I N F E C T I O N P R E V E N T I O N . F O R L I F E . A N N U A L R E P O R T 2 0 2 1 N A NOSONICS LIMITED | ANNUAL REPORT 2021 O U R M I S S I O N . We improve the safety of patients, clinics, their staff and the environment by transforming the way infection prevention practices are understood and conducted, and introducing innovative technologies that deliver improved standards of care. NANOSONICS (ASX:NAN) is an Australian infection prevention company that has successfully developed and commercialised a unique automated disinfection technology, trophon®, representing the first major innovation in high level disinfection for ultrasound probes in more than 20 years. trophon is fast becoming the global standard of care for ultrasound probe disinfection. We will continue to drive trophon adoption through our ability to transform the way infection prevention practices are understood and conducted in existing markets and through continued geographical expansion. Our commitment to innovation is reflected in our investment in research and product development as we look to expand our product portfolio and bring new infection prevention products to market. In June 2021, we released our first discrete data, traceability and compliance management system, Nanosonics AuditProTM, which integrates infection prevention decision-making, track and trace, and compliance into a single digital solution. Infection Prevention. For Life 1 CONTENTS.Overview and MissionFinancial highlights 2Chairman’s letter 4CEO’s report 6Our Commitment to ESG22trophon®224AuditPro26The Board28The Executive Team30Financial report32Directors’ report 32Remuneration Report 38Financial statements58Auditor’s independence declaration59Directors’ declaration 96Independent auditor’s report to the members97Other Information102Shareholder information 102Glossary104Corporate directory and information for investors105 2 F I N A N C I A L H I G H L I G H T S . $103.1 100.1 84.3 67.5 60.7 $80.4 75.5 62.8 50.2 45.3 15.1 20.9 $5.9 6.2 2.6 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 SALES ( $ M ) GROSS PROFIT ( $ M ) FREE CASH FLOW ( $ M ) $96.0 91.8 $70.8 63.2 49.2 42.6 37.0 13.9 16.8 $11.0 63.0 12.4 69.4 72.2 5.6 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 OPERATING EXPENSES ( $ M ) PROFIT/( LOSS ) BEFORE TA X ( $ M ) CASH AND CASH EQUIVALENTS ( $ M ) NANOSONICS LIMITED | ANNUAL REPORT 2021 3 Total revenue for the year was $103.1 million, up 3% compared with the prior corresponding period. In constant currency, total revenue was up 12% compared with the prior corresponding period. M I C H A E L K A V A N A G H | C E O 2012-2021 RESULTS$’0002021202020192018201720162015201420132012Operating revenue 103,079 100,054 84,324 60,698 67,507 42,796 22,214 21,492 14,899 12,301 Gross Profit 80,384 75,513 62,816 45,291 50,155 32,166 15,313 13,921 8,471 7,502 R&D expenses(17,194) (15,558) (11,375) (9,882) (9,486) (7,297) (4,902) (4,103) (3,167) (3,135)EBITDA 15,188 15,563 17,642 5,861 14,140 950 (4,732) (1,845) (5,366) (4,982)EBIT 10,763 11,671 15,502 4,362 12,866 (359) (5,795) (2,820) (6,410) (5,896)Operating profit/(loss) before tax 10,984 12,459 16,830 5,583 13,852 136 (5,465) (2,636) (5,735) (5,310)Net income tax benefit/(expense) (2,406) (2,322) (3,228) 168 12,306 (14) 5 31 (33) 631 Operating profit/(loss) after tax 8,578 10,137 13,602 5,751 26,158 122 (5,460) (2,605) (5,768) (4,679)Cash and cash equivalents 96,027 91,781 72,180 69,433 62,989 48,841 45,724 21,233 24,064 29,310 Infection Prevention. For Life 4 C H A I R M A N ’ S L E T T E R . The 2021 financial year has been unprecedented, both in terms of its challenges and achievements. Globally, countries are aspiring to move into a more ‘normal’ phase, while they recognise that unchecked pathogens, such as SARS-CoV-2, can and will continue to have an ongoing impact locally and globally. The Nanosonics team has safely navigated through this period. We have continually met the needs of our customers, adapting to new and innovative ways to conduct our business whilst maintaining our focus on having a positive environmental impact across all our activities. In parallel, multiple initiatives continue to be driven across each region. On behalf of our Board and shareholders I take the opportunity to recognise the outstanding efforts of the Nanosonics team under Michael’s leadership, who display the Company’s values and commitment in not only meeting and exceeding our operational objectives, but so successfully driving our strategic aims, particularly in the arena of our technology portfolio expansion. The values of Agility, Discipline and Will to Win have been on full display throughout the year in all our operations worldwide. The partnership with our customers has been a real feature of the period and demonstrates that adversity can always be navigated with a true spirit of collaboration. It is very pleasing to see that Nanosonics continues to deliver on the growth of its installed base of trophon® and the associated ecosystem, particularly in the second half of the year, whilst responding to the significant impact of COVID-19 in creating unprecedented headwinds. This clearly demonstrates the strength and resilience of Nanosonics’ business model, its solid relationship with GE and other global OEMs, together with the inherent value of its infection prevention products and services. Our investment in R&D continues to grow. Nanosonics has made a clear commitment to expand the trophon franchise in new and existing markets. At the same time, we have expanded proactively across our other areas of interest within infection prevention. On 28 June 2021 our release of Nanosonics AuditPro™ extends our activities into digital health and was achieved during a period of rolling lockdowns across many of our Australian and U.S. operations. The expanded technology group is now focused in four areas: core R&D, sustaining engineering, external technology evaluation and Nanosonics Investments. Our mission of ‘Infection Prevention. For Life’ is being underwritten by our investment in our technology teams, which are second to none, as we maintain a profitable, growing and innovative business. Your Company delivered a strong financial performance despite the many challenges that needed to be addressed in every dimension of the business. Customer access restrictions resulting from lockdowns are now trending in a positive direction, notwithstanding the ongoing impact of the Delta variant. During the year, sales increased 3% to $103.1 million. Importantly, sales in the second half of the year were up 39% compared with the first half as market conditions improved. The Company returned another positive profit before tax outcome of $11.0 million in the context of a significant growth in investment in our strategic growth agenda. The Company’s global trophon installed base continued to grow in all markets, up 13% to 26,750, including approximately 23,480 units in North America installed across over 5,000 facilities, where it is clearly established as standard of care. Despite our record investments in an expanded team, accelerated R&D and resources for future growth, the Company continues to increase its cash reserves. These cash reserves serve the Company in a number of ways. NANOSONICS LIMITED | ANNUAL REPORT 2021 5 First and most importantly, I wish to take this opportunity to recognise the outstanding efforts of the Nanosonics team who continue to embody the Company’s Values in delivering on the Company’s strategic growth agenda for our customers and shareholders. M A U R I E S TA N G C H A I R M A N I N F E C T I O N P R E V E N T I O N . F O R L I F E . $103.1M REVENUE $80.4M GROSS PROFIT They provide a significant degree of stability and allow the Company to continue to pursue its strategic growth agenda in uncertain times. Our Board and management are actively engaged in reviewing our priorities, identifying opportunities for investment and ensuring that Nanosonics is on track to deliver improved social and healthcare outcomes. This remains entirely consistent with building shareholder value through the best use of the Company’s free cash flow and capital reserves. I would again like to recognise the outstanding stewardship and commitment of our Board. Over a number of years the Company has gone through a process of Board renewal. With each new director joining, the business has benefited from an injection of valuable expertise and industry insight. The Board reflects diversity in a number of important and complementary ways. Our Directors bring a mix of skills and perspectives that strongly support our growth and governance objectives, and through the Board sub-Committees add real value to every dimension of our business. Nanosonics’ Sustainability Report contains an extensive amount of information on the environmental, social and governance practises that are core to the Company’s mission, future success and represents the Company’s DNA. I trust shareholders will see that the Report showcases our approach to caring for our employees, customers, suppliers, and critically, our investment in social responsibility and the environment. I am always particularly proud to see the strong diversity results across the Company and recognise the value and creativity that support our innovative and forward looking business. The business has an active program of community contributions and initiatives which were adopted by the Board during the past year to formalise and expand the Company’s commitment to society, internationally. Your Company is strongly positioned to continue its growth agenda and product expansion, and to develop as an emerging leader in infection prevention technologies and services. The team’s outstanding success in navigating these ‘black swan’ events demonstrate the character, depth and breadth of your Company’s capabilities. We have all now seen, in the most demonstrable way, the negative impact that unchecked pathogens can have in virtually every field of human endeavour. We at Nanosonics believe that we have a significant contribution to make in partnership with our customers, regulators and our industry to deliver a safer and more efficient health care system to the benefit of all. We believe our expanded investments in the future such as CORIS, together with our strong financial position and outstanding team, provide the opportunity for continuing growth now and into the future. M A U R I E S TA N G Chairman 24 August 2021 Infection Prevention. For Life 6 C E O ’ S R E P O R T. M I C H A E L K A V A N A G H C E O A N D P R E S I D E N T I start my report by acknowledging all the infection preventionists and frontline workers globally for their tireless efforts in managing the COVID-19 pandemic. I would also like to acknowledge each Nanosonics employee around the world for their resilience, flexibility, dedication and customer focus during what has been an unprecedented year. This resulted in many significant achievements and progress across key aspects of our strategy throughout the year. Overall, the year can be viewed in two distinct periods. The first half, in particular the first quarter, when the impact of COVID-19 was the greatest. During this period, market restrictions impacted ultrasound procedure volumes, hospital access and consequently new installed base growth. Then, a significant recovery in the second half, as market conditions improved with total revenue growing 39% over first half, including an 84% growth in capital revenue and a 27% growth in consumables and service revenue and importantly, a 20% growth in new installed base, with strong growth momentum trending toward pre-COVID-19 levels. Investment in our growth strategies also increased in the second half. As an infection prevention company, we are acutely aware of the risks of cross-contamination and the devastation infections can cause as clearly evidenced through the impacts of COVID-19. Now more than ever infection prevention is of paramount importance not just within the medical community but the community at large, highlighting the importance of 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 and introducing innovative technologies that deliver improved standards of care. Up to 22 million patients per year are protected from the risk of ultrasound probe cross-contamination by our trophon® technology. This number increases every day as our installed base grows. In addition, we continue to invest in research and development programs with the aim of bringing new innovations to market that deliver improved standards of care in infection prevention. Despite the impacts of COVID-19 throughout FY21, our growth strategy has not changed, and the organisation successfully adapted to the real global challenges associated with COVID-19. Significant recovery in FY21 H2 over H1 to strong pre-COVID growth momentum levels. M I C H A E L K A V A N A G H C E O A N D P R E S I D E N T UP TO 2 2 MILLION PATIENTS PER YE AR ARE PROTECTED FROM THE RISK OF ULTR ASOUND PROBE CROSS - CONTAMINATION BY OUR TROPHON ® TECHNOLOGY. NANOSONICS LIMITED | ANNUAL REPORT 2021 7 G R O W T H I N H 2 V S H 1 TOTAL REVENUE 39% CAPITAL REVENUE 84% INSTALLED BASE 20% O U R S T R AT E G I C P R I O R I T I E S There are four key strategic priorities the organisation is focused on: The first is our work to establish our trophon technology as standard of care for ultrasound reprocessing. This includes active sales in countries where the fundamentals for adoption of trophon are strong through mandates and guidelines for high level disinfection, as well as supporting the establishment of national guidelines in those countries where guidelines are emerging. What is very encouraging is that more and more countries are releasing guidelines as awareness grows about the risk of cross-contamination through ultrasound probes. T R O P H O N A S S TA N D A R D O F C A R E Support establishment of national guidelines. Provide awareness and education to highlight risks of cross-contamination for all semi-critical transducers. Ensure customers have a positive experience with all aspects of the product and brand. E X P A N D G E O G R A P H I C F O O T P R I N T Expand operations across Asia Pacific and EMEA with trophon plus new products. P R O D U C T E X P A N S I O N Expand portfolio of infection prevention solutions to address unmet needs. Leverage technology platforms for potential expanded indications. Strategic acquisitions in the infection prevention space. I N V E S T T O G R O W Maintain strong financial position to support growth. Deliver operational efficiencies, scale and leverage. Infection Prevention. For Life 8 C E O ’ S R E P O R T. C O N T I N U E D . The third component of our growth strategy is product expansion where we continue to grow our R&D investment, building our internal capabilities and expanding our R&D programs. In addition, we have implemented a separate business development function to identify and assess potential strategic acquisitions and investments in infection prevention opportunities. Finally, to enable the first three priorities, our fourth focus is investing to grow. It is recognised that there is significant opportunity for growth in trophon as well as expanding our product portfolio from internal R&D efforts along with potential acquisitions. At this stage of the organisation’s journey it is imperative that we continue to invest in these opportunities, maintaining a strong financial position to enable such investments. The second aspect of our strategy is to expand our geographical footprint. The focus for expansion is primarily across the European and Middle East region where we are now represented in 22 countries. In addition, in Asia Pacific there is a focus on expansion activities in Japan, where we have built a solid foundation and infrastructure as we work with relevant specialists and societies for the implementation of local guidelines. We have also made progress in China where we are finalising the registration of a wholly owned foreign enterprise (纳安诺医疗设备（上海）有限公司) and are now preparing for regulatory submission to approve trophon®2 for commercialisation in that market. E X PA N D I N G G L O B A L P R E S E N C E CA N A DA USA ME XICO SWED EN N ORWAY FINL A ND ESTONIA UNITED KING D OM IR EL A ND G ERM A NY FR A NCE D ENM A R K NE THER L A NDS BELG IUM AUSTRIA SWIT ZER L A ND SPA IN ITA LY PORTUG A L LEBA N ON ISR A EL KUWA IT Q ATA R UNITED A R A B EMIR ATES NANOSONICS LIMITED | ANNUAL REPORT 2021 9 I N S TA L L E D B A S E Despite the impacts of COVID-19, the global installed base increased 13% to 26,750 units, an increase of 3,030 units for the year, with all regions performing well. Importantly, the second half of the year saw a significant recovery in new installed base adoption as market conditions improved, with 1,650 new units installed, growing 20% compared with the first half. CUMUL ATIVE INSTALLED BASE 13% VS. FY20 NEW INSTALLED BASE 20% H2 FY21 VS. H1 FY21 26,750 23,720 1,570 1,650 1,380 1,220 20,930 17,740 14,160 FY17 FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 GLOBAL INSTALLED BASE INSTALLED BASE GROWTH ( BY HALF) RUS SIA JA PA N H ONG KONG SING A POR E AUSTR A LIA NE W ZE A L A ND AVAILABLE IN 30 COUNTRIES WORLDWIDE Infection Prevention. For Life 10 C E O ’ S R E P O R T. C O N T I N U E D . NORTH AMERICA In North America, the installed base increased 12% or 2,490 units for the year with 23,480 units now installed across over 5,000 institutions. A significant recovery was experienced in H2 as market conditions improved, with new installed base growing by 1,360 units, up 28% compared with the prior corresponding period and up 20% vs H1. Importantly, the estimated Total Addressable Market for trophon units in North America has been revised up from 40,000 units to 60,000 1 units, taking into account the growth in ultrasound over the last eight years in the U.S., which further increases the opportunity for trophon as we continue expanding our North American operations. EUROPE AND MIDDLE EAST In the Europe and Middle East region, despite COVID-19 related restrictions prevailing for the full year, the installed base grew 35% or 390 units for the year, with 1,510 units now installed across the region. This growth reflects the strengthening fundamentals for adoption of trophon across the region as our geographical footprint expands, guidelines supporting automated high-level disinfection continue to emerge, and our infrastructure investments continue to increase. Both halves of the year demonstrated significant growth over prior corresponding periods with H1 up 54% compared with the prior corresponding period and H2 up 73% compared with the prior corresponding period. ASIA PACIFIC In Asia Pacific the installed base grew 9% or 150 units for the year with 1,760 units now installed in the region. The majority of the growth was experienced in ANZ as Japan was effectively in lockdown for the majority of the year. The number of new units installed in H2 was up 100% compared with both the prior corresponding period and the first half, demonstrating the strong recovery in ANZ. TOTAL INSTALLED BASE NEW INSTALLED BASE ( BY HALF) 12% VS. FY20 28% H2 VS. PCP 20% H2 VS. H1 23,480 20,990 18,570 1,360 1,360 1,060 1,130 15,620 12,400 FY17 FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 35% VS. FY20 54% H1 VS. PCP 73% H2 VS. PCP 1,510 1,120 130 110 200 190 880 730 490 FY17 FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 9% VS. FY20 100% H2 VS. PCP 100% H2 VS. H1 1,760 1,610 1,390 1,480 1,270 100 80 50 50 FY17 FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 1. Nanosonics analysis based on updated ultrasound information commissioned by Nanosonics and an estimated trophon to ultrasound attachment rate. The North America market has been the focus of the TAM analysis undertaken. Similar data is not readily available for the Asia Pacific and EMEA regions. However, the Company’s expectation is that the ultrasound market will have also grown in those two regions in the years since the Company last analysed the TAM in those markets. NANOSONICS LIMITED | ANNUAL REPORT 2021 11 F I N A N C I A L R E S U LT S TOTAL RE VENUE Total revenue for the year was $103.1 million, up 3% compared with the prior corresponding period. In constant currency, total revenue was up 12% compared with the prior corresponding period. Importantly, H2 saw a significant recovery with market conditions improving, resulting in a total revenue of $60 million, up 39% over H1. In constant currency terms, H2 revenue was up 50% compared with H1. REVENUE GLOBAL ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 100.1 103.1 84.3 60.7 111.6 3% VS. FY20 12% VS. FY20 FY18 FY19 FY20 FY21 FY21 REVENUE GLOBAL HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 48.6 51.6 43.1 60.0 39% 16% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP 67.0 44.6 50% 30% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP H1 H2 H1 H2 FY20 FY21 H1 H2 FY21 CAPITAL RE VENUE Despite a 13% increase in new installed base, capital revenue for the year was down 11% to $26.7 million (down 8% in constant currency). This reduction was primarily associated with a reduction in the number of units sold to GE Healthcare in the first half of FY21. This was due to a decrease in installed base growth as a result of COVID-19, particularly in Q4 of FY20 and Q1 of FY21 and the corresponding impact on GE’s inventory levels. Importantly, capital revenue increased 84% in H2 over H1 as market conditions improved, installed base growth recovered and GE resumed normal capital purchasing patterns. CAPITAL REVENUE GLOBAL ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 32.8 30.0 26.7 25.6 11% VS. FY20 FY18 FY19 FY20 FY21 8% VS. FY20 27.5 FY21 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year. Infection Prevention. For Life 12 C E O ’ S R E P O R T. C O N T I N U E D . CAPITAL REVENUE GLOBAL HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 14.4 15.6 17.3 9.4 H2 FY21 VS. H1 FY21 9.4 84% 11% H2 FY21 VS. PCP 18.1 92% 16% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP H1 H2 H1 H2 FY20 FY21 H1 H2 FY21 CONSUMABLES AND SERVICE RE VENUE Revenue from consumables and service increased 9% to $76.4 million (up 20% in constant currency). First half consumables sales were reduced due to the impacts of COVID-19 on ultrasound procedure volumes. However, the second half saw a positive trend towards pre-COVID-19 procedure levels, with revenue from consumables and service up 27% (39% in constant currency) in H2 over H1. Importantly, towards the end of FY21 all indications were that ultrasound procedure volumes were approaching pre-COVID-19 levels across most markets. CONSUMABLES AND SERVICE REVENUE GLOBAL ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 70.1 76.4 51.5 35.1 9% VS. FY20 84.1 20% VS. FY20 FY18 FY19 FY20 FY21 FY21 CONSUMABLES AND SERVICE REVENUE GLOBAL HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 34.1 36.0 33.7 42.7 27% 19% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP 49.0 35.1 39% 36% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP H1 H2 H1 H2 FY20 FY21 H1 H2 FY21 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year. NANOSONICS LIMITED | ANNUAL REPORT 2021 13 R E G I O N A L F I N A N C I A L P E R F O R M A N C E NORTH AMERICA Total revenue for the year of $89.2 million was down 1% compared with the prior corresponding period (up 8% in constant currency). This reduction in revenue was primarily associated with a significant reduction in capital revenue in H1 of FY21 compared with H2 of FY20 of 49%. This reduction was primarily associated with the impacts of COVID-19 on new installed base growth in Q4 of FY20, resulting in GE Healthcare’s capital inventory being higher than anticipated at the end of FY20. As market conditions improved in the second half of the year, total revenue improved significantly up 42% over H1. Capital revenue in H2 increased 96% over H1 as new installed base grew and GE Healthcare resumed purchasing capital equipment. Consumables & Service revenue increased 8% for the year. In H2, as ultrasound procedure volumes trended back to pre-COVID-19 levels, so did the recovery of the consumables and service revenue, increasing 29% in H2 over H1. REGIONAL REVENUE NORTH AMERICA ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 90.1 89.2 76.5 54.4 1% VS. FY20 FY18 FY19 FY20 FY21 8% VS. FY20 97.4 FY21 REGIONAL REVENUE NORTH AMERICA HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 43.7 46.5 36.9 52.3 42% 12% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP H1 H2 H1 H2 FY20 FY21 54% 27% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP 59.1 38.3 H1 H2 FY21 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year.Infection Prevention. For Life 14 C E O ’ S R E P O R T. C O N T I N U E D . NORTH AMERICA – REVENUE BY PRODUCT CAPITAL REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 31.0 27.5 24.1 21.3 22% VS. FY20 FY18 FY19 FY20 FY21 96% – H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP 13.5 14.1 14.1 7.2 H1 H2 H1 H2 FY20 FY21 CONSUMABLES /SERVICE REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 62.7 67.9 45.6 30.4 8% VS. FY20 30.3 32.4 29.7 38.2 29% 18% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 ULTRASOUND PROCEDURES THERE ARE OVER 150 PROCEDURES 1 THAT USE ULTRASOUND PROBES THAT RISK CONTACT WITH MUCOUS MEMBRANES, NON-INTACT SKIN AND/ OR STERILE TISSUE. ENDOCAVITARY Abdominal Duplex Vascular (complete and limited, transvaginal) Pregnancy scans Chorionic Villus Sampling Transrectal scan Transrectal prostate biopsy UG 2 BIOPSY Biopsy of liver Biopsy of pancreas Biopsy of pleural fluid Biopsy of pulmonary lesions Biopsy of salivary gland Biopsy of sclerosing mesenteritis INTR AOPER ATIVE NERVE BLOCKS WOUNDS Intraoperative neurosurgical procedures Intraoperative UG tracer injection UG implantation of iodine seeds UG percutaneous renal transplant biopsy UG transthoracic punctures UG cervical nerve root block UG burn patient assessment UG ankle block UG femoral nerve block UG ophthalmic regional anesthesia UG percutaneous peripheral nerve stimulation UG Focused Assessment with Sonography in Trauma (FAST) UG focused diagnostic echocardiography (e.g., cardiac resuscitation in presence of trauma) 1. Nanosonics analysis, SDMS guidelines, market reports. 2. Ultrasound guided. NANOSONICS LIMITED | ANNUAL REPORT 2021 15 EUROPE AND MIDDLE E AST Despite severe COVID-19 restrictions being imposed throughout Europe and Middle East for the full year, total revenue in the region was up 38% to $7.2 million (43% in constant currency). This is a positive indication of the growing opportunity in the region as the fundamentals for adoption of trophon continue to strengthen with new guidelines continuing to emerge. The company continued to invest in the region’s infrastructure and market expansion activities throughout the year. Both halves of the year delivered strong growth over prior corresponding periods with H1 up 50% and H2 up 29% compared with the prior corresponding period. Total capital revenue for the year was up 91% to $2.7 million. Importantly, as the majority of units were placed in the U.K. (the largest market in the region) are under the managed equipment service model where no capital revenue is recognised, this increase in capital revenue reflects the growth in the markets outside of the U.K. Consumable and service revenue increased 18% compared with the prior corresponding period. As in North America, an increase in consumables revenue was achieved in H2 over H1 as ultrasound procedure volumes continued to trend back towards pre-COVID-19 levels. ULTRASOUND PROBE DISINFECTION GUIDELINES ACROSS EUROPE N E T H E R L A N D S S W E D E N S C O T L A N D E N G L A N D U K HLD I R E L A N D E U W A L E S D E N M A R K G E R M A N Y B E L G I U M F R A N C E I TA LY S W I T Z E R L A N D REGIONAL REVENUE EUROPE AND MIDDLE EAST ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 7.2 5.2 38% VS. FY20 3.8 3.0 FY18 FY19 FY20 FY21 43% VS. FY20 7.4 FY21 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year.Infection Prevention. For Life 16 C E O ’ S R E P O R T. C O N T I N U E D . REGIONAL REVENUE EUROPE AND MIDDLE EAST HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 3.6 3.6 3.6 3.8 2.8 2.4 29% 50% H2 FY21 VS. PCP H1 FY21 VS. PCP 34% 53% H2 FY21 VS. PCP H1 FY21 VS. PCP H1 H2 H1 H2 FY20 FY21 H1 H2 FY21 EUROPE AND MIDDLE EAST – REVENUE BY PRODUCT CAPITAL REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 2.7 91% VS. FY20 0.9 1.1 1.4 FY18 FY19 FY20 FY21 1.5 1.2 0.9 0.5 H1 H2 H1 H2 FY20 FY21 20% 33% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP CONSUMABLES /SERVICE REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 4.5 3.8 2.7 2.1 18% VS. FY20 1.9 1.9 2.1 2.4 14% 26% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 ASIA PACIFIC Total revenue in the Asia Pacific region was up 42% to $6.7 million. The majority of the growth was recorded in ANZ as the installed base continued to grow by 9% and trophon upgrades commenced. Total capital revenue for the year was up 143% to $2.7 million and was up 36% excluding revenue from upgrades. Consumables and service revenue increased 12% compared with the prior corresponding period with H2 revenue up 11% over H1 as the installed base grew and ultrasound procedure volumes returned to pre-COVID-19 levels. 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year.NANOSONICS LIMITED | ANNUAL REPORT 2021 17 REGIONAL REVENUE ASIA PACIFIC ANNUAL GROWTH ( $ M ) CONSTANT CURRENCY1 6.7 4.0 3.3 4.7 42% VS. FY20 FY18 FY19 FY20 FY21 43% VS. FY20 6.7 FY21 REGIONAL REVENUE ASIA PACIFIC HALF ON HALF GROWTH ( $ M ) CONSTANT CURRENCY1 4.1 2.3 2.3 2.6 H1 H2 H1 H2 FY20 FY21 58% 78% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP 4.1 2.7 H1 H2 FY21 53% 75% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP ASIA PACIFIC – REVENUE BY PRODUCT CAPITAL REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 2.7 1.1 0.8 0.6 FY18 FY19 FY20 FY21 VS. FY20 143% 36% VS. FY20 (EX. UPGRADES) 2.0 186% H2 FY21 VS. H1 FY21 0.5 0.6 0.7 H1 H2 H1 H2 FY20 FY21 CONSUMABLES /SERVICE REVENUE ANNUAL GROWTH ( $ M ) HALF ON HALF GROWTH 4.0 3.6 3.2 2.7 12% VS. FY20 1.9 1.7 1.9 2.1 11% 24% H2 FY21 VS. H1 FY21 H2 FY21 VS. PCP FY18 FY19 FY20 FY21 H1 H2 H1 H2 FY20 FY21 1. Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current year sales of entities that use currencies other than Australian dollars at the average rates that were applicable in the prior year.Infection Prevention. For Life 18 C E O ’ S R E P O R T. C O N T I N U E D . O T H E R F I N A N C I A L R E S U LT S The Company continued to increase its investments in its strategic growth agenda throughout the year, reflecting the significant growth opportunity for trophon globally as well as major opportunities for growth in the broader infection prevention market through product expansion. Operating expenses for the year increased 12% to $70.8 million. In particular, expenditure increased in H2, up 15% compared with H1 as market conditions improved. Operating expenses in Q4 represented 29% of the total year as the Company returned to its intended investment run rate for the year. Profit before tax for the year was $11.0 million. Of the $11.0 million, $10.8 million was achieved in the second half as revenue grew 39% in H2 over H1. Total free cash flow for the year was $5.9 million, with H2 free cash flow of $8.3 million offsetting net cash outflow of $2.4 million in the first half. Cash and cash equivalents increased 5% to $96 million. The Company has no debt and reviews its capital management strategy regularly. In light of an increasing global focus on infection prevention and the opportunities this presents for Nanosonics, investment in the broader strategic growth agenda of the Company is planned to continue actively and the capital reserves of the Company provide strong support for this. OPERATING EXPENDITURE ( $ M ) PROFIT BEFORE TA X ( $ M ) Q4: The company returned to its intended investment run rate. 63.2 70.8 20.3 13.9 16.8 12.4 11.0 5.6 49.2 42.6 37.0 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 FREE CASH FLOW ( $ M ) CASH AND CASH EQUIVALENTS ( $ M ) 20.9 15.1 6.2 2.6 91.8 87.9 96.0 69.4 72.2 FY 5.9 63.0 8.3 FY17 FY18 FY19 FY20 H1 H2 FY17 FY18 FY19 FY20 H1 H2 FY21 FY21 (2.4) NANOSONICS LIMITED | ANNUAL REPORT 2021 P E O P L E A N D C U LT U R E We recognise the tremendous value that our people provide to the Company. Throughout the year we continued to expand our capacity and capability with the total number of employees increasing 9% to 339. Diversity and inclusion is recognised as an important driver of our growth and a core aspect of the Nanosonics culture. The Nanosonics workforce now represents around 29 different nationalities with 41% of employees being female. 38% of senior management positions in the organisation are also held by females. Our people focus was recognised with exceptional results in the Company’s Employee Engagement survey where 94% of our employees strongly agree with the Company purpose, and importantly, with 93% of our employees knowing how their work contributes to the goals of the company. OUR CORE VALUES COLLABORATION We do things together because we value diversity of opinion, perspective and knowledge and are stronger when we work as a team. INNOVATION We innovate because we want to continuously make things better, adding value to our customers, our operations and our business. DISCIPLINE We do the right thing because we are ethical, compliant and are clear about our responsibility and accountability for delivering on our commitments. AGILITY We are effective because we not only embrace, but drive change; we are continuously learning and can adapt quickly. WILL TO WIN We do things with a sense of urgency, anticipating market and customers’ needs, because we always strive to be the best with a will to win. 19 EMPLOYEES 339 9% INCREASE ON FY20 FEMALE WORKFORCE 1 41% WOMEN IN STEM 42% FEMALE ~29 NATIONALITIES We recognise the tremendous value that our people provide to the Company. 1. Inclusive of all employees as at 30 June 2021. Infection Prevention. For Life 20 C E O ’ S R E P O R T. C O N T I N U E D . L A U N C H O F N A N O S O N I C S A U D I T P R O ™ In June 2021, Nanosonics AuditPro™ was launched at the Association for Professionals in Infection Control (APIC) conference in the United States, with plans for launch into other key markets throughout FY22. AuditPro is the result of a number of years of research and development and opens up a significant opportunity to market a unique solution that integrates infection prevention decision-making, track and trace, and compliance into a single digital solution. AuditPro delivers real-time access to a broad range of compliance and traceability data for customers, which is an important aspect of infection prevention to ensure medical instruments have been appropriately disinfected in accordance with relevant standards. The new AuditPro digital solution comprises of a mobile scanning device coupled with a subscription to a browser-based application for users. The first application focuses on ultrasound procedures, with the new handheld device designed to be coupled with every ultrasound console at point of care. With approximately 271,000 ultrasound units in the U.S. alone1, AuditPro represents a significant new opportunity for Nanosonics. Being a platform technology, AuditPro presents the opportunity to grow beyond ultrasound and be applied to other medical instruments. While AuditPro is a discrete new product platform, its application for ultrasound and connectivity with trophon®2 further enhances the trophon2 value proposition as well as competitive advantage. This further supports the leading position and ongoing adoption of trophon2 as well as the potential to support upgrades from trophon EPR to trophon2. In addition, through its education platform to guide clinicians on which ultrasound procedures require high level disinfection of the probe, there is the potential that this could lead to increased usage of trophon devices. R E S E A R C H A N D D E V E L O P M E N T 5 During the year, Nanosonics continued to invest in its product expansion strategy. R&D investment increased 11% to $17.2 million directed across multiple projects. Nanosonics’ R&D interests span five key areas of infection prevention: – Instrument cleaning; – Instrument disinfection; – Environmental decontamination; – Digital solutions for traceability and compliance; and – Storage solutions. NE W PRODUCT PL ATFORM – NANOSONICS CORIS ®, TR ANSFORMING THE CLE ANING OF FLE XIBLE ENDOSCOPES The R&D team achieved a number of important milestones across a number of projects with a focus on our new technology platform which is directed at addressing one of the most significant issues in instrument reprocessing today – flexible endoscope cleaning. Indeed, more healthcare-associated outbreaks have been linked to contaminated endoscopes than any other medical device 2,3. Reusable flexible endoscopes are highly sophisticated medical devices designed to enable advanced diagnostic and therapeutic interventions to diagnose and treat cancers and other life-threatening conditions. They incorporate advanced technology that gives physicians a sophisticated level of control in carrying out complex, minimally-invasive procedures and navigating challenging anatomical situations to deliver the highest level of patient care. There are many different types of flexible endoscopes, including colonoscopes, gastroscopes, duodenoscopes, bronchoscopes, urological scopes and ENT* scopes, in addition to other specialty scopes. The potential to address the challenges of contaminated endoscopes represents a significant opportunity for Nanosonics, with over 60 million flexible endoscopy procedures being conducted across the United States and the largest five markets in Europe alone every year and growing at 6% per annum 4. The cleaning stage of the reprocessing process is a critical step and has significant implications for the outcomes of the subsequent high level disinfection stage of the process. Challenges associated with manual cleaning, combined with reports of persistent contamination from biofilm despite routine cleaning, represents a significant unmet need which has been recognised by regulators and customers. This technical challenge has existed for many years and is a complex one to address. The Nanosonics R&D team have focused on these significant technical challenges with the aim of developing a novel automated technology designed to revolutionise the cleaning process of flexible endoscopes. The new CORIS platform technology, like trophon, will comprise both capital equipment and consumables with the expectation that the system will benefit from intellectual property protection. In testing to date, this new automated platform technology has demonstrated the potential to deliver significant superiority in cleaning efficacy over the requirements of the current standards. In addition, testing demonstrates superior efficacy over manual cleaning against difficult biofilm contamination, including in the smallest channels of an endoscope. Work continues to progress positively with the product development, including the integration of a number of enhancements to the new platform. This work will be followed by external clinical assessment to support the regulatory submission. Nanosonics continues to engage with the U.S. FDA to determine the necessary requirements to support a successful regulatory submission. The timing for commercial launch previously indicated is being revised and will be determined in due course dependent on the necessary technical, regulatory and operational milestones being met with the Company currently targeting the first commercial launch to occur in calendar 2023. Updates will be provided as material new information becomes available. The Company remains confident, both in the ongoing progress of the development project and importantly in the overall commercial opportunity for this transformational technology platform, which it believes has the potential to become a new standard of care for endoscope cleaning. 1. Nanosonics analysis of U.S. ultrasound market based on third party data. 2. Guideline for Disinfection and Sterilization in Healthcare Facilities, U.S. CDC, Update: May 2019. 3. Top 10 Health Technology Hazards for 2018, ECRI Institute, 2018. 4. Frost & Sullivan, Endoscope Reprocessing Systems and Software Solutions Market Assessment (US, W. Europe, Australia), 2018. 5. All research and new product development programs involve inherent risks and uncertainties which can impact commercialisation timelines. * Refers to ear, nose, throat, larynx, and sinuses. NANOSONICS LIMITED | ANNUAL REPORT 2021 21 During the year, Nanosonics continued to invest in its product expansion strategy. R&D investment increased 11% to $17.2 million directed across multiple projects. INTELLECTUAL PROPERT Y Nanosonics recognises the importance of its Intellectual Property (IP) portfolio in maintaining its sustainable competitive advantage. During FY21, Nanosonics filed an additional seven new provisional patent applications representing new innovations. The subject matter protected by Nanosonics’ IP portfolio helps protect trophon (capital equipment, consumables and accessories), new products (AuditPro and ecosystem products), as well as new product developments planned for commercialisation. Nanosonics now has a dedicated IP function that manages its active program of IP development and third party analysis to support the Company’s strategic growth agenda. INVESTMENT IN R & D ( $ M ) 17.2 15.6 11.4 9.5 9.9 FY17 FY18 FY19 FY20 FY21 B U S I N E S S O U T L O O K – F Y 2 2 The second half of FY21 reflected a significant recovery as market conditions improved. This recovery demonstrates the strength of the underlying fundamentals of the business. Despite the inherent risks and uncertainties associated with COVID-19, in particular those emerging with different strains of the virus, Nanosonics remains optimistic that the improved market conditions will continue as vaccination numbers increase across all major markets. Assuming the positive market recovery trends continue, the Company anticipates a return to double-digit growth in total revenue in FY22, driven by a ongoing increase in installed base globally and increased usage of consumables across all regions as ultrasound procedures return to pre-COVID-19 levels. In addition, it is anticipated that a growth in upgrades from trophon EPR to trophon2 will occur in FY22. Taking into account the anticipated increase in capital from new installed base growth and upgrades, the mix between capital revenue and consumables will likely change, which will result in a lower gross profit margin compared with FY21. However, it is anticipated that the Company’s gross profit margin will remain above 75%. Nanosonics’ infrastructure, people, capability and cash balance provide a strong foundation for the future. With growing opportunities for the trophon franchise, as well as further opportunities in the broader infection prevention market, the Company maintains its commitment to continue to invest in its long-term strategic growth agenda with an emphasis on continuing investment growth in our regional operations and R&D. Operating expenses for the fourth quarter of FY21 were $20.3 million as the business returned to its intended investment run rate. It is expected that there will be growth in this run rate into FY22, with total operating expenses for the year expected to be approximately $90 million. B E Y O N D F Y 2 2 Nanosonics’ forward-looking growth agenda remains very much intact, with significant opportunities for growth of the trophon franchise as well as significant opportunities from the planned expanded product portfolio. Beyond FY22, Nanosonics is targeting: – Continued growth in the trophon installed base and associated ecosystem across all regions; – Growth in upgrades of trophon EPR to trophon2; – Japan to become an important contributor to global installed base growth as well as further expansion into Asia Pacific, including China; – New source of revenue opportunity associated with the global launch of AuditPro as well as further new product launches; – Ongoing expansion of the product portfolio through internal product development and opportunities for strategic acquisitions and product licensing across key vectors of infection; and – Ongoing investment in R&D, infrastructure, people and capability to continue to drive the Company’s global growth strategy with the aim of establishing Nanosonics as a global leader in infection prevention. M I C H A E L K A V A N A G H CEO and President 24 August 2021 Infection Prevention. For Life 22 O U R C O M M I T M E N T T O E S G . Financial Year 2021 was the first full year that the world has lived with the financial, operational and community impacts of the current pandemic. It is an honour to be at the helm of an emerging leader in the infection control market at a time when the need for infection control practices has never been greater. We acknowledge and thank all our customers on the front line, in particular the infection prevention community, for their tireless efforts in the management of the pandemic over the last 12 months. Our business continued to progress its mission to improve the safety of patients, clinics their staff and the environment. Every day our trophon technology protects over 88,000 patients from the risk of cross contamination. Ensuring the safety and well-being of our staff throughout the year was of paramount importance and I thank them for their relentless efforts as they continued to support all our customers and stakeholders. In that context, I am pleased to introduce this year’s Sustainability Report. This is the second year in which we have published an extensive, standalone report from the Annual Report detailing the Company’s ESG performance. We take pride in our commitment to ESG at Nanosonics, helping to deliver on our mission and contributing to a safer and better environment for patients, clinics and their staff around the world. We have arranged this year’s report into four key sections: governance, environment, people & culture, and communities. We believe that this structure allows us to best communicate our contributions to each aspect of ESG. Our focus in this year’s report has been to align with international reporting standards including the Task Force on Climate-Related Financial Disclosures (TCFD) and better quantifying our performance for year-on- year comparison and target-setting. I am thrilled to see the Company continue to expand the way it reports on important ESG topics. Of course, this reporting is only possible when the Company also “walks the talk” in this area. FY21 is another year where the Company’s growth in other business, product and commercial areas is matched by its evolution in ESG spheres. There are many examples that spring to mind. These include examples from the way that the Company engages with environmental issues, its social responsibilities (internal and external), and maintaining our high standards of corporate governance throughout the operation. The specific areas are illustrated throughout this report, and reflect our commitment to a wide variety of ESG activities throughout our business as we continue to execute on our important global mission: Infection Prevention. For Life. MICHAEL KAVANAGH Chief Executive Officer and President “The principles of ESG are connected to, and embedded in, all aspects of our business. Importantly, it manifests in the care delivered to patients, and the objectives of our R&D across our areas of interest in infection prevention. Fundamentally, it informs the way we care about the environment, people and embracing the true principles of governance. These continue to be the drivers of our success today, and into the future. MAURIE STANG | CHAIRMAN 2 0 2 1 S U S TA I N A B I L I T Y R E P O R T. N A N O S O N I C S L I M I T E D FOR MORE INFORMATION See Nanosonics’ 2021 Sustainability Report available at https://www. nanosonics.com/investor-centre/reports- and-presentations/ NANOSONICS LIMITED | ANNUAL REPORT 2021 23 DE VELOPED SUSTAINABLE SUPPLY CHAIN INITIATIVE TO MAP SUPPLY CHAIN CHAR ACTERISTICS. INTRODUCED EXECUTIVE RISK MANAGEMENT COMMIT TEE, OVERSEEING RISK AND ESG ISSUES. STRENGTHENED IT, PRIVACY AND CYBER SECURIT Y PROTECTIONS IN ALIGNMENT WITH THE GDPR EXPANDED SCOPE OF CLIMATE ASSESSMENT, COVERING KE Y ARE AS OF OUR GLOBAL OPER ATIONS AS WE MOVE TOWARDS TCFD COMPLIANCE ~80% OF TOTAL WASTE DIVERTED TO RECYCLING AND WATE R SAV INGS FROM APPROXIM ATE LY 22 MILLION TROPHON CYCLES ANNUALLY ACROSS THE GLOBAL INSTALLED BASE AT LE AST 3.1 TONNES OF E ND - OF- LIFE PRODUCTS AND S E RVICE PARTS RES PONS IBLY RECYCLE D IN ACCORDANCE WITH WEEE AND OTHER REQUIREMENTS 94% OF EMPLOYEES STRONGLY BE LIE V E IN THE PURPOS E OF NANOSONICS FEMALES MAKE UP 41% OF THE GLOBAL WORKFORCE , 3 8 % OF S E NIOR M AN AGE ME NT AND 42 % OF STE M - RE L ATE D POS ITIONS ACHIE VED 100% OF F Y21 DIV E RS IT Y AND INCLUS ION OB JECTIV ES 14 STUDENTS PARTICIPATED IN INTE RNS HIP PROGR AM S ACROS S SE VER AL DEPARTMENTS $43,805 R AISED THROUGH VARIOUS CHARITABLE INITIATIVES CONTINUED TO STRENGTHEN PATIENT HEALTH AND SAFET Y WITH THE INTRODUCTION OF NANOSONICS AUDITPRO TM GOVERNANCEENVIRONMENTPEOPLE & CULTURECOMMUNITIESInfection Prevention. For Life 24 P R O T E C T I O N B Y D E S I G N TROPHON REPRODUCIBLE AND SAFE OUTCOMES trophon technology continues to represent a transformation in HLD for ultrasound probes. This patented novel technology works by generating a sonically-activated hydrogen peroxide (H202) mist able to access all surfaces of the probe and handle suspended within the closed trophon chamber, including crevices and tiny imperfections. Sensors monitor critical parameters, including temperature, mist volume and flow rates with sophisticated software controls monitoring the process throughout the cycle, ensuring that effective disinfection is delivered with every cycle. Most importantly, trophon effectively delivers HLD to all surfaces of the probe and handle without damaging the sensitive probe or exposing patients, staff and the environment to dangerous chemicals, as the only by-products of every trophon cycle are oxygen and water. TROPHON IS THE ONLY ULTR ASOUND HLD TECHNOLOGY TO DEMONSTR ATE EFFICACY ON PATIENT-USED PROBES ACCORDING TO ITS L ABELED CYCLE TIME . R I S K R E C O G N I T I O N G R O W S W O R L D W I D E This year has seen a growing trend toward the need for validated high-level disinfection (HLD) of medical devices. There is also growing acceptance of the risks of cross- contamination associated with ultrasound probes and that manual solutions, including wipes, do not reliably eliminate this risk for semi-critical devices. Ultrasound use in both the medical diagnostic and treatment setting broadened this year with its recognition as a vital tool in the fight against SARS CoV-2. There are over 150 procedures1 that use ultrasound probes that risk contact with mucous membranes, non-intact skin and/or sterile tissue. Ultrasound is routinely used in obstetrics, gynaecology, radiology, cardiology, critical care, and the operating theatre. This past year has seen it on the ICU ward supporting the critical care of COVID patients. Facilities in the United States adopted trophon® as a supplement to manual wiping for non-critical probes used to scan COVID patients and persons under investigation 4,5. Implicit in the adoption of trophon as an extra precaution is the recognition of trophon technology as a recognised, reliable solution that provides healthcare workers with confidence in managing infection risk. At a minimum, HLD should be used when indicated by the Spaulding classification, and trophon as an automated solution, provides assurance that critical parameters (i.e. contact time, dosage, temperature) are met for every cycle to achieve disinfection efficacy on all surfaces of the probe, supporting infection prevention practices. “Automated HLD continues to be recognised as best practice worldwide for semi-critical probes, and critical probes that cannot be sterilised, reducing the risk of cross-contamination between patients, and allowing facilities to standardise best practice infection prevention for their patients.” 1. Nanosonics analysis, SDMS guidelines, market reports. German federal requirements mandate on- site validation for reprocessing semi-critical devices. In November 2020, The Robert Koch Institute (RKI), the German public health institute, published a statement determining that they were unable to identify any standard or guidelines that demonstrated the validation of wipes as a final disinfection step for semi- critical devices 2. The Dusseldorf health authority responded with a statement that wipes are no longer acceptable for semi-critical device disinfection 3. This represents a fundamental shift in both the recognition of risk and in re-affirming the need for validated and reproducible reprocessing solutions – a key benefit of trophon technology. TROPHON ® – UNRIVALLED HLD EFFICACY The body of evidence demonstrating trophon technology efficacy continues to set the standard in automated HLD. As the only automated technology with both FDA classification and CE-Mark registration, trophon continues to represent the gold standard. trophon technology has demonstrated microbial efficacy against the widest range of clinically relevant pathogens, including bacterial endospores, mycobacteria, fungi, vegetative bacteria and virus. This efficacy spectrum includes multi-drug resistant bacteria, blood borne viruses (Hepatitis B, HIV) and sexually transmitted infections such as chlamydia, gonorrhoea and human papillomavirus (HPV). While trophon has not been tested directly against SARS CoV-2, coronaviruses, including SARS CoV-2, fall into the category of enveloped viruses, where trophon has been proven to be highly effective. This year has seen a strengthening of Nanosonics’ continued relationships with all ultrasound equipment manufacturers. Our probe compatibility program continues to set the standard with more than 1,000 probes tested, approved, endorsed and recommended for use with trophon technology, by all major and many specialised ultrasound equipment manufacturers. NANOSONICS LIMITED | ANNUAL REPORT 2021 25 APPROXIMATELY 88,000 PATIENTS EVERY DAY ARE PROTECTED FROM THE RISK OF ULTRASOUND PROBE CROSS-CONTAMINATION BY TROPHON TECHNOLOGY. THIS EQUATES UP TO 22 MILLION PATIENTS EVERY YEAR. TROPHON – EFFICIENT WORKFLOW INTEGRATION AND DEMONSTRATED COMPLIANCE trophon technology seamlessly integrates infection prevention practice into the clinical workflow. Designed with the user and their workflow needs in mind, trophon guides the user through the required steps of cleaning, loading and capturing critical HLD cycle compliance information in a process that requires minimal hands-on time for the user. Once the user presses the cycle start button, trophon disinfects the probe while the user completes other critical workflow tasks including room turnover and patient documentation. trophon digitally captures critical compliance information through AcuTrace® RFID technology as part of the trophon workflow. As a closed system, trophon can be placed in the examination room next to the ultrasound, further maximising patient throughput and clinical workflow efficiencies. To add further efficiencies, trophon offers a range of complementary consumable products and accessories to further support effective disinfection. These include companion cleaning and drying wipes to clean the probe before the HLD process, specialised probe bags to provide effective probe storage between patients, and connectivity solutions and services to facilitate automated disinfection record management. REFERENCES 2. RKI 2020. Aufbereitung von Medizinprodukten. Zur Frage der Validierbarkeit der abschließenden Desinfektion von semikritischen Medizinprodukten mittels Wischtüchern 3. Bezirksregierung Dusseldorf 2020. Desinfektion von semikritischen Medizinprodukten mittels Wischtuchern. Fachliche Einschatzung des RKI 4. Wessner, C. E., et al. (2020). “A Sonographer’s Step-by-Step Approach for Preventing Transmission of COVID-19.” Journal of Diagnostic Medical Sonography. 5. Sheth, S., et al. (2020). “Guidelines for Ultrasound in the Radiology Department During the COVID-19 Pandemic.” Ultrasound Q 36(3): 200-205. The trophon® family includes trophon® EPR and trophon®2 which share the same core technology of 'sonically activated' hydrogen peroxide. Infection Prevention. For Life 26 NANOSONICS AUDITPRO™ – STANDARDISING ULTRASOUND INFECTION PREVENTION PRACTICES TO MEET ACCREDITATION REQUIREMENTS AND DELIVER BEST PRACTICE PATIENT CARE. Traceability that links infection control cycle to the patient is required to meet best practice standards. Many national infection control standards and guidelines across the world require facilities to collect reprocessing cycle information, medical device identifiers, procedure information and patient details to demonstrate that semi-critical and critical devices have been appropriately high-level disinfected between patients.1-8 The tracking and traceability of this information allows a facility to demonstrate compliance to these standards and in the event of an outbreak or infection prevention breach, a reliable traceability system becomes instrumental for a facility in investigating, identifying and notifying patients. EVERY DATA POINT, ON EVERY PROBE, FOR EVERY PROCEDURE AND EVERY PATIENT. trophon AcuTrace® RFID technology digitally captures the clinical workflow – the introduction of AuditPro now seamlessly links this workflow information through to the procedure and the patient, representing a new level of traceability for the first time. AuditPro provides facilities with the opportunity to improve and standardise ultrasound infection prevention and control compliance across all ultrasound procedures, supporting the management of organisational and facility risk and delivering best practice patient care. A WORKFLOW COMPLIANCE SOLUTION THAT EDUCATES THE USER WITH EVERY CYCLE AuditPro comprises a mobile scanning device (MSD) for ultrasound users to integrate infection control decision-making and practice as part of the clinical workflow. This is coupled with sophisticated software to support compliance across the organisation. The MSD uniquely sits with the ultrasound console at point of care. With built-in education as part of the workflow, users qualify every procedure against the Spaulding classification for probe disinfection, thereby standardising the infection prevention decision every time. “100% COMPLIANCE, 100% OF THE TIME” – STANDARDISED BEST PRACTICE ACROSS THE FACILITY AuditPro software combines ultrasound patient procedures and probe disinfection information, including HLD records from the trophon®2 device, and interrogates the data captured through the clinical workflow to create non- compliance notifications and intuitive information-rich dashboards to not only deliver standardisation across the organisation, but to mitigate risk to patients and healthcare facilities by equipping users, infection preventionists, and quality managers with tools and information to drive better compliance. AUDITPRO ULTRASOUND 1:1 271K 9 Designed to sit alongside the ultrasound console to track all types of procedures ULTRASOUND INSTALLED BASE U.S. REFERENCES 1. AAMI ST58:2013 Chemical sterilization and high-level disinfection in health care facilities. 2. Association of periOperative Registered Nurses (AORN). High-Level Disinfection. AORN Guidelines for perioperative practice. Online: AORN, Inc; 2018 3. Canadian Standards Association (CSA) (2018). CAN/CSA-Z314-18 Canadian medical device reprocessing. 4. ASNZS 4187:2014 Cleaning, disinfecting and sterilizing reusable medical and surgical instruments and equipment, and maintenance of associated environments in health care facilities. NANOSONICS LIMITED | ANNUAL REPORT 2021 27 We looked to implement Nanosonics AuditPro to automate the linking of reprocessing of ultrasound probes to patient procedures. However, by far the most beneficial part has been the workflow education built into the system… the system guides [our users] to make the right decision, it challenges how we can learn from it and this grows the hospital as a whole to help us in our aim of 100% compliance, 100% of the time. This ensures we are a high reliability organisation making sure our patients are always protected. L I N D S AY T U R N E R RT( R ) , ( M ) , RDMS ( A B ) ( OB / GYN ) , RV T, LE AD SONOGR APHER , IMAGING SERVICES HUTCHISON REGION A L MEDICA L CENTER . 5. Kommission für Krankenhaushygiene und Infektionsprävention (KRINKO) 2012. Anforderungen an die Hygiene bei der Aufbereitung von Medizinprodukten. Bundesgesundheitsblatt – Gesundheitsforschung – Gesundheitsschutz: 66 6. Health Service Executive (HSE) Quality Improvement Division (2017). HSE Guidance for Decontamination of Semi-critical Ultrasound Probes; Semi-invasive and Noninvasive Ultrasound Probes. Document: QPSD-GL-028-1. 7. European Society of Radiology (ESR) 2017. Infection prevention and control in ultrasound – best practice recommendations from the European Society of Radiology Ultrasound Working Group. 8. Society and College of Radiographers and British Medical Ultrasound Society 2020. Guidelines for Professional Ultrasound Practice. 9. Nanosonics analysis based on updated ultrasound information commissioned by Nanosonics and an estimated trophon to ultrasound attachment rate. The North America market has been the focus of the TAM analysis undertaken. Infection Prevention. For Life 28 T H E B O A R D . MAURIE STANG STE VEN SARGENT Bus, FAICD, FTSE MICHAEL K AVANAGH BSc, MBA (Advanced) MARIE MCDONALD BSc (Hons), LLB (Hons) Non-executive Chairman 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. 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. CEO, President and Managing Director Non-executive 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. 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. NANOSONICS LIMITED | ANNUAL REPORT 2021 29 LISA MCINT YRE BSc (Hons), PhD DAVID FISHER BRurSc (Hons), MAppFin, PhD, FFin, GAICD GEOFF WILSON ACID, BCom, ICCA, CPA, US CPA Non-executive Director Non-executive Director Non-executive Director Dr McIntyre joined the Nanosonics Board in November 2019. Her executive background is in strategy, particularly in the areas of medical technology and healthcare, with many years as a partner at L.E.K. Consulting in the U.S. and Australia, where she led the Asia Pacific Health practice. Dr McIntyre was a Director of the Garvan Institute of Medical Research for 12 years and is a Senate Fellow of the University of Sydney and on the advisory committee of the NSW Generations Fund. She is currently a Non-executive Director of HCF Group, Insurance for NSW (icare) and Studiosity Pty Ltd. 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 has not held any directorships of other listed companies in the last three years. 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. Infection Prevention. For Life 30 T H E E X E C U T I V E T E A M . MICHAEL K AVANAGH BSc, MBA (Advanced) STE VEN FARRUGIA BE, PhD CEO, President and Managing Director Chief Technology Officer 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. 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 25 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 close to 300 granted and pending patents and an active proponent of STEM education. He has been a past Adjunct Professor of Engineering at the University of Sydney and is currently a member of the Biomedical Engineering, Industry Advisory Committee at the University of Sydney and a member of the Graduate School of Biomedical Engineering, Industry Advisory Committee at the University of New South Wales. MCGREGOR GR ANT BEc, CA, GAICD, FGIA, FCIS Chief Financial Officer and Company Secretary McGregor joined Nanosonics in April 2011. He is responsible for the overall financial management of the Company and also serves as the Company Secretary. McGregor 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. RENEE SAL ABERRY MBA, GAICD ROD LOPE Z MBA, BEng (Hons), GAICD Chief Marketing Officer Chief Operating Officer Renee joined Nanosonics in January 2019. She is a highly experienced international marketer, having 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 and Head of Marketing for Abbott Nutrition, ANZ. She has held marketing and finance roles for Merck, Sharp & Dohme and the Commonwealth Bank. Rod joined Nanosonics in April 2019. He 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 roles such as Global Head of Manufacturing and Chair of the Operational Excellence Strategy Group. At GM Holden, Rod held senior management roles across operations and global customer support. Rod is also an award-winning academic with continuing Adjunct Faculty appointments since 2006, with MGSM, AGSM and the University of Sydney Business School. NANOSONICS LIMITED | ANNUAL REPORT 2021 31 JODI SAMPSON MBA(Exec), CPHR Chief People and Culture Officer Jodi joined Nanosonics in April 2020. Jodi is an experienced human resources professional who has contributed to strategy, culture and business transformation at an executive level in the finance, telco and IT industries. Most recently, Jodi was Head of Human Resources with the Eclipx Group. She has also led international human resource functions as HR Director for Samsung and Head of Human Resources, Asia Pacific at Orange Business Services. RONAN WRIGHT BSc, Bus BSc, Bus Management, BEng Regional President for Europe, Middle East and Africa Ronan joined Nanosonics in September 2019 and is responsible for Nanosonics’ continued expansion across Europe and the Middle East. He has more than 20 years’ experience in infection prevention through senior sales, management and business development roles with Advanced Sterilization Products and Wassenburg Medical, a global leader in endoscope reprocessing. Most recently, Ronan was the Vice President of Global Sales and a Board member at Wassenburg Medical, where he had also served as Managing Director for Ireland and Director of Business Development for EMEA. KEN SHAW BSc Finance DAVID MORRIS BBus, BAppSc, GAICD Regional President for the United States, Canada and Latin America Chief Strategy Officer and Regional President Asia Pacific 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. David joined Nanosonics in February 2019. David has more than 25 years of executive leadership, international business development, and strategy experience. David was Chief Executive Officer and Managing Director at the Monash IVF Group, and prior to that he was an Executive at Cochlear Limited, where he was the Chief Strategy Officer, and the President of Bone Anchored Solutions. Prior to joining Cochlear Limited David worked at Accenture in their Strategy practice. Infection Prevention. For Life 32 D I R E C T O R S ’ R E P O RT 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 2021, 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 $103,079,000 (2020: $100,054,000), an increase of $3,025,000 or 3%. North American revenue decreased by $912,000 or 1% to $89,229,000 reflecting a 22% reduction in capital revenue offset by an 8% increase in consumables and service revenue. Revenue in Europe and Middle East increased by $1,955,000 or 38% to $7,157,000 with capital revenue increasing by 91% and consumables and service revenue increasing by 18%. Revenue in Asia Pacific increased $1,982,000 or 42% to $6,693,000, with capital revenue increasing by 143% and consumables and service revenue increasing by 12%. Gross profit increased by 6% to $80,384,000 compared with $75,513,000 in the prior period. Gross margin as a percentage of sales was 78.0% compared with 75.5% in the previous year. Selling and general expenses (S&G) were $37,562,000, (2020: $34,659,000). The increase in S&G of $2,903,000 was mainly to support continued growth in North America, as well as significant investment in operational infrastructure for market expansion activities in Europe and Japan. Administration expenses were $16,003,000 (2020: $12,965,000), an increase of $3,038,000 relating to investments in back office support and increased compliance and risk management activities of a global business. Research and development expenses (R&D) for the year were $17,194,000, (2020: $15,558,000), an increase of 11%. This increase of $1,636,000 was a result of the Company’s continued investment in its product expansion strategy. Other income for the year amounted to $156,000 (2020: $10,000). Other net gains of $982,000 comprised mainly of net gain in foreign currency changes and derivative financial instruments, compared with a net loss of $670,000 in 2020. Finance income amounted to $559,000 (2020: $1,132,000) which related to interest earned on cash investments. Finance expense for the year of $338,000 related mainly to interest on leases and the financing component on cash received in advance on customer contracts (2020: $344,000). Income tax expense for the year was $2,406,000 compared with income tax expense of $2,322,000 in 2020. 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 $8,578,000 (2020: $10,137,000). The Group ended the year with $96,027,000 (2020: $91,781,000) in cash and cash equivalents, an increase of $4,246,000. The cash and cash equivalents balance provides a strong balance sheet for the Company to continue executing on its growth strategies. Further information on the operations of the Group and its business strategies and prospects are included in the CEO’s report on pages 6 to 21 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 2021 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. Accordingly, the material business risks below should not be considered an exhaustive list of potential risks that may affect Nanosonics. Risk COVID-19 Description and potential consequences Strategies used by Nanosonics to mitigate the risk Sales There is a risk that direct access to hospitals and other healthcare facilities may be impacted by further waves of COVID-19 infection rates in key markets, which may extend the timeline for adoption of trophon by some customers. There is also a risk that there may be a reduction in hospital procedures requiring ultrasound (for example, as part of ‘further waves’ of COVID-19) which may impact demand for consumables. Sales Measures are in place for digital communication and engagement with customers. Nanosonics continues to provide on-site support for installation of new trophon devices while taking the necessary safety precautions. The Company has introduced selling models aimed at reducing the up-front capital outlay required to purchase trophon. NANOSONICS LIMITED | ANNUAL REPORT 2021 33 Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk COVID-19 continued People The Company has transitioned many of its personnel globally to work from home arrangements. There remains a risk that the COVID-19 pandemic and/or government measures to contain it could further impact the Group’s employees. Further, there is a risk that it will be more difficult to hire talent internationally and locally whilst mobility restrictions are in place. Increased competition for local talent may also impact talent retention. Operations and supply chain There is a risk of COVID-19 related disruption to Nanosonics’ operations, including its global supply chain. Significant distribution customer The Group’s key distribution customer accounts for approximately 60% of the Group’s revenue (see note 2.2 of the financial statements), the majority of which is in the 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. Research & development and commercialisation Competition 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). Further, all research and new product development programs involve inherent risks and uncertainties which can impact commercialisation timelines. New products are also likely to require a range of regulatory approvals. The potential for increased competition exposes Nanosonics to the risk of losing existing and new 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 market share, or render trophon obsolete. People The Company’s Work Health & Safety and people policies have been updated to address COVID-19 related matters, including supporting mental health, work from home and return to work arrangements. Physical distancing measures and sanitiser stations were also introduced, together with widespread education on the importance of good hand hygiene. The Company is also enhancing its programs in place for attracting, recruiting and retaining talent in the current environment. The Group’s priority remains taking care of its people and protecting its strong relationships with customers and suppliers. This risk is monitored closely in all markets. Operations and supply chain The supply chain is being closely managed and is currently well positioned to meet customer demand, having increased inventory of raw materials and finished goods for capital equipment and consumables. No major disruption has occurred to the Company’s global supply chain for its main products arising from COVID-19 and this risk is actively managed. The Group continues to strengthen its own direct operations in North America and now has significant direct sales operations in place which can be scaled further. The Group has appointed other distributors and resellers in the USA (many of whom are ultrasound OEMs) and its other key markets. Whilst revenue from the Group’s key distribution customer amounts to approximately 60% of the Group’s revenue, a large proportion of this flows from the sale of consumables by the distribution customer to the Group’s installed base. That proportion of the Group’s revenue could continue to be generated by Nanosonics independently of the key distribution customer. The Group continues to invest in infrastructure in the North American market to assist the business to scale, as well as research & development with a view to diversifying its product portfolio. Importantly, the business continues to grow in other key regions (Asia Pacific, Europe and Middle East). 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 supported with an appropriate level of investment. In late FY21, the Company launched a new digital traceability product, Nanosonics AuditPro™. 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, trophon®2, and continues to invest in the trophon product roadmap. The trophon2 is now sold in many key markets, and regulatory approvals continue to be obtained in new markets. The Company also invests in its relationships with ultrasound OEMs, including its probe compatibility program, as well as considering product development opportunities. Infection Prevention. For Life 34 D I R E C T O R S ’ R E P O RT Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk Intellectual Property 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. Nanosonics seeks appropriate patent, design and trademark protection and manages any identified IP risks. Nanosonics also recognises the significant value in unregistered IP. Along with internal personnel to manage IP opportunity and risk, Nanosonics works closely with specialists and advisors internationally to monitor and manage its IP portfolio, 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. Additional patents have been filed in respect of trophon2. Further, the Company’s new digital product, AuditPro, is the subject of a patent filing. The Group has a dedicated IP function and an active program to continue to protect the IP in its technology having regard to its commercial strategy as well as defensive purposes, as well as maintain 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 to ensure continued product supply in the short term. The Group has a highly developed worldwide Quality Management System to manage this risk and invests in suitably qualified personnel to oversee the implementation of that system. 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. The business is also subject to annual regulatory audits from key regulators. The management of these risks is guided by the Group’s internal financial risk management policy. The Company seeks external advice, as appropriate. Further information is available in Note 8 to the financial statements. 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. There is also a risk of COVID-19 related disruption to Nanosonics’ global supply chain. The Group operates in a highly regulated industry. Medical devices are subject to strict regulations of various regulatory bodies where the products are sold. 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 product recall. The Group is exposed to foreign currency risk and credit risk in light of the international nature of its operations. Supply chain Regulation Financial Product liability Personnel 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 operates a compliant Quality Management System across all aspects of the design, manufacture and release of products to market. The Group also has product liability insurance in place. 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, recruiting and retaining key talent, including scientific, medical device regulations, and engineering talent. The Company has programs in place both for Workplace, Health and Safety (WHS), and the attraction, recruitment and retention of talent. NANOSONICS LIMITED | ANNUAL REPORT 2021 D I R E C T O R S ’ R E P O RT C O N T I N U E D 35 Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk Nanosonics is taking steps to enhance its cyber-security strategy and disaster recovery plans with a view to safeguarding the business against these risks. Cyber security Nanosonics recognises the risks 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 of 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 and cause significant reputational damage. The Company also recognises the need to ensure operations can continue in the event of a disaster impacting its critical IT systems. 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 on pages 6 to 21 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 2021. No dividends were proposed, declared or paid during the financial year (2020: 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 On 18 August 2021, the Company issued 37,201 shares at $4.51 per share for a total of $167,777 under the Global Employee Share Plan (GESP). No other matters or circumstances have arisen since 30 June 2021 that have 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 and business outlook are in the ‘review of operations’ included in the CEO’s report on pages 6 to 21 of this Annual Report. The inherent uncertainties and ongoing risks associated with the COVID-19 pandemic make accurate forecasting challenging, in particular the uncertainties associated with hospital access, emergence of further waves, and associated lockdowns. 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. Directors and company secretary During the year and to the date of this report, the Board of Nanosonics Limited comprised Maurie Stang, Steven Sargent, Geoff Wilson, David Fisher, Marie McDonald, Lisa McIntyre, and Michael Kavanagh. During the year and to the date of this report, McGregor Grant is the sole Company Secretary. Information on the Directors, Company Secretary and the executive team is a part of the Directors’ report and can be found on pages 28 to 31 of the Annual Report. As at the date of this report, Nanosonics Limited has the following committees of the Board: Audit and Risk, Remuneration, People and Culture Committee, Nomination, and R&D and Innovation. Details of members of the committees of the Board during the year are included below and on page 40 of the Remuneration Report. Infection Prevention. For Life 36 D I R E C T O R S ’ R E P O RT C O N T I N U E D Meetings of Directors The number of Directors’ meetings, including meetings of the committees, held during the year ended 30 June 2021, 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 and Culture R&D and Innovation 1 Held 2 Attended Held 2 Attended Held 2 Attended Held 2 Attended Held 2 Attended Maurie Stang Steven Sargent Geoff Wilson David Fisher Marie McDonald Lisa McIntrye Michael Kavanagh 12 12 12 12 12 12 12 11 3 12 12 12 12 12 12 5 5 5 5 5 5 5 5 4 5 4 5 5 5 5 5 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 1. 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. 2. Indicates the number of meetings held which the Director is eligible to attend. 3. The Board meeting not attended by Mr Stang covered transactions with organisations of which Mr Stang is a related party. 4. Attended in part or full in ex-officio capacity 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 2021, the Company issued a total of 861,449 (2020: 636,291) new ordinary shares in Nanosonics Limited of which 69,302 shares were issued under the Global Employee Share Plan at an average price of $5.23 per share and 792,147 were issued pursuant to the exercise of performance rights and options under the share-based compensation plans. No amount was unpaid on any of the shares issued. As at 30 June 2021, there were 301,465,019 (2020: 300,603,570) ordinary shares in Nanosonics Limited on issue. At the date of this report, there were 301,502,220 shares on issue. Further information on issued shares is provided in the Share-based payments Note 4.3 and Capital and reserves Note 9.1 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, 771,787 (2020: 256,931) unquoted performance rights and 920,633 unquoted share appreciation rights (2020: 922,444 unquoted share options) over unissued ordinary shares in Nanosonics Limited. Further information on the grants is provided in Share-based payments Note 4.3 to the financial statements. Shares under option At the date of this report, there were 4,821,596 unissued ordinary shares of Nanosonics Limited under option under the Nanosonics Omnibus Equity Plan. As at 30 June 2021, there were 4,825,225 (2020: 4,116,344) unissued ordinary shares of Nanosonics Limited under option. Further information on the options is provided in the Share-based payments Note 4.3 to the financial statements. Share-based compensation plan Total shares under option at 30 June 2021 Performance rights and options lapsed Total shares under option to the date of this report Number of shares under option 4,825,225 (3,629) 4,821,596 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. NANOSONICS LIMITED | ANNUAL REPORT 2021 37 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 59 of this report. Auditor 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. The Corporate Governance Statement and Corporate Governance policies can be found on the Company’s website at http://www.nanosonics.com/Investor-Centre/ Corporate-Governance. Remuneration Report The Remuneration Report forms part of the Directors’ Report. This report, which includes the review of operations in the CEO’s report (on pages 6 to 21), the Information on the Board and the Executive Team (on pages 28 to 31) and the Remuneration Report (on pages 38 to 57), is made on 24 August 2021 and signed in accordance with a resolution of directors, pursuant to section 298(2) of the Corporations Act. G E O F F W I L S O N Director, Sydney 24 August 2021 D I R E C T O R S ’ R E P O RT C O N T I N U E D Indemnifying officers or auditor During the financial year, the Company paid insurance premiums to insure the Directors and Secretary and Key Management Personnel of the Company and its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their positions or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. The Directors have not included in this report the amount of the premium paid in respect of the insurance policy, as such disclosure is prohibited under the terms of the contract. 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 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 $1,000 (where rounding is applicable) and where noted ($’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 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. Infection Prevention. For Life 38 R E M U N E R AT I O N R E P O RT L E T T E R F R O M T H E C H A I R O F T H E R E M U N E R AT I O N , P E O P L E A N D C U LT U R E C O M M I T T E E Dear Shareholders, On behalf of the Remuneration, People and Culture Committee (RPC) and the Board, I am pleased to present the Remuneration Report for the year ended 30 June 2021 (FY21). Nanosonics in FY21 Acknowledging the COVID-19 related challenges throughout the year, in particular during the first half, the Nanosonics team adapted well, focusing on customer support and progressing its growth agenda. For the total year, revenue grew 3% (11% in constant currency). Importantly in the second half, the team grew revenue 39% over the first half as market conditions improved. The total global installed base for the year grew 13% and as hospital access improved in the second half, new installed base growth was up 20% over the first half. The team also managed to progress the R&D program with the launch of an important new digital innovation, Nanosonics AuditPro™, while progressing a number of other product expansion projects. Attraction of new talent to expand the capability of the organisation was also a focus throughout the year, with the total number of employees increasing 9% to 339 employees while ensuring diversity was a cornerstone of the human capital growth. 41% of Nanosonics employees globally are female and importantly 38% of senior management positions in the organisation are now held by females. During the year the Company had no COVID-19 related job losses, nor did the Company access any government subsidies, such as JobKeeper in Australia, or similar programs in markets such as Canada or the U.S. Nanosonics’ culture remained strong during FY21, illustrated by the outcomes of the Nanosonics Global Employee Engagement Survey, where 97% of employees participated in the survey and 94% of the employees are highly engaged with the overall purpose of Nanosonics. FY21 remuneration outcomes Details of the performance of the team against their metrics is detailed in Section 4 of this Remuneration Report. The STI overall outcomes for the year reflected: – An on-target (100%) performance for Profit Before Tax; – Slightly below (92.7%) target performance on Global Installed Base; – Good progress on R&D activities; – Good progress on geographic regional growth; and – Good progress on commercial terms with our large customers and partners. Profit Before Tax (PBT) result exceeded the Stretch hurdle set by the Board when agreeing the FY21 operating plan, which would have resulted in 150% achievement of the PBT metric. Notwithstanding this solid financial performance, having regard to the difficulties and uncertainties experienced in forecasting revenue and operating expenses, the Board agreed with the CEO&P’s recommendation to apply discretion to reduce the achievement of the PBT metric to be assessed at Target or 100%. In summary for FY21: – The CEO’s STI outcome was 72.77% of maximum (94.60% of target); – Other Executive KMP STI outcomes range between 66.81% and 73.38% of maximum (90.20% to 95.40% of target); – The aggregate STI outcome was 71.74% of maximum (93.85% of target); and – The 2017 LTI outcome was 100% of target due to the performance conditions (TSR hurdles) being met, 100% of the Performance Rights and Options vested. There were no downward Values rating modifiers applied to the CEO&P or Executive KMP in FY21. In FY20, following a comprehensive assessment undertaken with external remuneration consultants, Godfrey Remuneration Group (GRG), the Board approved changes to the Executive Remuneration Framework, in particular the design of the STI and LTI Plans. These changes were introduced in FY21 and we believe they strike an appropriate balance between driving accountability for sustainable short-term results and generating long-term growth and value creation for shareholders. Following extensive engagement with investors and proxy advisor organisations, these changes were strongly supported by shareholders last year. Full details are set out in section 3.3 and 3.4 of the Remuneration Report. The Company received some feedback and questions on the LTI metrics. To ensure transparency, we have reiterated our rationale here for adopting these metrics. The FY21 LTI award introduced two new performance metrics: an external, market-based metric – Relative TSR (Index-TSR); and an internal, financial metric – Underlying Return on Equity (UROE). After careful consideration as to what would be the most appropriate comparator group for the Index-TSR metric, the Company adopted the ASX300 Industrials Index, excluding financial services, mining and energy. We received some feedback that a comparator group of companies in a broadly defined Healthcare index may be more appropriate. The Board did consider an industry-based comparator group, however determined that identifying a group of companies within the Health Care industry that were similar enough to Nanosonics and could be considered as a suitable ‘relative comparator’, was not possible. In considering a Healthcare comparator group in 2020, there was a total of 38 companies classified as Health Care Equipment & Supplies Industry, with only five being larger than Nanosonics (four significantly larger). NANOSONICS LIMITED | ANNUAL REPORT 2021 R E M U N E R AT I O N R E P O RT C O N T I N U E D 39 This has largely remained the same in 2021, with only eight companies larger than Nanosonics (seven significantly larger). Of the companies analysed in 2020 that had a lower market capitalisation, the closest had a market capitalisation of $313 million, representing approximately one-sixth of Nanosonics’ market capitalisation, and this dropped rapidly to a $10 million market capitalisation for other companies in this industry. The Board and its advisors were therefore unable to identify an appropriate bespoke list of suitable health care companies to form an effective comparator group at the time, and this remains the case in 2021 due to there not being enough relative health care comparators available. After considering the advice received, the Board determined that due to Nanosonics’ position within the ASX based on market capitalisation in 2020, the TSR of the ASX300 Industrials Index was an appropriate comparator group. The upcoming 2021 LTI award will again feature this same comparator group and will be disclosed in the 2021 Notice of Annual General Meeting. Nanosonics also took independent advice regarding the risk/return profile and adjusted the NAN beta to 1.35 (i.e. a 3.5% percentage premium vs. the Index for setting the target and a 7% percentage premium at stretch). The rationale for applying a third of the grant value to the Index-TSR metric was due to the relative volatility of Nanosonics’ stock price performance historically and uncertainty regarding future TSR, given the current high PE ratio which requires a significant stretch performance of management to deliver inbuilt expectations, evident in the existing share price. It is also important to note that there is a positive TSR gate. The second LTI metric, representing two thirds of the award, is Underlying Return on Equity, which excludes R&D expenses from the calculation. The rationale for assigning two-thirds of the award to the UROE metric is to encourage management to work towards driving long-term sustainable value for shareholders in the ‘core business’, noting the correlation between long-term ROE in excess of the cost of equity has a strong correlation with strong TSR outcomes for shareholders. Nanosonics is very much in investment/growth phase and if the R&D expenses were not excluded, a perverse incentive could be created for management to reduce investment in future developments/growth, to the detriment of long-term growth and value creation for shareholders. Furthermore, the structure of the STI scheme is designed to capture the R&D expenses and therefore address the disciplined management of R&D expenditure in the short term because a significant portion of the award is tied to the achievement of current year profit before tax (including R&D expenditure). The Board believes this framework provides the elegant balance of running the business well for the short term while investing for the long term. Prior to recommending this metric we engaged extensively with a significant number of our large shareholders, by whom it was well received. That support is evidenced with the support of the Remuneration Report resolution approval last year. These shareholders were unsupportive of a typical ROE for LTI because they view Nanosonics as a growth Company with significant investment opportunities and they believed a traditional ROE metric would disincentivise investment for the future. The feedback we received confirmed we had the balance right and the Board considers the calculation of ROE as the measure that is best fit-for-purpose for the LTI award. The STI Plan introduced discrete metrics with a focus on the Company financial performance, being Profit Before Tax and Global Installed Base growth which was determined as the most important metric as a proxy for current and future annuity revenue growth. The PBT metric includes R&D expenses to ensure effective management of the R&D expenditure and drive profitability for the year. FY22 remuneration Other Board approved changes to the FY21 Executive Remuneration framework arising from the external benchmarking review conducted by GRG will be implemented in FY22. The changes include the second phase of the increase in the target STI opportunity for Executive KMP which was increased from 30% to 40% in FY21 and will be increased to 50% in FY22. The changes also include a remuneration review of Total Fixed Remuneration (TFR) for the CEO&P and Executive KMP which was postponed in FY20 due to the uncertain business environment associated with COVID-19 and the impacts on our customers and the broader community. That review has resulted in an increase to the base remuneration of 4.5% for the CEO&P and an average of 5.31% for Executive KMP. The remuneration increase was considered appropriate by the Board as the FY20 GRG benchmarking review indicated that the TFR for the CEO&P and each Executive KMP was low in comparison to the market median. The 4.6% increase in the CEO&P’s TFR is well below the median (P50) when compared to the comparator group. There were no increases recommended for the Non-Executive Directors’ (NED) Board fees for FY22, with the last review and increase having occurred in FY19. The focus for FY22 will be to continue to reward performance to align the interests of employees and shareholders, with a clear focus on attraction and retention of key talent to deliver on the Company’s continued growth and investment strategy. On behalf of the Committee and the Board I would like to thank shareholders for their ongoing belief in the Company’s purpose and vision. S T E V E S A R G E N T Chairman, Remuneration, People and Culture Committee 24 August 2021 Infection Prevention. For Life 40 R E M U N E R AT I O N R E P O RT — A U D I T E D The Remuneration Report for the year ended 30 June 2021 (2021 Financial Year or FY21) forms part of the Directors’ Report. It has been prepared in accordance with the Corporations Act 2001 (Cth) (the Act), Corporations Regulation 2M.3.03, in compliance with AASB124 Related Party Disclosures, and audited as required by section 308(3C) of the Act. It also includes additional information and disclosures that are intended to support a deeper understanding of remuneration governance and practices, where statutory requirements are not sufficient. Report Structure The report is divided into the following sections: 1 Key Management Personnel 2 Remuneration link with Company performance and strategy 3 Remuneration Framework 4 Company performance and remuneration outcomes 5 Governance 6 Non-executive Director remuneration 7 Statutory tables and disclosures 1 KEY MANAGEMENT PERSONNEL 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. Name Role Committee membership Appointed Nomination Audit & Risk RPC R&D and Innovation Non-executive Maurie Stang Chairman, Non-independent Director 14 Nov 2000 Steve Sargent Deputy Chairman, Lead Independent Director 6 Jul 2016 Geoff Wilson Independent Director David Fisher Independent Director Marie McDonald Independent Director Lisa McIntyre Independent Director Executive Michael Kavanagh Chief Executive Officer & President (CEO&P) and Managing Director 17 Jul 2019 30 Jul 2001 24 Oct 2016 13 Dec 2019 21 Oct 2013 1 McGregor Grant Chief Financial Officer (CFO) and Company Secretary 28 Apr 2011 Steven Farrugia Chief Technology Officer 5 Sep 2016 David Morris Chief Strategy Officer and Regional President, APAC 4 Feb 2019 Rod Lopez Chief Operating Officer 4 Mar 2019 ✓ = member C = Chair 1. Mr Kavanagh was appointed Director on 30 July 2012 and appointed CEO&P on 21 October 2013. There were no changes to KMP during FY21 and to the date of this report. ✓ ✓ ✓ ✓ ✓ ✓ ✓ C ✓ ✓ ✓ ✓ C ✓ ✓ ✓ ✓ ✓ C ✓ ✓ NANOSONICS LIMITED | ANNUAL REPORT 2021 R E M U N E R AT I O N R E P O RT — A U D I T E D C O N T I N U E D 41 2 REMUNERATION LINK WITH COMPANY PERFORMANCE AND STRATEGY 2.1 OVERVIEW OF REMUNERATION FRAMEWORK Nanosonics’ Remuneration Framework, outlined below, is designed to support the Company’s strategy and reward executives for successful implementation. Additional information on the Nanosonics Remuneration Framework is provided in section 3. The Remuneration Framework is intended to attract, motivate and retain talent to enable the Company to deliver on the growth strategy of the core business and to develop and implement the long-term strategy through significant investments to establish Nanosonics as a globally recognised leader in infection prevention. EXECUTIVE KMP REMUNERATION OBJECTIVES An appropriate balance of fixed and variable components. Attract, motivate and retain executive talent. The creation of reward differentiation to drive performance and behaviours. Shareholder value creation through equity components. Fixed Variable Total Remuneration Total Fixed Remuneration (TFR) Short-Term Incentive (STI) Long-Term Incentive (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 shareholder value creation. Base salary plus any fixed elements related to local markets, including superannuation or equivalents. Delivery Part cash and part equity. The delivery of equity as part of the award facilitates Executive KMP share ownership in the business as encouraged by the Company’s Share Ownership Policy. The equity component is deferred to facilitate malus/clawback policies, and to create a longer-term aspect to the short-term incentive. Strategic intent and marketing positioning Equity is held subject to performance and service tests. The measurement period is three years to create a long-term focus aligned with the financial interests of the Company shareholders. TFR will generally be positioned at the median compared to relevant market-based data considering expertise and performance in the roles. Performance incentives are directed to achieving demanding growth targets. TFR + STI is intended to be positioned competitively when compared to groups of similar companies. 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 2.2 ASSESSMENT OF BEHAVIOURS AGAINST NANOSONICS’ CORE VALUES Nanosonics believes that the value created by desirable behaviours is inextricably linked to sustainable long-term value creation for shareholders. Our values, desired behaviours and the relationship with our customers and the broader community are taken into consideration when assessing individual performance which has implications on the modification of variable remuneration where appropriate. The Board conducts a formal behavioural assessment of each Executive KMP as part of their overall performance review. Infection Prevention. For Life 42 R E M U N E R AT I O N R E P O RT — A U D I T E D C O N T I N U E D 3 REMUNERATION FRAMEWORK 3.1 TARGET REMUNERATION MIX The remuneration mix for each Executive KMP is weighted to provide an appropriate balance between fixed and variable 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. A portion of executive remuneration is paid in equity (48% for the CEO&P and 37% for Other Executive KMP at Target achievement). CEO &P REMUNERATION MIX MINIMUM $722,000 TARGET $1,805,000 STRETCH $ 2,585,000 100% 40% 12% 12% 36% 60% PERFORMANCE BASED 48% EQUIT Y BASED 28% 11% 11% 50% 72% PERFORMANCE BASED 61% EQUIT Y BASED TFR Cash STI Deferred STI LTI OTHER EXECUTIVE KMP REMUNERATION MIX MINIMUM $ 394,000 TARGET $ 589,000 STRETCH $ 994,000 100% 52% 40% TFR Cash STI Deferred STI LTI 3.2 TOTAL FIXED REMUNERATION (TFR) 12% 12% 26% 48% PERFORMANCE BASED 37% EQUIT Y BASED 10% 10% 40% 60% PERFORMANCE BASED 50% EQUIT Y BASED TFR comprises base salary plus any fixed elements relating to local markets, including superannuation or equivalent. In addition to base salary, executives may receive benefits in line with local practice, such as health insurance and a car allowance. TFR for Executive KMP is benchmarked regularly for market competitiveness by reference to appropriate independent and externally sourced comparable information. Adjustments are only made in response to individual performance, an increase in job responsibilities, changing market conditions or promotion. Any adjustment to Executive KMP remuneration is approved by the Board, based on recommendations by the CEO&P and the Remuneration, People and Culture Committee. Target Total Remuneration is comprised of an appropriate mix of remuneration elements including TFR, short-term and long-term variable components. The intended long-term market pay position is P62.5. 3.3 SHORT-TERM INCENTIVE (STI) The FY21 STI structure was adjusted in FY20 in response to the Board identifying an opportunity to improve executive remuneration. The changes included: – Increased STI % opportunity and calculated on TFR based on the market review; – Defined outcomes for each Group Financial metric at threshold, target and stretch; – Calculation of the overall STI % outcome based on the sum of discrete metrics with stand-alone results (FY20 STI outcome was determined by the achievement of Company Performance Objectives multiplied by Individual Performance Objectives); – The introduction of a Values rating modifier to recognise the impact of an individual’s behaviour when not aligned with the Company’s Core Values; and – 50% of the STI payment to be delivered in Service Rights, subject to one-year service condition and one-year exercise restriction period, i.e. two-year lockup. NANOSONICS LIMITED | ANNUAL REPORT 2021 R E M U N E R AT I O N R E P O RT — A U D I T E D C O N T I N U E D 43 3.3 SHORT-TERM INCENTIVE (STI) continued The FY21 STI is dependent on meeting Group Financial and Operational metrics, as detailed below: Purpose To motivate and reward executives for the achievement against annual weighted metrics which are approved by the Board at the beginning of the financial year. Performance measures The measure for metrics with stretch outcomes, for example Group Financial metrics, will be scaled according to outcome levels with the reward calculated on a straight-line basis between each level. The three performance levels are: Threshold: Represents a minimum level of outcome that would result in a reward; Target: Represents the desired outcome that is considered challenging and reasonably achievable; and Stretch: Represents the upper limit of outcomes that are inherently challenging. The targets for the performance levels within each discrete metric is approved by the Board, taking into consideration prior performance, market conditions and Board approved budgets. The CEO&P metrics for FY21 are: – Group Financial metrics (60% weighting) with Threshold opportunity of 50%, Target opportunity of 100% and Stretch opportunity up to a maximum of 150%: · Profit Before Tax (PBT) (20% weighting): PBT is considered to be an appropriate metric aligned with the Company’s growth. The 20% weighting was applied in recognition of the market uncertainties associated with COVID-19 in FY21. · Global Installed Base (40% weighting): Global Installed Base is considered to be an appropriate metric as it aligns with shareholders’ long-term interests in driving profit. The 40% weighting was applied in recognition of the strategic importance of growing the installed base in FY21. – Operational metrics (40% weighting) with the maximum opportunity of 100%: Aligned with the business priorities – Customer Experience, Product Innovation, Operational Excellence, People Engagement and Value Creation and does not include a stretch opportunity. The weightings indicated above apply to all Executive KMP with the exception of David Morris, Chief Strategy Officer and Regional President, APAC, who had a higher weighting attached to the achievement of Operational metrics. Opportunity CEO&P: Target opportunity is 60% of TFR, with maximum of up to 78% of TFR for achievement of Stretch outcomes. Calculation Executive KMP: Target opportunity is 40% of TFR, with a maximum of up to 52% of TFR (or up to 54% for Regional Presidents) for achievement of Stretch outcomes. The overall STI outcome is calculated as demonstrated below, including the impact of the Values rating modifier. The values rating is a downward modifier and is based on each executive’s individual behaviour in relation to living the Company’s Core Values of Collaboration, Innovation, Discipline, Agility and Will to Win. The Values rating modifier is applied to the total STI outcome % in recognition of the contribution of behaviour. In determining the total STI award, the TFR used is calculated on the amount paid to the individual during the financial year (1 July 2020 to 30 June 2021). Total STI award ($) = TFR ($) (calculated on the amount paid during the financial year) x STI opportunity (% of TFR) x STI outcome % (includes total results of each discrete metric, including stretch outcomes, where applicable) x Values rating modifier (0% to 100%) Delivery The STI is delivered as follows: – 50% of STI paid in cash; and – 50% of STI delivered as Service Rights subject to one-year service condition and one-year exercise restriction period i.e. two-year lockup. STI awards issued prior to the FY21 STI were delivered as Performance Rights subject to one-year service vesting condition. After which these are automatically exercised into Shares and subject to a further one-year holding lock. Allocation method The equity component will be determined based on the Volume Weighted Average Price (VWAP) of Nanosonics’ shares during the 20 business days from the date of announcement following the release of the Company’s full year results. Dividends Rights do not carry any dividend or voting rights prior to exercise. Termination of employment To be eligible to receive the cash component, the participants must be employed by the Company and not working a notice period at the time the cash is paid. To be eligible to receive the equity component, the participants must be employed by the Company and not working out a notice period from the date of grant to the vesting date. Board discretion The Board retains discretion to modify STI award assessment outcomes, or the form of settlement, if it deems it appropriate in the circumstances that prevailed over the measurement period. The Board will disclose the application of such discretion to Executive KMP STI awards, when applicable. Infection Prevention. For Life 44 R E M U N E R AT I O N R E P O RT — A U D I T E D C O N T I N U E D 3.4 LONG-TERM INCENTIVE (LTI) The LTI structure was adjusted in FY20 in response to the Board identifying an opportunity to improve executive remuneration and in response to feedback through engagement with shareholders and proxy advisory firms. The changes included introducing two financial measures: an external, market-based metric (Index-TSR) reflecting a Nanosonics specific risk adjusted return relative to return of an index, and an internal, earnings-based metric Underlying Return on Equity (UROE) to support investment in growth. Further, the target LTI opportunity for the CEO&P and Executive KMP was increased. Details of these metrics that are intended to drive the creation of value for shareholders are provided below. Index-TSR (iTSR) – 33.3% weighting – The Board determined the ASX300 Industrials Index, excluding financial services, mining and energy, was an appropriate comparator group due to Nanosonics’ position within the ASX based on market capitalisation in 2020. The Board did consider an industry-based comparator group, however determined that identifying a group of companies within the Health Care industry that were similar enough to Nanosonics and could be considered as a suitable ‘relative comparator’ was not possible. In considering a Healthcare comparator group in 2020, there was a total of 38 companies classified as Health Care Equipment & Supplies Industry, with only five being larger than Nanosonics (four significantly larger). Of the companies analysed in 2020 that had a lower market capitalisation, the closest had a market capitalisation of $313 million, representing approximately one-sixth of Nanosonics’ market capitalisation, and this dropped rapidly to a $10 million market capitalisation for other companies in this industry. The Board and its advisors were therefore unable to identify an appropriate bespoke list of suitable health care companies to form an effective comparator group at the time. – Nanosonics’ risk-return profile was considered within the ASX300 Industrials and independent advice confirmed that over a three-year period the beta of Nanosonics’ shares is approximately 1.35. Accordingly, a premium of +3.5% was applied to increase the iTSR hurdle at Target performance and a premium of +7.0% was applied for Stretch performance. – The weighting of this measure reflects the volatility of Nanosonics’ historical performance and the future uncertainty, given the Company’s high PE ratio. – A positive TSR must be achieved before any securities associated with the iTSR metric will vest. Underlying Return on Equity (UROE) – 66.6% weighting – Nanosonics is very much in an investment/growth phase and invests a relatively high proportion of its total expenses in R&D activities that are directed to driving long-term growth and value creation for shareholders. The decision to exclude R&D expenses from the ROE metric was made to drive management actions towards both short-term results and long-term outcomes. The exclusion of R&D expenses ensures that management is incentivised to drive the growth and profitability of the underlying business as well as investing in activities that will drive Nanosonics’ long-term growth. – R&D expenses are included in the Group Financial metric of the STI (PBT) which encourages management accountability of the R&D expenditure to control profitability of the underlying business. – The higher weighting on the UROE metric, excluding R&D expenses, is to encourage management to drive long-term sustainable value for shareholders through investments in identified strategic growth priorities. At the 2020 Annual General Meeting held on 24 November 2020, shareholders approved the 2020 LTI award for the CEO&P. The description of the approved 2020 LTI award, which also applies to the Executive KMP, is set out below: Purpose To align a significant portion of executives’ overall remuneration opportunity with the indicators or drivers of shareholder value creation over the longer term and to align executive interests with those of shareholders. Opportunity CEO&P: Target opportunity is 90% of TFR, with a maximum of up to 180% of TFR for achievement of Stretch outcomes. Executive KMP: Target opportunity is 50% of TFR, with a maximum of up to 100% of TFR for achievement of Stretch outcomes. The maximum LTI opportunity for awards granted prior to the 2020 LTI was 60% of base salary for the CEO&P and 30% of base salary for Other Executive KMP. Delivery Equity grants to the Executive KMP will be awarded as follows: – The iTSR component will be awarded as Share Appreciation Rights (SARs), which are cashless exercise options Allocation method that have a notional exercise price of $6.0436 (determined based on the Volume Weighted Average Price (VWAP) of Nanosonics’ shares during the 20 business days from the date of announcement following the release of the Company’s FY20 full year results); and – The UROE component will be awarded as Performance Rights with a nil exercise price. The number of Share Appreciation Rights or Performance Rights granted is calculated as follows: Number of Rights = TFR ($) x LTI opportunity % at Stretch x Tranche weighting ÷ Value of Right The value of each Share Appreciation Right or Performance Right is determined using a Black-Scholes model (prepared by an independent consultant), ignoring vesting conditions (i.e. no discounting applies). NANOSONICS LIMITED | ANNUAL REPORT 2021 R E M U N E R AT I O N R E P O RT — A U D I T E D C O N T I N U E D 45 3.4 LONG-TERM INCENTIVE (LTI) continued Measurement period The measurement period for the Share Appreciation Rights and Performance Rights are: – Share Appreciation Rights: From the announcement of the Company’s FY20 financial results to the announcement of the Company’s FY23 financial results based on the 20-day VWAP of the Company’s shares following those dates. – Performance Rights: From 1 July 2020 to 30 June 2023. The performance measurement periods for the LTI plans issued prior to 2020 that have not yet vested are summarised below: LTI year Measurement period 2019 2018 27 August 2019 to the date of the release of Nanosonics FY22 financial statements 20 August 2018 to the date of the release of Nanosonics FY21 financial statements Exercise restriction period The Rights will be subject to an exercise restriction period of one year after the Vesting Date and may only be exercised after that date. In the event that a taxing point arises during employment with the Company in relation to vested Rights, and the Exercise Restriction or disposal restrictions have not elapsed, then those restrictions will cease to apply to 50% of the taxable Rights. LTI awards issued prior to the 2020 LTI do not have an exercise restriction period once vested. Gate and Performance Conditions Gate A Gate is a condition that, if not fulfilled, will result in nil vesting of certain Rights, irrespective of performance in relation to the Performance Conditions. The Gate for the 2020 LTI is as follows: – For the Share Appreciation Rights (iTSR), the Gate is that the Company’s TSR must be positive over the Measurement Period. – For UROE Performance Rights, no Gate applies. Performance Conditions The Performance Conditions for the 2020 LTI are: – For the Share Appreciation Rights (iTSR), the Performance Condition will be based on the Total Shareholder Return (TSR) of the Company over the Measurement Period (equivalent to the change in Share Price, plus dividends declared assumed to be reinvested), compared to the TSR of the ASX 300 Industrials Total Return Index (excluding the energy and metal & mining industries) after adding a premium of 3.5% at Target and 7% at Stretch which was determined by the Board in assessing the Company’s risk profile. Vesting will be determined based on delivery of expectations which are inherently challenging according to the following scale: Outcome NAN TSR performance % vesting of grant % of opportunity Stretch Target Threshold Below Index TSR% + 7.0% TSR CAGR Index TSR% + 3.5% TSR CAGR Index TSR%60 days 2021 $’000 22,989 2,670 898 1,180 27,737 2020 $’000 11,780 2,519 668 1,005 15,972 c) Liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Surplus funds are invested in short and medium-term instruments which are tradeable in highly liquid markets. At the end of the reporting period the Group held short-term deposits of $73,000,000 (2020: $73,500,000) that are expected to readily generate cash inflows, as well as cash at bank of $23,000,000 (2020: $18,300,000) that is readily available for managing liquidty risk. 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. 2021 Trade and other payables Borrowings Lease liabilities Derivative financial instruments Total financial liabilities 2020 Trade and other payables Borrowings Lease liabilities Derivative financial instruments Total financial liabilities Less than three months Three to 12 months One to five years Over five years 7,194 — 289 104 7,587 7,674 77 271 41 8,063 — — 1,190 143 1,333 — — 887 29 916 — — 891 16 907 — — 1,374 44 1,418 — — 121 — 121 — — — — — Total 7,194 — 2,491 263 9,948 7,674 77 2,532 114 10,397 Infection Prevention. For Life 92 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N T I N U E D 9 CAPITAL STRUCTURE 9.1 CAPITAL AND RESERVES a) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 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 30 June 2019 Issue of shares under employee share plans – proceeds received Balance 30 June 2020 Issue of shares under employee share plans – proceeds received Balance 30 June 2021 b) Reserves Number of shares 299,967,279 636,291 300,603,570 $’000 112,713 464 113,177 861,449 362 301,465,019 113,539 i. Share-based payments reserve 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. 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 Capital commitments As at 30 June 2021, the Group had commitments to purchase plant and equipment of $290,000 (2020: $464,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. NANOSONICS LIMITED | ANNUAL REPORT 2021 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N T I N U E D 93 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 Share-based payments Total Directors and Key Management Personnel compensation 2021 $ 822,545 2,528,418 206,683 175,925 1,176,553 4,910,124 2020 $ 775,405 2,293,843 246,659 180,302 1,011,802 4,508,011 Detailed remuneration disclosures are provided in the remuneration report on pages 38 to 57. 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 Maurie Stang Related entity Transactions Gryphon Capital Pty Ltd Maurie Stang Regional Healthcare Group Pty Ltd Sale of products and services to Related Parties Purchases of goods and services from Related Parties Reimbursement of costs incurred on behalf on Nanosonics Director fees Reimbursement of costs incurred on behalf of Nanosonics Products purchased, services received and products sold 2021 $ 5,089,524 9,137 — 2020 $ 2,661,573 3,384 1,576 The above transactions exclude Director fees which are disclosed in Non-executive Directors remuneration in section 7.2 of the Remuneration report on page 53. 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) 2021 $ 2020 $ 1,821,163 562,396 There were no other amounts due from or to other Related Parties. There were no provisions for impaired receivables in relation to any outstanding balances from Related Parties (2020: 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 2021 (2020: 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. Infection Prevention. For Life 94 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N T I N U E D 10.3 CONTROLLED ENTITIES The consolidated financial statements of the Group include: Name of controlled entity Principal activities Country of incorporation Class of shares Equity 2021 2020 Nanosonics Europe GmbH Saban Ventures Pty Limited Nanosonics, Inc. Nanosonics Europe Limited Nanosonics UK Limited Nanosonics Canada, Inc. Nanosonics Japan KK Provision of sales and customer support services to Nanosonics Limited in Germany Owner of the registered intellectual property of the Group Sales and distribution of Nanosonics’ products and provision of sales and customer support services to Nanosonics Limited in the USA Sales and distribution of Nanosonics’ products in Europe Provision of sales and customer support services in Europe Sales and distribution of Nanosonics’ products and services in Canada Sales and distribution of Nanosonics’ products and services in Japan Strategic investments Germany Australia Ordinary 100% 100% Ordinary 100% 100% USA Ordinary 100% 100% UK UK Ordinary Ordinary 100% 100% 100% 100% Canada Japan Australia Australia Ordinary 100% 100% Ordinary Ordinary — 100% 100% 100% 100% 100% 100% Nanosonics Investments Pty Ltd Nanosonics Employee Equity Trust Management of Nanosonics employee share plan 10.4 PARENT ENTITY INFORMATION As at and throughout the financial year ended 30 June 2021, 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) Retained earnings Total equity Profit for the year Total comprehensive income 2021 $’000 2020 $’000 159,773 171,163 13,880 14,970 113,538 21,117 369 21,169 156,193 9,827 9,208 145,954 162,378 15,948 18,025 113,176 19,143 691 11,343 144,353 7,549 8,306 ii. Guarantees entered into by the parent entity For the year ended 30 June 2021 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 2021 (2020:Nil). iv. Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2021, the parent entity had commitments to purchase plant and equipment of $249,000 (2020: $462,000). 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. NANOSONICS LIMITED | ANNUAL REPORT 2021 N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N T I N U E D 95 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: Fees to Ernst & Young (Australia) Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities Fees for non-audit services Tax compliance Other services Total fees to Ernst & Young (Australia) Fees to other overseas member firms of Ernst & Young Fees for auditing the statutory financial report of the U.K. subsidiaries Fees for non-audit services Tax compliance Total fees to overseas member firms of Ernst & Young Total auditors remuneration 2021 $ 2020 $ 371,528 323,622 106,500 37,719 515,747 110,900 39,185 473,707 52,972 40,817 7,147 60,119 575,866 7,807 48,624 522,331 10.6 NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED The Company has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. 10.7 EVENTS OCCURRING AFTER THE BALANCE DATE On 18 August 2021, the Company issued 37,201 shares at $4.51 per share for a total of $167,777 under the Global Employee Share Plan (GESP). No other matters or circumstances that have arisen since 30 June 2021 that have significantly affected, or may significantly affect: a) The Group’s operations in the current or future financial years; b) The results of those operations in the current or future financial years; or c) The Group’s state of affairs in the current or future financial years. Infection Prevention. For Life 96 D I R E C T O R S ’ D E C L A R AT I O N For the year ended 30 June 2021 1. In the Directors opinion: a) The financial statements and notes set out on pages 60 to 95 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 2021 and of its 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. G E O F F W I L S O N Director Sydney, 24 August 2021 NANOSONICS LIMITED | ANNUAL REPORT 2021 I N D E P E N D E N T A U D I T O R ’ S R E P O RT to the members of Nanosonics Limited 97 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 Independent auditor’s report to the members of Nanosonics Limited Report on the audit of the financial report Opinion We have audited the financial report of Nanosonics Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2021, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a. Giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated financial performance for the year ended on that date; and b. Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Infection Prevention. For Life 98 I N D E P E N D E N T A U D I T O R ’ S R E P O RT C O N T I N U E D Revenue Recognition Why significant How our audit addressed the key audit matter As disclosed in Note 2.1 of the financial report, revenue from the sale of goods is recognised when the Group has delivered goods to its customers and revenue from the sale of services is recognised as the service is provided. Our audit procedures included the following: ► Assessed the appropriateness of the Group’s revenue recognition accounting policies for compliance with Australian Accounting standards. The Group has a number of different revenue streams and channels to market for its products. Judgement is involved in determining whether the criteria for revenue recognition have been met and that revenue is recognised in the correct period. On this basis this was considered a Key Audit Matter. ► Assessed the operating effectiveness of relevant controls in place relating to the recognition of revenue from the sale of goods and services. ► Selected a sample of sales of goods and service revenue transactions and obtained evidence of the sale including cash receipt and tested whether the sale was recognised in the correct period. ► Used data analytical procedures to corroborate expected correlations between revenue, contract liability, accounts receivable and cash. ► Selected a sample of service revenue contract liabilities and obtained evidence of the sale and recalculated the contract liability recorded. ► Assessed the adequacy of the disclosures relating to revenue in the financial report. Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2021 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation NANOSONICS LIMITED | ANNUAL REPORT 2021 I N D E P E N D E N T A U D I T O R ’ S R E P O RT C O N T I N U E D 99 Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Infection Prevention. For Life 100 I N D E P E N D E N T A U D I T O R ’ S R E P O RT C O N T I N U E D ► Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ► Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 40 to 57 of the directors’ report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Nanosonics Limited for the year ended 30 June 2021, complies with section 300A of the Corporations Act 2001. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation NANOSONICS LIMITED | ANNUAL REPORT 2021 I N D E P E N D E N T A U D I T O R ’ S R E P O RT C O N T I N U E D 101 Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Gamini Martinus Partner Sydney 24 August 2021 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Infection Prevention. For Life 102 S H A R E H O L D E R I N F O R M AT I O N The shareholder information set out below was applicable as at 18 August 2021. A. Equity security holders Twenty largest holders of quoted equity securities Ordinary shares HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Ltd Six Sis Ltd UBS Nominees Pty Ltd BNP Paribas Noms Pty Ltd Mr Maurie Stang 1 Mr Bernard Stang 1 Mr Steve Kritzler National Nominees Limited BNP Paribas Nominees Pty Ltd Australian Foundation Investment Company Limited HSBC Custody Nominees (Australia) Limited Asia Union Investments Pty Limited Dr Harry Hirschowitz Avanteos Investments Limited <2349414 Hofbauer A/C> Powerwrap Limited Mr Michael Kavanagh 1 Truebell Capital Pty Ltd BNP Paribas Nominees Pty Ltd 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 Rights and options on issue Performance rights under NOEP to take up unissued ordinary shares Share appreciations rights under NOEP to take up unissued ordinary shares Options under NOEP to take up unissued ordinary shares Total performance rights and options on issue 1. There are 164 unique holders with some holding two or three types of unquoted securities. Number of quoted shares held Percentage 71,166,923 38,534,430 25,685,887 9,048,695 9,015,071 8,887,946 8,629,534 9,358,048 7,489,737 7,238,753 4,984,762 3,545,000 2,924,746 2,200,000 2,139,090 1,200,000 1,165,041 1,018,363 1,000,000 912,009 216,144,035 85,358,185 23.60% 12.78% 8.52% 3.00% 2.99% 2.95% 2.86% 3.10% 2.48% 2.40% 1.65% 1.18% 0.97% 0.73% 0.71% 0.40% 0.39% 0.34% 0.33% 0.30% 71.68% 28.32% 301,502,220 100.00% Number of rights and options over ordinary shares Number of holders 1 1,183,097 920,633 2,717,866 4,821,596 164 47 39 164 NANOSONICS LIMITED | ANNUAL REPORT 2021 S H A R E H O L D E R I N F O R M AT I O N C O N T I N U E D 103 B. Distribution of equity securities Analysis of numbers of ordinary shares and rights and options by size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Holders Quoted ordinary shares Unquoted rights and options Units Percentage Holders Units Percentage Holders 4,727,111 16,766,739 12,048,915 29,348,547 238,610,908 1% 6% 4% 10% 79% 10,790 6,537 1,605 1,190 108 32,067 27,791 44,277 1,132,713 3,584,748 1% 1% 1% 23% 74% 301,502,220 100% 20,230 4,821,596 100% 107 10 6 31 10 164 A total of 56,312 units were held by 1,008 holders of less than a marketable parcel of 89 ordinary shares at $5.68 per share (being the closing market price on 18 August 2021). 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 Number of ordinary shares Percentage 28,854,714 18,946,517 16,302,493 9.57% 6.28% 5.41% All ordinary shares carry one vote per share without restrictions. Every member present at a meeting in person or by proxy shall have one vote for each share. b. Performance rights and options Performance rights and options have no voting rights. E. Restricted securities and voluntary escrow As at the date of this report, Nanosonics Limited has no restricted securities on offer. F. 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. Infection Prevention. For Life 104 G L O S S A RY AASB Australian Accounting Standards Board AcuTrace ® RFID technology that digitally captures the clinical workflow AGM APES Annual General Meeting Accounting Professional and Ethical Standard ASEAN Association of Southeast Asian Nations ASIC ASX AUD Australian Securities and Investments Commission Australian Securities Exchange Limited Australian dollar AuditPro ™ Digital workflow compliance management ANZ APIC CAD CAGR CDC CEO CEO&P CFO Company or Nanosonics Constant currency system for tracking various instruments used in medical procedures Australia and New Zealand Association for Professionals in Infection Control Canadian dollar Compounded Annual Growth Rate Center for Disease Control Chief Executive Officer Chief Executive Officer and President Chief Financial Officer Nanosonics Limited ABN 11 095 076 896 Removes the impact of foreign exchange rate movements to facilitate comparability of operational performance. This is done by converting the current period sales of entities that use currencies other than Australian dollars at the rates that were applicable in the prior period COVID-19 Coronavirus disease of 2019 CRIFM Clinical Research Institute of Fetal Medicine Date of this report 24 August 2021 EBIT EBTDA EMEA ENT EPS ERP ESG ESOP EUR FDA FY GBP GESP GRG Group GST H2O2 HIV HLD IASB IB Earnings Before Interest and Tax Earnings Before Tax Depreciation and Amortisation Europe Middle East and Africa Ear, Nose and Throat Earnings Per Share Enterprise Resource Planning Environmental, Social and Governance Employee Share Option Plan European Currency Food and Drug Administration Financial year, eg. FY2021 is the financial year ended 30 June 2021 Great Britain Pound Global Employee Share Plan Godfrey Remuneration Group Nanosonics Limited and its wholly owned subsidiary companies Goods and Services Tax Hydrogen Peroxide 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 International Accounting Standards Board Installed base ICU IFRS IP ISO 13485 ISUOG ITAA JSUM KMP LTI LTIS MSD NAN NHS NOEP NMPA OEM PBT PCP Intensive Care Unit International Financial Reporting Standards Intellectual Property Quality Management System for Medical Devices – Requirements for Regulatory Purposes International Society for Ultrasound Obstetrics and Gynaecology Income Tax Assessment Act Japan Society of Ultrasound Medicine Key Management Personnel Long-Term Incentives Long-Term Incentive Scheme Mobile scanning device Nanosonics Limited (ASX Code) National Health System (UK) Nanosonics Omnibus Equity Plan National Medical Products Administration Original Equipment Manufacturer Profit before tax Prior corresponding period 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 2021 RFID RKI ROE RPC SARs Radio-frequency Identification The Robert Koch Institute Return on equity Remuneration & People Committee Share Appreciation Rights SARS CoV-2 Severe acute respiratory syndrome coronavirus 2 SG&A STI TCFD TFR trophon® Selling, General and Administration Short-Term Incentives Task Force for Climate Related Financial Disclosures Total Fixed Remuneration The brand representing Nanosonics’ range of infection control solutions designed specifically for healthcare settings trophon® EPR The brand of Nanosonics’ first generation device specifically designed to disinfect intracavity and surface ultrasound probes 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 Total Shareholder Return Ultrasound guided United Kingdom United States of America United States dollar Value Added Tax Volume Weighted Average Price Weighted Average Exercise Price World Federation for Ultrasound in Medicine and Biology Work, Health and Safety Wholly Owned Foreign Enterprise trophon®2 TSR UG UK US USD VAT VWAP WAEP WFUMB WHS WOFE NANOSONICS LIMITED | ANNUAL REPORT 2021 Infection Prevention. For Life 105 105 C O R P O R AT E D I R E C T O RY Nanosonics Limited ABN 11 095 076 896 Incorporated 14 November 2000 Directors Maurie Stang David Fisher Steven Sargent Marie McDonald Geoff Wilson Lisa McIntyre Michael Kavanagh Company Secretary McGregor Grant Registered Office 14 Mars Road, Lane Cove NSW 2066 Australia Ph: +61 2 8063 1600 Share Register Computershare Investor Services Pty Ltd GPO Box 2975 Melbourne VIC 3001 Australia Ph: +61 3 9415 4088 Ph: 1300 555 159 (within Australia) www.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 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: HSBC Trinkaus & Burkhardt AG Deutsche Bank AG United States: HSBC Bank USA NA PNC Financial Services Group, Inc. Japan: MUFG Bank Ltd. Stock Exchange Listing Nanosonics Limited shares are listed on the Australian Securities Exchange ASX code: NAN Industry Group: Healthcare Equipment & Services 2021 Annual General Meeting The 2021 AGM of Nanosonics will be held at 11am on 19 November 2021. Details to be announced separately. Infection Prevention. For Life Nanosonics Limited 14 Mars Road, Lane Cove NSW 2066 Australia T +61 2 8063 1600 E info@nanosonics.com www.nanosonics.com ABN 11 095 076 896