 15.00 19.25 19.25 15.00 15.00 29.87 29.87 19.67 80.33 626,821 313,411 313,410 The 4 Company Performance Objectives that were set by the Board for the 2019 Financial Year are financial and operational in nature and designed to strengthen alignment between management and shareholder objectives. Details and the weighting of the Company Performance Objectives, which are shared by all employees who participate in the STI program, are summarised below. – Profit before tax (40% weighting): Requires the Company to achieve a profit before tax, above a threshold; – Installed base (20% weighting): Requires the Company to achieve an increase in the total installed base of trophon® units, above a threshold; – Product expansion (20% weighting): Requires the Company to achieve certain clearly defined milestones in relation to the development of new products; and – Customer experience and culture (20% weighting): Requires the Company to achieve certain objective metrics and complete defined activities that impact customer experience and culture. Having regard to the achievement and weighting of each of these Objectives, and taking into consideration the overall performance of the Company during the 2019 Financial Year as summarised in the CEO’s report and the Regional highlights on pages 6 to 16 of this Annual Report, the Board has assessed the overall achievement of the 2019 Company Objectives at 85%. In addition to the Company Performance Objectives, each KMP is required to achieve Individual Performance Objectives that are set by the Board. The Individual Performance Objectives are aimed at achieving specific outcomes across a range of areas in areas including profitability, operational effectiveness, risk and compliance management, innovation and new product development, and people and culture. Mr Kavanagh’s individual performance was assessed by the Board having regard to the Company Performance Objectives and the following Individual Performance Objectives: – Company strategy and risk management; – Product expansion; – Investor relations; and – People, organisation, culture. 4.4 2015 LTI outcome The performance conditions associated with the 2015 LTI included 2 TSR hurdles that were associated with 2 Comparator Groups, TSR-1 and TSR-2. To achieve 100% vesting, Nanosonics’ TSR performance relative to the selected groups of comparator companies was required to be at or above the 75th percentile. Following the release of the Company’s 2018 financial statements, Nanosonics’ relative TSR ranking was determined to be in the 94th percentile in respect of TSR-1 and in the 95th percentile in respect of TSR-2. Accordingly, 100% of the performance rights granted under the 2015 LTI vested during the 2019 Financial Year. 44 Remuneration report – audited 4.5 2016 LTI outcome The performance conditions associated with the 2016 LTI included 2 TSR hurdles that were associated with 2 Comparator Groups, TSR-1 and TSR-2, and a Pre-tax EPS hurdle. To achieve 100% vesting of the 2 TSR hurdles, Nanosonics’ TSR performance relative to the selected groups of comparator companies is required to be at or above the 75th percentile. As at 12 August 2019, Nanosonics’ relative TSR ranking was estimated to be over the 75th percentile in respect of both TSR-1 and TSR-2 and therefore would result in 100% vesting. A final calculation will be conducted at the end of the measurement period in respect of the TSR-1 and TSR-2 hurdles. In relation to the Pre-tax EPS hurdle, the Company did not meet the threshold which the Board had set at 6.75 cents per share (which would result in 75% vesting of the performance rights and options associated with the Pre-tax EPS hurdle). However, the Board is conscious that although the Pre-tax EPS hurdle was set in 2016, it subsequently expanded research and development activities beyond those contemplated to support the core trophon® business. Since that time, the Company has applied significant additional investment associated with the research and development of new products. Accordingly, the Board has reviewed the outcome, and after notionally adjusting for the additional research and development expenditure, the Board considers it likely that the Pre-tax EPS hurdle would have been met at the threshold. In view of this, the Board has decided to exercise its discretion to treat the threshold as satisfied, but has adopted a conservative position to allow 50% of the performance rights and options associated with the Pre-tax EPS hurdle to vest, rather than the threshold of 75%. 5.0 STATUTORY DISCLOSURES 5.1 Executive KMP statutory remuneration received – audited (A-IFRS) ($, except where otherwise indicated) Fixed Remuneration Variable Remuneration Totals Short-term Long- term Post- employment Total Short-term Long-term (Equity Compensation) 1 Total At risk Equity based Salary and fees Other 2 Accrued leave benefits Super- annuation/ pension contribution 3 Cash STI 4 Deferred STI LTI Termination Payment Total Remu- neration 20,531 20,049 672,578 127,387 108,500 255,419 491,306 543,692 116,105 112,798 336,210 565,113 — 1,163,884 — 1,108,805 KMP Michael Kavanagh McGregor Grant Steven Farrugia 5 David Morris 6 Rod Lopez 7 Ken Shaw 8 Gerard Putt 9 Year 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Ron Weinberger 10 2019 2018 Total 2019 2018 578,719 469,285 342,544 306,277 319,905 253,691 165,001 — 115,278 — — — — — — — — — — — 73,328 54,358 45,624 41,399 32,059 23,067 12,587 — 8,901 — — 161,026 241,393 — 208,982 — — — — — — 20,793 30,908 — 7,646 20,531 408,699 20,049 367,725 20,531 20,049 372,495 296,807 44,146 46,026 41,437 38,054 37,741 50,191 33,150 35,084 76,747 158,634 104,353 200,570 68,260 142,847 52,186 125,324 10,266 187,854 21,038 9,014 56,642 86,694 — — — — — — 7,772 131,951 14,698 6,296 34,587 55,581 — — — — — — — — — — — — 14,629 196,448 20,049 292,350 19,440 35,945 17,810 40,953 38,464 84,039 75,714 160,937 — — — — — — — — — — — — — 567,333 568,295 515,342 422,279 274,548 — 187,532 — 659,223 — 272,162 453,287 — 430,294 28,216 31,838 15,585 505,933 45,265 39,579 68,446 153,290 — — 15,037 231,665 — — — — — 30,420 107,631 138,051 238,000 607,716 2,112,767 28,216 225,130 109,845 2,475,958 313,411 252,090 598,565 1,164,066 — 3,640,024 1,479,628 — 157,378 95,233 1,732,239 236,130 269,446 684,419 1,189,995 238,000 3,160,234 1. The amount disclosed is the amount of the fair value of the performance rights and options recognised as an expense in each reporting period. The ability to exercise the performance rights and options is subject to vesting conditions. 2. Other short-term benefits include non-monetary benefit relating to health insurance premium contribution and cash benefit relating to health fund contribution for the US based KMP. 3. Post-employment benefits include superannuation contributions for Australian based KMP and IRA Retirement Plan contributions for US based KMP. 4. Cash STI is for the performance during the respective financial year. 2019 Amounts represent the Cash STI opportunity accrued related to the financial year based on the achievement of the Company Performance Objectives and Individual Performance Objectives. The actual Cash STI award is disclosed in section 4.3 5. Dr Farrugia received a special award of 23,747 performance rights during the year in addition to the 2018 Deferred STI and 2018 LTI. This special award is subject to a 3 year vesting period and is included in the LTI amount. 6. Mr. Morris joined Nanosonics on 4 February 2019. He received a sign on incentive of 60,837 performance rights subject to a 3 year vesting period and this is included in the LTI amount. 7. Mr Lopez joined Nanosonics on 4 March 2019. He received a sign on incentive of 35,621 performance rights subject to a 3 year vesting period and this is included in the LTI amount. 8. Mr Shaw became a KMP from 1 July 2019. 9. Mr Putt ceased being a KMP from 4 March 2019 and his remuneration includes amounts to this date. 10. Dr Weinberger’s employment ended on 20 February 2018 and his remuneration includes amounts to that date. Dr. Weinberger’s FY18 STI incentive was forfeited in full on 20 February 2018. 45 % 42 51 28 35 26 30 18 — 21 — 23 — 28 36 — 23 32 38 % 31 40 20 27 20 21 24 — 22 — 16 — 21 28 — 23 23 30 Nanosonics Annual Report 2019 Remuneration report – audited 5.2 Employee Share Scheme grants to KMP 5.2.1 Analysis of share-based payments granted as remuneration Details of the performance rights and options granted as remuneration to each Executive KMP, including the fair values of each of the grant, the vesting profiles as at 30 June 2019, and any vested and exercisable performance rights and options are set out below. Grant Date Vesting Date Expiry Date Fair Value $ Exercise Price $ Number granted Number vested during the year % vested during the year Number exercised during the year Balance at year end Vested and Exercis- able Fair Value $ Number granted Fair Value $ Balance at year end Performance Rights Options Total Intrinsic value of PR and options at year end ($) Vested and Exercis- able KMP Description 2018 LTIS 2018 LTIS 2018 Deferred STI Tranche 1 2018 Deferred STI Tranche 2 9 Nov 18 30 Sep 21 30 Sep 24 1.235 20,900 25,812 9 Nov 18 30 Sep 21 30 Sep 24 0.803 3.442 9 Nov 18 31 Aug 19 31 Aug 22 3.210 16,502 52,971 9 Nov 18 31 Aug 20 31 Aug 23 3.210 16,501 52,968 2017 LTIS Tranche 1 3 Nov 17 31 Aug 20 31 Aug 23 2.160 12,867 27,793 2017 LTIS Tranche 2 3 Nov 17 31 Aug 20 31 Aug 23 2.040 12,866 26,247 2017 LTIS Tranche 1 3 Nov 17 31 Aug 20 31 Aug 23 1.000 2.380 2017 LTIS Tranche 2 3 Nov 17 31 Aug 20 31 Aug 23 1.020 2.380 — — — — — 0 0 0 0 0 — 20,900 — 16,502 — 16,501 — 12,867 — 12,866 — — — — — 2017 Deferred STI 3 Nov 17 31 Aug 18 31 Aug 21 2.810 45,513 127,891 45,513 100 — 45,513 45,513 2017 Deferred STI 11 Jan 18 31 Aug 18 31 Aug 21 2.750 17,798 48,945 17,798 100 — 17,798 17,798 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 2.590 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 2.330 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 3.070 — — — 10,535 27,286 10,534 24,544 21,069 64,682 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 1.000 2.850 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 0.980 2.850 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 1.050 2.850 — — — — — — — — — — — — 2015 LTIS Tranche 1 1 4 Jan 16 31 Aug 18 31 Aug 21 1.460 2015 LTIS Tranche 2 1 4 Jan 16 31 Aug 18 31 Aug 21 1.060 — — 103,441 151,024 103,441 103,441 109,647 103,441 374,169 690,865 252,395 4 Feb 19 30 Sep 21 30 Sep 24 1.410 6,354 8,959 4 Feb 19 30 Sep 21 30 Sep 24 0.863 3.442 — Total 2018 LTIS 2018 LTIS 2018 Deferred STI 22 Nov 18 31 Aug 19 31 Aug 22 2.970 13,083 38,857 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 1.950 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 1.750 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 0.840 2.380 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 0.790 2.380 8,363 16,308 8,363 14,635 — — — — — — 0 0 0 100 100 67 0 0 0 0 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 2.590 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 2.330 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 3.070 — — — 2,568 2,567 6,651 5,981 5,135 15,764 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 1.000 2.850 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 0.980 2.850 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 1.050 2.850 — — — — — — — — — 2015 LTIS Tranche 1 1 4 Jan 16 31 Aug 18 31 Aug 21 1.460 2015 LTIS Tranche 2 1 4 Jan 16 31 Aug 18 31 Aug 21 1.060 Total — — 36,154 52,785 36,154 36,154 38,323 36,154 136,539 247,208 90,106 2019 Special 2 28 May 19 04 Mar 22 04 Mar 25 4.410 — 23,747 104,724 — 2018 LTIS 2018 LTIS 4 Feb 19 30 Sep 21 30 Sep 24 1.41 11,836 16,689 4 Feb 19 30 Sep 21 30 Sep 24 0.86 3.442 — 2018 Deferred STI 22 Nov 18 31 Aug 19 31 Aug 22 2.97 10,817 32,126 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 1.95 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 1.75 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 0.84 2.380 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 0.79 2.380 6,686 13,037 6,686 11,701 — — — — — — 0 0 0 100 100 66 0 0 0 0 0 — 10,535 — 10,534 — 21,069 — — — — 103,441 103,441 — 103,441 103,441 — 6,354 — 13,083 — 8,363 — 8,363 — — — — — 2,568 — — 2,567 5,135 — — — — 36,154 36,154 — 36,154 36,154 — 23,747 — 11,836 — 10,817 — 6,686 — 6,686 — — — — — h g a n a v a K l e a h c i M t n a r G r o g e r G c M i a g u r r a F n e v e t S 286,885 230,369 286,885 — — — — — — — — 170,212 170,212 170,212 170,212 173,616 170,212 52,827 52,827 52,827 52,826 51,769 52,826 105,653 110,936 105,653 — — — — — — — — — — 117,458 624,836 92,741 92,736 72,313 72,307 551,487 551,487 255,783 59,207 59,201 118,408 146,331 146,328 292,659 581,338 581,338 87,211 75,263 87,211 — 189,946 35,709 41,488 34,850 41,488 41,488 32,776 41,488 20,028 20,028 20,028 20,028 19,627 20,028 40,056 42,059 40,056 73,526 47,000 47,000 134,421 134,421 100,025 14,432 14,427 28,859 55,478 55,478 110,955 203,185 203,185 — — — — — 133,458 66,518 60,922 52,576 60,922 — 132,688 33,169 27,862 33,169 33,168 26,203 33,168 18,299 18,299 18,299 18,299 17,933 18,299 36,599 38,429 36,599 60,792 37,575 37,575 107,468 107,464 75,510 7,694 7,688 15,382 50,688 50,688 101,379 992,567 — — — — — — 2017 Deferred STI 11 Jan 18 31 Aug 18 31 Aug 21 2.75 13,436 36,949 13,436 100 — 13,436 13,436 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 2.59 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 2.33 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 3.07 — — — 1,369 1,368 3,546 3,187 2,737 8,403 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 1.00 2.850 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 0.98 2.850 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 1.05 2.850 — — — — — — — — — — — — 0 0 0 — 1,369 — 1,368 — 2,737 — — — Total 46 78,682 230,362 13,436 17 — 78,682 13,436 200,456 181,302 200,456 — 374,169 252,395 838,615 789,729 838,615 — 4,415,958 — 136,539 90,106 250,299 224,603 250,299 — 1,448,047 Remuneration report – audited KMP Description Grant Date Vesting Date Expiry Date Fair Value $ Exercise Price $ Number granted Performance Rights Options Number vested during the year % vested during the year Number exercised during the year Balance at year end Vested and Exercis- able Fair Value $ Number granted Fair Value $ Balance at year end Total Intrinsic value of PR and options at year end ($) Vested and Exercis- able 3 2019 Special 3 28 May 19 04 Feb 22 04 Feb 25 4.410 4 Feb 19 30 Sep 21 30 Sep 24 1.41 — — 60,837 268,291 5,910 8,333 4 Feb 19 30 Sep 21 30 Sep 24 0.86 3.442 — 4 2019 Special 4 28 May 19 04 Mar 22 04 Mar 25 4.410 4 Feb 19 30 Sep 21 30 Sep 24 1.41 66,747 276,624 — — 35,621 157,089 5,015 7,071 4 Feb 19 30 Sep 21 30 Sep 24 0.86 3.442 — 4 Feb 19 30 Sep 21 30 Sep 24 1.410 — 7,412 10,451 4 Feb 19 30 Sep 21 30 Sep 24 0.863 3.442 — 40,636 164,160 2018 Deferred STI 22 Nov 18 31 Aug 19 31 Aug 22 2.970 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 1.950 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 1.750 — — — 11,337 33,671 4,761 9,284 4,760 8,330 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 0.840 2.380 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 0.790 2.380 — — 28,270 61,736 4 Feb 19 30 Sep 21 30 Sep 24 1.410 — 9,213 12,990 4 Feb 19 30 Sep 21 30 Sep 24 0.863 3.442 — 2018 Deferred STI 22 Nov 18 31 Aug 19 31 Aug 22 2.970 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 1.950 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 1.750 — — — 10,218 30,347 8,631 16,830 8,630 15,103 2017 LTIS Tranche 1 9 Feb 18 31 Aug 20 31 Aug 23 0.840 2.380 2017 LTIS Tranche 2 9 Feb 18 31 Aug 20 31 Aug 23 0.790 2.380 — — 2018 LTIS 2018 LTIS Total 2018 LTIS 2018 LTIS Total 2018 LTIS 2018 LTIS Total 2018 LTIS 2018 LTIS s i r r o M d v a D i z e p o L d o R 5 w a h S n e K 6 t t u P d r a r e G — — — — — — — — — — — — — — — — — — — — 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2017 Deferred STI 11 Jan 18 31 Aug 18 31 Aug 21 2.750 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 2.590 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 2.330 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 3.070 — — — — 2016 LTIS Tranche 1 5 Jan 17 31 Aug 19 31 Aug 22 1.000 2.850 2016 LTIS Tranche 2 5 Jan 17 31 Aug 19 31 Aug 22 0.980 2.850 2016 LTIS Tranche 3 5 Jan 17 31 Aug 19 31 Aug 22 1.050 2.850 14,367 39,509 14,367 100 14,367 0 0 0 — 2,043 — 2,043 — 4,087 2,043 2,043 5,292 4,760 4,087 12,547 — — — — — — — — — 2015 LTIS Tranche 1 1 4 Jan 16 31 Aug 18 31 Aug 21 1.460 2015 LTIS Tranche 2 1 4 Jan 16 31 Aug 18 31 Aug 21 1.060 — — 29,632 43,263 29,632 29,633 31,411 29,633 100 100 29,632 29,633 — — — — — — 81,116 70,003 81,116 81,116 70,003 81,116 — 60,837 — 5,910 — 66,747 — 35,621 — 5,015 — — — — 68,835 59,405 68,835 — 40,636 — 68,835 59,405 68,835 — — 101,742 87,803 101,742 — 7,412 — 11,337 — 4,761 — 4,760 — — — — 62,975 52,899 62,975 62,974 49,749 62,974 — 28,270 — 227,691 190,451 227,691 — — 47,421 40,924 47,421 — 9,213 — 10,218 — 8,631 — 8,630 — — — — — — — — — — 28,544 23,977 28,544 — 28,543 22,549 28,543 — — — — — — 15,937 15,937 15,937 15,937 15,618 15,937 31,875 33,469 31,875 — — — — — — — — — — — — — — — — — — 341,904 33,214 176,671 551,789 200,190 28,184 149,923 378,297 41,655 221,594 63,714 26,757 26,751 204,039 204,036 788,546 51,777 103,283 57,425 48,506 48,501 92,483 92,479 — 11,482 11,482 22,969 44,145 44,145 88,294 — — Total 118,497 212,052 73,632 62 73,632 44,865 — 168,257 152,474 168,257 — 716,971 1. The performance conditions associated with the 2015 LTIS were fully met. Accordingly, these performance rights vested on 31 August 2018. The expiry date on the 2015 LTI changed from 30 August 2018 to 31 August 2021 following shareholder’s approval at the Annual General Meeting held on 3 November 2017. 2. Dr Farrugia received a special award of 23,747 performance rights during the year. 3. Mr Morris joined Nanosonics on 4 February 2019. He received a sign on incentive 60,837 performance rights, subject to a 3 year vesting period. 4. Mr Lopez joined Nanosonics on 4 March 2019. He received a sign on incentive reported under 2019 Special of 35,621 performance rights, subject to a 3 year vesting period. 5. Mr Shaw became a KMP from 1 July 2019. The performance rights and options granted included the 2017 LTI which was granted to him prior to this date. 6. Mr Putt ceased being a KMP from 4 March 2019. Accordingly, details of the performance rights and options granted are reported to 4 March 2019. No performance rights or options vest if the conditions are not satisfied, hence the minimum value is nil. The maximum value of the grants to be expensed has been determined as the fair value of the awards at grant date (as disclosed above). The factors and assumptions used in determining the fair value on grant date of performance rights and options granted to Directors and KMP which were unexpired on 30 June 2019, including those granted during the period are disclosed in note 4.3(iv) to the Financial Statements. There were no performance rights or options forfeited or lapsed during the period. There were no options vested and exercised during the period. There were no vested and exercisable options at year end. No share-based payments were settled in cash. 47 Nanosonics Annual Report 2019 Remuneration report – audited 5.2.2 Exercise of performance rights and options granted as remuneration During the financial year, the following shares were issued on the exercise of performance rights previously granted as part of remuneration to KMP: Number of shares Amount paid per share ($) Total amount paid ($) Intrinsic value 1 ($) Gerard Putt Total 73,632 73,632 — — — — 230,314 230,314 1. The intrinsic value of the shares is calculated as the 5-day volume weighted average price of the shares on the ASX on the day of exercise of performance rights and options less amount paid per share if there is an exercise price. There are no amounts unpaid on the shares issued as a result of the exercise of options in the current financial year or in prior years. There were no options exercised during the year. 5.2.3 Analysis of movement in performance rights and options The movement in number and value during the financial year of performance rights and options over ordinary shares of Nanosonics Limited held by KMP is detailed below. Balance at start of the year Granted in the year Exercised in the year Forfeited in the year Balance at end of the year Number Value ($) 1 Number Value ($) 1 Number Value ($) 2 Number Value ($) 2 Number Value ($) 1 Performance rights Michael Kavanagh 320,266 559,114 53,903 131,751 McGregor Grant 117,102 199,392 19,437 47,816 Steven Farrugia 32,282 76,823 46,400 153,539 David Morris Rod Lopez Ken Shaw 3 — — — — 66,747 276,624 40,636 164,160 9,521 17,614 18,749 Gerard Putt 4 99,066 168,715 19,431 44,122 43,337 — — — — — — — — — — — — 73,632 230,314 Total Options 578,237 1,021,658 265,303 861,349 73,632 230,314 Michael Kavanagh 551,730 559,360 286,885 230,369 McGregor Grant 163,088 149,340 87,211 75,263 Steven Farrugia 139,534 128,726 60,922 52,576 David Morris Rod Lopez — — — — 81,116 70,003 68,835 59,405 Ken Shaw 3 125,949 102,648 101,742 87,803 Gerard Putt 4 120,836 111,550 47,421 40,924 Total 1,101,137 1,051,624 734,132 616,343 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 374,169 690,865 136,539 247,208 78,682 230,362 66,747 276,624 40,636 164,160 28,270 61,736 44,865 97,869 — 769,908 1,768,824 — — — — — — — 838,615 789,729 250,299 224,603 200,456 181,302 81,116 70,003 68,835 59,405 227,691 190,451 168,257 152,474 — 1,835,269 1,667,967 1. The value of the performance rights and options granted in the year is the fair value of the performance rights and options calculated at grant date and derived by applying the valuation methodology prescribed under IFRS-2. The total value of performance rights and options granted is included in the table above. This amount is allocated to remuneration over the vesting period. 2. The value of the performance rights exercised is based on the 5-day volume weighted average price of the shares on the ASX on the date of exercise. 3. Mr. Ken Shaw became a KMP from 1 July 2019. The performance rights and options balance at the start of the year relates to the 2017 LTI which was granted to him prior to this date. 4. Mr. Putt ceased being a KMP from 4 March 2019. Accordingly, details of the performance rights and options granted, exercised and forfeited are reported to 4 March 2019. 48 Remuneration report – audited 5.3 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, this information has been provided for each Director (as required under the Corporations Act) and all Other Executive KMP. Equity interests as at 30 June 2019 and to the date of this report Nanosonics Limited ordinary shares 1 Performance rights and options over Nanosonics Limited ordinary shares Total Intrinsic Value of NAN securities as at year end ($) 2/3 Non-executive Directors Maurie Stang Richard England David Fisher Steven Sargent Marie McDonald Geoff Wilson 5 Executive Director Michael Kavanagh Other Executive KMP McGregor Grant Steven Farrugia David Morris Rod Lopez Ken Shaw 19,006,517 4 13,000 413,940 107,000 19,600 — — — — — — — 106,816,626 73,060 2,326,343 601,340 110,152 — 1,018,363 1,212,784 7,203,794 587,372 — — — — 386,838 279,138 147,863 109,471 255,961 3,772,842 411,664 346,627 223,565 252,187 1. Includes the number of Nanosonics shares held directly or indirectly and under the employee share plans. 2. The intrinsic value of Nanosonics shares calculated as the closing share price of Nanosonics shares on 30 June 2019 multiplied by the number of shares held. 3. The intrinsic value of performance rights and options calculated as the closing share price of Nanosonics shares on 30 June 2019 less the applicable exercise price multiplied by the number of performance rights and options. 4. Includes shares held by a close family member. 5. Mr Wilson joined the Board as a Non-executive Director effective 17 July 2019. He does not have an equity interest prior to his appointment and to the date of this report. 5.4 KMP share movement The numbers of shares in the Company held during the financial year by KMP, including their personally-related parties, are set out below. Balance at start of the year Received during the year on the exercise of perfor- mance rights and options Sale of shares during the year Balance at end of the year 2 Non-executive Directors Maurie Stang 1 Richard England David Fisher Steven Sargent Marie McDonald Executive Director Michael Kavanagh Other Executive KMP McGregor Grant Steven Farrugia David Morris Rod Lopez Ken Shaw Gerard Putt 1/2 20,320,157 13,000 503,940 107,000 19,600 — 1,328,363 587,372 — — — — — — — — — — — — — — — (1,313,640) 19,006,517 — (90,000) — — 13,000 413,940 107,000 19,600 (310,000) 1,018,363 — — — — — 587,372 — — — — 79,248 73,632 (71,978) 80,902 1. Includes shares held by a close family member. 2. Mr Putt ceased being a KMP on 4 March 2019. Movements in Mr Putt’s shareholding and the balance of shares held are reported to this date. 49 Nanosonics Annual Report 2019 Remuneration report – audited 6.0 EXECUTIVE SERVICE AGREEMENTS 6.1 CEO and President The following sets out the key terms and conditions of employment for the CEO and President, Michael Kavanagh. Length of contract Ongoing employment contract until notice is given by either party. Fixed Remuneration $620,000 p.a., inclusive of superannuation and reviewed annually, increased to $700,000 p.a. plus superannuation of $21,003 effective 1 July 2019. Short-Term Incentive 50% of base salary with a maximum opportunity of 75% of base salary for outperformance. Long-Term Incentive 60% of base salary. Notice periods In order to terminate the employment arrangements, Mr Kavanagh is required to provide Nanosonics with 9 months’ written notice. Nanosonics must provide Mr Kavanagh with 9 months written notice. Resignation On resignation, unless the Board determines otherwise: – All unvested STI or LTI benefits are forfeited and a prorated portion of the unvested STI are paid to the period up to the date of termination; and – All vested but unexercised STI or LTI benefits are forfeited (immediately or after 30 days subject to the terms of the award) following cessation of employment. Termination with 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 with notice by Nanosonics, unless the Board determines otherwise: – All unvested LTI benefits are forfeited and a prorated portion of the unvested STI are paid to the period up to the date of termination; and – All vested but unexercised STI or LTI benefits are forfeited (immediately or after 30 days subject to the terms of the award) following cessation of employment. Change of control In the event of a takeover or change in control of Nanosonics Limited, the Board may, in its discretion, determine that any performance rights or options that have not vested will vest on a date determined by the Board. Termination for serious misconduct Nanosonics may immediately terminate employment at any time in the case of serious misconduct, and Mr Kavanagh 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 event. 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. Clawback Mr Kavanagh’s remuneration is subject to the Company’s Clawback Policy as set out in section 7.3. 50 Remuneration report – audited 6.2 Other Executive KMP The following sets out details of the key terms and conditions of the Other Executive KMP’s employment. 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: – David Morris: 6 months. – McGregor Grant: 4 months. – Steven Farrugia, Rod Lopez and Ken Shaw: 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 (immediately or after 30 days subject to the terms of the award) following cessation of employment. Termination with 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 with notice by Nanosonics, unless the Board determines otherwise: – All unvested STI or LTI benefits are forfeited; and – All vested but unexercised STI or LTI benefits are forfeited (immediately or after 30 days subject to the terms of the award) following cessation of employment. Change of control In the event of a takeover or change in control of Nanosonics Limited, the Board may, in its discretion, determine that any performance rights or options that have not vested will vest on a date determined by the Board. 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. Statutory entitlements Post-employment restraints 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. Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. With the exception of Mr Shaw, who is employed by Nanosonics Inc under a contract of employment drafted for US-based executive employees, 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. Mr Shaw has an equivalent term with a period of 24 months; – 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. Mr Shaw has an equivalent term for a period of 1 year; or – Carrying-on or becoming in any way involved in any trade or business that is in competition with Nanosonics. Mr Shaw has an equivalent term for a period of 1 year. Clawback Other Executive KMP remuneration is subject to the Company’s Clawback Policy as set out in section 7.3. 51 Nanosonics Annual Report 2019 Remuneration report – audited 7.0 REMUNERATION GOVERNANCE This section describes the role of the Board, the Remuneration & People Committee, and the use of remuneration consultants when making remuneration decisions. 7.1 Role of the Board and the Remuneration & People Committee The Board is responsible for Nanosonics’ remuneration strategy and policy. Consistent with this responsibility, the Board has established a Remuneration & People Committee which comprises a majority of independent Non-executive Directors (including its Chair). The members of the Remuneration & People Committee during the 2019 Financial Year are shown in section 1. The role and responsibilities of the Remuneration & People Committee are set out in its Charter, which was last revised and approved by the Board in November 2018. In summary, the Remuneration & People Committee’s role is to: – Review and recommend to the Board for approval 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&P and consider and approve the remuneration of all designated senior executives; – Review and recommend to the Board for approval Nanosonics’ incentive schemes, including amounts, terms and offer processes and procedures; and – Determine and recommend to the Board for approval equity awards in accordance with policy and shareholder approvals, including testing of vesting and termination provisions. The Remuneration & People Committee’s role and its interaction with the Board, internal and external advisors, is illustrated below. Reviews, applies judgement and, as appropriate, approves the Remuneration & People Committee’s recommendations. The Board The Remuneration & People Committee The Remuneration & People Committee operates under the delegated authority of the Board. The Remuneration & People 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 Further information on the Remuneration & People Committee’s role, responsibilities and membership is contained in the Corporate Governance Statement. The Remuneration & People Committee Charter and the Corporate Governance Statement can be viewed in the Corporate Governance section of Nanosonics’ website at www.nanosonics.com.au 7.2 Use of remuneration consultants As appropriate, the Board and Remuneration & People Committee obtain and consider advice directly from external advisors, who are independent of management. Under engagement and following communication protocols adopted by Nanosonics, the Remuneration & People Committee engaged Laurie Wood at HR Ascent Pty Ltd, to provide benchmarking data to assist in the review of Non-executive Director and CEO&P remuneration. No ‘Remuneration Recommendations’ as defined by the Corporations Act were made for the 2019 financial year. 7.3 Clawback Nanosonics has implemented a policy that gives the Board discretion to clawback or reduce STI or LTI awards if it becomes aware of circumstances that have resulted in an unfair benefit to the executive KMP, including a material misstatement of the Group’s financial statements or misconduct of an Executive KMP. The policy is available on Nanosonics’ website, www.nanosonics.com.au under Investor Centre, Corporate Governance. 7.4 Securities trading restrictions Under the Nanosonics Limited Securities Trading Policy and in accordance with the Corporations Act, securities granted under Nanosonics’ equity incentive schemes must remain at risk until vested, or until exercised, if performance rights or options. No schemes may be entered into by an individual or their associates that specifically protects the unvested value of shares, performance rights or options. 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. 52 Remuneration report – audited KMPs are not permitted to enter into transactions in products associated with the securities without the prior approval of the Board, which operates 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 out 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 Nanosonics’ website, www.nanosonics.com.au under Investor Centre, Corporate Governance. 7.5 Cessation of employment provisions No benefits are payable on termination other than accrued entitlements. The provisions that apply for STI and LTI awards in the case of cessation of employment are detailed in section 6. 7.6 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. 7.7 Conditions of LTI grants The conditions under which LTI awards (performance rights and options) are granted are approved by the Board in accordance with the relevant scheme rules as summarised in section 5. 7.8 Minimum shareholding requirement for KMP In July 2019, the Company introduced a requirement for Non-executive Directors and Executive Key Management Personnel to build and maintain a minimum level of share ownership in the Company. The minimum share ownership is an equity holding equivalent to the previous year’s base salary/fees and is expected to be met within 4 years of commencement or appointment. 8.0 NON-EXECUTIVE DIRECTOR REMUNERATION 8.1 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 is considered. External consultants may be used to source the relevant data and commentary. Non-executive Directors’ fees are recommended by the Remuneration & People Committee and determined by the Board. Shareholders approve the aggregate amount available for the remuneration of Non-executive Directors. Remuneration is structured to preserve independence whilst creating alignment Aggregate Board Fees are approved by shareholders. 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 reference to measures of the Company’s performance. The total amount of fees paid to Non-executive Directors in the year ended 30 June 2019 is within the aggregate amount approved at a general meeting of the Company on 4 November 2016 of $1,000,000 a year. Flexibility in how fees are received Non-executive Directors can elect how they wish to receive their total fees – i.e. as cash, superannuation contributions or charitable donations. 8.2 Non-executive Director fees and other benefits Elements Details Board fees per annum 1 Chairman fee Deputy Chairman fee Non-executive Director fee Committee chair fee Committee member fee $225,000 $135,000 $100,000 $20,000 $10,000 Superannuation Superannuation contributions are included in the Board fees and are made at a rate of 9.5% of base fee (up to the Government’s prescribed maximum contributions limit) which satisfies the Company’s statutory superannuation contributions. Equity instruments Non-executive Directors do not receive any performance-related remuneration, options or performance shares. Other fees/benefits Non-executive Directors are reimbursed for out-of-pocket expenses that are directly related to Nanosonics’ business. 1. Following a review of Director fees, the Board fees were implemented effective from 1 July 2019. Previously, the Board Chairman’s fee was $170,000; the Non-executive Director fee was $85,000 and a Committee chair fee was $15,000. The Deputy Chairman fee was previously not differentiated and there was no separate Committee member fee. The Chairman does not receive separate Committee member fees. 53 Nanosonics Annual Report 2019 Remuneration report – audited 8.3 Non-executive Director total remuneration Maurie Stang Richard England David Fisher Steven Sargent Marie McDonald Total Year 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Fees ($) Superannuation ($) Total ($) 155,251 155,251 91,324 91,324 91,324 91,324 91,324 91,324 77,626 77,626 506,849 506,849 14,749 14,749 8,676 8,676 8,676 8,676 8,676 8,676 7,374 7,374 48,151 48,151 170,000 170,000 100,000 100,000 100,000 100,000 100,000 100,000 85,000 85,000 555,000 555,000 9.0 KEY MANAGEMENT PERSONNEL TRANSACTIONS 9.1 Loans to KMP and their related parties During the financial year and to the date of this report, the Group made no loans to Directors and other KMP and none were outstanding as at 30 June 2019 (2018: Nil). 9.2 Other transactions with KMP Certain Directors and KMP, or their personally-related entities (Related Parties), 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 2018 and 2019 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. The following transactions occurred with entities controlled by Related Parties: Related Party Related Entity Transactions Maurie Stang Gryphon Capital Pty Ltd Director fees; reimbursement of costs incurred on behalf of Nanosonics Maurie Stang Regional Healthcare Group Pty Ltd Products purchased, services received and products sold Richard England Angleterre Nominees Pty Ltd and Domkirke Pty Ltd Director fees The below transactions exclude Director fees which are disclosed in section 8.3. Sale of products and services to Related Parties Purchases of goods and services from Related Parties Reimbursement of costs incurred on behalf on Nanosonics 2019 $ 2018 $ 2,772,811 2,409,140 1,865 8,659 2,715 10,520 54 Financial statements For the year ended 30 June 2019 Content of the financial statements Auditor’s independence declaration Consolidated financial statements Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 1 General accounting policies Reporting entity 1.1 1.2 Basis of preparation 2 Performance for the year Segment and revenue information Individually significant items 2.1 Revenue 2.2 2.3 2.4 Other gains - net 2.5 Earnings per share 2.6 Dividends 3 Income taxes Income tax expense 3.1 3.2 Deferred taxes 4 Employee benefits Staffing costs 4.1 4.2 Employee benefits liabilities 4.3 Share-based payments 5 Assets and liabilities related to contracts with customers 5.1 Contract balances 6 Financial assets and financial liabilities Cash and cash equivalents 6.1 6.2 Trade and other receivables 6.3 Derivative financial instruments 6.4 Trade and other payables 6.5 Borrowings 7 Operating assets and liabilities Inventories 7.1 7.2 Property, plant and equipment 7.3 7.4 Provisions Intangible assets 8 Financial risk management 9 Capital structure 9.1 Capital and reserves 9.2 Capital management 10 Other notes 10.1 Commitments 10.2 Related party transactions 10.3 Controlled entities 10.4 Parent entity information 10.5 Remuneration of auditors 10.6 New Standards and Interpretations not yet adopted 10.7 Events occurring after the balance date Directors’ declaration Independent auditor’s report to the members 56 57 58 59 60 61 61 61 64 64 64 66 66 66 66 67 67 68 70 70 70 71 75 75 75 75 76 77 78 78 79 79 79 80 81 82 87 87 88 88 88 88 89 90 91 91 92 93 94 55 Nanosonics Annual Report 2019 Auditor’s independence declaration 56 Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2019 Continuing operations Revenue Cost of sales Gross profit Selling and general expenses Administration expenses Research and development expenses Other income Other gains – net Results from operating activities Finance income – interest Finance expense Net finance income Operating profit before income tax Income tax (expense)/benefit Net profit after income tax expense attributable to owners of the parent entity Other comprehensive loss Items that may be reclassified subsequently to profit or loss Exchange difference on foreign currency translation Effective portion of changes in fair value of cash flow hedges Income tax on items of other comprehensive (loss)/income Total other comprehensive loss Total comprehensive income for the year attributable to owners of the parent entity Earnings per share information: Basic earnings per share Diluted earnings per share The notes on pages 61 to 92 form an integral part of these consolidated financial statements. Notes 2.2 2.4 3.1 2.5(a) 2.5(b) 2019 $’000 84,324 (21,508) 62,816 (27,089) (10,716) (11,375) 24 1,842 15,502 1,571 (243) 1,328 16,830 (3,228) 13,602 (1,224) 64 (19) (1,179) 12,423 Cents 4.54 4.49 2018 $’000 60,698 (15,407) 45,291 (22,955) (9,734) (9,882) 93 1,549 4,362 1,279 (58) 1,221 5,583 168 5,751 (974) (129) 38 (1,065) 4,686 Cents 1.92 1.91 57 Nanosonics Annual Report 2019 Consolidated statement of financial position As at 30 June 2019 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Cost to obtain customer contracts Income taxes receivable Prepayments and other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Net deferred tax assets Other non-current assets Derivative financial instruments Cost to obtain customer contracts Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Income taxes payable Contract liabilities Employee benefits liabilities Provisions Borrowings Derivative financial instruments Total current liabilities Non-current liabilities Trade and other payables Contract liabilities Employee benefits liabilities Provisions Borrowings Derivative financial instruments Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity The notes on pages 61 to 92 form an integral part of these consolidated financial statements 58 Notes 2019 $’000 2018 $’000 6.1 6.2 7.1 6.3 5.1 7.2 7.3 3.2 6.3 5.1 6.4 5.1 4.2 7.4 6.5 6.3 6.4 5.1 4.2 7.4 6.5 6.3 9.1(a) 72,180 19,700 14,018 189 280 143 2,102 108,612 6,729 799 12,893 37 237 214 20,909 129,521 7,004 82 4,012 3,453 678 445 287 15,961 121 2,532 513 75 76 160 3,477 19,438 110,083 112,713 14,820 (17,450) 110,083 69,433 8,613 8,936 158 — 6 1,364 88,510 5,268 563 14,808 32 — — 20,671 109,181 4,371 46 2,932 3,006 505 424 684 11,968 195 1,678 440 75 522 — 2,910 14,878 94,303 112,713 13,061 (31,471) 94,303 Consolidated statement of changes in equity For the year ended 30 June 2019 Contributed Share-based payments Equity Reserves Foreign currency translation Hedging Total Accumulated losses reserves Total equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 Note 9.1 (a) At 30 June 2017 Profit for the period Other comprehensive loss Income tax on item of other comprehensive loss Total comprehensive income 112,713 11,020 — — — — — — — — Transaction with owners in their capacity as owners Share-based payments On-market share purchase Income tax on share-based payments — — — 2,187 (99) 278 740 — (974) — (974) — — — — — (129) 38 (91) — — — 11,760 (37,222) 87,251 — (1,103) 38 5,751 — — 5,751 (1,103) 38 (1,065) 5,751 4,686 2,187 (99) 278 — — — 2,187 (99) 278 At 30 June 2018 112,713 13,386 (234) (91) 13,061 (31,471) 94,303 At 1 July 2018 Change in accounting policy 1 112,713 13,386 — — At 1 July 2018 restated 112,713 13,386 Profit for the period Other comprehensive (loss)/income Income tax on item of other comprehensive income Total comprehensive income — — — — — — — — (234) — (234) — (1,224) — (1,224) Transaction with owners in their capacity as owners Share-based payments Income tax on share-based payments — — 1,616 1,322 — — (91) — (91) — 64 (19) 45 — — 13,061 (31,471) 94,303 — 419 419 13,061 (31,052) 94,722 — 13,602 13,602 (1,160) (19) — — (1,160) (19) (1,179) 13,602 12,423 1,616 1,322 — — 1,616 1,322 At 30 June 2019 112,713 16,324 (1,458) (46) 14,820 (17,450) 110,083 1. Refer to note 1.2(i) for further information regarding changes in accounting policies. The notes on pages 61 to 92 form an integral part of these consolidated financial statements. 59 Nanosonics Annual Report 2019 Consolidated statement of cash flows For the year ended 30 June 2019 Operating activities Receipts from customers (inclusive of GST/VAT) Payments to suppliers and employees (inclusive of GST/VAT) Interest received Income taxes paid Net cash provided by operating activities 6.1(ii) Notes Investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds from disposal of property, plant and equipment Net cash used in investing activities Financing activities Repayment of borrowings Interest paid Purchase of shares on exercise of performance rights Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year 6.1(i) The notes on pages 61 to 92 form an integral part of these consolidated financial statements. 2019 $’000 75,611 (72,201) 1,555 (139) 4,826 (1,684) (551) 34 (2,201) (425) (36) — (461) 2,164 69,433 583 72,180 2018 $’000 63,618 (55,685) 1,224 (148) 9,009 (2,314) (507) 8 (2,813) (404) (58) (99) (561) 5,635 62,989 809 69,433 60 Notes to the consolidated financial statements 1 GENERAL ACCOUNTING POLICIES This section sets out the Company’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. 1.1 Reporting entity Nanosonics Limited (the Company or Parent Entity) is a listed public company, limited by shares, incorporated and domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2019, comprise the Company and its subsidiaries (together referred to as Nanosonics, the Group or the Consolidated Entity). Nanosonics Limited is a for-profit entity for the purpose of preparing the financial statements. A description of the nature of the Group’s operations and its principal activities is included in the review of operations in the CEO’s report and Regional highlights on pages 6 to 16 of this Annual Report and in the Directors’ Report on page 30. 1.2 Basis of preparation a. Statement of compliance The Financial Report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASB) and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The Board of Directors approved the consolidated financial statements on 27 August 2019. b. Basis of measurement The consolidated financial statements have been prepared on a historical cost basis except for financial assets and financial liabilities including derivative instruments which are measured at fair value. c. Basis of consolidation 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. The financial statements of the subsidiaries are included in the financial statements from the date the control commences until the date that control ceases. Information on subsidiaries is contained in note 10.3 to the financial statements. 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. d. Functional and presentation currency The consolidated financial statements are presented in Australian dollars (AUD), which is Nanosonics Limited’s functional and presentation currency. e. Foreign currency Transactions and balances Foreign currency transactions are translated into the respective functional currencies of the entities using the exchange rates that approximate the actual exchange rates 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 consolidated 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. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Financial statements of foreign operations The results and financial position of foreign operations are translated into the Company’s functional and 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 profit or loss statement are translated at average exchange rates; 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. f. Use of judgements and estimates The preparation of financial statements in conformity with AASB/ IFRS requires management to exercise judgement and make estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, revenues and expenses. 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 and in any future periods affected. 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 included in the following notes: – note 3.2 Deferred taxes – note 4.2 Employee benefits liabilities – note 4.3 Share-based payments – note 5.1 Contract balances – note 7.1 Inventories – note 7.4 Provisions – note 8 Financial risk management 61 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 1 GENERAL ACCOUNTING POLICIES (continued) g. 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. h. Rounding The Company is of a kind referred to in ASIC Instrument 2016/191 issued in 2016 and in accordance with that Instrument, all financial information presented in AUD has been rounded to the nearest thousand dollars ($’000), unless otherwise stated. i. Changes in significant accounting policies The group has adopted the new accounting standards AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments utilising the modified retrospective method with initial application from 1 July 2018. The cumulative effect of adopting the standards has been recorded as an adjustment to the opening balance of retained earnings as set out below. Therefore, the comparative information was not restated and continues to be reported under the previous accounting standards. AASB 15 Revenue from Contracts with Customers Opening balance adjustment as at 1 July 2018 Decrease in contract liabilities Increase in costs to obtain customer contracts Decrease in net deferred tax assets Increase in retained earnings as at 1 July 2018 i, ii iii 1 July 2018 $’000 256 301 (138) 419 The following tables summarise the impact of adopting AASB 15 Revenue from Contracts with Customers on the Group’s statement of financial position as at 30 June 2019 and its statement of profit or loss and other comprehensive income for the year then ended for each of the line items affected. Impact on the consolidated statement of financial position As at 30 June 2019 Assets Costs to obtain customer contracts Net deferred tax assets Others Total assets Liabilities Contract liabilities Others Total liabilities Net assets Equity Accumulated losses Others Total equity 62 Notes As reported $’000 Adjustments $’000 Amounts under previous revenue standard $’000 iii i, ii 494 12,893 116,134 129,521 6,544 12,894 19,438 110,083 (17,450) 127,533 110,083 (494) 189 — (305) 212 — 212 — 13,082 116,134 129,216 6,756 12,894 19,650 (517) 109,566 (517) — (517) (17,967) 127,533 109,566 Notes to the consolidated financial statements 1 GENERAL ACCOUNTING POLICIES (continued) Impact on the consolidated statement of profit or loss and other comprehensive income For the period ended 30 June 2019 Continuing operations Revenue Selling and general expenses Finance expense Income tax expense Others Total comprehensive income Notes As reported $’000 Adjustments $’000 Amounts without adoption of AASB 15 $’000 i, ii iii ii 84,324 (27,089) (243) (3,228) (41,341) 12,423 (158) (191) 203 48 — (98) 84,166 (27,280) (40) (3,180) (41,341) 12,325 i) Under AASB 15, the recognition of revenue on multi-element service contracts occurs upon the fulfilment of distinct performance obligations within service contracts. Certain performance obligations within existing service contracts are recognised at a point in time under AASB 15. These were previously not differentiated and recognised over the contract period. The impact of the change results in an adjustment to service revenue and contract liabilities. ii) Some customers purchase service contracts up-front or enter into multi-period service contracts resulting in the Group holding the payment for periods greater than 12 months in advance of revenue recognition. Under AASB 15, timing between upfront consideration received and the fulfilment of services gives rise to a financing component. The impact of the change results in an adjustment to service revenue, finance costs and contract liabilities. The Group has elected to use the practical expedient related to the existence of significant financing components under the new standard. iii) Under AASB 15, incremental contract costs of sales commissions will be amortised over the contract period. These were previously expensed in the period they are paid or become payable. The impact of the change results in the capitalisation of costs to obtain customer contracts, and a decrease in selling and general expenses. The accounting policy for revenue recognition is set out in note 2.1. AASB 9 Financial Instruments The standard replaces all previous versions of AASB 9 and IAS 39 Financial Instruments: Recognition and Measurement. AASB 9 introduces new classification and measurement models for financial assets. New hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. AASB 9 has changed the assumptions for the Group’s accounting for impairment losses for financial assets by replacing the incurred loss approach with a forward-looking expected credit loss (ECL) approach. Except for derivative financial instruments, the group initially recognises a financial asset, including trade receivables, at fair value and subsequently measures these at amortised cost using the effective interest rate. The Group’s receivables are held to collect contractual cash flows and the cash flows represent solely payments of principal and interest. The accounting policy for derivative financial instruments is set out in note 6.3. The Group assessed the ECL related to each category of receivables. The adoption of AASB 9 has no significant impact to the Group and no adjustments were required in relation to AASB 9. The accounting for the Group’s financial liabilities remains largely the same as it was under AASB 139. 63 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 2 PERFORMANCE FOR THE YEAR 2.1 Revenue AASB 15 establishes a five-step model to account for revenue arising from contracts with customers. Under AASB 15, entities are required to exercise more judgement in developing revenue recognition policies, taking into consideration all the relevant facts and circumstances when applying each step of the model. The Group has revised its accounting policy in line with the requirements of AASB 15. A summary of the impact of the revised accounting policy for the period ended 30 June 2019 is included in note 1.2(i). Revenue from contracts with customers is recognised when the control of goods and services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods and services. Sale of goods The Group’s sales of goods consist of the sale of capital equipment which includes the sale of trophon® and related accessories, and the sale of consumables and spare parts. Revenue is recognised at a point in time when the Group has delivered goods to its customers, and it is probable that consideration will be collected in exchange. Revenue is measured on the consideration expected to be received, net of trade rebates and discounts paid. If the contract includes variable consideration, the variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur which is when the associated uncertainty with the variable consideration is subsequently resolved. Some contracts for the sale of goods provide customers with volume rebates which give rise to variable consideration. The Group provides retrospective volume rebates to certain customers once certain contracted thresholds have been achieved. Rebates are offset against amounts receivable from the customer. To estimate the variable consideration for the expected future rebates, the Group applies the most likely amount method for contracts with a single-volume threshold and the expected value method for contracts with multi-tiered thresholds. The selected method that best predicts the amount of variable consideration is primarily driven by the number of volume thresholds contained in the contract. The Group then applies the requirements on constraining estimates of variable consideration and recognises an offset against trade and other receivables for the expected future rebates. Service The Group’s sale of services is recognised using a proportionate fair value method based on relative standalone selling prices or in certain circumstances, using the residual method of distinct performance obligations within service contracts. Service contracts have separately identifiable performance obligations that are either provided at a point in time or over time. Revenue from the sale of services is recognised when the distinct performance obligation is fulfilled. Financing component The timing between upfront consideration received and the fulfilment of services gives rise to a financing component. Using the practical expedient in AASB 15, the Group does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised good or service to the customer and when the customer pays for that good or service will be one year or less. Some customers purchase service contracts up-front or enter into multi-period service contracts resulting in the Group holding the payment greater than 12 months in advance of revenue recognition. The transaction price for such contracts is discounted, using the rate that would be reflected in a separate financing transaction between the Group and its customers at contract inception, to take into consideration the significant financing component. Interest income Interest income is recognised on a time proportion basis using the effective interest method. Foreign exchange The accounting policy for foreign exchange gains arising from hedges of forecast sales transactions is set out in note 6.3. 2.2 Segment and revenue information Operating segment The Group has identified its operating segments based on the internal reports that are reviewed and used by the Chief Executive Officer & President (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. Accordingly, the Group’s consolidated total assets are the total reportable assets of the operating 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. 64 Notes to the consolidated financial statements 2 PERFORMANCE FOR THE YEAR (continued) Major customers The group has a number of customers to which it provides products and services. The most significant customer accounts for approximately 54% of external revenue (2018: 49.3%). The next most significant customer accounts for approximately 3.4% of external revenue (2018: 4.6%). Geographical information Geographically, the Group operates globally. Australia is the home country of the parent entity. Revenues are allocated based on the country in which the customer is located. Revenue from external customers by geographical location is detailed below: For the year ended 30 June 2019 Capital revenue before hedging Foreign exchange loss on hedged sales Total capital revenue Consumables and spare parts Service Total consumables and service revenue Total revenue At a point in time Over time For the year ended 30 June 2018 Capital revenue before hedging Foreign exchange gain on hedged sales Total capital revenue Consumables and spare parts Service Total consumables and service revenue Total revenue At a point in time Over time North America $’000 Europe and Middle East $’000 Asia Pacific $’000 31,218 (261) 30,957 40,017 5,537 45,554 76,511 74,621 1,890 23,997 49 24,046 27,279 3,081 30,360 54,406 52,431 1,975 1,076 — 1,076 2,194 532 2,726 3,802 3,705 97 891 — 891 1,695 397 2,092 2,983 2,590 393 784 — 784 1,694 1,533 3,227 4,011 3,436 575 610 — 610 1,384 1,315 2,699 3,309 2,007 1,302 Total $’000 33,078 (261) 32,817 43,905 7,602 51,507 84,324 81,762 2,562 25,498 49 25,547 30,358 4,793 35,151 60,698 57,028 3,670 For the purpose of this note, non-current assets consist of property, plant and equipment, intangible assets and other non-current assets excluding net deferred tax asset and derivative financial instruments. Assets and capital expenditure are allocated based on where the assets are located. The analysis of non-current assets by geographical location is detailed below: North America Europe and Middle East Asia Pacific Total 2019 $’000 1,032 1,464 5,283 7,779 2018 $’000 571 518 4,774 5,863 65 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 2 PERFORMANCE FOR THE YEAR (continued) 2.3 Individually significant items The profit from ordinary activities before income tax includes the following expenses: Depreciation, amortisation and impairment Rental expenses relating to operating leases Inventory provision 2.4 Other gains – net 2019 $’000 2,140 1,148 475 2018 $’000 1,499 996 592 Foreign exchange gains and losses are recognised in accordance with the accounting policy at note 1.2(e). Gains or losses on derivative financial instruments are recognised in accordance with the accounting policy referred in note 6.3. Realised gain on derivative financial instruments Unrealised loss on derivative financial instruments Net foreign exchange gain Net gain on foreign currency Gain on disposal of property, plant and equipment Total other gains – net 2.5 Earnings per share 2019 $’000 109 (669) 2,388 1,828 14 1,842 2018 $’000 187 (397) 1,757 1,547 2 1,549 Basic earnings per share (EPS) is calculated by dividing the net profit 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. 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. a) Basic earnings per share Basic earnings attributable to the ordinary equity holders of the parent entity b) Diluted earnings per share Diluted earnings attributable to the ordinary equity holders of the parent entity 2019 Cents 4.54 4.49 2018 Cents 1.92 1.91 $’000 $’000 c) Net earnings used in calculating earnings per share Net profits after income tax expense attributable to owners of the parent entity 13,602 5,751 d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 299,767,940 298,974,730 Adjustments for calculation of diluted earnings per share Performance rights and options Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 3,341,958 2,728,009 303,109,898 301,702,739 Number of shares Number of shares 2.6 Dividends No dividends were proposed, declared or paid during the financial year and to the date of this report (2018: Nil). 66 Notes to the consolidated financial statements 3 INCOME TAXES 3.1 Income tax expense The income tax expense or benefit for the period is the tax payable on or benefit attributable to the current period’s taxable income based on the notional income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses and adjustments in relation to prior periods. Current and any deferred tax utilised are recognised in the consolidated statement of profit or loss except to the extent that they relate to items recognised directly in other comprehensive income or equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. The major components of income tax expense for the period are: Consolidated statement of profit or loss Current income tax Current income tax expense Deferred income tax 2019 $’000 2018 $’000 (11,536) (5,582) Recognition and utilisation of deferred tax assets (net) including origination and reversal of temporary differences 8,079 5,834 Adjustment relating to prior periods Income tax (expense)/benefit reported in the statement of profit or loss Tax relating to item in other comprehensive loss (3,457) 229 (3,228) 252 (84) 168 Deferred tax (expense)/benefit recognised directly in other comprehensive loss relating to derivative financial instruments (19) 38 Tax benefit relating to items in equity Current tax benefit on share-based payments Deferred tax benefit/(expense) on share-based payments Tax benefit charged to equity 113 1,209 1,322 508 (230) 278 The Group first recorded previously unrecognised deferred tax assets in relation to the Australian entities in 2017 and the US entity in 2018 based on an assessment of its operations. Following a further assessment of the operations of the Group for the year ended 30 June 2019, it has been determined that taxable profits will continue to be generated by the Australian and US entities against which tax credits and future deductible temporary differences will be utilised. Following an assessment of the groups Canadian and UK operations, it has been determined that it is probable that taxable profits will be generated by the Canadian and UK subsidiaries against which carried forward tax losses and deductible temporary differences will be utilised. As a result, previously unrecognised deferred tax assets for the Canadian and UK entities were recognised in 2019 to the extent of probable taxable profits. The net deferred tax assets of the Group as at 30 June 2019 amounted to $12,893,000 (2018: $14,808,000) as detailed in note 3.2. 67 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 3 INCOME TAXES (continued) The reconciliation of income tax expense to prima facie tax payable is as follows: Operating profit before income tax from continuing operations The prima facie income tax expense applicable to the operating profit is calculated at the Australian tax rate of 30% (2018: 30%) Increase in income tax expense due to: Non-deductible expenses Research and development Derecognition of deferred tax assets in foreign jurisdictions Effect of tax rate in foreign jurisdictions Decrease in income tax expense due to: Other deductible expenses Utilisation of R&D tax credit in Australia Initial recognition and/or utilisation of deferred tax assets related to foreign subsidiaries Utilisation of unrecognised deferred tax assets in foreign jurisdictions Effect of tax rate in foreign jurisdictions Adjustment relating to prior period Income tax (expense)/benefit 3.2 Deferred taxes 2019 $’000 16,830 2018 $’000 5,583 (5,049) (1,675) (372) (3,412) — — 354 4,710 203 — 109 229 (3,228) (289) (2,964) (794) (535) 2,038 1,981 2,437 53 — (84) 168 Deferred income tax is calculated, 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. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the reporting 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 and tax credits only if it is probable that future taxable amounts will be available to utilise these temporary difference, losses and credits, 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. 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. These are reviewed at each reporting date. An assessment of the operations resulted in the recognition of the deferred tax assets on losses and temporary differences relating to the Australian entity in 2017 and US entity in 2018 and the deferred tax asset on losses of the Canadian and UK entities in 2019 as it has been determined that it is probable that taxable profits will be generated against which these can be utilised. Deferred tax asset and liabilities, if recognised, are classified as non-current assets and liabilities. 68 Notes to the consolidated financial statements 3 INCOME TAXES (continued) As at 30 June 2019, the net deferred tax asset recognised in the statement of financial position comprises: Deferred tax assets Non-refundable R&D tax credits Tax losses in foreign subsidiary tax jurisdictions Share-based payments Employee benefits liabilities Patent costs Provisions for warranties and make good Share issue costs Contract liabilities Inventory provision Deferred rent Derivative financial instruments Future intercompany deductible expenses Others Total deferred tax assets Deferred tax liabilities Unrealised foreign exchange gains Accrued interest and other income Property, plant and equipment Others Total deferred tax liabilities Net deferred tax asset 2019 $’000 4,019 1,139 2,624 975 564 226 2 1,639 235 59 19 1,769 526 13,796 (193) (120) (489) (101) (903) 12,893 2018 $’000 9,915 1,102 1,073 857 605 174 61 1,091 358 73 158 244 126 15,837 (893) (117) (12) (7) (1,029) 14,808 The Group offsets tax assets and liabilities only if it has legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. As at 30 June 2019, the Group has unrecognised deferred tax assets in relation to its subsidiaries as follows: Estimated unrecognised tax losses carried forward: Unrecognised tax losses brought forward at the beginning of the period Adjustment in respect of unrecognised tax losses carried forward relating to prior periods Carried forward tax losses utilised Tax losses for the period related to non-Australian entities Recognition of deferred tax assets on US tax losses Partial recognition of deferred tax assets on Canadian tax losses Partial recognition of deferred tax assets on UK tax losses Estimated unrecognised tax losses carried forward at the end of the period Potential tax benefit at 20.4% effective tax rate (2018: 20.7%) The probability of recovery of unrecognised tax losses in relation to the subsidiaries is reviewed on an on-going basis. 2019 $’000 7,846 212 (928) — — (761) (1,917) 4,452 909 2018 $’000 11,284 (679) (2,237) 3,649 (4,171) — — 7,846 1,628 69 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 4 EMPLOYEE BENEFITS 4.1 Staffing costs Staffing costs included in the profit or loss statement consist of: Salaries and wages Termination benefits Superannuation, pension and social security contribution Workers’ compensation Payroll tax Insurance premiums Other employee benefits and staffing costs Share-based payments The above staffing costs have been broken down into: Cost of sales Selling and general expenses Administration expenses Research and development expenses 4.2 Employee benefits liabilities i) Wages, salaries and annual leave 2019 $’000 26,299 329 2,760 172 1,056 1,154 3,774 1,616 2018 $’000 22,093 544 2,204 154 985 828 3,149 2,187 37,160 32,144 6,009 17,343 6,703 7,105 37,160 4,514 15,026 5,757 6,847 32,144 Liabilities for employee benefits, including wages, salaries and non-monetary benefits, and accumulated annual and other leave, represent present obligations resulting from employees’ services provided to the reporting date. Employee benefits have been measured at the amounts expected to be paid when the liabilities are settled and are recognised in the provision for employee benefits. The liability is calculated on remuneration rates as at the reporting date, including related on-costs such as workers’ compensation insurance and payroll tax. ii) 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 on corporate bonds at the reporting date with terms to maturity that match, as closely as possible, the estimated future cash outflows. The current portion of this liability includes the unconditional entitlements to long service leave where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. iii) 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. iv) 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. Short-term and long-term classification of benefits Benefits that are expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service are classified as short-term employee benefits. Short-term employee benefits are accounted for on an undiscounted basis in the period in which the service is rendered. Long-term employee benefits are benefits that are not expected to be wholly settled within 12 months, are discounted allowing for expected salary levels in the future period. Cash bonuses are classified as short-term employee benefits while annual leave and long service leave are long-term employee benefits. 70 Notes to the consolidated financial statements 4 EMPLOYEE BENEFITS (continued) Employee benefits liabilities as at the reporting date: Provision for annual leave Provision for long service leave Provision for bonuses Total employee benefits liabilities 4.3 Share-based payments 2019 Current Non-current $’000 $’000 1,818 162 1,473 3,453 — 513 — 513 Total $’000 1,818 675 1,473 3,966 2018 Current Non-current $’000 $’000 1,471 200 1,335 3,006 — 440 — 440 Total $’000 1,471 640 1,335 3,446 Share-based compensation benefits are equity-settled transactions provided to employees via the Nanosonics share-based compensation plans. i) Share-based compensation plans On 4 November 2016, the Nanosonics Omnibus Equity Plan (NOEP) was adopted following approval by shareholders. The Omnibus Plan allows the Board to issue a range of incentive awards with the purpose of providing competitive, performance-based remuneration in alignment with the interests of shareholders. The NOEP is intended to replace existing plans and will operate in accordance with the terms of the Nanosonics Omnibus Equity Plan Trust Deed, under which the trustee may subscribe for, or acquire, deliver, allocate or hold, shares for the benefit of the participants. Participants will be able to access the relevant taxation concessions available under the Income Tax Assessment Act 1997 (ITAA 1997). Under the NOEP Plan, eligible employees (including Executive Directors, casual employees and certain contractors) may be offered shares in Nanosonics Limited (Share Awards), Performance Share Awards, options or rights. Participation in the NOEP is at the Board’s discretion and no individual has a contractual right to participate in it or to receive any guaranteed benefits. The Company also has the Nanosonics Employee Share Option Plan (ESOP) which was established in 2007 and last approved by the shareholders on 8 November 2013. The ESOP is being phased out and replaced by the NOEP. No further offers will be made under the ESOP. ii) Exercise of performance rights and options Performance rights and options are granted under the NOEP for no consideration and carry no dividend or voting rights. When exercisable, each performance right and 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 performance rights and options issued to the date of this report were fixed on the dates the performance rights and options were granted. Performance rights and options granted under the NOEP requires the holder to be an employee of the Company at the time the performance rights and options are exercised, except that they may be exercised, if vested up to 12 months from the last date of employment provided it is a Qualifying Event (as defined in the NOEP plan rules to include death, serious injury/illness, retirement, retrenchment or as otherwise determined by the Board). iii) Reconciliation of outstanding performance rights and options The number and weighted average exercise price (WAEP) of performance rights and options under the share option plans were as follows: NOEP ESOP All Plans 2019 2018 2019 2018 2019 2018 Number Number Number Number of options WAEP ($) and rights of options WAEP ($) and rights of options WAEP ($) and rights of options WAEP ($) and rights Unexpired as at 1 July 2,293,411 Granted during the year 1,890,430 Exercised during the year (179,178) 1.35 2.53 — 1,070,230 1,601,972 (201,843) Forfeited during the year (385,822) 1.30 (176,948) Unexpired as at 30 June 3,618,841 2.04 2,293,411 1.32 1.25 — 1.77 1.35 966,542 — (443,022) (138,732) 384,788 Exercisable at 30 June 127,011 — 21,799 — 384,788 — — — — — — 2,452,292 — (1,461,033) (24,717) 966,542 — — — — — — — Number Number of options of options and rights and rights 3,259,953 3,522,522 1,890,430 1,601,972 (622,200) (1,662,876) (524,554) (201,665) 4,003,629 3,259,953 511,799 21,779 622,200 performance rights and options were exercised in 2019. The weighted average share price based on the dates of the exercise was $3.29 (2018: $2.49). No performance rights or options expired during the periods covered by the above table. 71 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 4 EMPLOYEE BENEFITS (continued) Performance rights and options outstanding at the end of the year have the following expiry dates and exercise prices: Exercise price ($) 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 Option Plan Description NOEP 2019 Special Award NOEP 2019 Special Award Grant date 28 May 19 28 May 19 NOEP 2018 LTIS Tranche 1 – CEO 9 Nov 18 NOEP 2018 LTIS Trance 1 – Others 4 Feb 19 NOEP 2018 LTIS Tranche 2 – CEO 9 Nov 18 NOEP 2018 LTIS Tranche 2 – Others 4 Feb 19 NOEP 2018 Deferred STI – CEO NOEP 2018 Deferred STI – CEO 9 Nov 18 9 Nov 18 NOEP 2018 Deferred STI – Others 22 Nov 18 NOEP 2017 LTIS Tranche 1 – CEO NOEP 2017 LTIS Tranche 2 – CEO 3 Nov 17 3 Nov 17 NOEP 2017 LTIS Tranche 1 – Others 9 Feb 18 NOEP 2017 LTIS Tranche 2 – Others 9 Feb 18 NOEP 2017 LTIS Trance 1 – CEO NOEP 2017 LTIS Tranche 2 – CEO 3 Nov 17 3 Nov 17 NOEP 2017 LTIS Tranche 1 – Others 9 Feb 18 NOEP 2017 LTIS Tranche 2 – Others 9 Feb 18 NOEP 2017 Deferred STI – CEO 3 Nov 17 NOEP 2017 Deferred STI – Others 11 Jan 18 NOEP 2016 Deferred STI NOEP 2016 LTIS Tranche 1 NOEP 2016 LTIS Tranche 2 NOEP 2016 LTIS Tranche 3 NOEP 2016 LTIS Tranche 1 NOEP 2016 LTIS Tranche 2 NOEP 2016 LTIS Tranche 3 ESOP 2015 LTIS Tranche 1 ESOP 2015 LTIS Tranche 2 Total 5 Jan 17 5 Jan 17 5 Jan 17 5 Jan 17 5 Jan 17 5 Jan 17 5 Jan 17 4 Jan 16 4 Jan 16 — — 3.44 3.44 — — — — — — — — — 2.38 2.38 2.38 2.38 — — — 2.85 2.85 2.85 — — — — — 4.41 4.41 0.80 0.86 1.24 1.41 3.21 3.21 2.97 2.16 2.04 1.95 1.75 1.00 1.02 4 Mar 25 04 Feb 25 30 Sep 24 30 Sep 24 30 Sep 24 30 Sep 24 31 Aug 22 31 Aug 23 31 Aug 22 31 Aug 23 31 Aug 23 — — — — — — — — — 12,867 12,866 31 Aug 23 204,104 31 Aug 23 204,089 31 Aug 23 170,212 31 Aug 23 170,212 0.84 31 Aug 23 204,830 0.79 2.81 2.75 3.07 1.00 31 Aug 23 204,827 31 Aug 21 45,513 31 Aug 21 249,347 1 Sep 20 21,779 31 Aug 22 115,519 0.98 31 Aug 22 115,517 31 Aug 22 231,038 31 Aug 22 82,676 31 Aug 22 82,662 31 Aug 22 165,353 1.05 2.59 2.33 3.07 1.46 1.06 59,368 60,837 286,885 1,105,411 20,900 120,047 16,502 16,501 203,979 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 59,368 60,837 286,885 (62,367) 1,043,044 — 20,900 (12,107) 107,940 — — 16,502 16,501 (22,976) 181,003 — — 12,867 12,866 — (48,319) 155,785 — (48,314) — — — — — (38,654) — (38,654) — — (171,044) (9,628) (8,134) (822) 155,775 170,212 170,212 166,176 166,173 45,513 68,675 12,823 — — — — — — (8,428) 107,091 (8,427) 107,090 (16,855) (17,568) (17,566) (35,137) 214,183 65,108 65,096 130,216 — — — — — — — — — — — — — — — — — 45,513 68,675 12,823 — — — — — — 31 Aug 21 1 483,265 — (229,245) (69,366) 184,654 184,654 31 Aug 21 1 483,277 — (213,777) (69,366) 200,134 200,134 3,259,953 1,890,430 (622,200) (524,554) 4,003,629 511,799 1. At the 2017 Annual General Meeting held on 3 November 2017, the Company’s shareholders approved a change to the terms of the 2015 LTIS, which provide for vesting on 31 August 2018, by removing the “deemed” exercise provisions and extending the expiry date for exercise of vested Performance Rights from 30 September 2018 to August 2021. All the terms and conditions of 2015 LTIS remained the same. iv) Fair values Fair values of performance rights and options granted The assessed fair value on the date performance rights and options were granted was independently determined using an appropriate valuation model that takes into account relevant inputs including the exercise price, the term of the performance right or option, the impact of dilution, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the performance right or option. 72 Notes to the consolidated financial statements 4 EMPLOYEE BENEFITS (continued) The inputs used in the measurement of the fair values at the grant date are the following: Exercise price ($) Grant date Vesting date Estimated share price at grant date ($) Expiry date Expected price volatility of the Company’s shares % Valuation model Expected dividend yield % Risk-free interest rate % Assessed fair value at grant date ($) — 28 May 19 4 Mar 22 4 Mar 25 4.41 Black-Scholes 37.76 0.00 — 28 May 19 4 Mar 22 4 Mar 25 4.41 Black-Scholes 37.76 0.00 1.12 1.12 4.41 4.41 3.44 9 Nov 18 30 Sep 21 30 Sep 24 3.21 Monte Carlo 41.09 0.00 2.19 0.80 3.44 4 Feb 19 30 Sep 21 30 Sep 24 3.46 Monte Carlo 40.09 0.00 1.74 0.86 — 9 Nov 18 30 Sep 21 30 Sep 24 3.21 Monte Carlo 37.34 0.00 2.19 1.24 — 4 Feb 19 30 Sep 21 30 Sep 24 3.46 Monte Carlo 37.63 0.00 1.74 1.41 — 22 Nov 18 31 Aug 19 31 Aug 22 2.97 Black-Scholes 36.67 0.00 2.19 2.97 — 9 Nov 18 31 Aug 20 31 Aug 23 3.21 Black-Scholes 36.67 0.00 2.19 3.21 — 22 Nov 18 31 Aug 19 31 Aug 22 2.97 Black-Scholes 37.34 0.00 2.14 2.97 Plan Description Vesting Conditions Granted during the year: NOEP NOEP 2019 Special Award 2019 Special Award Service Service Absolute CAGR TSR performance and service Absolute CAGR TSR performance and service Absolute CAGR TSR performance and service Absolute CAGR TSR performance and service NOEP 2018 LTIS Tranche 1 – CEO NOEP 2018 LTIS Tranche 1 – Others NOEP 2018 LTIS Tranche 2 – CEO NOEP NOEP NOEP NOEP 2018 LTIS Tranche 2 – Others 2018 Deferred STI – CEO 2018 Deferred STI – CEO 2018 Deferred STI – Others Service Service Service Granted in prior periods and unexpired at report date: NOEP 2017 LTIS Tranche 1 – CEO NOEP 2017 LTIS Tranche 2 – CEO NOEP 2017 LTIS Tranche 1 – Others NOEP 2017 LTIS Tranche 2 – Others NOEP 2017 LTIS Tranche 1 – CEO NOEP 2017 LTIS Tranche 2 – CEO NOEP 2017 LTIS Tranche 1 – Others 2017 LTIS Tranche 2 – Others Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service Relative TSR performance and service — 3 Nov 17 31 Aug 20 31 Aug 23 2.81 Monte Carlo 35.00 0.00 1.90 2.16 — 3 Nov 17 31 Aug 20 31 Aug 23 2.81 Monte Carlo 35.00 0.00 1.90 2.04 — 9 Feb 18 31 Aug 20 31 Aug 23 2.67 Monte Carlo 34.00 0.00 2.10 1.95 — 9 Feb 18 31 Aug 20 31 Aug 23 2.67 Monte Carlo 34.00 0.00 2.10 1.75 2.38 3 Nov 17 31 Aug 20 31 Aug 23 2.81 Monte Carlo 35.00 0.00 2.10 1.00 2.38 3 Nov 17 31 Aug 20 31 Aug 23 2.81 Monte Carlo 35.00 0.00 2.10 1.02 2.38 9 Feb 18 31 Aug 20 31 Aug 23 2.67 Monte Carlo 35.00 0.00 2.30 0.84 2.38 9 Feb 18 31 Aug 20 31 Aug 23 2.67 Monte Carlo 35.00 0.00 2.30 0.79 2017 Deferred STI – CEO 2017 Deferred STI – Others Service Service — 3 Nov 17 31 Aug 18 31 Aug 21 2.81 Black-Scholes 31.00 0.00 1.70 2.81 — 11 Jan 18 31 Aug 18 31 Aug 21 2.75 Black-Scholes 30.00 0.00 1.70 2.75 73 NOEP NOEP NOEP Nanosonics Annual Report 2019 Notes to the consolidated financial statements 4 EMPLOYEE BENEFITS (continued) Exercise price ($) Grant date Vesting date Estimated share price at grant date ($) Expiry date Expected price volatility of the Company’s shares % Valuation model Expected dividend yield % Risk-free interest rate % Assessed fair value at grant date ($) Plan Description Vesting Conditions NOEP 2016 LTIS Tranche 1 NOEP NOEP 2016 LTIS Tranche 2 2016 LTIS Tranche 3 Relative TSR performance and service Relative TSR performance and service Pre-tax EPS and service 2.85 5 Jan 17 31 Aug 19 31 Aug 22 3.07 Monte Carlo 35.80 0.00 2.00 1.00 2.85 5 Jan 17 31 Aug 19 31 Aug 22 3.07 Monte Carlo 35.80 0.00 2.00 0.98 NOEP 2016 Deferred STI Service — 5 Jan 17 1 Sep 17 1 Sep 20 2.85 5 Jan 17 31 Aug 19 31 Aug 22 3.07 3.07 Black-Scholes Black-Scholes 35.80 35.80 0.00 0.00 2.00 2.00 1.05 3.07 NOEP 2016 LTIS Tranche 1 NOEP NOEP 2016 LTIS Tranche 2 2016 LTIS Tranche 3 ESOP 2015 LTIS Tranche 1 ESOP 2015 LTIS Tranche 2 Relative TSR performance and service Relative TSR performance and service Pre-tax EPS and service Relative TSR performance and service Relative TSR performance and service Fair values of shares granted — 5 Jan 17 31 Aug 19 31 Aug 22 3.07 Monte Carlo 35.80 0.00 2.00 2.59 — 5 Jan 17 31 Aug 19 31 Aug 22 3.07 Monte Carlo 35.80 0.00 2.00 2.33 — 5 Jan 17 31 Aug 19 31 Aug 22 3.07 Black-Scholes 35.80 0.00 2.00 3.07 — 4 Jan 16 31 Aug 18 31 Aug 21 1.67 Monte Carlo 37.50 0.00 2.00 1.46 — 4 Jan 16 31 Aug 18 31 Aug 21 1.67 Monte Carlo 37.50 0.00 2.00 1.06 The issue price for shares granted is calculated as the 5-day volume 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. v) Recognition of expenses Recognition of expense of performance rights and options granted The fair value of performance rights and options granted is recognised as an employee expense with a corresponding increase in equity, on a straight line monthly basis over the vesting period in which the performance and/or service conditions are fulfilled after which the employees become unconditionally entitled to them. 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 ended and the Group’s best estimate of the number of equity instruments that will ultimately vest. The 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. Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were 1,616,000 (2018: $2,187,000). During the financial year there were no shares directly granted under the NOEP (2018: Nil). vi) Summary of shares issued by the trustee Shares issued on the exercise of performance rights and options granted to employees are initially held by the trustee of the NOEP or ESOP, Sargon CT Pty Ltd. Following is a reconciliation of shares held by the trustee of the NOEP and ESOP: Employee shares on issue at 1 July Issued on exercise of performance rights and options during the year On market purchase of shares on exercise of performance rights during the year Withdrawn during the year Employee shares on issue at 30 June 74 2018 Number of shares Number of shares 2019 1,106,449 622,200 — 2,153,926 1,612,124 36,823 (907,216) (2,696,424) 821,433 1,106,449 Notes to the consolidated financial statements 5 ASSETS AND LIABILITIES RELATED TO CONTRACTS WITH CUSTOMERS 5.1 Contract balances The Group’s accounting policy relating to trade and other receivables is detailed in note 6.2. Costs to obtain customer contracts include sales commissions paid to employees and are amortised over the customer contract period. Costs to obtain customer contracts expected to be amortised within 12 months of the reporting period are classified as current. Assets related to contracts with customers are as follows: 2019 Current Non-current $’000 $’000 Trade and other receivables Cost to obtain customer contracts 19,700 280 Total assets related to contracts with customers 19,980 — 214 214 Total $’000 19,700 494 20,194 2018 Current Non-current $’000 $’000 8,613 — 8,613 — — — Total $’000 8,613 — 8,613 Contract liabilities are the obligation to transfer goods and services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer. Contract liabilities expected to be realised within 12 months of the reporting period are classified as current. Liabilities related to contracts with customers are as follows: 2019 Current Non-current $’000 $’000 Contract liabilities 4,012 Total liabilities related to contracts with customers 4,012 2,532 2,532 Total $’000 6,544 6,544 2018 Current Non-current $’000 $’000 2,932 2,932 1,678 1,678 Revenue recognised that was included in the contract liability balance at the beginning of the period 6 FINANCIAL ASSETS AND FINANCIAL LIABILITIES 6.1 Cash and cash equivalents 2019 $’000 3,044 Total $’000 4,610 4,610 2018 $’000 1,697 For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and 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. i) Cash and cash equivalents Cash and cash equivalents at the reporting date as shown in the consolidated statements of cash flows and financial position are as follows: Cash at bank and on hand Deposit on call Short-term deposits Total cash and cash equivalents 2019 $’000 11,626 1,054 59,500 72,180 2018 $’000 13,812 2,130 53,491 69,433 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 8(a)(ii). The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. 75 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 6 FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) ii) Reconciliation of profit before income tax to net cash inflow from operating activities Operating profit before income tax Adjustment for: Depreciation and amortisation Share-based payments Borrowing costs Gain on disposal of property, plant and equipment Income tax paid Unrealised gain on foreign exchange movements Changes in assets and liabilities (Increase)/decrease in derivative financial instruments (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories (Increase)/decrease in prepayments and other current assets (Increase)/decrease in other non-current assets Increase/(decrease) in trade and other payables Increase/(decrease) in contract balances Increase/(decrease) in employee benefit liabilities Increase/(decrease) in provisions Net cash provided by operating activities iii) Credit standby arrangements unused Facility limits: Borrowing facilities Guarantee facility Facility remaining available: Borrowing facilities Guarantee facility 2019 $’000 16,830 2,140 1,616 36 (14) (139) (1,874) (441) (10,909) (6,671) (888) (5) 2,538 1,955 478 174 4,826 2019 $’000 620 475 99 14 2018 $’000 5,583 1,499 2,187 58 (2) (148) (1,892) 735 586 (1,963) 33 (10) 539 1,533 295 (24) 9,009 2018 $’000 2,115 475 1,170 14 The terms of the borrowing facility are described in note 6.5 6.2 Trade and other receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Loans and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. If collection of the amounts is expected in one year or less; they are classified as current assets, otherwise they are presented as non-current assets. Trade receivables are measured at amortised cost using the effective interest rate method. Trade receivables generally have 30 to 60 days credit terms and therefore are all classified as current. Due to the short-term nature of the receivables, their carrying amount is assumed to be the same as their fair value. 76 Notes to the consolidated financial statements 6 FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) Information about the impairment of trade and other receivables, their credit quality and the Group’s exposure to credit risk, foreign currency risk and interest rate risk is provided in note 8. Trade receivables net of allowance for impairment loss GST/VAT receivables Interest and other receivables Total trade and other receivables 6.3 Derivative financial instruments 2019 $’000 18,620 658 422 19,700 2018 $’000 7,525 658 430 8,613 The Group uses derivative financial instruments (foreign 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 foreign 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 profit or loss 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. 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 the profit or loss statement. – 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 the profit or loss statement. – If the forward exchange contract no longer meets the criteria for hedge accounting, expires, is terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs or when cash flows arising from the transactions are received. – For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the statement of profit or loss in the same period the hedged transactions affect the profit or loss on the same line item as the hedged transactions. The Group uses the following hierarchy 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. All of the Group’s foreign exchange forward contracts and options were valued using market comparison technique (Level 2) and there were no transfers between levels during the year. The fair values are based on third party independent valuations. Similar contracts are traded in an active market and the independent valuations reflect the actual transactions in similar instruments. 2019 2018 Current Non-current $’000 $’000 Total $’000 Current Non-current $’000 $’000 Total $’000 Derivative financial assets as follows: Derivative financial instruments 189 237 426 158 Derivative financial liabilities as follows: Derivative financial instruments 287 160 447 684 — — 158 684 77 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 6 FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) 6.4 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 payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 60 days of recognition. Amounts due to be settled within 12 months after the reporting period are classified as current. The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their short-term nature. 2019 Current Non-current $’000 $’000 3,225 75 3,704 7,004 — 121 — 121 Total $’000 3,225 196 3,704 7,125 2018 Current Non-current $’000 $’000 1,836 48 2,487 4,371 — 195 — 195 Total $’000 1,836 243 2,487 4,566 Trade payables Lease straight-lining liabilities Other payables Total trade and other payables 6.5 Borrowings Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequently loans and borrowings are stated at amortised cost using the effective interest method. Amounts due to be settled within 12 months after the reporting period are classified as current. 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. Finance leases – secured Current Non-current Total borrowings 2019 $’000 2018 $’000 445 76 521 424 522 946 On 21 September 2015, the Company entered into a finance lease arrangement with its bank for the leasehold improvements of its global corporate and manufacturing facility in Lane Cove, NSW, Australia for $2,048,000 repayable in fixed monthly instalments for a period of 5 years at 4.92% per annum. This borrowing is secured by the leasehold improvements included in property, plant and equipment. Finance lease liabilities at the end of the year are as follows: 2019 2018 Minimum payments $000 Present value of payments $000 Minimum payments $000 Present value of payments $000 Within 1 year After 1 year but not more than 5 years Total minimum lease payments Less future finance charges Present value of minimum lease payments 461 77 538 (17) 521 445 76 521 — 521 Finance leases liability at 1 July Interest charged Repayment of borrowings Interest paid Finance leases liability at 30 June 461 538 999 (53) 946 2019 $’000 946 36 (425) (36) 521 424 522 946 — 946 2018 $’000 1,350 58 (404) (58) 946 The carrying value of the finance lease liability is considered to approximate its fair value because the interest payable on this borrowing is close to current market rates. 78 Notes to the consolidated financial statements 7 OPERATING ASSETS AND LIABILITIES 7.1 Inventories Inventories are measured at the lower of cost and net realisable value. Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location. In the case of manufactured inventory and work in progress, cost includes materials, labour and an appropriate level of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion, selling, marketing and distribution expenses. Raw materials and stores Work in progress Finished goods Total inventories 2019 $’000 7,763 168 6,087 14,018 2018 $’000 3,861 386 4,689 8,936 Inventories recognised as an expense (cost of sales) during the year ended 30 June 2019 amounted to $16,978,000 (2018: $12,531,000). Management has performed an assessment of inventories held for the year ended 30 June 2019 including the impact of the introduction of the second generation of trophon® in the current year and recognised write-downs during the year of $475,000 (2018: $592,000). The expense has been included in selling and general expenses in the profit or loss statement. 7.2 Property, plant and equipment i) Owned assets All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment losses. 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 asset is derecognised when it is replaced. All other repairs and maintenance are charged to the profit or loss 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 for more than one period. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the profit or loss statement. ii) Leased assets 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 liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as finance costs in the profit or loss statement. 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 expensed on a straight-line basis over the term of the lease. Minimum lease payments include fixed rate increases. iii) Depreciation 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. Depreciation is expensed. The depreciation rates or useful lives used in the current and comparative years are as follows: leasehold improvements over the lease term; and plant and equipment 2 to 7 years. The assets’ residual values, useful lives and depreciation methods are reviewed prospectively and adjusted, if appropriate, at least annually. iv) Impairment The Group assesses at each reporting date whether there is an indication that an asset may be impaired. Non-financial assets, other than intangibles, 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 its 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. 79 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 7 OPERATING ASSETS AND LIABILITIES (continued) Total property, plant and equipment at net book amount Leasehold improvements $’000 Plant and equipment $’000 Capital work in progress $’000 Year ended 30 June 2018 Opening net book amount Additions Retirement and others Transfers Depreciation charge Foreign currency translation effect (net) Closing net book amount at 30 June 2018 At 30 June 2018 Cost or fair value Impairment Accumulated depreciation Net book amount at 30 June 2018 Year ended 30 June 2019 Opening net book amount Additions Retirement and others Transfers Depreciation charge Foreign currency translation effect (net) Closing net book amount at 30 June 2019 At 30 June 2019 Cost or fair value Impairment Accumulated depreciation Net book amount at 30 June 2019 7.3 Intangible assets i) Research and development 1,644 60 — — (404) 2 1,302 2,495 — (1,193) 1,302 1,302 295 — — (448) 1 1,150 2,791 — (1,641) 1,150 1,157 2,875 (6) 650 (870) 8 3,814 8,278 (45) (4,419) 3,814 3,814 2,404 (20) 157 (1,375) 10 4,990 10,829 (45) (5,794) 4,990 663 139 — (650) — — 152 152 — — 152 152 589 — (157) — 5 589 589 — — 589 Total $’000 3,464 3,074 (6) — (1,274) 10 5,268 10,925 (45) (5,612) 5,268 5,268 3,288 (20) — (1,823) 16 6,729 14,209 (45) (7,435) 6,729 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. ii) Patents and trademarks The costs of registering and protecting patents and trademarks are recognised as intangible assets when it is probable that the patent or trademark will, after considering it commercial and technical feasibility, be completed and generate future economic benefits and its cost can be measured reliably. Otherwise, these are expensed as incurred. iii) ERP system and computer software The expenditure incurred on the Group’s Enterprise Resource Planning (ERP) system and computer software and the costs necessary for the implementation of the system are recognised as an intangible asset, to the extent Nanosonics controls future economic benefits as a result of the costs incurred, and are stated at cost less accumulated amortisation. Costs include expenditure that is directly attributable to the development and implementation of the system. 80 Notes to the consolidated financial statements 7 OPERATING ASSETS AND LIABILITIES (continued) iv) Amortisation Amortisation is calculated to expense the cost of the intangible assets less its estimated residual values on a straight line basis over their estimated useful lives. The estimated useful lives for the current and comparative years are as follows: development costs 5 years and ERP system and computer software 3 years. Amortisation is recognised in the profit or loss statement from the date the asset is available for use unless their lives are indefinite. Intangible assets with an indefinite useful life are tested annually for impairment. v) Impairment Intangible assets are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. No impairment of intangibles were assessed during the period (2018: Nil). Total intangible assets at net book amount Year ended 30 June 2018 Opening net book amount Additions Amortisation Foreign currency translation effect (net) Closing net book amount at 30 June 2018 At 30 June 2018 Cost Accumulated depreciation Net book amount at 30 June 2018 Year ended 30 June 2019 Opening net book amount Additions Amortisation Foreign currency translation effect (net) Closing net book amount at 30 June 2019 At 30 June 2019 Cost or fair value Accumulated depreciation Net book amount at 30 June 2019 7.4 Provisions i) General Development Costs $’000 ERP and Computer Software $’000 — — — — — 201 (201) — — — — — — 201 (201) — 281 507 (225) — 563 1,977 (1,414) 563 563 551 (317) 2 799 2,530 (1,731) 799 Total $’000 281 507 (225) — 563 2,178 (1,615) 563 563 551 (317) 2 799 2,731 (1,932) 799 Provisions 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 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. 81 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 7 OPERATING ASSETS AND LIABILITIES (continued) ii) Provision for warranty Provision for warranty related costs are made in respect of the Group’s estimated liability on all products sold or services provided under warranty at the reporting 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. iii) Provision for make good The Group has operating leases over its offices that require the premises to be returned to the lessor in their original condition. The operating lease payments do not include an element for repairs or make good. A provision for make good lease costs is recognised at the time it is determined that it is probable that such costs will be incurred in a future year, measured at the expected cost of returning the asset to the lessor in its original condition. An offsetting asset of the same value is also recognised and is classified in property, plant and equipment. This asset is amortised to the profit or loss statement over the life of the lease. a. Provisions as at the reporting date Provision for warranty Make good provision Total provisions b. Movements in provisions Carrying amount at the beginning of the year Additional provisions recognised Amounts used during the period Carrying amount at end of the year 2019 2018 Current Non-current $’000 $’000 Total $’000 Current Non-current $’000 $’000 678 — 678 — 75 75 678 75 753 505 — 505 — 75 75 Provision for warranty $’000 Make good provision $’000 505 325 (152) 678 75 — — 75 Total $’000 505 75 580 Total $’000 580 325 (152) 753 The Group has recognised a provision for warranty consistent with the policy applied in prior periods. 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 the balance date. 8 FINANCIAL RISK MANAGEMENT The Group is exposed to a variety of financial risks, including market risk (comprising foreign currency risk and interest rate risk), credit risk and liquidity risk. The Board of Directors has overall responsibility for Group’s risk management framework. Responsibility for the development and implementation of controls to address risks is assigned to the Audit and Risk Committee. The responsibility is supported by the development of standards, policies and procedures for the management of these risks. The financial risk management policies of the Group are consistent with prior periods. Management have identified that foreign currency risk and credit risk on receivables are material to the Group. a) Market risk Market risk is the risk that changes in market prices will affect the Group’s financial performance. i) Foreign currency risk 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 expenses are denominated in a currency other than the Group’s functional currency) and the Group’s net investments in foreign subsidiaries. The Group enters into foreign currency contracts to mitigate its foreign currency risk on its net cash flows. 82 Notes to the consolidated financial statements 8 FINANCIAL RISK MANAGEMENT (continued) Exposure The Group’s primary exposure to foreign currency risk in the consolidated balance sheet at the end on the reporting period mainly comprised: 2019 USD $’000 2,095 12,977 (952) GBP £’000 2,260 283 (118) EUR € ‘000 CAD $’000 488 310 (203) 898 270 (166) USD $’000 6,951 4,098 (486) 14,120 2,425 595 1,002 10,563 2018 GBP £’000 EUR € ‘000 603 450 (178) 875 242 360 (230) 372 CAD $’000 1,043 335 (106) 1,272 19,420 — — — 9,789 — — — Cash and cash equivalents Trade and other receivables Trade and other payables Foreign currency forward contracts and options to buy/sell USD Sensitivity The following table demonstrates the sensitivity to a reasonable possible change in the USD, EUR, GBP and CAD against the AUD, with all other variables held constant. Impact on post-tax profit Impact on other components of equity Change in USD rate Increase 5% Decrease 5% Change in GBP rate Increase 5% Decrease 5% Change in EUR rate Increase 5% Decrease 5% Change in CAD rate Increase 5% Decrease 5% 2019 ’000 2,124 (2,222) 608 (550) 35 (32) 146 (132) 2018 ’000 1,410 (1,333) 336 (304) 90 (81) 131 (118) 2019 ’000 (606) 549 (638) 577 — — (151) 137 2018 ’000 (520) 470 (399) 361 (98) 88 (118) 107 Post-tax profit and other components of equity is most sensitive to movements in the Australian dollar/US dollar exchange rates because of the increased amount of US dollar denominated sales, trade receivables and bank balances. The sensitivity analysis above takes into account foreign currency denominated intercompany receivables and payables which do not form part of a net investment in foreign operations as although intercompany balances are eliminated in the consolidated balance sheet, the effect on profit or loss of their revaluation is not fully eliminated. The Group’s exposure to movement in other foreign currencies are not material. 83 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 8 FINANCIAL RISK MANAGEMENT (continued) ii) Interest rate risk The Group’s main interest rate risk arises from the cash reserves in the operating bank accounts and short-term deposits, which expose the Group to cash flow interest rate risk. The Group’s exposure to interest rate risk is summarized below: Fixed interest rate maturing in: Floating interest rate $’000 Notes 1 year or less $’000 Over 1 to 5 years $’000 More than Non-interest bearing $’000 5 years $’000 2019 Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments 6.1 6.2 6.3 12,680 59,500 — — — — Total financial assets 12,680 59,500 Weighted average interest rate 0.13% 2.43% Financial liabilities Trade and other payables Borrowings Derivative financial instruments Total financial liabilities Weighted average interest rate 6.4 6.5 6.3 — — — — — Net financial assets/(liabilities) 12,680 59,055 (76) 4.92% 4.92% — — — — — 76 — 76 Total $’000 72,180 19,700 426 — 19,700 426 20,126 92,306 7,125 — 447 7,572 — 7,125 521 447 8,093 — 12,554 84,213 — — — — — — — — — — 2018 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 Borrowings Derivative financial instruments Total financial liabilities Weighted average interest rate Fixed interest rate maturing in: Floating interest rate $’000 Notes 1 year or less $’000 Over 1 to 5 years $’000 More than Non-interest bearing $’000 5 years $’000 15,942 53,491 6.1 6.2 6.3 6.4 6.5 6.3 — — 15,942 0.22% — — — — — — — — — — — 522 — 522 4.92% (522) — — — — — — — — — — — — 8,613 158 8,771 4,566 — 684 5,250 — 3,521 Total $’000 69,433 8,613 158 78,204 4,566 946 684 6,196 — 72,008 Net financial assets/(liabilities) 15,942 Sensitivity The profit or loss statement is sensitive to higher/lower interest income from cash and cash equivalents as a result of changes in interest rates. For the year ended 30 June 2019, it is estimated that a general increase of 25 basis points in interest rates would have increased the Group’s profit after tax and equity by $124,000 (2018: $116,000). A decrease of 25 basis points in interest rates would have had the equal but opposite effect on the Group’s profit after tax and equity. 84 — 445 — 445 — — 53,491 2.63% — 424 — 424 4.92% 53,067 Notes to the consolidated financial statements 8 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk Credit risk is the risk of financial loss to Nanosonics if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises from cash and cash equivalents, favourable derivative financial instruments, deposits with banks and financial institutions, and credit exposures to customers. The maximum exposure to credit risk as at the reporting date is the carrying amount of the financial assets as described in note 6. The Company exposure to credit risk is influenced mainly by the geographical location, the type and characteristics of individual customers. Maximum exposure to credit risk for trade receivable by geographical region was as follows: North America Europe and Middle East Asia Pacific Maximum exposure to credit risk for trade receivable by type of counterparty was as follows: Distributors End-user customers 2019 $’000 16,616 551 1,453 18,620 2019 $’000 12,602 6,018 18,620 2018 $’000 5,739 976 810 7,525 2018 $’000 2,270 5,255 7,525 As at 30 June 2019, GE Healthcare (worldwide) accounted for over 65% of the trade receivables (2018: GE Healthcare Group accounted for over 23% of the trade receivables). Collateral is not held as security, nor is it the Group’s policy to transfer (on-sell) receivables to special purpose entities. i) Risk management Credit risk is managed on a group basis. The Group may only invest surplus funds in deposits and floating rate notes offered by any major bank approved by the Board with no more than 50% held at any one bank. Customer credit risk is managed subject to the Group’s established policy, procedures and control relating to credit risk management. The Group performs credit assessments of its customers prior to entering into any sales agreements. The Group utilises an external credit rating agency to assess the credit worthiness of its customers. In North America and Europe, outstanding customer receivables are regularly monitored and are generally covered by credit insurance. As a result, the Group believes that its accounts receivable credit risk exposure is mitigated and it has not experienced significant write-downs in its accounts receivable balances. The credit risk arising from derivative financial instruments is not significant. ii) Credit quality The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. An analysis of the credit policy of trade receivables that are neither past due nor impaired as follows: External financial ratings at least A-2 from Standard and Poor’s Covered by credit insurance Other customers: 4 or more years trading history with the Group Less than 4 years of trading history with the Group 2019 $’000 9,539 3,853 944 64 14,400 2018 $’000 2,057 3,267 708 385 6,417 85 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 8 FINANCIAL RISK MANAGEMENT (continued) Impaired trade receivables Individual receivables which are known to be uncollectible are written off by reducing the carrying amount directly. The other receivables are assessed collectively based on expected losses from the time a loan is originated, based on the deterioration of credit risks since initial recognition. For these receivables the estimated impairment losses are recognised in a separate provision for impairment. The Group considers that there is evidence of impairment if any of the following indicators are present: – significant financial difficulties of the debtor; – probability that the debtor will enter bankruptcy or financial reorganisation; or – default or delinquency in payments. Receivables for which an impairment provision was recognised are written off against the provision when there is no expectation of recovering additional cash. Impairment losses are recognised in the profit or loss statement within selling and general expenses. Subsequent recoveries of amounts previously written off are credited against selling and general expenses. As at 30 June 2019, trade receivables with a nominal value of $29,000 (2018: $9,000) were considered impaired and fully provided for. The movement in provision for impairment in respect of trade and other receivables during the year was as follows: Balance at 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectible Unused amount reversed Balance at 30 June Past due not impaired 2019 $’000 2018 $’000 9 22 — (2) 29 21 — (6) (6) 9 As at 30 June 2019, trade receivables of $4,220,000 (2018: $1,108,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The aging analysis of trade receivables is as follows: Neither past due nor impaired Past due but not impaired < 30 days 30-60 days >60 days c) Liquidity risk 2019 $’000 14,400 2,843 695 682 18,620 2018 $’000 6,417 787 240 81 7,525 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. At the end of the reporting period the Group held short-term deposits of $59,500,000 (2018: $53,491,000) that are expected to readily generate cash inflows for managing liquidity risk. 86 Notes to the consolidated financial statements 8 FINANCIAL RISK MANAGEMENT (continued) Maturities of financial liabilities The table below analyses the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. Less than 3 months $’000 3 to 12 months $’000 1 to 5 years Over 5 years $’000 $’000 Tota $’000 2019 Trade and other payables Borrowings Derivative financial instruments Total financial liabilities 2018 Trade and other payables Borrowings Derivative financial instruments Total financial liabilities 9 CAPITAL STRUCTURE 9.1 Capital and reserves a) Contributed equity 6,929 109 125 7,163 4,323 104 288 4,715 75 336 162 573 48 320 396 764 121 76 160 357 195 522 — 717 — — — — — — — — 7,125 521 447 8,093 4,566 946 684 6,196 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. 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 vote and upon a poll each share is entitled to one vote. Ordinary shares have no par value, are fully paid and the Company does not have a limited amount of authorised capital. Movements in ordinary share capital: Balance at 1 July 2017 Exercise of options and performance rights – proceeds received Balance at 30 June 2018 Exercise of options and performance rights – proceeds received Balance at 30 June 2019 b) Reserves i) Share-based payments reserve Number of shares 297,732,955 1,612,124 299,345,079 622,200 $’000 112,713 — 112,713 — 299,967,279 112,713 The share-based payments reserve is used to recognise the fair value at grant date of performance rights and options issued as detailed in note 4.3 less any payments made to meet the company’s obligations through the acquisition of shares on market, together with income taxes on such payments. ii) Foreign currency translation reserve The foreign currency translation reserve records the exchange differences arising on translation of the financial statements of the foreign subsidiaries where the functional currency is different from the presentation currency of the reporting entity as detailed in note 1.2 (e). iii) Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to underlying transactions that have not yet occurred. 87 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 9 CAPITAL STRUCTURE (continued) 9.2 Capital management The Board and 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. The Board and 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 the risk 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. 10 OTHER NOTES 10.1 Commitments Non-cancellable operating leases The Group leases offices and warehouses under non-cancellable operating leases. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within 1 year 1 year or later and no later than 5 years 5 years or later Capital commitments 2019 $’000 1,177 1,340 — 2,517 2018 $’000 1,066 2,099 — 3,165 As at 30 June 2019, the Group had commitments to purchase plant and equipment of $1,091,000 (2018: $399,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 10.2 Related party transactions a) Transactions with related parties Note 10.3 provides the information about the Group’s structure including the details of the subsidiaries and the parent entity. i) Directors and Key Management Personnel compensation Director fees Short-term employee benefits Long-term benefits Post-employment benefits Termination benefits Share-based payments 2019 $ 506,849 2,454,394 225,130 157,996 — 850,655 2018 $ 506,849 1,715,758 157,378 143,384 238,000 953,865 Total Directors and Key Management Personnel compensation 4,195,024 3,715,234 Detailed remuneration disclosures are provided in the Remuneration Report on pages 35 to 54. 88 Notes to the consolidated financial statements 10 OTHER NOTES (continued) ii) Transactions with other related parties Certain Directors and Key Management Personnel, or their personally-related entities (Related Parties), 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 Related Parties are as follows: Related Party Related entity Maurie Stang Gryphon Capital Pty Ltd Transactions Director fees Maurie Stang Regional Healthcare Group Pty Ltd Products purchased, services received and products sold Richard England Angleterre Pty Ltd and Domkirke Pty Ltd Director fees Reimbursement of costs incurred on behalf of Nanosonics Sale of products and services to Related Parties Purchases of goods and services from Related Parties Reimbursement of costs incurred on behalf on Nanosonics 2019 $ 2018 $ 2,772,811 2,409,140 1,865 8,659 2,715 10,520 The above transactions exclude Director fees which are disclosed in Non-executive Directors’ remuneration in section 8.3 of the Remuneration Report on page 54. iii) Outstanding balances arising from sales/purchases of goods and services The following balances are outstanding at the end of the reporting period in relation to transactions with Regional Healthcare Group Pty Ltd: Current trade receivables (supply of goods and services) 2019 $ 2018 $ 909,619 643,725 There were no amounts due from or to other Related Parties. There were no provisions for impaired receivables in relation to any outstanding balances from Related Parties (2018: Nil) and no expense has been recognised during the period in respect of impaired receivables due from Related Parties. iv) Loans to Directors and Key Management Personnel During the year and to the date of this report, the Group made no loans to Directors and Key Management Personnel and none were outstanding as at 30 June 2019 (2018 : Nil). v) Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Outstanding balances are unsecured and are repayable in cash. 10.3 Controlled entities The consolidated financial statements of the Group include: Name of controlled entity Principal activities Country of incorporation Equity Class of shares 2019 2018 Nanosonics Europe GmbH Provision of sales and customer support services to Nanosonics Limited in Germany Germany Ordinary 100% 100% Saban Ventures Pty Limited Owner of the registered intellectual property of the Group Australia Ordinary 100% 100% Nanosonics, Inc. Sales and distribution of Nanosonics’ products and provision of sales and customer support services to Nanosonics Limited in the USA USA Ordinary 100% 100% Nanosonics Europe Limited Sales and distribution of Nanosonics’ products in Europe UK Ordinary 100% 100% Nanosonics UK Limited Provision of sales and customer support services in Europe UK Ordinary 100% 100% Nanosonics Canada, Inc. Sales and distribution of Nanosonics’ products and services in Canada Canada Ordinary 100% 100% Nanosonics Japan K.K. Sales and distribution of Nanosonics’ products and services in Japan Japan Ordinary 100% — On 11 January 2019 Nanosonics Japan K.K. was established as a wholly owned subsidiary of Nanosonics Limited, based in Japan. 89 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 10 OTHER NOTES (continued) 10.4 Parent entity information As at and throughout the financial year ended 30 June 2019, the parent entity of the Group is Nanosonics Limited which is based and listed in Australia. The individual financial statements for the parent entity show the following aggregate amounts: i) Summary financial information Statement of financial position Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Share capital Share-based payments reserve Hedging reserve (net of tax) Accumulated profit/(losses) Total equity Profit for the year Total comprehensive income 2019 $’000 141,431 155,615 22,208 22,871 112,713 16,188 (46) 3,889 132,744 15,482 15,564 2018 $’000 113,943 131,359 16,149 17,186 112,713 13,232 (91) (11,681) 114,173 7,236 7,145 ii) Guarantees entered into by the parent entity For the year ended 30 June 2019 and 30 June 2018, the parent entity provided assurances to its controlled entities, Nanosonics Europe GmbH, Nanosonics Europe Limited and Nanosonics UK Limited that the intercompany debts will not be required to be repaid until such time as the controlled entities have sufficient funds available. No other guarantees were provided during the period. iii) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2019 or 30 June 2018. iv) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2019, the parent entity had commitments to purchase plant and equipment of $1,069,000 (2018: $399,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. v) Accounting policies The accounting policies of the parent entity are consistent with the Group except for Investment in controlled entities which is carried in the parent company financial statements at the lower of cost or recoverable amount. 90 Notes to the consolidated financial statements 10 OTHER NOTES (continued) 10.5 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Ernst & Young Australia Audit and review of financial reports Tax compliance services Total remuneration of Ernst & Young Australia Ernst & Young Global Tax compliance services Total remuneration of Ernst & Young Global UHY Haines Norton Audit and assurance service Audit and review of financial reports Total remuneration of UHY Haines Norton Network firm of UHY Haines Norton Audit and assurance service Audit and review of financial reports Tax compliance services Total remuneration of network firms of UHY Haines Norton 2019 $ 2018 $ 303,360 86,500 389,860 23,537 23,537 — — — — — 244,475 49,300 293,775 109,064 109,064 9,485 9,485 23,074 6,567 29,641 Total auditors’ remuneration 413,397 441,965 10.6 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for financial years beginning on or after 1 January 2019 and have not been applied in preparing these consolidated financial statements. Of the new standards, the following is expected to have an effect on the consolidated financial statements of the Group: AASB 16 Leases For lessee accounting, the standard eliminates the operating lease and finance lease classification required by AASB 117, Leases. Subject to exemptions, a right-of-use asset will be capitalised in the statement of financial position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets where an accounting policy choice exists where either a right-of-use asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the lease asset (included in operating expenses) and in interest expense on the recognised lease liability (included in finance costs). For classification within the statement of cash flows, the lease payments will be separated into both principal (financing activities) and interest (either operating or financing activities) components. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. 91 Nanosonics Annual Report 2019 Notes to the consolidated financial statements 10 OTHER NOTES (continued) Transition to AASB 16 The Group plans to adopt AASB 16 modified retrospective method. The Group will elect to apply the standard to contracts that were previously identified as leases applying AASB 117 and AASB Interpretation 4. The Group will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. As at 30 June 2019, the Group has performed a detailed impact assessment of AASB 16. A summary of the expected opening balance adjustments as at 1 July 2019 are included below. Impact on the statement of financial position as at 1 July 2019: Financial statement line item Right of use asset Accumulated depreciation - right of use asset Right of use asset – net of accumulated depreciation Deferred tax asset Increase in assets Lease liability Trade and other payables 1 Increase in liabilities Net decrease in equity 1. Reversal of Lease straight-lining liability in note 6.4. Opening balance adjustment as at 1 July 2019 $ 000’ 5,499 (3,488) 2,011 56 2,067 (2,413) 196 (2,217) (150) The impact of AASB 16 will be first presented for the half-year ending 31 December 2019. The cumulative effect of adopting the standard will be recorded as an adjustment to the opening balance of accumulated profits/(losses). 10.7 Events occurring after the balance date No matters or circumstances that have arisen since 30 June 2019 that have significantly affected, or may significantly affect: a) the Group’s operations in the current of future financial years; b) the results of those operations in the current of future financial years; or c) the Group’s state of affairs in the current or future financial years. 92 Directors’ declaration For the year ended 30 June 2019 1. In the Directors’ opinion: a) the financial statements and notes set out on pages 55 to 92 are in accordance with the Corporations Act 2001, including: i. complying with the Accounting Standards and the Corporations Regulations 2001; ii. giving a true and fair view of the Company’s and Group’s financial position as at 30 June 2019 and of their performance for the financial year ended on that date, and b) the financial statements and notes also comply with International Financial reporting Standards as disclosed in note 1.2; and c) 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. 2. The Directors have been given the declarations by the Managing Director and CEO and the Chief Financial Officer required by section 295A of the Corporations Act 2001. 3. This declaration is made in accordance with a resolution of Directors. Richard England Director Sydney, 27 August 2019 93 Nanosonics Annual Report 2019 Independent Auditors’ Report to the members of Nanosonics Limited Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 94 Independent Auditors’ Report to the members of Nanosonics Limited A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 95 Nanosonics Annual Report 2019 Independent Auditors’ Report to the members of Nanosonics Limited A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 96 Independent Auditors’ Report to the members of Nanosonics Limited A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 97 Nanosonics Annual Report 2019 Independent Auditors’ Report to the members of Nanosonics Limited A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 98 Independent Auditors’ Report to the members of Nanosonics Limited A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 99 Nanosonics Annual Report 2019 Shareholder Information The shareholder information set out below was applicable as at 14 August 2019. A. Equity security holders 20 largest holders of quoted equity securities Ordinary shares HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited UBS Nominees Pty Ltd Mr Maurie Stang 1 National Nominees Limited Mr Bernard Stang 1 Mr Steve Kritzler Bnp Paribas Nominees Pty LtdWoodross Nominees Pty Ltd BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd National Nominees Limited Asia Union Investments Pty Limited Dr Harry Hirschowitz Avanteos Investments Limited <2349414 Hofbauer A/C> Mr Michael Kavanagh Sargon Ct Pty Ltd Larinda Pty Ltd Bennelong Resources Pty Limited Total top 20 holders Total all other holders Total shares on issue 1. Exclude indirect holdings and shares held by close family member. Unquoted equity securities Performance rights and options on issue Performance rights under ESOP to take up unissued ordinary shares Performance rights and options under NOEP to take up unissued ordinary shares Total performance rights and options on issue 1. There are 7 common holders in ESOP and NOEP. Number of quoted shares held Percentage 84,595,823 28,816,055 17,233,349 13,203,244 12,629,534 12,533,526 10,506,972 8,489,737 5,234,138 4,427,567 3,591,038 3,213,000 2,761,200 2,700,000 2,139,090 1,200,000 1,018,363 813,842 800,000 715,000 28.20% 9.61% 5.75% 4.40% 4.21% 4.18% 3.50% 2.83% 1.74% 1.48% 1.20% 1.07% 0.92% 0.90% 0.71% 0.40% 0.34% 0.27% 0.27% 0.24% 216,621,478 83,345,801 72.22% 27.78% 299,967,279 100.00% Number of options over ordinary shares Number of holders 1 384,788 3,618,841 4,003,629 7 125 125 100 Shareholders Information 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 There were 306 holders of less than a marketable parcel of 98 ordinary shares. C. Substantial holders Substantial holders in the Company are shown below: FMR LLC Mr Maurie Stang 1 Mr Bernard Stang 1 1. Include indirect holdings but exclude shares held by family member. D. Voting rights The voting rights attaching to each class of equity securities are set out below: a. Ordinary shares Quoted ordinary shares Unquoted PR and options 4,859 5,319 1,507 1,318 110 13,113 60 32 1 23 9 125 Number of ordinary shares Percentage 27,783,829 18,946,517 17,451,417 9.26% 6.32% 5.82% On show of hands every member present at a meeting in person or by proxy shall have one vote and on poll each share shall have one vote. b. Performance rights and options Performance rights and options have no voting rights. E. On market share purchase or buy-backs The company did not carry out any on market purchase or buy-backs of shares during the year. 101 Nanosonics Annual Report 2019 Glossary AASB ACIPC AGM APES APIC ASIC ASUM ASX AUD BMUS CAD CAGR CEO CEO&P CFO Australian Accounting Standards Board Australian College for Infection Prevention and Control Annual General Meeting Accounting Professional and Ethical Standard Association for Professionals in Infection Control and Epidemiology Australian Securities and Investments Commission Australasian Society for Ultrasound in Medicine Australian Securities Exchange Limited Australian dollar British Medical Ultrasound Society Canadian dollar Compound Annual Growth Rate Chief Executive Officer Chief Executive Officer and President Chief Financial Officer Company or Nanosonics Nanosonics Limited ABN 11 095 076 896 Date of this report 27 August 2019 DESP EBIT EBTDA ECL EMEA EPS ERP ESG ESOP EUR FDA Deferred Employee Share Plan Earnings Before Interest and Tax Earnings Before Tax Depreciation and Amortisation Expected Credit Loss Europe Middle East and Africa Earnings Per Share Enterprise Resource Planning Environmental, Social and Governance Employee Share Option Plan European Currency Food and Drug Administration Fiscal Year Year to 30 June Financial year, eg. FY2019 is the financial year ended 30 June 2019 Great Britain Pounds Global Reporting Initiative Nanosonics Limited and its wholly owned subsidiary companies Goods and Services Tax Hydrogen Peroxide Healthcare Acquired Infection Hepatitis B Human Immunodeficiency Virus High Level Disinfection – involves the complete elimination of all microorganisms in or on an instrument, except for small numbers of bacterial spores Human papillomavirus International Accounting Standards International Accounting Standards Board FY GBP GRI Group GST H2O2 HAI Hep B HIV HLD HPV IAS IASB 102 Glossary IFRS IP International Financial Reporting Standards Intellectual Property ISO 13485 Quality Management System for Medical Devices – Requirements for Regulatory Purposes ITAA JSOG KMP LTI LTIS MES MRSA NAN NHS NOEP NPI OEM PBT PCT Income Tax Assessment Act Japanese Society of Obstetrics and Gynecology Key Management Personnel Long-Term Incentives Long-Term Incentive Scheme Managed Equipment Service Methicillin resistant Staphylococcus aureus Nanosonics Limited (ASX Code) National Health System (UK) Nanosonics Omnibus Equity Plan New Product Introduction Original Equipment Manufacturer Profit before tax Patent Corporation Treaty Q1, 2, 3, or 4 Three-monthly periods beginning 1 July, 1 October, 1 January and 1 April respectively R&D Research and Development Reporting period Year to 30 June 2019 RFID SASB SG&A STI TFR Radio-frequency Identification Sustainability Accounting Standards Board Selling, General and Administration Short-Term Incentives Total Fixed 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 trophon®2 The next generation trophon® device with an enhanced design and new functionality including AcuTrace™ for audit- ready digital record keeping and capabilities to seamlessly connect trophon®2 with hospital IT systems TSR UK US USD VAT VWAP WAEP WHS Total Shareholder Return United Kingdom United States of America United States dollar Value Added Tax Volume Weighted Average Price Weighted Average Exercise Price Work, Health and Safety 103 Nanosonics Annual Report 2019 Corporate directory and information for investors Nanosonics Limited ABN 11 095 076 896 incorporated 14 November 2000 Directors Maurie Stang Richard England David Fisher Steven Sargent Marie McDonald Geoff Wilson Michael Kavanagh Company Secretary McGregor Grant Registered Office 14 Mars Road, Lane Cove NSW 2066 Australia Ph: +61 2 8063 1600 Share Register Bankers Australia Australia and New Zealand Banking Group Limited HSBC Bank Australia Limited National Australia Bank Limited Commonwealth Bank of Australia Limited United Kingdom HSBC Bank PLC Germany Deutsche Bank AG United States HSBC Bank USA NA PNC Financial Services Group, Inc. Japan MUFG Bank Ltd. Stock Exchange Listing Computershare Investor Services Pty Ltd Nanosonics Limited shares are listed on the Australian Securities Exchange ASX code: NAN Industry Group: Healthcare Equipment & Services 2019 Annual General meeting The 2019 AGM of Nanosonics Limited will be held: At 11:00am on 18 November 2019 Studio Rooms, Four Seasons Hotel 199 George Street, The Rocks, NSW 2000 Website address www.nanosonics.com.au GPO Box 2975 Melbourne, VIC 3001 Australia Ph: +61 3 9415 4088 Ph: 1300 555 159 (within Australia) www.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 Ernst & Young 200 George Street Sydney, NSW 2000 Australia Legal Advisors Baker & McKenzie AMP Centre Level 27, 50 Bridge Street Sydney, NSW 2000 Australia Mills Oakley Level 7, 151 Clarence Street Sydney, NSW 2000 Australia Shelston IP Level 21, 60 Margaret Street Sydney, NSW 2000 Australia 104 Nanosonics Annual Report 2019 105 105 Nanosonics Annual Report 2019 N A N O S O N I C S L I M I T E D A N N U A L R E P O R T 2 0 1 9 Nanosonics Limited 14 Mars Road, Lane Cove NSW 2066 Australia T +61 2 8063 1600 E info@nanosonics.com.au www.nanosonics.com.au ABN 11 095 076 896 NAN0056 Nansonics UPDATED Annual Report Covers _FINAL.indd 1 26/8/19 4:19 pm