INFECTION PREVENTION. FOR LIFE. ANNUAL REPORT 2022 2 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. O V E R V I E W 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. NANOSONICS LIMITED I ANNUAL REPORT 2022 3 Approximately 98,000 patients are protected every day from the risk of ultrasound probe cross-contamination by trophon technology, equating up to 25 million patients every year. C O N T E N T S 2 Overview and Mission 28 The Board 4 6 8 Financial highlights 30 The Executive Team Letter to Shareholders 32 Directors’ report Financial and Operational Review 38 Remuneration report 22 Our Commitment to ESG 62 Financial statements 24 trophon®2 26 AuditPro™ 63 Auditor’s independence declaration 102 Directors’ declaration 103 Independent auditor’s report to the members 108 Shareholder information 110 Glossary 112 Corporate directory and information for investors INFECTION PREVENTION. FOR LIFE. 4 F I N A N C I A L H I G H L I G H T S REVENUE ($M) GROSS PROFIT ($M) OPERATING EXPENDITURE ($M) 120.3 100.1 103.1 84.3 60.7 91.9 80.4 75.5 62.8 45.3 49.2 42.6 90.5 70.8 63.2 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 PROFIT BEFORE TA X ($M) FREE CASH FLOW ($M) CASH AND CASH EQUIVALENTS ($M) 16.8 20.9 12.4 11.0 91.8 96.0 94.5 69.4 72.2 5.6 6.2 5.9 1.6 2.6 2018 2019 2020 2021 2022 2018 2019 2020 2021 (0.2) 2022 2018 2019 2020 2021 2022 Total revenue for the year grew 17% to $120.3 million resulting from continued growth in new installed base, upgrades and consumables/service. MICHAEL KAVANAGH, CEO & PRESIDENT NANOSONICS LIMITED I ANNUAL REPORT 2022 5 2013-2022 RESULTS$’0002022202120202019201820172016201520142013Revenue 120,320 103,079 100,054 84,324 60,698 67,507 42,796 22,214 21,492 14,899 Gross profit 91,905 80,384 75,513 62,816 45,291 50,155 32,166 15,313 13,921 8,471 R&D expenses (22,358) (17,194) (15,558) (11,375) (9,882) (9,486) (7,297) (4,902) (4,103) (3,167)EBITDA7,509 15,188 15,563 17,642 5,861 14,140 950 (4,732) (1,845) (5,366)EBIT 1,782 10,763 11,671 15,502 4,362 12,866 (359) (5,795) (2,820) (6,410)Operating profit/(loss) before tax 1,578 10,984 12,459 16,830 5,583 13,852 136 (5,465) (2,636) (5,735)Net income tax benefit/(expense) 2,164 (2,406) (2,322) (3,228) 168 12,306 (14) 5 31 (33)Operating profit/(loss) after tax 3,742 8,578 10,137 13,602 5,751 26,158 122 (5,460) (2,605) (5,768)Cash and cash equivalents 94,512 96,027 91,781 72,180 69,433 62,989 48,841 45,724 21,233 24,064 INFECTION PREVENTION. FOR LIFE. 6 L E T T E R T O S H A R E H O L D E R S After two years of significant disruptions due to the global COVID-19 pandemic, Nanosonics is in a strong position demonstrating growth momentum with a clear growth strategy to expand its participation as a leading contributor in the multi-billion dollar global infection prevention market. FY22 saw significant progress made against key strategic priorities, and the Company’s strong balance sheet and resilient business model means that we are well positioned to continue to create value for all our stakeholders now, and over the long term. STEVE SARGENT MICHAEL KAVANAGH Chairman CEO & President In another year of significant change, the partnership with our customers is a key feature that remains constant. We are very pleased to serve their infection prevention needs during a time in which the importance of infection prevention has only been elevated. We would like to recognise the resilience and the outstanding efforts of our team, who all demonstrate a passion for the Company’s mission and again successfully navigated a number of further lockdowns around the world to deliver on our objectives keeping our customers operating and their patients safe. During the year the Company significantly increased its capabilities and capacity through the move to new corporate headquarters. Supported by the NSW Government Jobs Plus Program, these new facilities include expanded manufacturing and state of the art R&D facilities that enables the Company to further invest in R&D and expand its infection prevention portfolio focusing on significant unmet market needs. Central to many of these needs is the requirement to develop solutions with integrated connectivity and ability to access real time traceability data to ensure compliance with necessary standards to mitigate the risks of cross contamination. Nanosonics has developed a leading capability in this area and such features are a cornerstone not only of our current trophon solution but new technologies under development. The Company successfully executed many key strategic priorities during the year. Central to these was the successful evolution of our sales model in our largest market, North America. Aligned with the Company’s ultimate goal of operating through more direct sales channels, the Company expanded its infrastructure in North America and now operates under a largely direct model while maintaining ongoing ultrasound OEM partnerships through capital reseller agreements. Having a direct interface with our customers brings many benefits to our 1. All research and new product development programs involve inherent risks and uncertainties which can impact commercialisation timelines. customers and also to Nanosonics, where the direct access enables us to broaden and deepen our customer relationship with additional product and service sales. We also get excellent feedback from customers which generates new ideas for product enhancements. During the year, despite COVID-19 disruptions, we continued the important investments in our geographical expansion activities across Europe and Asia Pacific. These investments included an expansion of our local infrastructures and medical affairs activities. With the total installed base continuing to grow and market fundamentals continuing to strengthen in these regions, we expect our investments to be further leveraged in FY23 with improved market access conditions after prolonged periods of COVID-19 related disruption. Importantly, throughout the year our manufacturing and logistics teams continued to manage a challenging and complex supply chain. Effective management saw continuity of supply maintained across all regions and all customers orders delivered in full and on time. Our product diversification plans progressed through increased investment in R&D across our ultrasound reprocessing, endoscopy reprocessing and cloud solution platforms as well as investments in chemistry and biosciences. Positive progress continued in the development activities, clinical and regulatory planning and preparation for manufacturing of the new endoscope reprocessing platform, Nanosonics CORIS®.1 NANOSONICS LIMITED I ANNUAL REPORT 2022 T H A N K Y O U Nanosonics is a highly respected ASX 200 company and an emerging global leader in automated instrument reprocessing. I am proud to welcome Steve Sargent, who has outstanding qualifications and track-record for this important role of chairing the Company’s Board of Directors. I will hold the position of Deputy Chairman, working with Steve and the Board until the 2022 AGM, at which time I will not stand for re- election, but rather, assume the position of Chairman of the new Innovation and Infection Control Advisory Committee. As a Founder and Chairman of Nanosonics for more than two decades, it has been my privilege to see this company grow in literally every dimension of its activities and continue to make a significant contribution to patient safety, and indeed, a dramatic improvement in environmental health by the elimination of the use of toxic chemicals used in instrument disinfection. Proudly Australian, Nanosonics has succeeded in leveraging innovation and technology to a world market and is a recognised emerging leader in its field. The investment that the Nanosonics team continues to make in R&D is world- leading, significant and a tribute to the Company’s vision, expressed in our “Infection Prevention, For Life” statement. Today, Nanosonics enjoys a new campus at Macquarie Park, comprising of an It was very pleasing to have the FDA recently accept CORIS into the FDA Safer Technologies Program (STeP). Products accepted into this program are reasonably expected to significantly improve the safety of currently available treatments. Through the program the FDA aims to provide additional review resources facilitating more interactive and timely communication through the submission review process. Total revenue for the year grew 17% to $120.3 million resulting from continued growth in new installed base, upgrades and consumables/service. This was a very pleasing result taking into consideration the foreshadowed one-off revenue impact in H2 associated with the transition to a largely direct sales model in North America. As a result of this revised sales model, GE Healthcare ran down their capital and consumable inventory and transitioned to a non-stocking capital reseller extending their agreement by a further 12 months to 30 June 2023. Gross profit margin for the year was 76.4% delivering a gross profit of $91.9 million. Consistent with our investment for growth strategy, our investments across R&D, the revised North American sales model, geographical expansion and broad capability and capacity expansion saw operating expenses increase to $90.5 million. Pleasingly, profit before tax for the year was $1.6 million, which was ahead of expectations, despite the complex operating environment experienced during the year and the foreshadowed one-off impact in H2 FY22 on revenue in North America associated with the move to a largely direct sales model. 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 25% to 425. 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 33 different nationalities with 42% of employees being female. 41% 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. We were also pleased to see the Company’s expanding ESG agenda outlined in the FY22 Sustainability Report. We see sustainability as a key consideration for our business, and one that is fully aligned with our Values and Mission. We are fortunate that our unique healthcare solutions are in many respects neatly aligned with sustainability principles which means we achieve positive sustainability outcomes for our customers because they use far less hazardous chemicals for cleaning and a lot less water, all the while addressing their important infection control needs and protecting their patients and employees. 7 outstanding R&D centre and an impressive new manufacturing capability, together with a well-established presence in the major international markets. In the USA, we have transitioned to an evolved business model, which brings us closer to our customers and provides a remarkable basis for future growth. I am confident that Nanosonics is strongly positioned for ongoing success over the near and long-term, in a marketplace that is demanding new ideas and innovation which we are ideally positioned to provide. I look forward to my new role with the Company and working with an outstanding team and Board to contribute to an exciting future for all our stakeholders. MAURIE STANG Non-executive Director and Deputy Chairman We would again like to recognise the outstanding stewardship and commitment of our Board during the year. We particularly recognise the significant contribution of our founder and longstanding Chairman, Maurie Stang, who recently stepped down as Chairman and assumed the role of Deputy Chairman, until his retirement following the 2022 Annual General Meeting. Maurie has made significant contributions not only to Nanosonics but the wider infection prevention field over the last two decades. Over this time Maurie has created a number of very successful businesses in the healthcare sector. He is one of Australia’s leading authorities in medical technologies, infection control and the biosciences. We are pleased that Maurie will continue to contribute to the Company through an informal advisory committee that will provide ongoing advice to the Board on emerging scientific, commercial developments and opportunities in infection control. STEVE SARGENT Chairman MICHAEL KAVANAGH CEO & President 23 August 2022 INFECTION PREVENTION. FOR LIFE. 8 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W REVISED NORTH AMERICAN SALES MODEL As foreshadowed in our 8 February 2022 announcement, Nanosonics and GE Healthcare revised the North American sales model to a largely direct Nanosonics sales model. Through this change, GE has transferred all its trophon customers to Nanosonics for the ongoing provision of all consumables. In addition, through an expansion of the Nanosonics direct team, Nanosonics is now responsible for the majority of all capital sales moving forward, with GE still having access to capital equipment as a non-stocking capital reseller. This evolution of the North American sales strategy to a largely direct sales model with OEM capital reseller partners represented another significant milestone in the ongoing growth of the organisation bringing many benefits to Nanosonics and trophon customers. The transition to the largely direct sales model is now complete. The expanded North American team is in place and includes the hiring of a number of members of the former GE high-level disinfection team. Shipping volumes through the Nanosonics logistics facility in Indianapolis are up over 100% in the last three months with no disruption in supply to customers and sufficient capacity in place to support expected future growth. The team has also executed over 30 new enterprise agreements with strategic accounts / Integrated Delivery Networks with many more due to be completed in the coming months. Nanosonics has also established the necessary partnerships to enable selling to US Federal Government accounts where GE previously represented 80% of the sales to those accounts. Our North American team is now well positioned to manage the overall growth strategy associated with new installed base, upgrade adoption and consumables usage. The business performance in Q4 FY22 saw many of these benefits start to come to fruition. In that quarter the Nanosonics team were responsible for 91% of the new installed base together with 86% of upgrade sales. The resulting deeper customer relationships with the majority of North American hospitals and our corresponding infrastructure expansion also supports planned product expansion beyond trophon. INSTALLED BASE GROWTH The global installed base increased 12% to 29,850 units, an increase of 3,100 units for the year. The installed base increased 1,690 units in H2, up 20% compared with H1. GLOBAL INSTALLED BASE (UNITS) INSTALLED BASE GROWTH (BY HALF) (UNITS) 29,850 26,750 23,720 1,570 1,650 1,690 1,380 1,410 1,220 12% CUMULATIVE INSTALLED BASE 20% NEW INSTALLED BASE GROWTH H2 VS. H1 FY20 FY21 FY22 H1 H2 H1 H2 H1 H2 FY20 FY21 FY22 NANOSONICS LIMITED I ANNUAL REPORT 2022 NORTH AMERICA In North America, the installed base increased 2,650 units for the year to 26,130 representing an 11% increase. Hospital access continued to improve throughout the year and the installed base increased by 1,450 units in H2, up 21% compared with H1. The North American installed base now represents approximately 44% of the estimated total addressable market of 60,000 units where trophon is in use in over 5,000 institutions, further consolidating its position as standard of care. The overall ultrasound market continues to grow with new innovations in the market such as wireless hand-held probes being released. The Nanosonics R&D team has developed an accessory to enable wireless probes to be decontaminated in trophon with the first of such accessories due to launch in Q2 FY23. During FY22, the Company also progressed the launch of AuditPro in North America with a focus on a number of key reference sites. In parallel, the Company advanced preparations for ISO27001 accreditation, the internationally accepted standard for the management of information security, which will further streamline customer security assessment requests as part of AuditPro implementation. EUROPE AND MIDDLE EAST In the Europe and Middle East region, the installed base increased 310 units for the year, with the total installed base increasing by 21% to 1,820 units. Notwithstanding the impact of COVID-19 related market restrictions during the year, and other factors such as the sanctions on Russia, the number of new installed base units in H2 was 170 units, up 21% compared with H1. The Company continued its investment in the EMEA region in FY22 in particular in the UK and Germany. With market restrictions and hospital access now markedly improved it is expected that FY23 will see the first full year since 2020 where the investments in this region can be fully leveraged. ASIA PACIFIC In Asia Pacific, the installed base increased 140 units for the year with the total installed base increasing 8% to 1,900 units. The number of units installed in H2 was equivalent to H1 reflecting the COVID-19 restrictions that prevailed during the year. In Japan, the Company expanded its local team and medical affairs activities as we worked with local authorities on the establishment of local guidelines. In China, the registration of our Wholly Owned Foreign Enterprise was completed. Further, after significant delays due to COVID-19 related lockdowns, required local testing of the trophon device and consumables by the relevant State authorities has now commenced as part of our product registration plans. 9 11% VS. FY21 TOTAL INSTALLED BASE (UNITS) 26,130 23,480 20,990 18,570 15,620 FY18 FY19 FY20 FY21 FY22 TOTAL INSTALLED BASE (UNITS) 1,820 1,510 1,120 880 730 21% VS. FY21 FY18 FY19 FY20 FY21 FY22 TOTAL INSTALLED BASE (UNITS) 1,900 1,760 1,610 1,480 1,390 8% VS. FY21 FY18 FY19 FY20 FY21 FY22 INFECTION PREVENTION. FOR LIFE. 1 0 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D TROPHON UPGRADE OPPORTUNITY There is a significant opportunity for upgrades from the first-generation trophon EPR to trophon2, where approximately 9,000 trophon EPR units are now at least seven years of age. In North America, where the majority of the upgrade opportunity exists, 880 upgrade units were sold during the year up 283% compared with FY21. Good growth momentum was also achieved in H2 over H1, with 500 upgrade units in H2 up 32% compared with H1. Importantly, 63% of the upgrade units sold in North America in H2 were sold in Q4 during the transition to the largely direct sales model with Nanosonics responsible for 86% of those sales. This result demonstrates the opportunity for Nanosonics to further drive the upgrade strategy with its direct access to all trophon customers. In Australia / New Zealand, 100 upgrades were sold with 80% of those in H2. GLOBAL INSTALLED BASE AGE DISTRIBUTION AT JUNE 20221 9,000+ UNITS 13% 8% 5% 5% 1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs 8 yrs 9 yrs 10+ yrs 1. Percentages represent the upgrade opportunity as a proportion of the cumulative Installed Base. U P G R A D E S DEVELOPING STRONG MOMENTUM IN CAPTURING UPGRADE VALUE. Globally, 1,000 trophon EPR devices were upgraded in FY22, up 133% compared with FY21. Upgrade momentum continued into H2 with upgrades of 600 units, up 50% compared with H1. GLOBAL UPGRADES (UNITS) 600 370 400 60 H1 H2 H1 H2 FY21 FY22 133 % GLOBAL UPGRADES VS. FY21 50 % UPGRADE UNITS H2 VS. H1 Graphs are not to scale and therefore not comparable NANOSONICS LIMITED I ANNUAL REPORT 2022 1 1 TOTAL REVENUE Total revenue for the year was $120.3 million, up 17% (15% in constant currency1) on prior corresponding period. Revenue in H2 FY22 was $59.7 million, down 2% compared with H1 FY22 of $60.6 million. The growth in revenue associated with both capital and consumables in H2 was impacted by the transition to the largely direct sales model in North America. As part of that transition, GE ran down their capital and consumable inventory with no replenishment as they transitioned to a non-stocking capital reseller by 30 June 2022. REVENUE ($ MILLION) H1 H2 CONSTANT CURRENCY1 100.1 103.1 51.6 60.0 84.3 43.6 40.7 48.6 43.1 60.7 30.7 30.0 120.3 59.7 60.6 17% VS. FY21 2% H2 VS. H1 FY18 FY19 FY20 FY21 FY22 118.7 58.4 60.3 FY22 15% VS. FY21 3% H2 VS. H1 1. Constant currency (CC) 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. The average exchange rate used for the Company’s major foreign currency (USD) for the 12 months to 30 June 2022 was 0.7231 (2021: 0.7492). INFECTION PREVENTION. FOR LIFE. 1 2 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D CAPITAL REVENUE Total capital revenue for the year was $37.7 million, up 41% on prior corresponding period. This increase reflects the recovery from the significant reduction in capital revenue experienced in H1 FY21 in North America associated with the reduction in the number of units sold to GE Healthcare in that period as a result of the negative impact of COVID-19 on new installed base growth. While new installed base and upgrade capital units increased in H2, capital revenue of $18.6 million in H2 was down 2% compared with H1. This was primarily due to the impact of the revised North American sales model and GE Healthcare destocking as they transitioned to a non-stocking capital reseller. CONSUMABLES AND SERVICE REVENUE As COVID-19 restrictions eased during the year, market access conditions improved resulting in ultrasound procedure volumes returning to near pre-COVID levels. Consumables and service revenue represented 69% of total revenue highlighting the attractive annuity revenue nature of the business. Total consumables and service revenue for the year was $82.6 million, up 8% on prior corresponding period. Revenue of $41.1 million in H2 FY22 was down 1% compared with H1 FY22 again reflecting the impact of the revised North American sales model with GE Healthcare consuming their inventory. There was no impact in the continuity of supply of consumables to customers during the transition. GLOBAL ($ MILLION) H1 H2 30.0 15.6 14.4 FY20 GLOBAL ($ MILLION) H1 H2 70.1 36.0 26.7 17.3 9.4 FY21 76.4 42.7 34.1 33.7 37.7 18.6 19.0 FY22 82.6 41.1 41.6 41% VS. FY21 2% H2 VS. H1 8% VS. FY21 1% H2 VS. H1 FY20 FY21 FY22 NANOSONICS LIMITED I ANNUAL REPORT 2022 1 3 REGIONAL FINANCIAL PERFORMANCE NORTH AMERICA Total revenue for the year in North America was $106.9 million, up 20% on prior corresponding period. Capital revenue was $33.6 million, up 58% on prior corresponding period. While installed base and upgrade units sold in H2 FY22 increased, capital revenue in H2 of $16.3 million was down 6% compared with H1, primarily due to the impact of the revised North American sales model and GE Healthcare destocking. Consumables and service revenue was $73.3 million, up 8% on prior corresponding period. In H2 FY22 consumables and service revenue was $36.3 million, down 2% compared with H1 FY22 again reflecting the impact of GE Healthcare’s destocking. TOTAL REVENUE ($ MILLION) H1 H2 54.4 27.2 27.2 FY18 76.5 39.4 37.1 FY19 90.1 46.5 43.7 FY20 89.2 52.3 36.9 FY21 106.9 52.5 54.4 FY22 20% VS. FY21 3% H2 VS. H1 CAPITAL REVENUE ($ MILLION) CONSUMABLES/SERVICE REVENUE ($ MILLION) H1 H2 27.6 14.1 13.5 FY20 33.6 16.3 17.4 FY22 21.3 14.1 7.2 FY21 58% VS. FY21 6% H2 VS. H1 H1 H2 62.7 32.4 67.9 38.2 30.3 29.7 73.3 36.3 37.0 FY20 FY21 FY22 8% VS. FY21 2% H2 VS. H1 INFECTION PREVENTION. FOR LIFE. 1 4 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D EUROPE AND MIDDLE EAST Total revenue for the year in the Europe and Middle East region was $7.5 million, up 4% on prior corresponding period. H2 FY22 revenue was $4.1 million, up 21% compared with H1 FY22. Capital revenue was $2.1 million, down 22% on prior corresponding period. The reduction in revenue reflects the delayed easing of COVID-19 related market restrictions coupled with other factors including impact of sanctions on Russia. It is important to note that the majority of units placed in the UK (the largest market in the region) are under the managed equipment service model where no capital revenue is recognised. Consumables and service revenue was $5.4 million, up 20% compared with prior corresponding period. Consumables and service revenue in H2 FY22 was $2.8 million, up 8% compared with H1 FY22 as ultrasound procedure volumes returned to near pre-COVID levels. TOTAL REVENUE ($ MILLION) H1 H2 3.0 1.6 1.3 FY18 3.8 2.1 1.7 FY19 5.2 2.8 2.4 FY20 7.2 3.6 3.6 7.5 4.1 3.4 FY21 FY22 4% VS. FY21 21% H2 VS. H1 CAPITAL REVENUE ($ MILLION) CONSUMABLES/SERVICE REVENUE ($ MILLION) H1 H2 1.4 0.9 0.5 FY20 2.7 1.2 1.5 2.1 1.3 0.8 22% VS. FY21 63% H2 VS. H1 H1 H2 3.8 1.9 1.9 4.5 2.4 2.1 5.4 2.8 2.6 FY21 FY22 FY20 FY21 FY22 20% VS. FY21 8% H2 VS. H1 NANOSONICS LIMITED I ANNUAL REPORT 2022 1 5 ASIA PACIFIC Total revenue for the year was $5.9 million, down 12% compared with the prior corresponding period. H2 FY22 revenue was $3.0 million, up 3% compared with H1 FY22. Importantly, FY21 included a one-off upgrade deal of 200 units with I-MED Radiology Network, the largest customer in Australia. Capital revenue was $1.9m, down 30% compared with the prior corresponding period, mainly as a result of the upgrade deal with I-MED in FY21. H2 FY22 revenue was up 11% compared with H1 FY22. Consumables and service revenue of $4.0 million was the same as the prior corresponding period. While revenue growth in FY22 was impacted by the timing of shipments to distributors, sales of consumables (NanoNebulant) to end customers increased in FY22 compared with FY21. TOTAL REVENUE ($ MILLION) H1 H2 3.3 1.8 1.5 FY18 4.0 2.1 1.9 FY19 4.7 2.3 2.3 FY20 6.7 4.1 2.6 FY21 5.9 3.0 2.9 FY22 12% VS. FY21 3% H2 VS. H1 CAPITAL REVENUE ($ MILLION) CONSUMABLES/SERVICE REVENUE ($ MILLION) H1 H2 1.1 0.6 0.5 FY20 2.7 2.0 0.7 FY21 30% VS. FY21 11% H2 VS. H1 1.9 1.0 0.9 FY22 H1 H2 3.6 1.7 4.0 2.1 1.9 1.9 4.0 2.0 2.0 FY20 FY21 FY22 0 % VS. FY21 0 % H2 VS. H1 INFECTION PREVENTION. FOR LIFE. 1 6 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D OTHER FINANCIAL RESULTS GROSS PROFIT Gross profit margin for the year was 76.4% compared with 78% in prior corresponding period. This reduction was primarily attributable to increased freight costs driven by global shortages in transport capacity. An increase in freight costs in Q4 FY22 were also attributable to the transition to the largely direct sales model in North America (amounting to approximately $0.3 million). The gross profit margin was ahead of the February 2022 guidance mainly due to favourable pricing outcomes in North America. INVESTING FOR GROWTH – OPERATING EXPENSES In line with the Company’s deliberate strategy to continue to invest for growth in the multi-billion-dollar global infection prevention market, operating expenses for the year increased 28% to $90.5 million. Attractive returns from these investments are expected over time as demonstrated by the Company’s performance in North America, its largest and most developed business, where operating margins have been in the range of 55% – 60%.1 Of the total operating expenses in FY22 approximately: • 43% was associated with market development activities. The increase in these costs included the additional investment in Q4 of approximately $0.8 million to expand the Company’s North American operations; • 25% of total operating expenses in FY22 was associated with the Company’s product innovation programs across the new Nanosonics CORIS technology as well as ongoing programs in ultrasound reprocessing and cloud solutions; and • 32% of total operating expenses in FY22 relate to the Company’s infrastructure including, manufacturing and other headquarter support costs. OPERATING EXPENDITURE (GLOBAL, $ MILLION) 90.5 Q4 24.6 70.8 63.2 49.2 42.6 28% VS. FY21 12% H2 VS. H1 FY18 FY19 FY20 FY21 FY22 Operating expenses increased to $47.8 million in H2, up 12% compared with H1 and in Q4 FY22 operating expenses were $24.6 million or 27% of the total year. In FY22, the Company incurred additional costs of approximately $1.5 million as a result of its relocation to its new global headquarter facility, increasing the organisation’s capabilities and capacity for future growth. Our new Macquarie Park facilities will support future company growth. 2x Manufacturing capacity 3x Laboratory space 400+ Employee capacity GLOBAL HEADQUARTERS 7-11 TALAVERA ROAD 35-41 WATERLOO ROAD R&D CENTRE + LABS MANUFACTURING WAREHOUSE 1. Before any HQ costs are allocated to the region. NANOSONICS LIMITED I ANNUAL REPORT 2022 1 7 OTHER INCOME AND PROFIT BEFORE TA X Other income for the year was $0.5 million, up $0.3 million compared with prior corresponding period. The increase in other income was mainly attributable to the NSW State Government funding received from the Jobs Plus Program. Profit before tax for the year was $1.6 million reflecting the increased investment in the Company’s strategic growth agenda as well as the foreshadowed impact in H2 on revenue in North America associated with the move to a largely direct sales model. WORKING CAPITAL Free cash flow for the year was a net outflow of $0.2 million driven mainly by capital expenditure associated with the new corporate headquarters and the increase in the Company’s inventory holding. Free cash flow in H2 FY22 was a net inflow of $3.6 million, offsetting the net outflow in H1 of $3.8 million. The Company expects to receive at least $1.6 million cash in FY23 relating to infrastructure rebate claims in respect of FY22 under the NSW Government Jobs Plus Program. PROFIT BEFORE TA X (GLOBAL, $ MILLION) FREE CASH FLOW (GLOBAL, $ MILLION) 20.9 16.8 12.4 11.0 5.6 1.6 6.2 2.6 5.9 FY22 3.6 (0.2) (3.8) FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 H1 H2 Net Cash and cash equivalents were $94.5 million at 30 June, providing a strong foundation for continued investment in growth. The Company has no debt and continues to regularly review its capital management strategy. During the year the Company increased its inventory holding by 91% to $22.6 million. This increase was driven by the need to carry more safety inventory in response to increased supply chain risks caused by the COVID-19 pandemic and the Company’s transition to a largely direct sales model in North America. Of the total increase, 55% was associated with finished goods and the balance related to raw materials. As a result of the Company’s COVID-19 pandemic inventory policy, there were no supply disruptions to customers. The Company expects it will maintain inventory at a similar level throughout FY23 reflecting the ongoing complexities with the global supply chain and the move to a largely direct model in North America. It is anticipated that once the supply chain risks reduce the Company’s inventory holding requirements will also reduce. CASH AND CASH EQUIVALENTS (GLOBAL, $ MILLION) 91.8 96.0 94.5 69.4 72.2 FY18 FY19 FY20 FY21 FY22 INFECTION PREVENTION. FOR LIFE. 1 8 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D R&D / NEW PRODUCTS In FY22 the Company invested $22.3 million in R&D. Research and development is a corner stone of the future growth of the Company. In FY22 the Company invested $22.3 million in R&D up 30% compared with FY21. Through these investments, which are all expensed, the Company has expanded its capacity and capabilities programs across ultrasound reprocessing, endoscope reprocessing, data through cloud solutions as well as chemistry and bioscience. The Company also increased its capacity to add new innovation programs to its R&D program through the establishment of expanded R&D facilities as part of its corporate headquarters move. These important investments position the Company well to further expand its participation as a leading infection prevention company in the significant global infection prevention market. INVESTMENT IN R&D (GLOBAL, $ MILLION) H1 H2 17.2 9.6 15.6 8.8 11.4 5.9 5.5 6.8 7.6 9.9 5.2 4.6 22.3 11.6 10.7 FY18 FY19 FY20 FY21 FY22 30% VS. FY21 8 % H2 VS. H1 NANOSONICS CORIS – TRANSFORMING THE CLEANING OF FLEXIBLE ENDOSCOPES In the United States, CORIS represents a disruptive innovation. As such, there is no existing predicate device like it on the market. As a completely novel technology platform, CORIS will be subject to the FDA de novo clearance pathway thus setting a new benchmark and creating an entirely new category for endoscope cleaning. Recently, the Nanosonics CORIS technology was accepted into the FDA Safer Technologies Program (STeP). Products accepted into this program are reasonably expected to significantly improve the safety of currently available treatments. The goal of STeP is to provide patients and healthcare providers with timely access to these medical devices by expediting their development, assessment and review while preserving the statutory standards for approval. Through the program, the FDA provides sponsors of devices with additional review resources, facilitating more interactive and timely communication through the submission review process. The new CORIS platform aims to deliver a solution to one of the biggest unmet needs in instrument reprocessing – reprocessing failures of flexible endoscopes due to current limitations of manual cleaning resulting in an increased risk of cross-contamination. NANOSONICS LIMITED I ANNUAL REPORT 2022 1 9 Recently, the Nanosonics CORIS technology was accepted into the FDA Safer Technologies Program (STeP). Products accepted into this program are reasonably expected to significantly improve the safety of currently available treatments. The potential to address the challenges of contaminated endoscopes represents a significant opportunity for Nanosonics in a growing market with over 60 million flexible endoscopy procedures per annum being conducted across major Western markets including the United States, Canada, Australia and key European markets every year. Similar to trophon (which comprises a range of business models), CORIS will include capital equipment together with an annuity revenue stream associated with consumables used for every cleaning cycle. Studies have shown that the cost of the full manual cleaning stage for a single flexible endoscope today can be between US$11 – $37.1 CORIS aims to automate a significant proportion of the current manual cleaning including the complex channel cleaning and deliver significantly superior cleaning outcomes compared to what can be achieved today. CORIS is being designed as a global solution ultimately to be used across all channeled flexible endoscope types. The CORIS technology continues to advance with the Company targeting progressive market introductions aligned with regulatory approvals, with the first introduction targeted for calendar 2023 and likely to be in Australia and/or Europe. Further details on CORIS can be found in the Company’s 2022 Full Year Results Investor Presentation. 1. Ofstead, C.L., Quick, M.R., Eiland, J.E. and Adams, S.J., 2017. A glimpse at the true cost of reprocessing endoscopes. International Association of Healthcare Central Service Material Management. LARGE VARIETY OF ENDOSCOPES... COLONOSCOPY GASTROSCOPY DUODENOSCOPY ENTEROSCOPY ENDOSCOPIC ULTRASOUND BRONCHOSCOPY UROLOGY E.N.T. GYNAECOLOGY ...WITH STRONG FUNDAMENTALS AND STANDARDS FOR REPROCESSING Public Health Agency of Canada Irish Health ServiceExecutive ANSI/AAMI ST91:2021 Society of Gastroenterology Nurses & Associates (SGNA) British Society of Gastroenterology UK Department of Health Steering group for Flexible Endoscope Cleaning & Disinfection (SFERD) French National Guidelines German Society of Hospital Hygiene Global Standards/Guidelines World Gastroenterology Organisation (WGO) ISO15883-4 Japan Gastroenterological Endoscopy Society State Administration for Market Regulation and Standardisation Administration (SAC) Gastroenterological Society of Australia(GESA) Australian/New Zealand Standards AS/NZS 4187:2014 INFECTION PREVENTION. FOR LIFE. 2 0 F I N A N C I A L A N D O P E R A T I O N A L R E V I E W C O N T I N U E D • Operating expenses to grow between 15-18%. It is expected that the overall proportion of operating expenses associated with infrastructure will decrease. Accordingly, the significant majority of the increase in operating expenses in FY23 is expected to be weighted towards: − market development activities; and − ongoing product innovation across ultrasound reprocessing, endoscope reprocessing, data through cloud solutions as well as chemistry and bioscience. All guidance is subject to ongoing uncertainty in relation to variability in market access conditions should COVID-19 pandemic related measures change in relevant markets and broader economic and geopolitical uncertainty. Recognising the increasing global focus on infection prevention and the opportunities this presents for Nanosonics, the Company will also continue to work on identifying M&A opportunities to expand its product portfolio. INTELLECTUAL PROPERTY Nanosonics recognises the importance of its Intellectual Property (IP) portfolio in maintaining its sustainable competitive advantage. During FY22 Nanosonics filed six patent applications, one provisional application establishing a new patent family, and one design registration establishing another new patent family. 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 including CORIS. 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. CASH RESERVES Despite our record investments in an expanded team, accelerated R&D and resources for future growth, the Company has maintained a significant cash reserve. This cash reserve provides a significant degree of stability and allows the Company to continue to pursue its growth agenda in uncertain times. Our Board and management are actively engaged in reviewing our priorities, identifying opportunities for investment and ensuring that Nanosonics remains 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 cash reserves. BUSINESS OUTLOOK – FY23 Nanosonics is well positioned to continue to invest in its longer-term strategic growth agenda and expand its participation as a leading infection prevention company in the multi-billion-dollar global infection prevention market. While the threat of further COVID-19 related disruptions exist through growing rates of infection or the emergence of new variants, our expectation is that current improved market conditions will prevail throughout FY23. FY23 will also be the first full year of the largely direct sales model in North America and is anticipated to be the first full year since 2020 in which the Company will be able to fully leverage its investments in geographical expansion, especially in the Europe and Middle East region. TARGETS FOR FY23 INCLUDE: • Total revenue growth of 20-25%. • Gross margin of between 75-76%, reflecting: − an increase in the proportion of capital revenue resulting from growth in the sales of both new installed base units (which drives growth in high margin consumable revenue over time) and upgrade units; − ongoing increased freight costs; and − increased component costs. NANOSONICS LIMITED I ANNUAL REPORT 2022 2 1 BEYOND FY23 In addition to the targeted growth in FY23, beyond FY23 Nanosonics is targeting: • Continued expansion of the trophon franchise across all regions including growth in installed base, consumables usage, service business and trophon upgrades. • Japan to become an important contributor to the global trophon installed base as well as further expansion across the Asia Pacific region including China. • Growth in our participation in the • Ongoing investment in R&D, infection prevention data and analytics field through the AuditPro platform. • Ongoing expansion of the product portfolio introducing the new CORIS endoscope reprocessing platform across multiple markets and broader indications. In addition, opportunities for strategic acquisitions will continue to be identified and assessed. infrastructure, people and capability to continue driving the Company’s global growth strategy with the aim of establishing Nanosonics as a global leader in infection prevention. INFECTION PREVENTION. FOR LIFE. 2 2 O U R C O M M I T M E N T T O E S G Financial Year 2022 represented another year where Nanosonics, by continuing to deliver on its objectives, created sustainable growth. This is only possible when we embrace the principles of sustainability throughout our business. As an emerging leader in the infection control market, we are privileged to be able to provide value to our stakeholders through providing innovative, sustainable solutions to some of the most complex unmet needs in healthcare. One of the key areas of value we provide is to our customers through the products we create and make available. In many cases, our solutions replace old ways of working that are harmful to the environment and for that reason, the success of our business is incidental to creating sustainable business outcomes for all our stakeholders. That is why readers will see an increased emphasis on the sustainability outcomes that are observable at each stage of our core product’s lifecycle. In addition, there is further emphasis on how Nanosonics’ business advances the United Nations Sustainable Development Goals. In that context, I am pleased to introduce this year’s Sustainability Report. This is the third year in which we have published an extensive, standalone report from the Annual Report detailing the Company’s sustainability performance. We take pride in our commitment to sustainability 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 retained the usual format for this year’s report. The report is divided into four key sections: governance, environment, people & culture, and communities. In addition, we have provided some additional context for how our healthcare solutions deliver sustainability outcomes for our stakeholders. I am particularly pleased to see continued development of the Company’s reporting against international reporting standards and more detailed year-on-year data disclosure and target-setting. In addition to the emphasis on healthcare solutions described above, I am also particularly pleased to see a further emphasis on our greatest asset, our people, in this year’s report. The Nanosonics global team have shown a remarkable commitment to our Values of Collaboration and Agility in navigating the return-to-work arrangements, and contributing to community causes, whilst still making enormous strides in achieving our mission: Infection Prevention. For Life. MICHAEL KAVANAGH CEO & President “We see sustainability as a key consideration for our business, and one that is fully aligned with our Values and Mission. We are fortunate that our unique healthcare solutions are in many respects neatly aligned with sustainability principles which means we achieve positive sustainability outcomes whilst addressing our customer’s important infection control needs.” MICHAEL KAVANAGH CEO & President FOR MORE INFORMATION See Nanosonics’ 2022 Sustainability Report available at www.nanosonics.com/investor- centre/reportsand-presentations/ 2022 SUSTAINABILITY. REPORT. NANOSONICS LIMITED NANOSONICS LIMITED I ANNUAL REPORT 2022 2 3 E S G A T A G L A N C E GOVERNANCE PROGRESS MADE IN RESPECT OF SUSTAINABLE SUPPLY CHAIN INITIATIVE ARTICULATED NANOSONICS’ CONTRIBUTION TO THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS STRENGTHENED IT, PRIVACY AND CYBER SECURITY PROTECTIONS AS WE MOVE TOWARD ISO27001 ACCREDITATION ENVIRONMENT 68% OF TOTAL WASTE IN AUSTRALIA DIVERTED TO RECYCLING COMMITMENT TO WORKING TOWARDS AUSTRALIAN PACKAGING COVENANT ORGANISATION 2025 TARGET 14 TONNES OF END-OF-LIFE PRODUCTS AND SERVICE PARTS RESPONSIBLY RECYCLED IN ACCORDANCE WITH WEEE AND OTHER REQUIREMENTS PEOPLE & CULTURE 94% OF EMPLOYEES STRONGLY BELIEVE IN THE PURPOSE OF NANOSONICS FEMALES MAKE UP 42% OF THE GLOBAL WORKFORCE, 41% OF SENIOR MANAGEMENT AND 39% OF STEM-RELATED POSITIONS ACHIEVED 100% OF DIVERSITY OBJECTIVES AND SUBSTANTIALLY ALL OF OUR INCLUSION OBJECTIVES COMMUNITIES $38,500 RAISED THROUGH VARIOUS CHARITABLE INITIATIVES 16 STUDENTS PARTICIPATED IN INTERNSHIP PROGRAMS ACROSS SEVERAL DEPARTMENTS WIDENED THE RANGE OF COMMUNITY ACTIVITIES WITH MORE TO FOLLOW THROUGH THE ESTABLISHMENT OF THE COMMUNITY ENGAGEMENT COMMITTEE INFECTION PREVENTION. FOR LIFE. 2 4 P R O T E C T I O N B Y D E S I G N RISK RECOGNITION GROWS WORLDWIDE This year has seen several reminders around the need for standardised ultrasound infection prevention guidelines to reduce the risk of cross-contamination and protect patient safety. There is a growing acceptance of the infection risks associated with ultrasound probes, and of the need for validated, automated high-level disinfection (HLD) of semi-critical medical devices and critical devices that cannot be sterilised. A validated method of disinfection for semi-critical ultrasound probes is essential for patient safety. In Germany, the Supreme State Authorities responsible for medical devices (AGMP) and the Federal Institute for Drugs and Medical Devices (BfArM) have joined the Robert Koch Institute (RKI) in reinforcing the legal requirement for validated reprocessing of semi-critical devices1. The RKI had previously clarified that they do not consider the final wipe disinfection of semi-critical medical devices to be validatable, and it is now clear that validated reprocessing is the only option for semi-critical devices, including endocavity ultrasound probes, to meet legal requirements. A North American survey by the U.S. Joint Commission (TJC) reported that 46% of healthcare facilities were non-compliant with their standard on intermediate, high-level disinfection and sterilisation of medical devices2. Following the survey, the TJC reaffirmed that healthcare organisations must follow the minimum level of ultrasound probe reprocessing based on intended use (as per the Spaulding classification adopted by the FDA) and manufacturer instructions for use. In Australia, a recent survey of emergency departments (ED) identified only 31% of respondents had access to ultrasound probe HLD3. The ED is a complex healthcare delivery environment, and standardised, reproducible, and easy-to- use HLD options are key to support staff and patient safety. Two separate outbreaks in Europe and North America last year are additional reminders about the need for standardised ultrasound infection prevention practices. The North American multistate gel-associated outbreak of Burkholderia cepacia, which included 48 bloodstream infections, resulted in a safety alert issued by the U.S. Centers for Disease Control and Prevention (CDC)4. The UK Health Security Agency (UKHSA) also identified that a long-standing outbreak of B. cepacia was linked to a non-sterile ultrasound gel product used in hospitals in the UK and Ireland5. While the safety alerts were concerned primarily with affected gels, both agencies took the opportunity to reinforce guidance around ultrasound infection prevention. The CDC called for facilities to review ultrasound probe reprocessing practices, and UKHSA identified those procedures for which higher levels of infection prevention were expected. There are over 150 procedures6 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. 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 represents the gold standard. trophon delivers effective HLD by generating a ‘sonically-activated’ hydrogen peroxide (H2O2) mist which is unimpeded by any shadows, crevices and grooves on the ultrasound probe. The 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 and Monkeypox viruses, these fall into the category of enveloped viruses, where trophon has been proven to be highly effective. INDUSTRY-LEADING TROPHON PROBE COMPATIBILITY PROGRAM Nanosonics is continuing the collaboration with all major and several specialised ultrasound probe manufacturers to ensure that their probes are tested, approved, and endorsed for use with trophon devices. In the past year, the compatibility list grew to over 1,200 ultrasound probes across 26 Original Equipment Manufacturers (OEM). The trophon® family includes trophon® EPR and trophon®2 devices which share the same core technology of 'sonically-activated' hydrogen peroxide. 1. AGMP, BfArM, RKI. Validation of the final disinfection of semi-critical medical devices using wipe disinfection. Available at https://www.rki.de/DE/ Content/Infekt/Krankenhaushygiene/Aufb_MedProd/Validierung-Desinf-semikrit-MedProd.html. Accessed July 2022. 2. Joint Commission Online Newsletter – August 11, 2021. Available at https://www.jointcommission.org/-/media/tjc/newsletters/joint-commission- online-aug-11-2021.pdf. Accessed July 2022. 3. Manivel V et al. Australas J Ultrasound Med. 2021 Sep 12;24(4):187-207. 4. Centers for Disease Control and Prevention. Multistate Outbreak of Burkholderia cepacia Infections Associated with Contaminated Ultrasound Gel. Available at https://www.cdc.gov/hai/outbreaks/b-cepacia-ultrasound-gel/index.html. Accessed July 2022. 5. UK Health Security Agency National Patient Safety Alert NatPSA/2021/010/UKHSA. 6. Nanosonics analysis, SDMS guidelines, market reports. NANOSONICS LIMITED I ANNUAL REPORT 2022 2 5 “We love the trophon device’s ability to do work while we move on to other tasks.” KERRI SCOTT, LEAD SONOGRAPHER, PHYSICIANS EAST. These numbers position Nanosonics as the industry leader in scientifically proven probe compatibility. The rigorous trophon Probe Compatibility Program ensures that each probe is exposed to thousands of trophon cycles, then functionally tested and approved by OEMs before listing in the trophon compatibility database. CONSISTENT PROTECTION FOR EVERY PATIENT 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. Designed with the user and their workflow needs in mind, trophon2 devices guide the user through the required steps of preparing, disinfecting, storing and tracing probes throughout the reprocessing workflow. The automated workflow, which includes digitised traceability replacing cumbersome handwritten logbooks, frees up several minutes of hands-off time for the user – time which can be spent with the patient. The trophon portfolio offers a series of consumable and accessory products to provide a total ultrasound probe reprocessing solution. These include cleaning and drying wipes to prepare the probe before the HLD process, specialised probe bags to provide effective probe storage between patient use, and connectivity solutions and services to facilitate automated disinfection record management. SUSTAINABLE AND SAFE-TO-USE HLD The trophon technology achieves effective HLD without damaging the sensitive probe or exposing patients, staff and the environment to dangerous chemicals – the ‘sonically-activated’ hydrogen peroxide (H2O2) mist is broken down by the trophon device to environmentally friendly oxygen and water after each HLD cycle. As a self-contained system, the trophon device can be safely placed in the examination room next to the ultrasound console, further maximising patient throughput and clinical workflow efficiencies. INFECTION PREVENTION. FOR LIFE. 2 6 N A N O S O N I C S A U D I T P R O ™ S T A N D A R D I S I N G U L T R A S O U N D I N F E C T I O N P R E V E N T I O N P R A C T I C E S AUTOMATED DIGITAL TRACEABILITY LINKING INFECTION CONTROL DATA TO PATIENT; DELIVERING A NEW STANDARD IN ULTRASOUND INFECTION CONTROL MANAGEMENT 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. Traditional mechanisms to capture the necessary information are often manual and time-consuming. As a result, there is pressure to move to automation to improve the accuracy of the information collected, improve clinical workflows, and enable the quick and confident retrieval of records during compliance audits. DIGITAL AUTOMATION DRIVING STANDARDISATION Nanosonics AuditPro equips facilities to efficiently monitor ultrasound infection prevention practices, driving increased compliance to Standard Operating Procedures (SOP) to better protect patients, staff and organisations for every ultrasound procedure. The digital system provides end-to-end automated data traceability and efficient infection control compliance management for ultrasound probe infection prevention. With built-in education as part of the clinical workflow, each procedure is qualified against the Spaulding classification to standardise the infection prevention decision across multiple operators, departments and facility sites every time. Powered by trophon AcuTrace® technology, facilities can, for the first time, have complete data visibility across patients, probes, clinical procedures and reprocessing records. PRODUCT DETAIL The AuditPro automated digital system intelligently links reprocessing workflow data from trophon2 with probe and patient procedure identifiers in real-time to produce: • A searchable digital logbook, • Data-led infection control insights to guide decision making, and • Real-time alert notifications allowing for fast risk management. AUDITPRO DELIVERING CLINICAL EFFICIENCY AND RISK REDUCTION AuditPro launched in June 2021 and is currently installed within facilities in the US and Ireland, with further rollouts planned for other markets over FY23. Feedback from early adopting sites of this novel technology has indicated strong clinical user acceptance and demonstrated consistent clinical compliance to facility ultrasound infection control SOPs, resulting in increased clinical efficiency and risk reduction through standardisation and automation. EFFICIENCY GAINS A recent efficiency study conducted by an installed facility demonstrated a sixfold reduction in ultrasound infection control audit trace time9, providing significant efficiency gains, following the implementation of the AuditPro system. RISK REDUCTION In another facility, AuditPro was successfully assessed in an external compliance audit to meet accreditation requirements. This audit demonstrated elevation to 100% compliance following the installation of AuditPro, demonstrating the success of automated standardisation in reducing risk10. 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. 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. Introduction of Electronic Traceability for Semi-Invasive Ultrasound Probes in Radiology Department, Beaumont Hospital. K.Owens 2021. 10. Hutchinson Regional Medical Center, KS. NANOSONICS LIMITED I ANNUAL REPORT 2022 2 7 “Following the implementation of AuditPro, a study conducted by our Decontamination Manager confirmed a sixfold reduction in audit trace time freeing up our Senior Radiologists to see more patients.” KATE OWENS Beaumont Hospital, Ireland INFECTION PREVENTION. FOR LIFE. 2 8 T H E B O A R D STEVEN SARGENT BBus, FAICD, FTSE MAURIE STANG MICHAEL KAVANAGH BSc, MBA (Advanced) MARIE MCDONALD BSc (Hons), LLB (Hons) Non-executive Director and Chairman Non-executive Director and Deputy Chairman CEO & President and Managing Director Non-executive Director Mr Sargent joined the Nanosonics Board in July 2016 and was appointed Chairman in July 2022, having previously been Deputy Chairman and Lead Independent Director. 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 (ASX:ORG), Ramsay Healthcare Limited (ASX:RHK) and a Director of the Great Barrier Reef Foundation and Chairman of the Origin Foundation. Previously, Mr Sargent was a director of OFX Limited (ASX:OFX), was a Director of Veda Group, a Director of Bond University and a Director of the Business Council of Australia. Mr Stang is a Non-executive Director and Deputy Chairman of Nanosonics, and has been a member of the Board since November 2000. He was Chairman from March 2007 until July 2022. 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 (ASX:VBS) and has been a Non-executive Chairman of Aeris Environmental Ltd (ASX:AEI) since 2002. 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 29 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 practiced 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 (ASX:CSL), Nufarm Limited (ASX:NUF) and the Walter and Eliza Hall Institute of Medical Research. NANOSONICS LIMITED I ANNUAL REPORT 2022 2 9 LISA MCINTYRE 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 US 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. He is a founding partner of Brandon Capital Partners, a leading Australian venture capital provider. Dr Fisher 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 (ASX:FGG), ipSCAPE, and Sydney Symphony Limited. He is also an Ambassador for the Australian Indigenous Education Foundation. INFECTION PREVENTION. FOR LIFE. 3 0 T H E E X E C U T I V E T E A M MICHAEL KAVANAGH BSc, MBA (Advanced) MCGREGOR GRANT BEc, CA, GAICD, FGIA, FCIS STEVEN FARRUGIA BE, PhD DAVID MORRIS Bus, BAppSc, GAICD CEO, President and Managing Director Chief Financial Officer and Company Secretary 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 29 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. 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 24 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. Steven joined Nanosonics as Senior Vice President, Design and Development, in September 2016 and was appointed to the role of CTO in February 2018. He has over 21 years’ experience leading the development of medical devices. Prior to Nanosonics, Steven held a range of senior executive roles with ResMed, including VP of Technology and VP of Product Development. He is an inventor of almost 300 granted and pending patents and is an Adjunct Professor of Engineering at The University of Sydney. Chief Strategy Officer and Regional President Asia Pacific 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. ROD LOPEZ MBA, BEng (Hons), GAICD Chief Operating Officer 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 for over 15 years with MGSM, AGSM and the University of Sydney Business School. NANOSONICS LIMITED I ANNUAL REPORT 2022 3 1 MATTHEW CARBINES LLB, BCom MATTHEW LIPSCOMBE MBA, BSc, BE JODI SAMPSON MBA (Exec), CPHR KEN SHAW BSc Finance RONAN WRIGHT BSc, Bus Management, BEng General Counsel Chief Marketing Officer Chief People and Culture Officer Regional President for North America Regional President for Europe and Middle East Matthew joined Nanosonics in April 2022. He has over 20 years of experience in strategic marketing and product management in medical device, high technology and consulting fields across the full product development cycle. Prior to Nanosonics, Matthew held a range of strategic executive roles including Global Director of Portfolio Strategy & Planning at Cochlear, R&D management at ResMed and Founder- CEO of an enterprise SaaS startup. 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. Ken joined Nanosonics in September 2017 as Regional President for the United States, Canada and Latin America. He has more than 25 years’ experience in the healthcare, medical devices and consumer products industries, with a specific focus on infection prevention products. Most recently Ken was the President for Amoena GmbH and prior to that he held senior management roles at Essity, Medicom, Energizer and Pfizer. 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. Matt joined Nanosonics in August 2017 and was appointed to the Executive Team in October 2021. Matt is responsible for all legal matters across the Nanosonics Group and supports the Company Secretary on corporate governance matters. Prior to joining Nanosonics, Matt held a variety of senior legal roles in Australia and abroad with a focus on technology and healthcare. Immediately prior to joining Nanosonics, Matt served as General Counsel for an international software business based in London. Matt is a member of the Australian Institute of Company Directors, and the Governance Institute of Australia. INFECTION PREVENTION. FOR LIFE. 3 2 D I R E C T O R S ’ R E P O R T 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 2022 and the Auditor’s Report thereon. P R I N C I PA L A C T I V I T I E S 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. ‒ 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. R E V I E W O F O P E R AT I O N S A N D F I N A N C I A L R E S U LT S A review of operations and information on the financial results of the Group and its business strategies and prospects is set out in the Financial and Operational Review on pages 8 to 21 of this Annual Report. M AT E R I A L B U S I N E S S R I S K S Nanosonics has a risk management framework to identify, assess and appropriately manage risks. Details of the risk management framework are set out in the 2022 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 Description and potential consequences Strategies used by Nanosonics to mitigate the risk COVID-19 Change in North American channel strategy COVID-19 continues to represent a risk to the business in a number of ways. Due to the uncertainties that COVID-19 (and future strains thereof) represent, COVID-19 should be considered a risk in itself and is referred to in a number of the risk areas in this material business risk summary. In particular, there remains a risk that COVID-19 and/or government measures to contain it could further impact the Group’s employees, supply chain, and customers. During the year, the Company announced a revision to its North American sales model. This revision sees Nanosonics’ direct operations now being responsible for an increased proportion of capital sales in the North American market, as well as the ongoing provision of consumables to all customers. This represents a potential risk to Nanosonics’ growth rate. The business has put in place a number of mitigations for the various risks posed by COVID-19. These include Work Health and Safety (WHS) protocols and people policies to support our people, increased inventory and other mitigations to improve the resilience of our supply chain, and alternative selling models to better engage with our customers. Whilst this topic can be characterised as a risk, the Company considers that the risks have been adequately mitigated as evidenced by the Company’s FY22 H2 results. Further, there are a range of benefits to Nanosonics that flow from the revision. The Group expanded its own direct operations in North America and now has significant direct sales capability in place which can be scaled further. A number of members of the previous GE high-level disinfection team have joined Nanosonics during the year. The Group has also appointed other distributors and resellers in the USA (many of whom are ultrasound OEMs) and has extended its relationship with its key distributor customer. Further, a large proportion of the Company’s sales comprise consumables, which continue independent of the changes to its relationship with its key distribution customer. NANOSONICS LIMITED I ANNUAL REPORT 2022 3 3 D I R E C T O R S ’ R E P O R T Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk Research & development and commercialisation Competition Intellectual property 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. 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. 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™. In addition, the Company has informed the market that it is developing a new platform technology associated with the cleaning of endoscopes, to be known as Nanosonics CORIS, where significant R&D investments have continued to be made, with regulatory and commercialisation plans progressing. 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. Further, the Company actively upgrades its first generation trophon EPR fleet to trophon2 units at the appropriate time which helps to retain its existing installed base of trophon units in key markets. The Company also invests in its relationships with ultrasound OEMs, including its probe compatibility program, as well as considering product development opportunities. 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 have a significant period remaining in their term, including patents relating to the consumables which do not expire until 2031. Additional patents have been filed in respect of trophon2, AuditPro and the new CORIS platform. 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. Supply chain 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 ongoing COVID-19 related disruption to Nanosonics’ global supply chain. 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 Company has managed the disruptions that have impacted its global supply chain for its main products arising from COVID-19 and this risk continues to be actively managed. INFECTION PREVENTION. FOR LIFE. 3 4 D I R E C T O R S ’ R E P O R T Risk Description and potential consequences Strategies used by Nanosonics to mitigate the risk Regulation 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 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. Financial The Group is exposed to foreign currency risk and credit risk in light of the international nature of its operations. 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. Product liability 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. The Company has programs in place for WHS, and the attraction, recruitment and retention of talent. The Company has a new global headquarters in Macquarie Park which is expected to support its growing Australia-based team to work more effectively. The Company’s WHS 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 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. Nanosonics is taking steps to enhance its cyber- security strategy and disaster recovery plans with a view to safeguarding the business against these risks, including progressing towards ISO27001 accreditation. Personnel Cyber security 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. 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. During the year, the Company has transitioned the majority of its personnel globally from work from home arrangements to a hybrid approach. There remains a risk that the COVID-19 pandemic and/or government measures to contain it could further impact the Group’s employees. 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. NANOSONICS LIMITED I ANNUAL REPORT 2022 3 5 D I R E C T O R S ’ R E P O R T S I G N I F I C A N T C H A N G E S I N T H E S TAT E O F A F FA I R S In the opinion of the Directors, other than the matters described above and in the Financial and Operational Review on pages 8 to 21 of this Annual 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. D I V I D E N D S – N A N O S O N I C S L I M I T E D The directors do not recommend the payment of a dividend for the financial year ended 30 June 2022. No dividends were proposed, declared, or paid during the financial year (2021: 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. M AT T E R S S U B S E Q U E N T T O T H E E N D O F T H E F I N A N C I A L Y E A R On 17 August 2022, the Company issued 37,692 shares at $4.00 per share for a total of $150,768 under the Global Employee Share Plan (GESP). No other matters or circumstances have arisen since 30 June 2022 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. c. The Group’s state of affairs in future financial years. L I K E LY D E V E L O P M E N T S A N D E X P E C T E D R E S U LT S O F O P E R AT I O N S Comments on expected results of the operations of the Group and business outlook are included in the Financial and Operational Review on pages 8 to 21 of this Annual Report. Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this Annual Report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. E N V I R O N M E N TA L R E G U L AT I O N 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. D I R E C T O R S A N D C O M PA N Y S E C R E TA R Y During the year and to the date of this report, the Board of Nanosonics Limited comprised Steven Sargent, Maurie Stang, 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 Company Secretary. Mr Stang stepped down as Chairman on 1 July 2022 and assumed the role of Deputy Chairman. He will retire from the Board at the AGM on 18 November 2022. Mr Sargent was elected by the Board as Independent Chairman and assumed this position on 1 July 2022. 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 this Annual Report. As at the date of this report, Nanosonics Limited has the following committees of the Board: Audit and Risk, Nomination, Remuneration, People and Culture (RPC), and R&D and Innovation. The Board establishes ad hoc committees focused on specific topics and during the year, the Board convened a Related Party Committee. Details of members of the committees of the Board are included below and on page 40 of the Remuneration Report. INFECTION PREVENTION. FOR LIFE. 3 6 D I R E C T O R S ’ R E P O R T M E E T I N G S O F D I R E C T O R S The number of Directors’ meetings, including meetings of the committees, held during the year ended 30 June 2022, and numbers of meetings attended by each of the Directors were as follows: Full meetings of Directors1 Audit and Risk Nomination RPC R&D and Innovation2 Related Party3 Held4 Attended Held4 Attended Held4 Attended Held4 Attended Held4 Attended Held4 Attended Meetings of committees Maurie Stang Steven Sargent Geoff Wilson David Fisher Marie McDonald Lisa McIntyre Michael Kavanagh 17 17 17 17 17 17 17 17 17 16 17 17 17 17 5 5 5 5 5 5 5 55 45 5 3 5 5 55 2 2 2 2 2 2 2 2 2 2 2 2 2 25 6 6 6 6 6 6 6 6 6 6 65 6 65 65 3 3 3 3 3 3 3 3 3 35 3 35 3 3 — 3 3 3 3 3 3 — 3 3 3 3 3 35 1. A number of additional Board meetings were held during the year. These essentially represented the continuation of a single meeting held over a number of days. 2. In addition to the R&D and Innovation Committee meeting held during the year, R&D matters were considered on a regular basis at Board meetings. 3. The Board establishes ad hoc committees focused on specific topics and during the year the Board convened a Related Party Committee. 4. Indicates the number of meetings held which the Director is eligible to attend. 5. Attended in part or full in ex-officio capacity. S H A R E - B A S E D PAY M E N T S Shares issued and rights and options granted under the share-based compensation plans during the year are detailed below. S H A R E S I S S U E D During the year ended 30 June 2022, the Company issued a total of 370,110 (2021: 861,449) new ordinary shares in Nanosonics Limited of which 67,616 shares were issued under the Global Employee Share Plan at an average price of $4.42 per share and 302,494 were issued pursuant to the exercise of rights and options under the share-based compensation plans. No amount was unpaid on any of the shares issued. As at 30 June 2022, there were 301,835,129 (2021: 301,465,019) ordinary shares in Nanosonics Limited on issue. At the date of this report, there were 301,872,821 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. S H A R E O P T I O N S G R A N T E D 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, 818,639 (2021: 771,787) unquoted rights with nil exercise price and 843,496 unquoted share appreciation rights (2021: 920,633 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. Section 7.3 of the Remuneration Report provides the details of grants received by Key Management Personnel. S H A R E S U N D E R O P T I O N At the date of this report, there were 5,782,527 unissued ordinary shares of Nanosonics Limited under option under the Nanosonics Omnibus Equity Plan. As at 30 June 2022, there were 5,792,730 (2021: 4,825,225) 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 2022 Rights and options lapsed Total shares under option to the date of this report Number of shares under option 5,792,730 (10,203) 5,782,527 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 I ANNUAL REPORT 2022 3 7 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. O F F I C E R S O F T H E C O M PA N Y W H O A R E F O R M E R A U D I T PA R T N E R S O F E R N S T & Y O U N G There are no officers of the Company who are former audit partners of Ernst & Young. A U D I T O R ’ S I N D E P E N D E N C E D E C L A R AT I O N A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is included on page 63 of this report. A U D I T O R 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. C O R P O R AT E G O V E R N A N C E 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. R E M U N E R AT I O N R E P O R T The Remuneration Report forms part of the Directors’ Report. This report, which includes the Financial and Operational Review (on pages 8 to 21), the Information on the Board and the Executive Team (on pages 28 to 31) and the Remuneration Report (on pages 38 to 61), is made on 23 August 2022 and signed in accordance with a resolution of directors, pursuant to section 298(2) of the Corporations Act. GEOFF WILSON Director, Sydney 23 August 2022 D I R E C T O R S ’ R E P O R T I N D E M N I F Y I N G O F F I C E R S O R A U D I T O R 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. P R O C E E D I N G S O N B E H A L F O F T H E C O M PA N Y 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. R O U N D I N G 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. N O N-A U D I T S E R V I C E S 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. 3 8 R E M U N E R AT I O N R E P O R T L E T T E R F R O M T H E C H A I R M A N 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 and the Board, I am pleased to present the Remuneration Report for the year ended 30 June 2022 (FY22). NANOSONICS IN FY22 Nanosonics’ demonstrated continued commitment to its growth strategy during the year, advancing a number of important strategic priorities. The Company reported a 17% increase in total revenue to $120.3 million resulting from the ongoing growth in new installed base, increased trophon2 upgrade sales and ongoing growth in consumables and service. This was a pleasing result considering the short-term impact of the revised sales model in North America with GE Healthcare on second half revenue in North America. The successful transition to the revised sales model involved substantial work for our team and is expected to bring a number of benefits to Nanosonics going forward. The global installed base grew by 12%, or 3,100 units, despite COVID conditions impacting Europe and Asia Pacific in H1 FY22. As the external market conditions improved, the new installed base increased by 20% in H2 in comparison to H1. It was also encouraging to see the number of trophon2 upgrades increase significantly over the last year, with 1,000 unit upgrades in the year. With product expansion a cornerstone of the Company’s strategic growth agenda, during the year the Company continued to invest in R&D, increasing 30% to $22.4 million. This investment is directed across multiple areas including ultrasound reprocessing, endoscopy reprocessing and cloud solutions platform. In the second half of the year the Company relocated to new global headquarters and established a state-of-the-art new manufacturing and R&D facility. The investment in this move further supports the growth agenda of the organisation, creating an excellent work environment to support all our employees in achieving their best. This relocation pleasingly coincided with more employees returning to the workplace while flexible work arrangements remain in place. We are pleased that the total number of employees increased by 25% to 425 employees. We continued our focus on diversity, with the number of female Nanosonics’ employees being comparable to last year at 42% globally. Importantly, the level of senior management positions in the organisation held by females increased to 41% from 38% in FY21. Nanosonics’ culture remained strong during FY22, illustrated by the outcomes of the Nanosonics Global Employee Engagement Survey, where 93% of employees participated in the survey and 94% of the employees continued to remain highly engaged with the overall purpose of Nanosonics. Importantly, 93% of our employees understood how their work contributes to the goals of the Company. FY22 REMUNERATION AND OUTCOMES As foreshadowed in the 2021 Remuneration Report, we implemented the second phase of an increase in the target Short Term Incentive (STI) opportunity for Other Executive Key Management Personnel (Other Executive KMP) from 40% in FY21 to 50% in FY22. The Chief Executive Officer & President’s (CEO&P) target STI opportunity remained at 60% of Total Fixed Remuneration (TFR). We also implemented the results of a previously postponed review of base remuneration, which resulted in an increase to the base remuneration of 4.5% for the CEO&P and an average of 5.6% for Other Executive KMP. Details of the performance of the team against their FY22 metrics are provided in section 4 of this Remuneration Report. As a result of the transition to the revised sales model in North America in H2, there was an impact on the outcome for the FY22 STI financial group metrics. The financial metric outcomes were: ‒ Profit Before Tax (PBT) of $1.6 million, being below threshold performance, resulting in 0% achievement. ‒ Global Installed Base (IB) of 3,100 new IB, being below threshold performance, resulting in 0% achievement. The overall outcomes for the year reflected positive outcomes across many of the operational metrics of the business including: ‒ Good progress on the strategic R&D growth activities, and development of product roadmaps. ‒ Seamless move to new headquarters in Macquarie Park, including a new manufacturing and R&D centre which has significantly increased the manufacturing capacity and laboratory space. ‒ Effective management of supply chain and freight management in a complex business environment. ‒ Good progress on geographic regional growth. ‒ Enhanced risk management and governance processes. In addition, the Company successfully transitioned to the revised largely direct North American sales model, which was not planned at the time of the setting of the annual objectives. Notwithstanding the achievements of the Nanosonics team across the planned and additional operational objectives the Board was cognisant of the shareholder experience and, accordingly, it did not exercise any discretion in relation to the STI financial metrics. It did however exercise discretion to increase the STI outcome for the personal objectives for one member of Executive KMP, the Chief Operating Officer, Mr Rod Lopez, from an outcome of 40% to 50% to recognise his exceptional contribution to the Nanosonics and GE transition, effective management of the supply chain ensuring continuity of customer supply as well as the move to the new corporate headquarters. In summary for FY22: ‒ The CEO’s STI outcome was 30.77% of maximum (40% of target). ‒ Other Executive KMP STI outcomes ranged between 22.22% and 40% of maximum (30% to 50% of target). ‒ The aggregate STI outcome for all KMP was 31.83% of maximum (41.40% of target). ‒ The 2018 Long Term Incentive (LTI) outcome was 100% of target due to the performance conditions (PBT Gate and Absolute Compounded Annual Growth Rate (CAGR) Total Shareholder Return (TSR) being met. Therefore, 100% of the Performance Rights and Options vested. There were no downward Values rating modifiers applied to the CEO&P or Other Executive KMP in FY22. 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 that they strike an appropriate balance between driving accountability for sustainable short-term results and generating long-term growth and value creation for shareholders. NANOSONICS LIMITED I ANNUAL REPORT 2022 3 9 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 PBT (including R&D expenditure). The Board believes this framework provides the appropriate 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 by the high level of Remuneration Report resolution approval over the last two years. The feedback we received confirmed we had the balance right and the Board considers the calculation of UROE is the measure which is most fit-for-purpose for this tranche of the LTI award. FY23 REMUNERATION The Board approved some adjustments to the Executive Remuneration framework for the coming year. For Executive KMP STI, this involved changing the weighting of PBT and installed base metrics from 20%/40% to a more balanced 30%/30%. In addition, the installed base measure was changed from global new installed base to a global trophon units measure (new installed base and upgrades), to reflect the strategic importance of upgrades to the business and customer experience. In response to the external market conditions of retaining talent and having regard to 2021/22 external market data provided by GRG in FY22, we increased the base remuneration for Executive KMP, 6% for CEO&P and 3.5%–5% (average 4.2%) for Other Executive KMP. There were no increases recommended for the Non-Executive Directors’ (NED) Board fees for FY23, with the last review and increase having occurred in FY19. The focus for FY23 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. As our Executive Remuneration Framework adopted in 2020 will have been in place for three years by FY24, the Committee proposes to conduct a high-level review of the framework in FY23 to ensure that it continues to be effective in motivating and aligning the executive team with the Company’s strategic ambitions and shareholder experience. Any changes will not be implemented until FY24 and will be disclosed in next year’s Remuneration report letter. 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. MARIE MCDONALD Chairman, Remuneration, People and Culture Committee 23 August 2022 R E M U N E R AT I O N R E P O R T Following extensive engagement with investors and proxy advisor organisations these changes were strongly supported by shareholders in the last two years. Full details are set out in section 3.3 and 3.4 of the Remuneration Report. As 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 LTI award contains two performance metrics: an external, market-based metric – 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 for the 2020 LTI Award, the Company adopted the ASX300 Industrials Index. The Board gave careful consideration to using an industry- based comparator group, however it 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. After considering advice received, the Board determined that, due to Nanosonics position within the ASX based on market capitalisation, the TSR of the ASX300 Industrials Index was the most appropriate comparator group. The absence of a meaningful Healthcare comparator continued for the 2021 LTI award. At the start of FY22, there were 38 companies with a GICS classification of Health Care Equipment & Supplies Industry. On the bases of market capitalisation, total assets, net assets, revenue and earnings, two companies were significantly larger than Nanosonics across each of these measures, one company was around the same as Nanosonics for most measures and the rest, 35 companies, were less than a third of Nanosonics’ size for each measure. Accordingly, there were not sufficient Health Care Equipment and Supply companies within a relevant size range of financial statistics (33% to 300%), operational and geographic comparability to form a statistically reliable peer group against which to compare Nanosonics’ TSR performance over a three-year period. As investors had previously indicated a preference for a TSR measure, the Board determined that the Company’s TSR performance for this tranche of the 2021 LTI would again be best measured relative to the ASX 300 Industrials Index. The upcoming 2022 LTI award (to be granted in FY23) will also employ the same comparator group. 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. The Company’s historically high Price Earnings (PE) ratio required a significant stretch performance of management to deliver inbuilt expectations, evident in the then 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 UROE, 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 in the 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 INFECTION PREVENTION. FOR LIFE. 4 0 R E M U N E R AT I O N R E P O R T The Remuneration Report for the year ended 30 June 2022 (2022 Financial Year or FY22) 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, and in compliance with AASB124 Related Party Disclosures. Except for section 4.5, this Remuneration Report has been 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. R E P O R T S T R U C T U R E 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 . K E Y M A N A G E M E N T P E R S O N N E L 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. The KMP in FY22 and their relevant roles during the year were as follows: Name Role Non-executive Maurie Stang Steve Sargent Geoff Wilson David Fisher Chairman, Non-independent Director Deputy Chairman, Lead Independent Director Independent Director Independent Director Marie McDonald Independent Director Lisa McIntyre Independent Director Executive Michael Kavanagh1 Chief Executive Officer & President (CEO&P) and Managing Director Committee membership Appointed Nomin- ation Audit and Risk RPC R&D and Innovation C C C 14 Nov 2000 6 Jul 2016 17 Jul 2019 30 Jul 2001 24 Oct 2016 13 Dec 2019 21 Oct 2013 McGregor Grant Steven Farrugia David Morris Chief Financial Officer (CFO) and Company Secretary 28 Apr 2011 Chief Technology Officer (CTO) Chief Strategy Officer (CSO) and Regional President, APAC 5 Sep 2016 4 Feb 2019 4 Mar 2019 Rod Lopez Chief Operating Officer (COO) = member, C = Chairman 1. Mr Kavanagh was appointed director on 30 July 2012 and appointed CEO&P on 21 October 2013. From time to time, the Board establishes ad hoc committees focused on specific areas. During FY22, the Board convened a Related Party Committee, chaired by Mr Sargent, Deputy Chairman, and attended by the relevant Directors. There were no changes to KMP during FY22. However, a number of changes to Board positions were announced on 31 May 2022: ‒ Mr Stang stepped down as Chairman on 1 July 2022 and assumed the role of Deputy Chairman. He will retire from the Board at the AGM on 18 November 2022. ‒ Mr Sargent was elected by the Board as Independent Chairman and assumed this position on 1 July 2022. ‒ Ms McDonald was elected by the Board as Chairman of Remuneration, People & Culture Committee and assumed this position on 1 July 2022. NANOSONICS LIMITED I ANNUAL REPORT 2022 4 1 R E M U N E R AT I O N R E P O R T 2 R E M U N E R AT I O N L I N K W I T H C O M PA N Y P E R F O R M A N C E A N D S T R AT E G Y 2.1 O v e r v i e w o f R e m u n e r a t i o n F r a m e w o r k 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. E X E C U T I V E K M P R E M U N E R AT I O N O B J E C T I V E S 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 To t a l R e m u n e r a t i o n 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. D e l i v e r y 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. 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. S t r a t e g i c i n t e n t a n d m a r k e t i n g p o s i t i o n i n g 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 A s s e s s m e n t o f b e h a v i o u r s a g a i n s t N a n o s o n i c s ’ C o r e V a l u e s 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. 4 2 R E M U N E R AT I O N R E P O R T 3 R E M U N E R AT I O N F R A M E W O R K 3.1 Ta r g e t r e m u n e r a t i o n m i x 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 37.5% for Other Executive KMP at Target achievement). The tables below show the CEO&P remuneration mix and the average remuneration mix for the Other Executive KMP and reflects the increased STI opportunity for Other Executive KMP in FY22 to 50% from 40% in FY21. CEO&P REMUNERATION MIX Minimum $755,000 Target $1,888,000 Stretch $2,703,000 100% 40% 28% 12% 12% 36% 60% Performance based 48% Equity based 11% 11% 50% 72% Performance based 61% Equity based OTHER EXECUTIVE KMP REMUNERATION MIX Minimum $416,000 Target $833,000 Stretch $1,103,000 100% 50% 38% TFR Cash STI Deferred STI LTI 12.5% 12.5% 25% 50% Performance based 37.5% Equity based 12% 12% 38% 62% Performance based 50% Equity based 3.2 To t a l F i x e d R e m u n e r a t i o n ( T F R ) 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 (TTR) 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 of TTR is P62.5. NANOSONICS LIMITED I ANNUAL REPORT 2022 4 3 R E M U N E R AT I O N R E P O R T 3 R E M U N E R AT I O N F R A M E W O R K c o n t i n u e d 3.3 S h o r t -Te r m I n c e n t i v e ( S T I ) As foreshadowed in the 2021 Remuneration Report, the second phase of an increase in the target STI opportunity for Other Executive KMP was implemented from 40% in FY21 to 50% in FY22. The CEO&P’s target STI opportunity remained at 60% of TFR. The FY22 STI is dependent on meeting Group Financial and Operational metrics for the year, 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 the 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. Stretch: Represents the upper limit of outcomes that are inherently challenging. The targets for the performance levels within each discrete metric are approved by the Board, taking into consideration prior performance, market conditions and Board approved budgets. The CEO&P metrics for FY22 are: ‒ Group Financial metrics (60% weighting) with achievement at Threshold resulting in award of 50% of weighted opportunity, achievement at Target resulting in award of 100% of weighted opportunity, and achievement at Stretch resulting in award of up to 150% of weighted opportunity: › Profit Before Tax (PBT) (20% weighting): PBT is considered to be an appropriate metric aligned with the Company’s continued growth strategy and is a financial indicator that is able to be influenced by the CEO&P. › Global Installed Base (40% weighting): Global Installed Base is considered an appropriate metric as it aligns with shareholders’ long-term interests in driving profit. The higher weighting was applied recognising the strategic importance of continuing to grow the installed base. ‒ Operational metrics (40% weighting): With achievement of the metric resulting in a maximum of 100% of the weighted opportunity. The FY22 Operational metrics are aligned with the FY22 business priorities: Strategic Partnerships, Product Expansion Strategy and three-year Operational Plan. The weightings for each Executive KMP are as follows: Executive KMP Michael Kavanagh McGregor Grant Steven Farrugia 1 David Morris 2 Rod Lopez Metric weighting allocation Group financial metrics Individual/ operational metrics Profit before tax Global installed base Regional financial Individual/ operational 20% 20% 20% 10% 20% 40% 40% 30% 20% 40% 40% 40% 50% 30% 40% 40% 1. Dr. Farrugia, Chief Technology Officer, had a higher weighting attached to the achievement of Operational metrics on product development. 2. Mr. Morris, Chief Strategy Officer and Regional President, APAC, had a higher weighting attached to the achievement of Regional and Operational metrics reflecting the role of Regional President, APAC. Opportunity CEO&P: Target opportunity is 60% of TFR, with maximum of up to 78% of TFR for achievement of Stretch outcomes. Other Executive KMP: Target opportunity is 50% of TFR, with a maximum of up to 65% of TFR for the CFO and COO, up to 62.5% for the CTO or up to 67.5% for the CSO and APAC President for achievement of Stretch outcomes. INFECTION PREVENTION. FOR LIFE. 4 4 R E M U N E R AT I O N R E P O R T 3 R E M U N E R AT I O N F R A M E W O R K c o n t i n u e d Calculation 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 is used to calculate the amount paid to the individual during the financial year (1 July 2021 to 30 June 2022). Total STI award ($) = TFR ($) X STI opportunity X STI outcome X (calculated on the amount paid during the financial year) (% of TFR) (includes total results of each discrete metric, including stretch outcomes, where applicable) Values rating modifier (0% to 100%) Delivery The STI is delivered as follows: ‒ 50% of STI paid in cash. ‒ 50% of STI delivered as Service Rights subject to one-year service condition and one-year exercise restriction period, i.e. two-year lockup. 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 FY22 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. NANOSONICS LIMITED I ANNUAL REPORT 2022 4 5 R E M U N E R AT I O N R E P O R T 3 R E M U N E R AT I O N F R A M E W O R K c o n t i n u e d 3.4 2 0 2 1 L o n g -Te r m I n c e n t i v e ( LT I ) At the 2021 Annual General Meeting held on 19 November 2021, shareholders approved the 2021 LTI award for the CEO&P. The LTI structure includes two financial measures: an external, market-based metric (Index-TSR or iTSR) reflecting a Nanosonics specific risk adjusted return relative to a return of the ASX300 Industrials Index, and an internal, earnings-based metric, Underlying Return on Equity (UROE) to support investment in growth. These measures were first introduced in the 2020 LTI structure. Details of the 2021 LTI award, which applies to all Executive KMP, are 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. Other Executive KMP: Target opportunity is 50% of TFR, with a maximum of up to 100% of TFR for achievement of Stretch outcomes. Delivery Equity grants to the Executive KMP were awarded as follows: ‒ The iTSR component (33.33% weighting) was awarded as Share Appreciation Rights (SARs), which are cashless exercise options with a notional exercise price of $6.825 (determined based on the Volume Weighted Average Price (VWAP) of Nanosonics’ shares during the 20 business days from the date of the release of the Company’s FY21 full year results). ‒ The UROE component (66.67% weighting) was awarded as Performance Rights with a nil exercise price. Allocation method The number of Share Appreciation Rights or Performance Rights granted is calculated as follows: Number of Rights = TFR ($) 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). Measurement period The measurement periods for the Share Appreciation Rights and Performance Rights are: ‒ Share Appreciation Rights: from the announcement of the Company’s FY21 financial results to the announcement of the Company’s FY24 financial results based on the 20-day VWAP of the Company’s shares following those dates. ‒ Performance Rights: from 1 July 2021 to 30 June 2024. The performance measurement periods for the LTI plans issued prior to 2021 that have not yet vested are summarised below: LTI year Measurement period 2020 2019 ‒ 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. ‒ 27 August 2019 to the date of the release of Nanosonics’ FY22 financial results. 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. INFECTION PREVENTION. FOR LIFE. 4 6 R E M U N E R AT I O N R E P O R T 3 R E M U N E R AT I O N F R A M E W O R K c o n t i n u e d 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 2021 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 2021 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 Index 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 Stretch Target Index TSR% + 7.0% CAGR Index TSR% + 3.5% TSR CAGR Threshold Index TSR% Below60 days 2022 $’000 2021 $’000 16,966 22,989 3,187 2,900 1,235 2,670 898 1,180 24,288 27,737 NANOSONICS LIMITED I ANNUAL REPORT 2022 9 7 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 8 F I N A N C I A L R I S K M A N A G E M E N T c o n t i n u e d L i q u i d i t y r i s k c) 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 $72,750,000 (2021: $73,000,000) that are expected to readily generate cash inflows, as well as cash at bank of $21,762,000 (2021: $23,027,000) that is readily available for managing liquidity 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. 2022 Trade and other payables Lease liabilities Derivative financial instruments Total financial liabilities 2021 Trade and other payables Lease liabilities Derivative financial instruments Total financial liabilities Less than three months Three to 12 months One to five years Over five years 9,582 783 492 10,857 — 2,049 1,796 3,845 — 9,542 543 10,085 — 101 — 101 Less than three months Three to 12 months One to five years Over five years 7,194 289 104 7,587 — 1,190 143 1,333 — 891 16 907 — 121 — 121 Total 9,582 12,475 2,831 24,888 Total 7,194 2,491 263 9,948 INFECTION PREVENTION. FOR LIFE. 9 8 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 9 C A P I TA L S T R U C T U R E 9.1 C a p i t a l a n d r e s e r v e s 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 ordinar y share capital: Balance 30 June 2020 Issue of shares under employee share plans – proceeds received Balance 30 June 2021 Issue of shares under employee share plans – proceeds received Balance 30 June 2022 Number of shares 300,603,570 861,449 $’000 113,177 362 301,465,019 113,539 370,110 316 301,835,129 113,855 b) Reserves i) Share-based payments reserve The share-based payments reserve is used to recognise the fair value at grant date of 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 C a p i t a l m a n a g e m e n t 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. NANOSONICS LIMITED I ANNUAL REPORT 2022 9 9 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 1 0 O T H E R N O T E S 10.1 C o m m i t m e n t s Capital commitments As at 30 June 2022, the Group had commitments to purchase plant and equipment of $1,867,000 (2021: $290,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 10.2 R e l a t e d p a r t y t r a n s a c t i o n s 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 2022 $ 2021 $ 824,432 822,545 2,472,577 2,528,418 265,847 183,408 206,683 175,925 1,235,599 1,176,553 4,981,863 4,910,124 Detailed remuneration disclosures are provided in the remuneration report on pages 38 to 61. ii) Transactions with other related par ties Certain Directors and Key Management Personnel, or their personally-related entities (Related Parties), hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. Details of the type of transactions that were entered into with Related Parties are as follows: Related Party Related entity Maurie Stang Gryphon Capital Pty Ltd Transactions Director fees Maurie Stang Regional Healthcare Group Pty Ltd Products purchased, services received and products sold Sale of products and services to Related Parties Purchases of goods and services from Related Parties Reimbursement of costs incurred on behalf on Nanosonics 2022 $ 2021 $ 3,959,462 5,089,524 1,784 — 9,137 — The above transactions exclude Director fees which are disclosed in Non-executive Directors’ remuneration in section 7.2 of the Remuneration report on page 57. 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) 2022 $ 2021 $ 1,137,540 1,821,163 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 (2021: 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 2022 (2021: 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. 1 0 0 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 1 0 O T H E R N O T E S c o n t i n u e d 10.3 C o n t r o l l e d e n t i t i e s The consolidated financial statements of the Group include: Name of controlled entity Principal activities Nanosonics Europe GmbH Saban Ventures Pty Limited Nanosonics, Inc. Nanosonics Europe Limited Nanosonics UK Limited Nanosonics Canada, Inc. Nanosonics Japan KK Nanosonics China 1 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 Sales and distribution of Nanosonics’ products and services in China Country of incorporation Class of shares Equity Holdings 2022 2021 Germany Ordinary 100% 100% Australia Ordinary 100% 100% USA Ordinary 100% 100% UK UK Ordinary 100% 100% Ordinary 100% 100% Canada Ordinary 100% 100% Japan Ordinary 100% 100% China Ordinary 100% — Nanosonics Investments Pty Ltd Strategic investments Nanosonics Employee Equity Trust Management of Nanosonics employee Australia Australia Ordinary — 100% 100% 100% 100% 1. Nanosonics China is a wholly-owned foreign enterprise formed in FY22. share plan 10.4 P a r e n t e n t i t y i n f o r m a t i o n As at and throughout the financial year ended 30 June 2022, 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) Summar y 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 2022 $’000 2021 $’000 174,577 199,866 21,208 34,020 159,773 171,163 13,880 14,970 113,855 113,538 23,170 (1,053) 29,874 21,117 369 21,169 165,846 156,193 8,706 7,126 9,827 9,208 NANOSONICS LIMITED I ANNUAL REPORT 2022 1 0 1 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 10 O T H E R N O T E S c o n t i n u e d ii) Guarantees entered into by the parent entity For the year ended 30 June 2022, 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 2022 (2021:Nil). iv) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2022, the parent entity had commitments to purchase plant and equipment of $1,860,000 (2021: $249,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. Accounting policies v) 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. 10.5 R e m u n e r a t i o n o f a u d i t o r s 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 2022 2021 368,000 371,528 116,000 — 106,500 37,719 484,000 515,747 44,084 — 44,084 52,972 7,147 60,119 528,084 575,866 10.6 N e w s t a n d a r d s a n d i n t e r p r e t a t i o n s n o t y e t a d o p t e d 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 E v e n t s o c c u r r i n g a f t e r t h e b a l a n c e d a t e On 17 August 2022, the Company issued 37,692 shares at $4.00 per share for a total of $150,768 under the Global Employee Share Plan (GESP). No other matters or circumstances that have arisen since 30 June 2022 have significantly affected, or may significantly affect: a) The Group’s operations in the current of future financial years. b) The results of those operations in the current of future financial years. c) The Group’s state of affairs in the current or future financial years. INFECTION PREVENTION. FOR LIFE. 1 0 2 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 2022 1. In the Directors’ opinion: a) The financial statements and notes set out on pages 62 to 101 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 2022 and of its performance for the financial year ended on that date. b) The financial statements and notes also comply with International Financial reporting Standards as disclosed in Note 1.2. 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. GEOFF WILSON Director, Sydney Sydney, 23 August 2022 NANOSONICS LIMITED I ANNUAL REPORT 2022 I N D E P E N D E N T A U D I T O R ’ S R E P O R T to the members of Nanosonics Limited 1 0 3 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 2022, 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 2022 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. 1 0 4 I N D E P E N D E N T A U D I T O R ’ S R E P O R T to the members of Nanosonics Limited Revenue Recognition Why significant 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. 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. How our audit addressed the key audit matter Our audit procedures included the following: ► Assessed the appropriateness of the Group’s revenue recognition accounting policies for compliance with Australian Accounting Standards. ► 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. ► Selected a sample of service revenue contract liabilities, and obtained evidence of the sale and recalculated the contract liability recorded. ► Used data analytical procedures to corroborate expected correlations between revenue, contract liability, accounts receivable and cash. ► 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 2022 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 I ANNUAL REPORT 2022 I N D E P E N D E N T A U D I T O R ’ S R E P O R T to the members of Nanosonics Limited 1 0 5 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. ► 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation INFECTION PREVENTION. FOR LIFE. 1 0 6 I N D E P E N D E N T A U D I T O R ’ S R E P O R T to the members of Nanosonics Limited ► 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 61 of the directors’ report for the year ended 30 June 2022. In our opinion, the Remuneration Report of Nanosonics Limited for the year ended 30 June 2022, 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 I ANNUAL REPORT 2022 I N D E P E N D E N T A U D I T O R ’ S R E P O R T to the members of Nanosonics Limited 1 0 7 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 23 August 2022 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation INFECTION PREVENTION. FOR LIFE. 1 0 8 S H A R E H O L D E R S I N F O R M AT I O N The shareholder information set out below was applicable as at 17 August 2022. A . E Q U I T Y S E C U R I T Y H O L D E R S 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 Noms Pty Ltd UBS Nominees Pty Ltd Mr Maurie Stang 1 Mr Bernard Stang 1 Mr Steve Kritzler National Nominees Limited Australian Foundation Investment Company Limited Mirrabooka Investments Limited Dr Harry Hirschowitz HSBC Custody Nominees (Australia) Limited Asia Union Investments Pty Limited BNP Paribas Nominees Pty Ltd Amcil Limited Colonial First State Inv Ltd <2349414 Hofbauer A/C> Bnp Paribas Nominees Pty Ltd Powerwrap Limited Mr Michael Kavanagh 1 Total top 20 holders Total all other holders Total shares on issue 1. Excludes indirect holdings and shares held by close family member. Unquoted equity securities Rights and options on issue Rights at nil exercise price 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 rights and options on issue 1. There are 154 unique holders with some holding two or three types of unquoted securities. Number of quoted shares held Percentage 67,537,345 41,848,804 32,323,481 17,889,824 9,015,071 8,629,534 9,389,048 7,489,737 7,370,598 5,970,000 2,276,674 2,139,090 1,968,977 1,700,000 1,580,028 1,228,000 1,200,000 1,130,050 1,039,457 1,018,363 22.37% 13.86% 10.71% 5.93% 2.99% 2.86% 3.11% 2.48% 2.44% 1.98% 0.75% 0.71% 0.65% 0.56% 0.52% 0.41% 0.40% 0.37% 0.34% 0.34% 222,744,081 79,128,740 73.78% 26.22% 301,872,821 100.00% Number of rights and options over ordinary shares Number of holders 1 1,700,704 1,674,299 2,407,524 5,782,527 154 44 33 154 NANOSONICS LIMITED I ANNUAL REPORT 2022 1 0 9 S H A R E H O L D E R S I N F O R M AT I O N B . D I S T R I B U T I O N O F E Q U I T Y S E C U R I T I E S 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 4,082,314 14,791,852 10,723,847 27,571,882 244,702,926 1% 5% 4% 9% 81% 9,473 5,766 1,433 1,113 102 34,529 38,552 38,652 1,091,535 4,579,259 1% 1% 1% 23% 74% 1% 1% 1% 19% 79% 301,872,821 100% 17,887 5,782,527 100% 100% A total of 64,865 units were held by 1,113 holders of less than a marketable parcel of 100 ordinary shares at $5.02 per share (being the closing market price on 17 August 2022). C . S U B S TA N T I A L H O L D E R S Substantial holders in the Company are shown below FMR LLC 1 Mr Maurie Stang 1,2 Yarra Capital Management Group1 Mr Bernard Stang 1,2 AustralianSuper 1 1. Shares held as at 30 June 2022. 2. Includes indirect holdings but excludes shares held by family member. D . V O T I N G R I G H T S The voting rights attaching to each class of equity securities are set out below: a. Ordinary shares Number of ordinary shares Percentage 29,826,717 18,971,717 16,933,061 16,333,493 15,571,390 9.9% 6.3% 5.6% 5.4% 5.2% All ordinary shares carry one vote per share without restrictions. Every member present in person or by proxy shall have one vote for each share. b. Rights and options Rights and options have no voting rights. E . R E S T R I C T E D S E C U R I T I E S A N D V O L U N TA R Y E S C R O W As at the date of this report, Nanosonics Limited has no restricted securities on offer. F. O N M A R K E T S H A R E P U R C H A S E O R B U Y B A C K S The Company did not carry out any on market purchase or buy-backs of shares during the year. INFECTION PREVENTION. FOR LIFE. 1 1 0 G L O S S A R Y AASB AcuTrace® AGM APES ASEAN ASIC ASX AUD Australian Accounting Standards Board RFID technology that digitally captures the clinical workflow Annual General Meeting Accounting Professional and Ethical Standard Association of Southeast Asian Nations Australian Securities and Investments Commission Australian Securities Exchange Limited Australian dollar AuditPro ™ Digital workflow compliance management system for tracking various instruments used in medical procedures ANZ APIC CAD CAGR CDC CEO CEO&P CFO 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 Company or Nanosonics Nanosonics Limited ABN 11 095 076 896 Constant currency 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 Date of this report 23 August 2022 EBIT EBTDA EMEA 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 Earnings Per Share Enterprise Resource Planning Environmental, Social and Governance Employee Share Option Plan European Currency Food and Drug Administration Financial year e.g. FY22 is the financial year ended 30 June 2022 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 NANOSONICS LIMITED I ANNUAL REPORT 2022 1 1 1 G L O S S A R Y IFRS IP ITAA KMP LTI LTIS NAN NHS NOEP OEM PBT PCP PR International Financial Reporting Standards Intellectual Property Income Tax Assessment Act Key Management Personnel Long-Term Incentives Long-Term Incentive Scheme Nanosonics Limited (ASX Code) National Health System (UK) Nanosonics Omnibus Equity Plan Original Equipment Manufacturer Profit before tax Prior corresponding period Performance Rights Q1, 2, 3, or 4 R&D Three-monthly periods beginning 1 July, 1 October, 1 January and 1 April respectively Research and Development Reporting period Year to 30 June 2022 RKI ROE RPC RR SARs The Robert Koch Institute Return on equity Remuneration & People Committee Restricted Rights Share Appreciation Rights SARS CoV-2 Severe acute respiratory syndrome coronavirus 2 SR SG&A STI TFR trophon® trophon® EPR trophon®2 TSR UG UK US USD VAT VWAP WAEP WEEE WHS WOFE Service Rights Selling, General and Administration Short-Term Incentives Total Fixed Remuneration The brand representing Nanosonics’ range of infection control solutions designed specifically for healthcare settings 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 Waste from Electrical and Electronic Equipment Work, Health and Safety Wholly Owned Foreign Enterprise INFECTION PREVENTION. FOR LIFE. 1 1 2 N A N O S O N I C S L I M I T E D I A N N U A L R E P O R T 2 0 2 2 C O R P O R AT E D I R E C T O R Y A N D I N F O R M AT I O N F O R I N V E S T O R S Nanosonics Limited ABN 11 095 076 896 incorporated 14 November 2000 D I R E C T O R S Steve Sargent Maurie Stang David Fisher Marie McDonald Geoff Wilson Lisa McIntyre Michael Kavanagh C O M PA N Y S E C R E TA R Y McGregor Grant R E G I S T E R E D O F F I C E Level 1 Building A 7-11 Talavera Road, Macquarie Park NSW 2113 Australia Ph: +61 2 8063 1600 S H A R E R E G I S T E R 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 I N V E S T O R / M E D I A R E L AT I O N S McGregor Grant – Company Secretary Ph: +61 2 8063 1600 Email: info@nanosonics.com.au A U D I T O R Ernst & Young 200 George Street Sydney, NSW 2000 Australia L E G A L A D V I S O R S Baker & McKenzie AMP Centre Level 27, 50 Bridge Street Sydney NSW 2000 Australia Spruson & Ferguson Pty Limited Level 21, 60 Margaret Street Sydney NSW 2000 Australia B A N K E R S 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. Canada: HSBC Bank Canada Japan: MUFG Bank Ltd. China: HSBC Bank (China) Shanghai S T O C K E X C H A N G E L I S T I N G Nanosonics Limited shares are listed on the Australian Securities Exchange ASX code: NAN Industry Group: Healthcare Equipment & Services 2 0 2 2 A N N U A L G E N E R A L M E E T I N G The 2022 AGM of Nanosonics Limited will be held at 11:00am on 18 November 2022. Four Seasons Hotel 199 George Street Sydney NSW 2000 Further details to be announced separately. Website address www.nanosonics.com.au