Optical Cable
Annual Report 2017

Plain-text annual report

RegeneRating mobility 2017 AnnuAl RepoRt CONTENTS Corporate directory ................................................................................................................................... 2 Directors’ report .......................................................................................................................................... 3 Auditor’s independence declaration ..................................................................................................... 14 Consolidated statement of profit or loss and other comprehensive income ..................................... 15 Consolidated statement of financial position ........................................................................................ 16 Consolidated statement of changes in equity ...................................................................................... 17 Consolidated statement of cash flows ................................................................................................... 18 Notes to the financial statements ........................................................................................................... 19 Directors’ declaration .............................................................................................................................. 42 Independent auditor’s report .................................................................................................................. 43 Corporate governance statement.......................................................................................................... 47 ASX additional information ...................................................................................................................... 54 Annual Report for the Year Ended 30 June 2017 1 CORPORATE DIRECTORY Board of Directors Dr Stewart Washer Executive Chairman, appointed 7 April 2014 Mr Paul Anderson Managing Director, appointed 21 March 2006 Mr Matthew Callahan Non-Executive Director, appointed 30 May 2006 Professor Lars Lidgren Independent Non-Executive Director, appointed 17 December 2007 Mr Qi Xiao Zhou Non-Executive Director, appointed 2 November 2012 Company Secretary Mr Simon Robertson Registered Office & Principal Place of Business Building 191, Murdoch University South Street Murdoch WA 6150, Australia Share Register Automic Registry Services Level 2, 267 St Georges Terrace Perth WA 6000, Australia Auditor PKF Mack 4th Floor, 35 Havelock Street West Perth WA 6005, Australia Solicitors Gilbert + Tobin Level 16, Brookfield Place Tower 2 123 St Georges Terrace, Perth WA 6000, Australia Bankers Westpac Banking Corporation Securities Exchange Listing Australian Securities Exchange ASX code: OCC Website www.orthocell.com.au Annual Report for the Year Ended 30 June 2017 2 DIRECTORS’ REPORT The directors present their report, together with the consolidated financial statements, on the consolidated entity (referred to hereafter as the 'consolidated entity') consisting of Orthocell Limited (referred to hereafter as the 'Company' or 'parent entity') and the entity it controlled at the end of, or during, the year ended 30 June 2017. 1. Directors The following persons were directors of Orthocell Limited during the financial year and up to the date of this report, unless otherwise stated: Dr Stewart Washer Executive Chairman Mr Paul Anderson Managing Director and CEO Mr Matthew Callahan Non-Executive Director Professor Lars Lidgren Independent Non- Executive Director Mr Qi Xiao Zhou Non-Executive Director Directors have been in office since the start of the financial year to the date of this report. Executive Chairman Dr Stewart Washer has 25 years of CEO and Board experience in medical and agrifood biotech companies. He is currently the Executive Director of Zelda Therapeutics Ltd (ASX:ZLD) in the medicinal cannabis space, Founding Chairman and current Director of Cynata Therapeutics Ltd (ASX:CYP) who are developing global stem cell therapies and Chairman of Minomic International Ltd with a novel approach to cancer diagnosis and treatment. He is also a founder and consultant to AusCann Ltd (ASX:AC8), the largest medicinal cannabis company in Australia. Stewart has previously worked in life science Fund Management with BioScience Managers in Australia and the Nestlé Fund Inventages. Stewart has held a number of Board positions in the past, including Chairman of Hatchtech Pty Ltd that was sold in 2015 for A$279m and was a Director of iCeutica that was sold to a US Pharma. He was also a Senator with Murdoch University and was a Director of AusBiotech Ltd. Current Directorships Cynata Therapeutics Ltd (ASX: CYP) Zelda Therapeutics Ltd (ASX:ZLD) Previous directorships (last 3 years) iSonea Ltd (ASX:ISN) Immuron Ltd (ASX: IMC AusBiotech Ltd Managing Director Mr Paul Anderson has over 20 years’ experience in the medical device and regenerative medicine fields with expertise in bridging the gap between research and clinical practice in the development of emerging medical technologies. He also has extensive expertise in the establishment of GMP manufacturing facilities and scale-up activities for cell therapies and biological medical devices, and the associated regulatory filings. Mr Anderson has a proven track record with over 15 years’ experience in CEO and board roles. His intimate knowledge of the regenerative medicine fields compliments his insight and know-how in taking biological therapies from research to clinical applications and market introduction. Previous directorships (last 3 years) Nil Non-Executive Directors Mr Matthew Callahan is a founding director of Orthocell. He is also the founding CEO of iCeutica, and a co-inventor of technologies that comprise the SoluMatrix Fine Particle Technology™ for improving the bioavailability of pharmaceuticals. He has more than 20 years legal, licensing and investment management experience and is a director of Botanix Pharmaceuticals Ltd (ASX:BOT). Mr Callahan has worked as investment director for two venture capital firms investing in life sciences and other sectors. He was General Manager and General Counsel with an ASX listed patent licensing company where he was responsible for licensing programs that have generated over $120 million in revenue. Current directorships Botanix Pharmaceuticals Limited (ASX:BOT) Previous directorships (last 3 years) Nil Professor Lars Lidgren is an Independent Non- Executive director of Orthocell who has authored and co-authored over 250 original publications, and has more than 150 patents/applications. He Annual Report for the Year Ended 30 June 2017 3 DIRECTORS’ REPORT was spokesman for Biomaterials in the Nordic Orthopaedic Society, Chairman for the Swedish National Knee Register, Director of the National Board of Health and Welfare, Musculoskeletal Competence Centre and member of several editorial boards. Professor Lidgren initiated and has led the UN ratified Bone and Joint Decade and founded Scandimed, a global leading company in bone cements and delivery. Professor Lidgren is the inventor, founder and board member of Bone Support, an emerging leader in bone therapeutics. Current directorships GWS (Nasdaq First North: GWS) Rethinking Care (Nasdaq First North: RTC) Previous directorships (last 3 years) Nil Mr Qi Xiao Zhou has 16 years’ experience within China as a senior business manager and executive. Mr Zhou is the founding CEO of Shenzhen Lightning Digital Technology Co Ltd, a company focused on the manufacture and distribution of electronic semiconductor since 2001. Mr Zhou has experience within the public markets in Hong Kong, China and Taiwan and brings to the Board a wealth of business management and development experience. In particular Mr Zhou has broad connections and experience in the licensing of technologies into the Asian region. Previous directorships (last 3 years) Nil Directors’ interests As at the date of this report, the interests of the Directors in the shares and options of Orthocell Limited were: Shares Dr Stewart Washer Mr Paul Anderson Mr Matthew Callahan Prof Lars Lidgren Mr Qi Xiao Zhou 490,411 6,981,970 10,219,059 964,091 5,996,241 Options & Warrants 495,842 1,263,692 400,000 204,767 204,767 Company Secretary Simon Robertson has held the role of Company Secretary since 8 November 2012. Mr Robertson gained a Bachelor of Business from Curtin University in Western Australia and Master of Applied Finance from Macquarie University in New South Wales. He is a member of the Institute of Chartered Accountants and the Governance Institute of Australia. Mr Robertson currently holds the position of Company Secretary for a number of publically listed companies and has experience in corporate finance, accounting and administration, capital raisings and ASX compliance and regulatory requirements. Meetings of Directors The number of meetings of the Company's Board of Directors ('the Board') held during the year ended 30 June 2017, and the number of meetings attended by each director was: Dr Stewart Washer Mr Paul Anderson Mr Matthew Callahan Professor Lars Lidgren Mr Qi Xiao Zhou Dr Stewart Washer Mr Matthew Callahan Professor Lars Lidgren Full Board Attended 5 5 4 5 3 Held(1) 5 5 5 5 5 Remuneration Committee Attended 2 2 2 Held(1) 2 2 2 (1) Held: represents the number of meetings held during the time the director held office. 2. Principal activities During the financial year the principal continuing activities of the consolidated entity consisted of the development and commercialisation of cell therapies and related technologies. 3. Review and results of operations The loss for the consolidated entity after income tax amounted to $4,177,416 (30 June 2016: $3,784,864). Overview Orthocell Ltd is a regenerative medicine company dedicated to the development of an important new class of tissue regeneration medical devices, cellular therapies and growth factors for the repair and regeneration of human tendons, bone, cartilage and soft tissue defects. Development to date has focused on two main products: Annual Report for the Year Ended 30 June 2017 4 DIRECTORS’ REPORT • ‘CelGro®’ a naturally derived collagen medical device for soft tissue repair currently in clinical trials for use as an augment to the surgical repair of tendons, peripheral nerves, bone and articular cartilage; and In February 2017, the Company released initial positive safety and tolerability results for nerve study demonstrating that the scaffold is safe and has been well tolerated with no inflammatory reactions or complications. Autologous Tenocyte Implantation • (“Ortho-ATI®”) for chronic, treatment resistant tendon regeneration. CelGro is targeted to a variety of orthopaedic, reconstructive and surgical applications and is being readied for first regulatory approval in Europe. Orthocell’s CelGro scaffold represents a paradigm shift in soft tissue reconstruction and exhibits a number of qualities that make it ideal for use as a guided tissue reconstruction and soft tissue repair device. Orthocell’s Ortho-ATI is a unique regenerative treatment that uses a minimally invasive, non- surgical approach that uses each patient’s own tendon-derived cells to stimulate tendon regeneration and is delivered via ultrasound guided injection under local anaesthetic. Published data demonstrates that Ortho-ATI is a durable disruptive technology facilitating the healing of tendons which are resistant to existing therapies. Summary of key events The Company has made significant progress in the clinical development of its collagen medical device platform technology and has advanced regulatory applications for marketing authorisation of CelGro. Clinical studies in the areas of bone and tendon repair have demonstrated and confirmed that CelGro is a novel medical device with unique characteristics and competitive advantages over existing tissue repair scaffolds, particularly in the areas of cell compatibility, tensile strength and promotion of quality tissue in-growth and scar-less repair. In October 2016, the Company received ethics approval for a human clinical study examining the safety and effectiveness of its CelGro scaffold, to be used as an augment to the surgical repair of peripheral nerve injuries. The company’s world leading cell therapy for tendon regeneration, Ortho-ATI, was further validated during the year with the announcement in January 2017 of a research collaboration agreement with DePuy Synthes Products, Inc (“DPS”), a Johnson & Johnson Company for its Ortho-ATI stem cell approach for the regeneration of degenerate tendons and ligaments. The study obtained ethics approval in October 2016, has commenced recruitment and will be led by Professor Allan Wang, current President of the Australian Elbow and Shoulder Society, in conjunction with Professor Ming Hao Zheng, Division of Surgery, School of Medicine at the University of Western Australia. The Company continued the clinical development of its minimally invasive cell therapy for tendon regeneration receiving ethics approval to conduct a study comparing surgery for severe tennis elbow to Orthocell’s Ortho-ATI. The study is being conducted by two of Australia’s leading elbow surgeons and follows publication of Orthocell’s positive pilot study results announced in April 2015 in the prestigious American Journal of Sports Medicine. Patient recruitment has commenced and the study is designed to show that a single non-invasive treatment of Ortho-ATI is superior or equivalent to the more costly and invasive surgical intervention for the repair of severe, treatment resistant Lateral Epicondylitis. This program will support the continued demonstration of clinical efficacy and the cost effectiveness of Ortho-ATI as a minimally invasive injectable treatment for resistant tendon injuries of the elbow. On 27 February 2017, Orthocell announced the publication of 2-year data for Ortho-ATI in degenerate hip (gluteal) tendons in the Orthopaedic Journal of Sports Medicine. The data shows positive outcomes including reduced pain and increased functionality out to 24 months following Ortho-ATI. This paper further supports Orthocell’s Ortho-ATI as a durable, long-term Annual Report for the Year Ended 30 June 2017 5 DIRECTORS’ REPORT solution for degenerate, treatment-resistant tendons. Orthocell’s regenerative cell therapy for cartilage repair, Ortho-ACI® was included on the Australian Register of Therapeutic Goods (ARTG). Orthocell’s Autologous Chondrocyte Implantation (Ortho- ACI) for cartilage repair and regeneration has previously been approved for sale in Australia pursuant to a TGA issued manufacturing license. Inclusion on the ARTG marks a significant milestone for the Company enabling the commencement of the process for reimbursement and the wider sale and distribution of Ortho-ACI for cartilage repair and regeneration within Australia, Hong Kong, Singapore and New Zealand and other regions. This milestone also represents the first cell therapy for cartilage repair to be included on the ARTG. During the year the Company received numerous international patents for its world leading regenerative medicine technologies. The patents provide important protection of its technologies as Orthocell prepares for registration and commercialisation in global markets. A Singapore patent was granted for CelGro relating to the method of manufacture of novel bio-scaffolds to aid in the surgical repair of soft tissue injuries such as tendon, nerve, cartilage and bone, as well as the delivery of cells to relevant surgical sites. The Company also announced it had received a European patent for its pipeline ‘Cell Factory’ technology that produces tissue specific growth factors and bioactive proteins to enhance tissue repair. This IP for cell factory concept is now granted in two key jurisdictions – USA and EU. The Company completed a $4 million capital raise via the Placement of 10,000,000 fully paid ordinary shares at an issue price of $0.40 per share. The funds raised from the Placement (after costs) will be used to progress the Company’s portfolio of products and for working capital purposes. In January 2017, the Company received a Research and Development (R&D) tax incentive cash refund of $1,947,998 for the financial year 2015/2016. The R&D refund strengthened the Company’s balance sheet and increased the operational runway during a very active clinical trial program for its collagen platform technology, CelGro and cellular therapy for tendon regeneration, Ortho-ATI. The Company was very pleased to receive the Innovation Excellence Award for Celgro at the 2016 Annual Western Australian Industry & Export Awards. The Award is, “for outstanding achievement or excellence in developing an innovative commercial product, process, service or technology. The Innovation Excellence Award recognizes business that are contributing to the advancement of the economy through their innovation.” The finalists for this award category were Austal Ltd, Proteomics International Pty Ltd and Orthocell Ltd. During the year the company presented at numerous leading national and international congresses further supporting the international interest, safety and effectiveness of its tendon regeneration product (Ortho-ATI) and cartilage regeneration (Ortho-ACI) products, as well as its pipeline products. Presentations included:     Previously released positive follow up data for the treatment of recalcitrant tendon injuries in the hip (2 year data) and the elbow (4.5 year data) at GPCE meetings in Brisbane, Melbourne and Sydney, Australia. Previously released positive data around its Ortho-ATI for The Treatment of Compensating Occupationally Related Lateral Epicondylitis at the Shoulder and Elbow Society of Australia meeting in Darwin, Australia and at the Combined Australian and New Zealand Orthopaedic Association meeting in Cairns, Australia. Podium presentation on Autologous Tendon Stem Cell Injection: The Regenerative Approach of Tendinopathy at the ISAKOS Congress in Shanghai, China to over 300 delegates including internationally recognised leaders in the field of tendinopathy. Previously released positive data around Ortho-ATI treatment presented at key session. Positive data around Ortho-ACI treatment for A Randomised Trial Investigating An Accelerated Weight Bearing Program After Autologous Chondrocyte Implantation: 2- Annual Report for the Year Ended 30 June 2017 6 DIRECTORS’ REPORT Year Outcomes at the Sports Medicine of Australia congress in Melbourne, Australia. 8. Therapeutic Goods Administration regulation  Numerous podium presentations showcasing Orthocell’s regenerative medicine portfolio in the US, UK, Hong Kong, Spain, China and Australia. In March 2017, Paul Anderson (CEO, Orthocell) presented at the 29th Annual Roth Capital Partners conference in California highlighting the Company’s progress and confirming that the Company is deal ready and positioned for growth. Mr Anderson also presented during extensive promotional roadshows in Perth, Adelaide, Melbourne and Sydney (September 2016) and Hong Kong (February 2017). 4. Dividends No dividends were paid during the current or previous financial years and no dividends have been declared subsequent to the financial year end and up to the date of this report. 5. Significant changes in the state of affairs In December 2016 Orthocell raised $4,000,000 via the placement of 10,000,000 shares at $0.40 per share. The funds will be used to further progress Orthocell’s technologies towards commercialisation. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. Orthocell Limited is subject to Australian federal legislation administered by the Therapeutic Goods Administration (TGA). Orthocell hold a manufacturing license (MI-19052008-LI-002420-11) provided by the TGA for tissue processing, on site storage and release for supply of autologous tenocytes and chondrocytes. 9. Remuneration report (audited) This Remuneration Report outlines the director and executive remuneration arrangements of the Company and the consolidated entity in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel (KMP) of the consolidated entity are defined as those persons having the authority and responsibility for planning, directing and controlling the major activities of the Company and the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the parent Company. Remuneration Philosophy The performance of the Company depends upon the quality of its directors and executives. To prosper, the Company must attract, motivate and retain highly skilled directors and executives. To this end, the Company embodies the following principles in its remuneration framework: • Provide competitive rewards to attract high 6. Likely developments and expected calibre executives. results of operations Having completed its successful capital raise in December 2016, the Company will continue the development and commercialisation of cell therapies and related technologies. The Company expects to complete and publish clinical trials currently being conducted and progress regulatory approvals. 7. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. • Link executive rewards to shareholder value. • A portion of executive remuneration may be put ‘at risk’, dependent on meeting pre- determined performance benchmarks. • Where appropriate, establish performance hurdles in relation to variable executive remuneration. Due to the early stage of development which the Company is in, shareholder wealth is directly affected by the Company share price, the Company is not in a position to pay dividends. By remunerating directors and Executives in part by Annual Report for the Year Ended 30 June 2017 7 DIRECTORS’ REPORT options, the Company aims to align the interests of directors and executives with shareholder wealth, thus providing individual incentive to perform and thereby improving overall Company performance and associated value. Remuneration structure and mix of remuneration commensurate with their position and responsibilities within the Company so as to:  Attract and retain high quality individuals.  Reward executives for Company performance. Non-executive director remuneration  Align the interest of executives with those of Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The maximum aggregate amount of fees that can be paid to non-executive Directors is subject to approval by shareholders at General Meetings and is currently set at $450,000. The amount of aggregate directors’ fees sought to be approved by shareholders and the manner in which it is apportioned amongst directors will be reviewed annually. The Board may consider advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process. Each non-executive director receives a fee for being a director of the Company. In addition, if a director performs extra or special services beyond their role as a director, the Board may resolve to provide additional remuneration for such services. Fees for directors are not linked to the performance of the consolidated entity however, to align all directors’ interests with shareholder interests, directors are encouraged to hold shares in the Company and may receive options. This effectively links directors’ performance to the share price performance and therefore to the interests of shareholders. For this reason there are no performance conditions prior to grant, but instead an incentive to increase the value to all shareholders. Executive remuneration Objective The Company aims to reward executives (both directors and Company executives) with a level shareholders.  Link reward with the strategic goals and performance of the Company.  Ensure total remuneration is competitive by market standards. Structure Executive remuneration consists of both fixed and variable (at risk) elements. Fixed Remuneration Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually or upon renewal of fixed term contracts by the Board and the process consists of a review of Company and individual performance, relevant comparative remuneration in the market and internal policies and practices. Structure Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the Company. Variable Remuneration Objective The objective of variable remuneration provided is to reward executives in a manner which aligns this element of remuneration with the creation of shareholder wealth. Structure Variable remuneration may be delivered in the form of a cash bonuses, or share options. During the financial year ended 30 June 2017 the Annual Report for the Year Ended 30 June 2017 8 DIRECTORS’ REPORT Company granted options to Executives as detailed in the tables below. The remuneration of executives for the years ended 30 June 2016 and 30 June 2017 are detailed in the tables below. Details of remuneration: Amounts of remuneration Details of the remuneration of the key management personnel of the consolidated entity are set out in the following tables. Key Management personnel remuneration details: The key management personnel of the consolidated entity consisted of the following directors of Orthocell Limited: Dr Stewart Washer - Executive Chairman Mr Paul Anderson - Managing Director Mr Matthew Callahan - Non-Executive Director Prof Lars Lidgren - Independent Non-Executive Director Mr Qi Xiao Zhou - Non-Executive Director Short-term benefits Cash salary and fees $ 2016 Non-executive Directors: Mr M Callahan Prof L Lidgren Mr QX Zhou 120,000 45,000 41,097 Bonus(1) $ - - - Executive Directors: Mr P Anderson Dr S Washer 326,000 150,000 75,000 - 30,970 - Total 682,097 75,000 34,873 Post- employment benefits Super- annuation $ Long-term benefits Long Service Leave $ - - 3,903 - - - 5,962 - 5,962 Share- based payments Total $ Performance related % 120,000 45,000 45,000 0.0% 0.0% 0.0% 437,932 150,000 17.1% 0.0% 797,932 9.4% $ - - - - - - Short-term benefits Cash salary and fees $ 2017 Non-executive Directors: Mr M Callahan Prof L Lidgren Mr QX Zhou 120,000 45,000 41,100 Bonus(1) $ - - - Post- employment benefits Super- annuation $ Long-term benefits Long Service Leave $ - - 3,900 - - - Share- based payments Total $ Performance related % 120,000 45,000 45,000 0.0% 0.0% 0.0% $ - - - Executive Directors: Mr P Anderson Dr S Washer 350,000 150,000 87,500 - 40,375 - 13,832 - 41,600 - 533,307 150,000 24.2% 0.0% Total 706,100 87,500 44,275 13,832 41,600 893,307 14.5% (1) Discretionary bonus as approved by the board. Annual Report for the Year Ended 30 June 2017 9 DIRECTORS’ REPORT Share-based compensation During the year ended 30 June 2017 the following share-based payments of options were made to key management personnel for nil consideration: Grant date 13 Oct 2016 Exercise price $0.624 Expiry date 12 Oct 2019 No. issued 250,000 Fair value per option $0.166 Total fair value $41,600 There were no share-based compensation payments to key management personnel during the year ended 30 June 2016. Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance 30/06/2016 Additions Disposals/ Other Balance 30/06/2017 Ordinary shares: Mr Paul Anderson Mr Matthew Callahan(1) Professor Lars Lidgren Dr Stewart Washer Mr Qi Xiao Zhou 6,973,750 10,204,559 964,091 475,261 5,996,241 24,613,902 - - - - - - - - - - - - 6,973,750 10,204,559 964,091 475,261 5,996,241 24,613,902 There were no shares issued as part of directors’ remuneration during the financial year. Mr Callahan is a founder and director of Stone Ridge Ventures Pty Ltd which is the manager of the SRV Tech (1) Trust, a venture capital fund. Mr Callahan’s interest in shares is held indirectly through: a) SRV Custodians Pty Ltd as trustee for the SRV Tech Trust which is the venture capital fund (574,026 shares) in respect of which AustralianSuper Investments Pty Ltd, as trustee of the AustralianSuper Private Equity Trust is the sole unit holder; and b) SRV Nominees Pty Ltd as trustee for the SRV Trust which is the carry trust for the SRV Tech Trust (40,154 shares). Mr Callahan is considered to have a relevant interest in these shares due to his position as a director or shareholder of the respective trustee companies and holds a beneficial interest in the SRV Trust. Options / warrants holdings The number options/warrants over ordinary shares in the Company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at the start of year Options granted Options exercised Expired/ forfeited/ other Balance at the end of the year Options vested & exercisable Options / warrants over ordinary shares: Mr Paul Anderson Dr Stewart Washer Mr Matthew Callahan Professor Lars Lidgren Mr Qi Xiao Zhou 2,763,692 1,745,842 1,650,000 204,767 204,767 250,000(1) - - - - - - - - - - - - - - 3,013,692 1,745,842 1,650,000 204,767 204,767 3,013,692 1,745,842 1,650,000 204,767 204,767 (1) During the year 250,000 options were issued to the Company’s Chief Financial Officer Nicole Telford, Mr Anderson’s spouse. There were no other transactions with key management personnel. Annual Report for the Year Ended 30 June 2017 10 DIRECTORS’ REPORT Employment Contracts The Company has entered into employment agreements with the following key employees (each an Executive) on the following material terms and conditions. Mr Paul Anderson Position: Salary: Short-term incentive: Notice period: Managing Director $365,000pa plus superannuation A bonus of a maximum of 25% of Base Salary may be payable each year subject to achievement of key performance indicators to be agreed by the Board 6 months Under the employment agreement: either party may terminate the (i) employment agreement by providing the amount of notice set out in the table above. The Company may terminate the agreement without notice (and without having to pay the Executive an amount in lieu of notice) if the Executive engages in serious or wilful misconduct; the Executive is entitled to 20 days annual (ii) leave and 10 days personal leave per annum, and to long service leave and other paid and unpaid leave in accordance with applicable legislation; the Executive acknowledges that (iii) intellectual property created by the Executive will be owned by the Company; the Executive agrees to keep confidential (iv) information secret and confidential except to the extent required by law; and during the employment and for a period (v) of 12 months post-employment (or less if a court finds 12 months to be invalid), the Executive agrees not to carry on any business that competes with the business of the Company, solicit, employ or engage any director, employee or contractor of the Company, or entice, provide services to, or accept services from any customer, contractor or supplier of the Company to discontinue their relationship with the Company or otherwise reduce the amount of business they do with the Company. This restraint applies in Australia and New Zealand, or if a court finds this invalid, across, Australia, or if a court finds this invalid, across Western Australia. Consulting arrangements The Company has entered into the consulting agreements with the parties set out below under which directors Mr Matthew Callahan and Dr Stewart Washer are to provide services to the Company. The key terms of the consulting agreements are as follows: Mr Matthew Callahan / Bocca Consulting Pty Ltd Consulting fee $1,500 per day Consulting services: Advisory services to the Company on general matters relating to the Company’s business, identifying, evaluating and developing new opportunities, performing duties as a non- executive director and any other duties as may be delegated by the Board from time to time. Dr Stewart Washer / Biologica Ventures Pty Ltd Consulting fee $150,000 per annum Consulting services: Services to the Company in relation to acting as Chairman of the Company. The Company and Dr Washer acknowledge that Dr Washer will be the Executive Chairman of the Company pursuant to this consultancy agreement. The Company can terminate a consulting agreement on 3 months’ notice. The Company may terminate the agreement without notice (and without having to pay the Consultant an amount in lieu of notice) if the Consultant or the Key Employee is guilty of gross misconduct, the Key Employee dies, or becomes permanently incapacitated or incapacitated for a period of 2 months in any 6 month period, the Consultant or the Key Employee breaches the agreement and does not rectify the breach, the Key Employee ceases to be a Director, the Consultant or the Key Employee fails to provide the services under the agreement or breaches the covenants under the agreement. The Consultant may terminate the agreement by 6 months’ notice or by notice if the Company breaches the agreement or fails to observe any provision and has not adequately Annual Report for the Year Ended 30 June 2017 11 DIRECTORS’ REPORT responded to the breach or non-observance within 15 days. The consultants and the key employees acknowledges that intellectual property created by them in providing services under the agreements will be owned by the Company, and undertakes not to divulge any confidential information except so far as may be necessary in connection with the proper performance of their obligations to the Company under the agreement or with the consent of the Company. Non-Executive Directors letters of appointment Pursuant to letters of continuing appointment Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou are continuing their appointments to the Board as a Non-Executive Directors following listing. Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou will each be paid a directors fee of $45,000 per annum. Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou are also entitled to fees or other amounts as the Board determines where they perform special duties or otherwise perform special duties or otherwise perform services outside the scope of the ordinary duties of a director. They may also be reimbursed for all reasonable and properly documented expenses incurred in performing their duties. This concludes the remuneration report, which has been audited. 10. Directors’ and Officers’ deeds of indemnity, access and insurance The Company has entered into a deed of indemnity, access and insurance with each of its Directors and the Company Secretary. Under these deeds, the Company agrees to indemnify each officer to the extent permitted by law against any loss which the officer may incur, or be liable for, arising from or in connection with the officer acting as an officer of the Company. Under the deeds, the Company is also required to enter into an insurance policy for the benefit of the officer that insures the officer for all liability to which the officer is exposed in providing services in the capacity of an officer of the Company for which insurance may be legally obtained. When the policy expires, the Company must ensure that it maintains an insurance policy for the officer during the officer’s term of appointment that is on terms no less favourable to the officer (subject to the ability of the Company to reduce the scope of the insurance to the extent it considers reasonable, if it is determined that the cost of maintaining it is such that it is not in the interests of the Company to maintain it, or the Company is unable to obtain the insurance on reasonable terms). 11. Shares under option At the date of this report the following options and warrants are on issue: Grant date Expiry date Exercise 24/11/2014 19/11/2015 26/02/2016 13/10/2016 13/12/2016 13/12/2016 10/03/2017 19/06/2017 24/11/2017 19/11/2020 26/02/2019 12/10/2019 13/12/2019 13/12/2020 10/03/2020 19/06/2020 price $0.62 $0.58 $0.56 $0.62 $0.65 $0.55 $0.59 $0.51 Number of options/warrants 3,520,000 12,122,237 1,350,000 650,000 490,000 600,000 40,000 200,000 12. Shares issued on the exercise of options There were no shares of the Company issued during the year ended 30 June 2017 and up to the date of this report on the exercise of options granted. 13. Indemnity and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The Company paid a premium of $17,804 in respect of this policy. 14. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any Annual Report for the Year Ended 30 June 2017 12 DIRECTORS’ REPORT related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. 15. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to 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. 16. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. 17. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 21 to the consolidated financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 21 to the consolidated financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. 18. Officers of the Company who are former audit partners of PKF Mack There are no officers of the Company who are former audit partners of PKF Mack. 19. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. 20. Auditor PKF Mack continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors Mr Paul Anderson Managing Director 13 September 2017 Perth Annual Report for the Year Ended 30 June 2017 13 AUDITOR’S INDEPENDENCE DECLARATION Annual Report for the Year Ended 30 June 2017 14 CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME For the year ended 30 June 2017 Revenue Sales revenue Cost of goods sold Gross profit Other revenue Expenses Research & development expenses Administrative & general expenses Sales & marketing expenses Other expenses Loss before income tax expense Income tax benefit Loss after income tax expenses Other comprehensive income Note 2017 $ 2016 $ 3 4 3 4 5 529,818 (438,137) 666,499 (497,589) 91,681 168,910 546,770 520,713 (3,914,268) (1,784,946) (1,064,651) - (6,763,865) (3,369,040) (1,601,923) (983,660) (27,638) (5,982,261) (6,125,414) (5,292,638) 1,947,998 1,507,774 (4,177,416) (3,784,864) Other comprehensive income for the year, net of tax - - Total comprehensive loss (4,177,416) (3,784,864) Loss per share Basic earnings per share Diluted earnings per share 29 29 $ (0.043) (0.043) $ (0.043) (0.043) Note: the above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes Annual Report for the Year Ended 30 June 2017 15 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2017 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Property, plant and equipment Intangibles Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employment benefits Other Total current liabilities Non-current liabilities Other Total non-current liabilities Total liabilities Net assets Equity Issue capital Reserves Accumulated losses Total equity Note 2017 $ 2016 $ 6 7 8 9 5,046,257 116,848 88,397 33,887 5,181,812 185,147 134,161 58,862 5,285,389 5,559,982 10 11 357,813 1,515,694 289,172 1,264,030 1,873,507 1,553,202 7,158,896 7,113,184 12 13 14 1,074,700 428,074 376,791 736,942 338,193 444,912 1,879,565 1,520,047 15 566,844 708,540 566,844 708,540 2,446,409 2,228,587 4,712,487 4,884,597 16 17 18 23,102,888 1,288,976 (19,679,377) 19,359,578 1,026,980 (15,501,961) 4,712,487 4,884,597 Note: the above statement of financial position should be read in conjunction with the accompanying notes Annual Report for the Year Ended 30 June 2017 16 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2017 Issued Capital $ Share-based payment reserve $ Accumulated losses Total equity $ $ Balance at 1 July 2015 15,302,482 798,405 (11,717,097) 4,383,790 Loss after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options - - - 4,426,862 (369,766) - - - - - - 228,575 (3,784,864) (3,784,864) - - (3,784,864) (3,784,864) - - - 4,426,862) (369,766) 228,575 Balance at 30 June 2016 19,359,578 1,026,980 (15,501,961) 4,884,597 Issued Capital $ Share-based payment reserve $ Accumulated losses Total equity $ $ Balance at 1 July 2016 19,359,578 1,026,980 (15,501,961) 4,884,597 Loss after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options - - - 4,000,000 (256,690) - - - - - - 261,996 (4,177,416) (4,177,416) - - (4,177,416) (4,177,416) - - - 4,000,000 (256,690) 261,996 Balance at 30 June 2017 23,102,888 1,288,976 (19,679,377) 4,712,487 Note: the above statement of changes in equity should be read in conjunction with the accompanying notes Annual Report for the Year Ended 30 June 2017 17 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2017 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers & employees (inclusive of GST) Receipts from license fees and royalties Grants received R&D tax concession received Interest received Note 2017 $ 2016 $ 986,095 (6,527,317) 2,097 - 1,947,998 35,747 924,551 (5,938,693) 3,480 119,926 1,507,774 61,844 Net cash used in operating activities 28 (3,555,380) (3,321,118) Cash flows from investing activities Payments for intangible assets Payments for property, plant & equipment Net cash used in investing activities Cash flows from financing activities Share subscription funds received Share equity costs Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year (255,538) (107,947) (287,316) (40,958) (363,485) (328,274) 4,000,000 (216,690) 4,426,862 (369,766) 3,783,310 4,057,096 135,555 5,181,812 407,704 4,774,108 Cash and cash equivalents at the end of the financial year 5,046,257 5,181,812 Note: the above consolidated statement of cash flows should be read in conjunction with the accompanying notes Annual Report for the Year Ended 30 June 2017 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. Basis of preparation These general purpose consolidated financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for- profit oriented entities. These consolidated financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). The financial statements cover Orthocell Limited as a consolidated entity consisting of Orthocell Limited and its subsidiary. Orthocell Limited is a listed public company limited by shares, incorporated and domiciled in Australia. A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue in accordance with a resolution of directors on 12 September 2017. The directors have the power to amend and reissue the financial statements. Historical cost convention The consolidated financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss, investment properties, certain classes of property, plant and equipment and derivative financial instruments. Critical accounting estimates The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these consolidated financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 26. Going Concern The Group has net assets of $4,712,487 (2016: $4,884,597) as at 30 June 2017 and incurred a loss of $4,177,416 (2016: $3,784,864) and net operating cash outflow of $3,555,380 (2016: $3,321,118) for the period ended 30 June 2017. The Group’s ability to continue as a going concern and meet its debts and future commitments as and when they fall due is dependent on the Company’s ability to raise sufficient working capital to ensure the continued implementation of the Group’s business strategy. The financial report has been prepared on a going concern basis. In arriving at this position the directors have had regard to the fact that the Company has, or in the directors’ opinion will Annual Report for the Year Ended 30 June 2017 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS have access to, sufficient cash to fund administrative and other committed expenditure for a period of not less than 12 months from the date of this report. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities and results of Orthocell Limited ('Company' or 'parent entity') and its subsidiary Ausbiomedical Pty Ltd as at 30 June 2017. Orthocell Limited and its subsidiary together are referred to in these consolidated financial statements as the 'consolidated entity'. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The consolidated financial statements are presented in Australian dollars, which is Orthocell Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Sale of goods Sale of goods revenue is recognised at the point of sale, which is where the customer has taken delivery of the goods, the risks and rewards are transferred to the customer and there is a valid sales contract. Amounts disclosed as revenue are net of sales returns and trade discounts. Annual Report for the Year Ended 30 June 2017 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Research and development tax incentive The research and development tax incentives are recognised at their fair value on receipt when all conditions have been complied with. The research and development tax incentives are recognised as income tax benefits in the consolidated statements of profit or loss and other comprehensive income. Interest Interest revenue is recognised when it is received or due to be received. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: When the deferred income tax asset or  liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or  When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entity's which intend to settle simultaneously. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is current when it is expected to be realised or intended to be sold or consumed in normal operating cycle, it is held primarily for the purpose of trading, it is expected to be realised within twelve months after the reporting period, or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current. A liability is current when it is expected to be settled in normal operating cycle, it is held primarily for the purpose of trading, it is due to be settled within twelve months after the reporting period, or there is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to Annual Report for the Year Ended 30 June 2017 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Inventories Inventory relates to work in progress which consists of the costs of patients’ cells being held in the laboratory awaiting delivery and implantation into the patient. Inventory items are stated at the lower of cost and net realisable value. Inventory comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure based on normal operating capacity. As indicated in Note 2, when making the decision whether inventory items should be carried forward in the statement of financial position, or written off, management must consider the likelihood of whether each particular patient will proceed to implantation. This requires a degree of estimation and judgement based on historical sales experience, the ageing of the inventories and other demographic and market factors. At present management consider that 2 years is a reasonable period of time to hold inventory in the statement of financial position for each patient unless there is further particular information that would indicate otherwise. This policy is reviewed annually. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are either: i) held for trading, where they are acquired for the purpose of selling in the short- term with an intention of making a profit; or ii) designated as such upon initial recognition, where they are managed on a fair value basis or to eliminate or significantly reduce an accounting mismatch. Except for effective hedging instruments, derivatives are also categorised as fair value through profit or loss. Fair value movements are recognised in profit or loss. Available-for-sale financial assets Available-for-sale financial assets are non- derivative financial assets, principally equity securities, which are either designated as Annual Report for the Year Ended 30 June 2017 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS available-for-sale or not classified as any other category. After initial recognition, fair value movements are recognised in other comprehensive income through the available-for- sale reserve in equity. Cumulative gain or loss previously reported in the available-for-sale reserve is recognised in profit or loss when the asset is derecognised or impaired. Impairment of financial assets The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor, a breach of contract such as default or delinquency in payments, the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do, it becomes probable that the borrower will enter bankruptcy or other financial reorganisation, the disappearance of an active market for the financial asset, or observable data indicating that there is a measurable decrease in estimated future cash flows. The amount of the impairment allowance for financial assets carried at cost is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for similar financial assets. Available-for-sale financial assets are considered impaired when there has been a significant or prolonged decline in value below initial cost. Subsequent increments in value are recognised in other comprehensive income through the available-for-sale reserve. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Leasehold improvements Plant & equipment Computer software Furniture & fittings Straight line Diminishing value Straight line Diminishing value 40 yrs 3-7 yrs 2-3 yrs 10-15 yrs The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve Annual Report for the Year Ended 30 June 2017 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS relating to the item disposed of is transferred directly to retained profits. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Research and development Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility, the consolidated entity is able to use or sell the asset, the consolidated entity has sufficient resources, and intent to complete the development and its costs can be measured reliably. Capitalised development costs are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. Patents and trademarks Significant costs associated with patents and trademarks are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 20 years. Capitalisation commences on application for the patents or trademark. Amortisation commences once the patent or trademark has been granted over the remaining useful life of the patent. The useful life is taken as 20 years from the date of application. Patents and trademarks are sought globally in various jurisdictions. If a patent or trademark is unsuccessful the costs are then fully written off. All patents and trademarks once granted have an annuity commitment over the term of their life and these are detailed in note 24. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other non- financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre- tax discount rate specific to the asset or cash- generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Employee benefits Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date is recognised in non-current liabilities, provided there is an unconditional right to defer settlement of the liability. The liability is measured at current value and is not discounted if the effect of discounting is immaterial. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Short-term employee benefits Liabilities for wages and salaries, including non- monetary benefits, annual leave and long service leave expected to be settled within 12 months of Annual Report for the Year Ended 30 June 2017 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS the reporting date are recognised in current liabilities in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, which are provided to employees in exchange for the rendering of services. The costs of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using the Black- Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The costs of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non- financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and assumes that the transaction will take place either in the principle market or in the absence of a principal market in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the Annual Report for the Year Ended 30 June 2017 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS inputs used in making the measurements. Classifications are reviewed each reporting date and transfers between levels are determined based on a reassessment of the lowest level input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital 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. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the shareholders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of GST recoverable from, or payable to, the tax authority. Annual Report for the Year Ended 30 June 2017 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2017. The consolidated entity has not assessed of the impact of these new or amended Accounting Standards and Interpretations. AASB No. Title AASB 9 Financial Instruments AASB 2010-7 Amendments arising from Accounting Standards arising from AASB 9 (Dec 2010) AASB 2014-1 Amendments to Australian Accounting Standards Part E - Financial Instruments Application date of standard * 1 Jan 2018 Issue date Dec 2014 1 Jan 2018 Sep 2012 Part E - 1 Jan 2018 Jun 2014 AASB 2014-5 Amendments to Australian Accounting Standard Arising From AASB 15 1 Jan 2018 Dec 2014 AASB 2014-7 Amendments to Australian Accounting Standard Arising From AASB 9 (Dec 2014) 1 Jan 2018 Dec 2014 AASB 2014-10 Amendments to Australian Accounting Standard - Sale of Contribution of Assets Between Investors and its Associates or Joint Venture 1 Jan 2018 Dec 2014 AASB 2015-8 Amendments to Australian Accounting Standards – Effective Date of AASB 15 1 Jan 2018 Oct 2015 AASB 2015-10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128. 1 Jan 2018 Dec 2015 AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses [AASB 112] 1 Jan 2017 Feb 2016 AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 1 Jan 2017 Mar 2016 AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15 1 Jan 2018 May 2016 AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions [AASB 2] 1 Jan 2018 Jul 2016 AASB 2017-1 Amendments to Australian Accounting Standards – Transfers of Investment Property, Annual Improvements 2014-2016 Cycle and Other Amendments 1 Jan 2018 Feb 2017 AASB 2017-2 Amendments to Australian Accounting Standards –Further Annual Improvements2014-2016 Cycle 1 Jan 2017 Feb 2017 AASB 15 Revenues from Contracts with Customers 1 Jan 2018 Oct 2015 AASB 16 Leases 1 Jan 2019 Feb 2016 AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration 1 Jan 2018 Feb 2017 IFRIC 23 Uncertainty over Income Tax Treatments 1 Jan 2019 Jun 2017 * Annual reporting periods beginning after Annual Report for the Year Ended 30 June 2017 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 2. Critical accounting judgements, estimates and assumptions The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, believed to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Provision for impairment of receivables The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtor’s financial position. Impairment of work in progress Work in progress comprises patient cells taken via biopsy and cryopreserved awaiting implantation at the patients discretion at a future date. Impairment of work in progress assessment requires a degree of estimation and judgement. While the patient cells held can be preserved indefinitely the company has estimated that if the patient has not proceeded with implantation within 2 years from biopsy, resulting in a sale of the product, the value of the work in progress is impaired to nil. Estimation of useful lives of assets The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. The useful life of patents and trademarks is based on the period of the life of the patent or trademark, which is usually 20 years. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves value-in-use calculations, which incorporate a number of key estimates and assumptions. Other qualitative measures are also considered in the assessment of impairment. Employee benefits provision As discussed in note 1, the liability for employee benefits expected to be settled more than 12 months from the reporting date is recognised and measured at current value and is not discounted if the effect of discounting is immaterial. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. Annual Report for the Year Ended 30 June 2017 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 3. Revenue Sales revenue Sale of goods Other revenue Interest Commissions Export market development grant License fee & royalties Currency gain Other 2017 $ 2016 $ 529,818 529,818 35,747 - - 143,793 3,321 363,909 546,770 666,499 666,499 61,844 191,894 119,926 146,005 - 1,044 520,713 Total revenue 1,076,588 1,187,212 Note 4. Expenses Loss before income tax includes the following specific expenses: Cost of sales Cost of sales Depreciation and amortisation Depreciation – plant & equipment Amortisation – patents & trademarks Total Depreciation and amortisation Net foreign exchange gain/(loss) Net foreign exchange gain/(loss) Rental expense relating to operating leases Minimum lease payments Employment expenses Salaries & wages Employment benefits Superannuation expense Consultants’ fees Directors’ fees Payroll & other taxes Other employment costs Share-based payments expense Total employment expenses Write off assets Inventories 438,137 497,589 70,458 77,294 147,752 47,963 52,218 100,181 3,321 (4,327) 115,976 115,976 2,502,317 89,881 248,143 502,500 281,100 146,524 22,595 144,856 3,937,916 2,069,277 27,798 178,528 526,219 281,097 129,067 1,502 228,575 3,442,063 51,932 59,767 Annual Report for the Year Ended 30 June 2017 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 5. Income tax expense Income tax expense/(benefit) Current tax Deferred tax – origination and reversal of temporary differences Aggregate income tax expense 2017 $ 2016 $ (1,947,998) - (1,507,774) - (1,947,998) (1,507,774) Numerical reconciliation of income tax expense & tax at the statutory rate Loss before income tax expense from continuing operations (6,125,414) (5,292,638) Tax at the statutory tax rate of 27.5% (2016: 28.5%) (1,684,489) (1,508,402) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible items Research and development expenditure Research and development rebate received Share-based payments Sundry items Income tax benefit not brought to account 15,581 365,270 (535,700) - 39,835 1,799,503 - 12,443 258,988 (452,332) (35,978) 68,573 1,656,708 - Research and development tax benefit received 1,947,998 1,507,774 The following deferred tax balances have not been recognised: Deferred tax balances not recognised at 27.5% (2016: 28.5%) Provisions and accruals Capital raising costs Carried forward revenue losses 131,164 209,081 2,773,781 107,464 245,651 1,939,642 3,114,026 2,292,757 The tax benefits of the above deferred tax assets will only be obtained if: (i) The company derives future assessable income of a nature and an amount sufficient to enable the benefits to be utilised; (ii) The company continues to comply with the conditions for deductibility imposed by law; and (iii) No changes in income tax legislation adversely affects the company in utilising the benefits. Annual Report for the Year Ended 30 June 2017 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 6. Cash and cash equivalents Cash at bank Reconciliation to cash and cash equivalents at the end of the financial year The above figures are reconciled to cash and cash equivalents at the end of the financial year as shown in the statement of cash flows as follows: Balance as above Cash and cash equivalents Balance as per statement of cash flows Note 7. Trade and other receivables Trade receivables Other receivables: Sundry debtors GST refund due 2017 $ 2016 $ 5,046,257 5,181,812 5,046,257 5,181,812 5,046,257 5,181,812 5,046,257 5,181,812 35,711 125,888 - 81,137 4,044 55,215 81,137 59,259 116,848 185,147 Impairment of receivables There has been no impairment of receivables in the year ended 30 June 2017 (30 June 2016: $0). Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $10,940 as at 30 June 2017 (30 June 2016: $15,779) The consolidated entity did not consider a credit risk on the aggregate balances after reviewing credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: 0 to 3 months overdue 3 to 6 months overdue Note 8. Inventories Consumables – at cost Work in progress – at cost 10,940 - 11,049 4,730 10,940 15,779 6,752 81,645 15,974 118,187 88,397 134,161 Annual Report for the Year Ended 30 June 2017 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 9. Other Prepayments Note 10. Property, plant and equipment Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation 2017 $ 2016 $ 33,887 58,862 33,887 58,862 272,502 (70,456) 202,056 523,896 (383,664) 140,232 41,464 (25,939) 15,525 272,502 (63,633) 208,869 400,981 (335,616) 65,365 37,760 (22,822) 14,938 357,813 289,172 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial years are set out below: Balance at 30 June 2015 Additions Disposals Depreciation Balance at 30 June 2016 Additions Disposals Depreciation Leasehold improvements $ Plant and equipment $ Furniture and fittings $ Total $ 215,682 - - (6,813) 208,869 - - (6,813) 76,377 27,556 - (38,568) 65,365 135,394 - (60,527) 14,070 3,450 - (2,582) 14,938 3,705 - (3,118) 306,129 31,006 - (47,963) 289,172 139,099 - (70,458) Balance at 30 June 2017 202,056 140,232 15,525 357,813 Note 11. Intangibles Patents and trademarks – at cost Less: Accumulated amortisation 2017 $ 2016 $ 1,686,038 (170,344) 1,357,080 (93,050) 1,515,694 1,264,030 Annual Report for the Year Ended 30 June 2017 32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 11. Intangibles (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 30 June 2015 Additions Amortisation expense Balance at 30 June 2016 Additions Amortisation expense Balance at 30 June 2017 Note 12. Trade and other payables Trade payables Other payables Note 13. Employee benefits Annual leave entitlements Long service leave entitlements $ 1,044,802 271,446 (52,218) 1,264,030 328,958 (77,294) 1,515,694 2017 $ 2016 $ 891,021 183,679 648,795 88,147 1,074,700 736,942 254,174 173,900 196,840 141,353 428,074 338,193 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. Note 14. Other current liabilities Accrued expenses Revenue received in advance 235,091 141,700 303,212 141,700 376,791 444,912 Annual Report for the Year Ended 30 June 2017 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 15. Other non-current liabilities Revenue received in advance Note 16. Equity – issued capital 2017 $ 2016 $ 566,844 708,540 566,844 708,540 2017 Shares 2016 Shares 2017 $ 2016 $ Ordinary shares – fully paid 101,479,437 91,479,437 24,664,002 20,664,002 Share equity costs – ordinary shares - - (1,561,114) (1,304,424) 101,479,437 91,479,437 24,664,002 20,664,002 101,479,437 91,479,437 23,102,888 19,359,578 Movements in ordinary share capital Details Balance Issue of shares Issue of shares Share issue costs Balance Issue of shares Share issue costs Balance Date Shares Issue price $ 1 Jul 2015 82,500,000 15,302,482 11 Nov 2015 26 Feb 2016 8,776,597 202,840 - $0.49 $0.49 4,326,862 100,000 (369,766) 30 Jun 2016 91,479,437 19,359,578 13 Dec 2016 10,000,000 - $0.40 4,000,000 (256,690) 30 Jun 2017 101,479,437 23,102,888 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. The Company does not have any externally imposed capital requirements. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Annual Report for the Year Ended 30 June 2017 34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 16. Equity – issued capital (continued) Capital Management Policy The consolidated entity's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company's share price at the time of the investment. The consolidated entity is not actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies. Note 17. Share-based payment reserve 2017 Options 2016 Options 2017 $ 2016 $ Share-based payment reserve 12,762,500 10,782,500 1,288,976 1,026,980 12,762,500 10,782,500 1,288,976 1,026,980 Movements in share-based payment reserve Details Date No of options Total $ Balance at 30 June 2015 9,432,500 798,405 Issue of options(1) 26 Feb 2016 1,350,000 228,575 Balance at 30 June 2016 10,782,500 1,026,980 Issue of options(2) Issue of options(3) Issue of options(4) Issue of options(5) Issue of options(6) 13 Oct 2016 12 Dec 2016 13 Dec 2016 10 Mar 2017 19 Jun 2017 650,000 490,000 600,000 40,000 200,000 1,980,000 108,160 80,164 40,000 5,612 28,060 261,996 Balance at 30 June 2017 12,762,500 1,288,976 Total value of share-based payments for the year is $261,996. Of this $221,996 has been recognised in the Statement of Profit or Loss and Other Comprehensive Income and the remaining $40,000 in the Share Issue Costs. The share based payments reserve is used to record the value of share based payments provided to employees, including Key Management Personnel, as part of their remuneration, as well as consultants as consideration for services in certain circumstances. Annual Report for the Year Ended 30 June 2017 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 17. Share-based payment reserve (continued) For the options granted the valuation model inputs used to determine the fair value at the grant date are as follows: (1) (2) (3) (5) (6) Grant date Expiry date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free rate Fair value at grant date 26 Feb 2016 26 Feb 2019 $0.365 $0.56 87% 0% 1.72% $0.169 13 Oct 2016 12 Oct 2019 $0.435 $0.624 72% 0% 1.72% $0.166 12 Dec 2016 12 Dec 2019 $0.440 $0.648 71% 0% 1.95% $0.164 10 Mar 2017 10 Mar 2020 $0.420 $0.594 63% 0% 2.11% $0.140 19 Jun 2017 19 Jun 2020 $0.350 $0.510 73% 0% 1.80% $0.137 (4) On 13 December 2016 600,000 options were granted as part payment for the provision of services in relation to a capital raising. The fair value of the service amounts to $240,000 as determined by market expectations. Of this fair value $200,000 was settled in cash and therefore the options are deemed to have a fair value of $40,000. The options have an exercise price of $0.55 and an expiry date of 13 December 2020. Set out below are summaries of options granted by the Company: Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year Grant date Expiry date 2016 03/08/2014 03/08/2017 24/11/2014 24/11/2017 19/11/2015 19/11/2020 26/02/2016 26/02/2019 $0.50 $0.62 $0.58 $0.56 5,912,500 3,520,000 - - - - 12,122,237 1,350,000 9,432,500 13,472,237 Weighted average exercise price $0.55 $0.58 2017 03/08/2014 03/08/2017 24/11/2014 24/11/2017 19/11/2015 19/11/2020 26/02/2016 26/02/2019 13/10/2016 12/10/2019 12/12/2016 12/12/2019 13/12/2016 13/12/2019 10/03/2017 10/03/2020 19/06/2017 19/06/2020 $0.50 $0.62 $0.58 $0.56 $0.62 $0.64 $0.55 $0.59 $0.41 5,912,500 3,520,000 12,122,237 1,350,000 - - - - - - - - - 650,000 490,000 600,000 40,000 200,000 22,904,737 1,980,000 Weighted average exercise price $0.56 $0.58 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,912,500 3,520,000 12,122,237 1,350,000 22,904,737 $0.56 5,912,500 3,520,000 12,122,237 1,350,000 650,000 490,000 600,000 40,000 200,000 24,884,737 $0.57 At 30 June 2017 the remaining weighted average contractual life of the options is 745 days (2016: 1,001 days). Annual Report for the Year Ended 30 June 2017 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 18. Equity – accumulated losses Accumulated losses at the beginning of the financial year Loss after income tax expense for the year 2017 $ 2016 $ 15,501,961 4,177,416 11,717,097 3,784,864 Accumulated losses at the end of the financial year 19,679,377 15,501,961 Note 19. Financial instruments (a) Financial risk management The Company’s principal financial instruments comprise cash. The main purpose of these financial instruments is to fund expenditure on the Company’s operations. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. It is, and has been throughout the period under review, the Company’s policy that no trading in financial instruments shall be undertaken. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in Note 1. (b) Interest rate risk At reporting date the Company had the following financial assets exposed to interest rate risk: Cash(1) (1) The weighted average interest rate of cash is 0.69% (2016: 1.29%) (c) Credit risk 2017 $ 2016 $ 5,046,257 5,181,812 Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The consolidated entity’s maximum exposure to credit risk in relation to each class of financial asset is the carrying amount of those assets as indicated in the Statement of Financial Position. The consolidated entity has in place policies that aim to ensure that counterparties and cash transactions are limited to high credit quality financial institutions and that the amount of credit exposure to one financial institution is limited as far as is considered commercially appropriate. Since the consolidated entity trades only with recognised third parties, there is no requirement for collateral. (d) Liquidity risk Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company’s reputation. Annual Report for the Year Ended 30 June 2017 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 19. Financial instruments (continued) The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Less than 6 months 6 – 12 months 1 – 2 years 2 – 5 years Over 5 years $ $ $ $ $ Total contractual cash flows $ Total carrying amount $ As at 30 June 2017: Trade & other payables As at 30 June 2016: Trade & other payables 1,126,112 952,207 (e) Net fair values - - - - - - - - - - 1,126,112 952,207 The carrying amount of financial assets and financial liabilities recorded in the financial statements represents their respective net fair values, determined in accordance with the accounting policies disclosed in Note 1. (f) Sensitivity analysis The following tables summarise the sensitivity of the consolidated entity’s financial assets to interest rate risk. Had the relevant variables, as illustrated in the tables, moved, with all other variables held constant, post-tax profit/(loss) and equity would have been affected as shown. The analysis has been performed on the same basis for 2016 and 2017. None of the Company’s financial liabilities are interest bearing. Financial assets 30 June 2017 Cash 30 June 2016 Cash Carrying amount $ Interest rate risk -1% Interest rate risk 1% Net profit $ Equity $ Net profit $ Equity $ 5,046,257 (50,462) (50,462) 50,462 50,462 5,181,812 (51,818) (51,818) 51,818 51,818 Note 20. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments 2017 $ 2016 $ 793,600 44,275 13,832 41,600 757,097 34,873 5,962 - 893,307 797,932 Annual Report for the Year Ended 30 June 2017 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 21. Remuneration of auditor During the financial year the following fees were paid or payable for services provided by PKF Mack, the auditor of the Company, its network firms and unrelated firms: Audit services – PKF Mack Audit or review of the consolidated financial statements Other services – PKF Mack Preparation of the tax return Other matters 2017 $ 2016 $ 32,400 30,600 3,300 - 3,300 5,850 3,200 9,050 35,700 39,650 Note 22. Contingent liabilities The consolidated entity has no contingent liabilities for the years ended 30 June 2017 or 30 June 2016. Note 23. Contingent assets The consolidated entity has no contingent assets for the year ended 30 June 2017 or 30 June 2016. Note 24. Commitments Patent annuity commitments To maintain patent rights the following commitments will need to be met by the Company: Within one year One to five years More than five years Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Total commitments 42,716 175,439 346,505 32,351 174,515 432,068 564,660 638,934 115,157 333,068 - 151,126 603,141 36,917 448,225 791,184 1,012,885 1,430,118 Operating lease commitments includes contracted amounts for various equipment under non-cancellable operating leases expiring within one to ten years and the current office and laboratory rental lease under an operating lease expiring in five years. Annual Report for the Year Ended 30 June 2017 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 25. Related party transactions Parent entity: Subsidiaries: Orthocell Limited is the parent entity Interests in subsidiaries are set out in note 26. Key management personnel: Disclosures relating to key management personnel are set out in note 20 and the remuneration report in the Directors' Report. Loans to/from related parties: There were no loans to or from related parties at the current and previous reporting dates Terms and conditions: All transactions were made on normal commercial terms and conditions and at market rates. Note 26. Parent entity and interest in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following wholly- owned subsidiaries in accordance with the accounting policy described in note 1: Name of entity Ausbiomedical Pty Ltd Country of incorporation Australia 2017 % 100 2016 % 100 Ausbiomedical Pty Ltd has no assets or liabilities and does not trade in its own right. As the Company’s only subsidiary, Ausbiomedical Pty Ltd, does not trade or have any assets and liabilities, the consolidated entity and parent entity disclosures are the same. Note 27. Events after the reporting period No other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. Annual Report for the Year Ended 30 June 2017 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 28. Reconciliation of loss after income tax to net cash from operating activities 2017 $ 2016 $ Loss after income tax expense for the year (4,177,416) (3,784,864) Adjustments for: Depreciation and amortisation Share-based payments expensed Inventory write-off Change in operating assets and liabilities: (Increase)/decrease in debtors (Increase)/decrease in prepayments (Increase)/decrease in inventories (Increase)/decrease in accrued revenue Increase/(decrease) in creditors Increase/(decrease) in accruals Increase/(decrease) in employee entitlements Increase/(decrease) in unearned income 147,752 221,996 51,932 100,181 228,575 59,767 94,220 24,975 (6,167) - 207,264 (68,121) 89,881 (141,696) 15,090 (54,399) (43,262) 77,590 (14,961) 209,063 27,798 (141,696) (3,555,380) (3,321,118) Note 29. Loss per share Loss after income tax expense for the year (4,177,416) (3,784,864) Weighted average number of shares used in calculating basic and diluted loss per share Shares Shares 96,958,889 87,965,279 Options are considered to be potential ordinary shares and have only been included in the determination of diluted loss per share to the extent to which they are dilutive. At the date of this report has 101,479,437 ordinary shares on issue. Note 30. Operating segments The consolidated entity has identified its operating segments based on the internal reports that are reviewed and used by the Chief Operating Decision Maker to make decisions about resources to be allocated to the segments and assess their performance. The financial information presented in the statement of profit or loss and other comprehensive income and statement of financial position is the same as that presented to the chief operating decision makers. The consolidated entity predominately operates in the regenerative medicine industry in Australia. Annual Report for the Year Ended 30 June 2017 41 DIRECTORS’ DECLARATION In the directors’ opinion: • • • • the attached consolidated financial statements and notes thereto and the remuneration report contained in the directors’ report comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached consolidated financial statements and notes thereto comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the consolidated financial statements; the attached consolidated financial statements and notes thereto give a true and fair view of the consolidated entity's financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Mr Paul Anderson Director 13 September 2017 Perth Annual Report for the Year Ended 30 June 2017 42 INDEPENDENT AUDITOR’S REPORT Annual Report for the Year Ended 30 June 2017 43 INDEPENDENT AUDITOR’S REPORT Annual Report for the Year Ended 30 June 2017 44 INDEPENDENT AUDITOR’S REPORT Annual Report for the Year Ended 30 June 2017 45 INDEPENDENT AUDITOR’S REPORT Annual Report for the Year Ended 30 June 2017 46 CORPORATE GOVERNANCE STATEMENT General The Board of Directors of Orthocell Limited (the “Company”) is responsible for the corporate governance of the Company. The Board guides and monitors the business and affairs of the Company on behalf of the shareholders by whom they are elected and to whom they are accountable. This statement sets out the main corporate governance practices in place throughout the financial year in accordance with 3rd edition of the ASX Principles of Good Corporate Governance and Best Practice Recommendations. Further information about the Company’s corporate governance practices is set out on the Company’s website at www.orthocell.com.au. This Statement was approved by the Board of Directors and is current as at 12 September 2017. PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT ASX Recommendation 1.1: a listed entity should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. The Board has adopted a formal charter that details the respective board and management functions and responsibilities. A copy of this board charter is available in the corporate governance section of the Company's website at www.orthocell.com.au. The Company has complied with this recommendation. ASX Recommendation 1.2: a listed entity should undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election as a director and provide security holders with all material information relevant to a decision on whether or not to elect or re-elect a director. The Company did not elect any new Directors during the year. Information in relation to Directors seeking reappointment is set out in the Directors report and Notice of Annual General Meeting. The Company has complied with this recommendation. ASX Recommendation 1.3: a listed entity should have a written agreement with each Director and senior executive setting out the terms of their appointment. The Company has in place written agreements with each Director. The Company has complied with this recommendation. ASX Recommendation 1.4: the company secretary of a listed company should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. The Board Charter provides for the Company Secretary to be accountable directly to the board through the Chair. The Company has complied with this recommendation. ASX Recommendation 1.5: a listed entity should: • • • • have a diversity policy which includes the requirement for the board to set measurable objectives for achieving gender diversity and assess annually the objectives and the entity’s progress to achieving them; disclose the policy or a summary of it; disclose the measurable objectives and progress towards achieving them; and disclose the respective proportions of men and women on the board and at each level of management and the company as a whole. The Company has adopted a Diversity Policy which is available in the corporate governance section of the Company's website at www.orthocell.com.au. The Board considers that, due to the size, nature and stage of development of the Company, setting measurable objectives for the Diversity Policy at this time is not appropriate. The Board will consider setting measurable objectives as the Company increases in size and complexity. Annual Report for the Year Ended 30 June 2017 47 CORPORATE GOVERNANCE STATEMENT As at 30 June 2017, the Company does not have any female Board members (2016: nil). The Company has 1 female (33%) in senior management positions, (2016: 1, 33%). Of the balance of the Company’s employees 76% are female (2016: 73%). 56% (2016: 52%) of the Company’s employees in total, including Directors, are female. The performance of executive Directors, including the Managing Director, will be reviewed by the Remuneration Committee. The Remuneration Committee will conduct a performance evaluation of the Executive Directors annually to review performance against KPIs set for the previous year, and to establish KPIs for the forthcoming year. The Company partly complies with this recommendation. Performance reviews were undertaken during the reporting period. ASX Recommendation 1.6: a listed entity should disclose the process for evaluating the performance of the board, its committees and individual directors and whether a performance evaluation was carried out during the reporting period in accordance with that process. The Chair has the overall responsibility for evaluating the Board, any committees established and, when appropriate, individual directors on an annual basis. The method and scope of the performance evaluation will be set by the Chair and which may include a Board self-assessment checklist to be completed by each Director. The Chairperson may also use an independent adviser to assist in the review if deemed appropriate. A performance review was undertaken during the reporting period. The Company has complied with this recommendation. ASX Recommendation 1.7: a listed entity should have and disclose a process for periodically evaluating the performance of its senior executives and disclose in relation to each reporting period where a performance evaluation was undertaken in accordance with a process. The Managing Director reviews the performance of the senior executives. The Managing Director conducts a performance evaluation of the senior executives by meeting individually with each senior executive on a yearly basis to review performance against the senior executive’s responsibilities as outlined in his or her contract with the Company and against key performance indicators (KPI’s) set for the senior executive set by the Managing Director or the Board. The Company has complied with this recommendation. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE ASX Recommendation 2.1: The board of a listed entity should establish a nomination committee: • • • with at least three members the majority of which are independent directors chaired by an independent Director; and disclose the charter of the committee, the members of the committee and the number of times the committee met throughout the period and member attendance at those meetings. Given the present size and complexity of the Company the Board has not constituted a Nomination Committee with the full Board carrying out the role of a Nomination Committee. The Company has not complied with this recommendation. ASX Recommendation 2.2: a listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. The Board has established a skills matrix. On a collective basis the Board has the following skills: Strategic expertise - ability to identify and critically assess strategic opportunities and threats and develop strategies. Specific Industry knowledge - Experience in regenerative medicine or other Biotech or related sector. Annual Report for the Year Ended 30 June 2017 48 CORPORATE GOVERNANCE STATEMENT International experience – members of the Board have an understanding the complexities of operating in foreign jurisdictions, including a basic knowledge of the general corporate, fiscal and labour laws and regulations. Accounting and finance - members of the Board have experience in accounting and finance or the ability to read and comprehend the company’s accounts, financial material presented to the board, financial reporting requirements and an understanding of corporate finance. Risk management - Identify and monitor risks to which the Company is, or has the potential to be exposed to. Experience with financial markets - Experience in working in or raising funds from the equity or capital markets. Investor relations - Experience in identifying and establishing relationships with Shareholders, potential investors, institutions and equity analysts. Government relations - Experience in dealing with relevant Government authorities and regulators. The Company has complied with this recommendation. ASX Recommendation 2.3: a listed entity should disclose the names of the directors considered by the board to be independent directors and provide details in relation to the length of service of each Director. During the year ended 30 June 2017 the only independent Director of the Company was Professor Lars Lidgren. Dr Stewart Washer and Mr Paul Anderson are Executive Directors and are not considered to be independent Directors as they are employed in an executive capacity. Mr Qi Xiao Zhou is a substantial shareholder and as such is not considered to be an independent Director. Mr Matthew Callahan is a founder and director of a substantial shareholder and as such is not considered to be an independent director. The appointment date of Directors is set out in the Directors Report forming part of the Annual Financial Statements. The Company has complied with this recommendation. ASX Recommendation 2.4: the majority of the board of a listed entity should be independent directors. The Board does not have a majority of directors who are independent. The Board considers that the composition of the Board is adequate for the Company’s current size and operations, and includes an appropriate mix of skills and expertise, relevant to the Company’s business. These skills include members with significant experience as directors of public companies, relevant experience in the management and growth of businesses together with extensive experience in the industry in which Orthocell operates. The Board will review its composition as the Company’s circumstances change. The Company has not complied with this recommendation. ASX Recommendation 2.5: The Chair of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. The Executive Chair of the Board is Dr Stewart Washer. The board considers that given its stage of development it is beneficial that Dr Washer is an Executive. The Board will consider the appointment of an independent chair as the Company increases in size and complexity. The Managing Director is Paul Anderson. The Company has not complied with this recommendation. ASX Recommendation 2.6: a listed entity should have a program for inducting new directors and provide appropriate professional development opportunities. The Board is responsible for providing new directors with an induction to the Company and for the program for providing adequate Annual Report for the Year Ended 30 June 2017 49 CORPORATE GOVERNANCE STATEMENT professional development opportunities for directors and management. No new directors were appointed during the year. The Company has complied with this recommendation. PRINCIPLE 3: ACT ETHICALLY AND RESPONSIBLY ASX Recommendation 3.1: a listed entity should establish a code of conduct and disclose the code or a summary of the code. The Company has established a Code of Conduct as to the practices necessary to maintain confidence in the Company’s integrity, the practices necessary to take into account its legal obligations and the reasonable expectations of its stakeholders and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. A copy of the Company’s code of conduct is available in the corporate governance section of the Company's website at www.orthocell.com.au. The Company has complied with this recommendation. PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING ASX Recommendation 4.1: The Board of a listed entity should establish an audit committee: • • • with at least three members, all of whom are non-executive directors and a majority of which are independent directors chaired by an independent Director; and disclose the charter of the committee, the members of the committee and the number of times the committee met throughout the period and member attendance at those meetings. Given the present size and complexity of the Company the Board has not constituted an Audit Committee with the full Board carrying out the role of an Audit Committee. The qualifications of the members of the Board are set out in the Directors report forming part of the Annual Financial Statements. The Company has not complied with this recommendation. ASX Recommendation 4.2: The Board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. The Board has received the assurance required by ASX Recommendation 4.2 in respect of the financial statements for the half year ended 31 December 2016 and the full year ended 30 June 2017 from the Managing Director and the Chief Financial Officer. Given the size and nature of the Company’s operations the Board has not received the assurance in respect of the quarterly cash flow statements believing that the provision of the assurance for the half and full year financial statements is sufficient. The Company partly complies with this recommendation. ASX Recommendation 4.3: a listed entity should ensure that the external auditor attends its Annual General Meeting and is available to answer questions from security holders relevant to the audit. The external auditor attends the Annual General Meeting and is available to answer questions from shareholders relevant to the audit and financial statements. The external auditor will also be allowed a reasonable opportunity to answer written questions submitted by shareholders to the auditor as permitted under the Corporations Act. The Company has complied with this recommendation. Annual Report for the Year Ended 30 June 2017 50 CORPORATE GOVERNANCE STATEMENT PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE ASX Recommendation 5.1: a listed entity should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. The Company has established a continuous disclosure policy which is designed to guide compliance with ASX Listing Rule disclosure requirements and to ensure that all Directors, senior executives and employees of the Company understand their responsibilities under the policy. The Chairman, Managing Director and Company Secretary act as the Company’s Disclosure Officers who are responsible for implementing and administering this policy. The Disclosure Officers are responsible for all communication with ASX and for making decisions on what should be disclosed publicly under this policy. In accordance with the Company's continuous disclosure policy, all information provided to ASX for release to the market is posted to its website at www.orthocell.com.au after ASX confirms an announcement has been made. A copy of the continuous disclosure policy is available in the corporate governance section of the Company's website at www.orthocell.com.au. The Company has complied with this recommendation. PRINCIPLE 6: RESPECT THE RIGHTS OF SHAREHOLDERS ASX Recommendation 6.1: a listed entity should provide information about itself and its governance to investors via its website. The Company’s website at www.orthocell.com.au contains information about the Company’s operations and technologies, Directors and management and the Company’s corporate governance practices, policies and charters. All ASX announcements made to the market, including annual and half year financial results are posted on the website as soon as they have been released by the ASX. The full text of all notices of meetings and explanatory material, the Company’s Annual Report and copies of all investor presentations are posted on the website. The Company has complied with this recommendation. ASX Recommendation 6.2: a listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. The Company’s Managing Director and Chairman are the Company’s main contact for investors and potential investors and make themselves available to discuss the Company’s activities when requested together with other Directors as required. In addition to announcements made in accordance with its continuous disclosure obligations the Company, from time to time, prepares and releases general investor updates about the Company. Contact with the Company can be made via email addresses provided on the website. The Company has complied with this recommendation. ASX Recommendation 6.3: a listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. The Company encourages participation of shareholders at any general meetings and its Annual General Meeting each year. Shareholders are encouraged to lodge direct votes or proxies subject to the adoption of satisfactory authentication procedures if they are unable to attend the meeting. The full text of all notices of meetings and explanatory material are posted on the Company’s website at www.orthocell.com.au. The Company has complied with this recommendation. ASX Recommendation 6.4: a listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security register electronically. Annual Report for the Year Ended 30 June 2017 51 CORPORATE GOVERNANCE STATEMENT Contact with the Company can be made via email addresses provided on the website. The Company has complied with this recommendation. The Company’s share register provides a facility whereby investors can provide email addresses to receive correspondence from the Company electronically and investors can contact the share register via telephone, facsimile or email. The Company has complied with this recommendation. PRINCIPLE 7: RECOGNISE AND MANAGE RISK ASX Recommendation 7.1: The Board of a listed entity should have a committee to oversee risk: • • • with at least three members, all of whom are non-executive directors and a majority of which are independent directors chaired by an independent Director; and disclose the charter of the committee, the members of the committee and the number of times the committee met throughout the period and member attendance at those meetings. Given the present size and complexity of the Company the Board has not constituted a Risk Committee with the full Board responsible for risk management. The Company has not complied with this recommendation. ASX Recommendation 7.2: The Board or a committee of the Board, of a listed entity should review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound and disclose in relation to each reporting period whether such a review was undertaken. The Board is responsible for the oversight of the Company’s risk management and control framework. Responsibility for control and design of risk management is delegated to the appropriate level of management within the Company with the Managing Director being responsible to the Board for the risk management and control framework. The Board conducted a review during the reporting period. ASX Recommendation 7.3: a listed entity should disclose if it has an internal audit function and if it does not have an internal audit function that fact and the processes it employs for evaluating and continually improving the effectiveness of risk management and internal control processes. Given the Company’s current size and level of operations it does not have an internal audit function. The Board is responsible for the oversight of the Company’s risk management and control framework. Responsibility for control and design of risk management is delegated to the appropriate level of management within the Company with the Managing Director being responsible to the Board for the risk management and control framework. The Company has complied with this recommendation. ASX Recommendation 7.4: a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and if it does how it manages or intends to manage those risks. The Company has exposure to economic risks, including general economy wide economic risks and risks associated with the economic cycle. There will a requirement in the future for the Company to raise additional funding to pursue its business objectives. The Company’s ability to raise capital may be effected by these economic risks. The Company has in place risk management procedures and processes to identify, manage and minimise its exposure to these economic risks where appropriate. The Board currently considers that the Company does not have any material exposure to environmental risk. The Board currently considers that the Company does not have any material exposure to social sustainability risk. The Company’s Corporate Code of Conduct outlines the Company’s commitment Annual Report for the Year Ended 30 June 2017 52 CORPORATE GOVERNANCE STATEMENT to integrity and fair dealing in its business affairs. The code sets out the principles covering appropriate conduct in a variety of contexts and outlines the minimum standard of behaviour expected from employees when dealing with stakeholders. The Company has complied with this recommendation. PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY ASX Recommendation 8.1: The board of a listed entity should establish a remuneration committee: • with at least three members the majority of which are independent directors • chaired by an independent Director; and • disclose the charter of the committee, the members of the committee and the number of times the committee met throughout the period and member attendance at those meetings. The Board has established a Remuneration Committee and adopted a charter that sets out the Remuneration Committee’s role and responsibilities, composition and membership requirements. Currently, Mr. Matthew Callahan (chair), Dr Stewart Washer and Dr Lars Lidgren serve on the Remuneration Committee. A copy of the committee’s charter is available in the corporate governance section of the Company's website at www.orthocell.com.au. Details of the number of meetings of the committee and attendance at those meetings is set out in the Directors Report. The Company has not complied with this recommendation. ASX Recommendation 8.2: a listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives. The Company remunerates non-executive Directors at a fixed fee for time, commitment and responsibilities. In addition non-executive Directors may be paid fees under consulting arrangements. Remuneration for non-executive Directors is not linked to individual performance. From time to time the Company may, subject to shareholder approval) grant options to non-executive Directors. The maximum aggregate amount of fees (including superannuation payments) that can be paid to non-executive directors is subject to approval by shareholders at a General Meeting. There are no termination or retirement benefits for non-executive directors (other than for superannuation). Executive remuneration consists of a base salary and performance incentives. Short term performance incentives may be paid in cash and may be subject to the successful completion of performance hurdles agreed by the board following recommendations from the Remuneration Committee. Long term performance incentives may include options or other equity based products granted at the discretion of the Board subject to obtaining the relevant shareholder approvals. The grant of equity based products is designed to recognise and reward efforts as well as to provide additional incentive to continue those efforts for the benefit of the Company, and may be subject to the successful completion of performance hurdles. The Company has complied with this recommendation. ASX Recommendation 8.3: a listed entity which has an equity based remuneration scheme should have a policy on whether participants are permitted to enter into transactions which limit the economic risk of participating in the scheme and disclose the policy or a summary of that policy. A participant in an equity based remuneration plan operated by the Company must not enter into a transaction (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the equity based remuneration plan. The Company has complied with this recommendation. Annual Report for the Year Ended 30 June 2017 53 ASX ADDITIONAL INFORMATION Information in this section is as at 12 September 2017. Substantial shareholders The number of substantial shareholders and their associates are set out below: Shareholder SRV Custodians Pty Ltd Ming Hao Zheng Mr Paul Frederick Anderson & Ms Nicole Jane Telford Mr Qixiao Xhou Shares 9,530,382 6,795,415 6,403,335 5,996,241 JP Morgan Nominees Australia Limited 5,698,892 Mr Jia Xun Xu 5,168,276 Voting rights Ordinary shares On a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Distribution of ordinary shares Ranges 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Shareholders Holdings 267 1,808 687 872 87 187,730 5,073,535 5,710,115 24,834,964 65,673,093 Totals 3,721 101,479,437 On-market buy back There is currently no on-market buy-back program for any of Orthocell Limited’s listed securities. Restricted securities Nil Securities Exchange The Company was listed on the Australian Securities Exchange on 12 August 2014. Ordinary shares 20 largest shareholders Shares held % SRV Custodians Pty Ltd Ming Hao Zheng Mr Paul Frederick Anderson & Ms Nicole Jane Telford Mr Qixiao Xhou JP Morgan Nominees Australia Limited 9,530,382 6,795,415 6,403,335 5,996,241 5,698,892 Mr Jia Xun Xu 5,168,276 National Nominees Limited 2,309,595 Veritas Securities Limited Enerview Pty Ltd Murdoch Ventures Pty Ltd Diamonex Ltd Argento Pty Ltd SRV Nominees Pty Ltd The University of Western Australia 1,729,319 1,000,000 923,841 768,091 695,758 649,177 646,687 BNP Paribas Nominees Pty Ltd 640,270 HSBC Custody Nominees (Australia) Limited 624,500 9.39 6.70 6.31 5.91 5.62 5.09 2.28 1.70 0.99 0.91 0.76 0.69 0.64 0.64 0.63 0.62 0.61 0.59 0.59 BT Portfolio Services Limited Dr John Clifford Philpott & Mrs Rebecca Anne Philpott 600,000 600,000 Dr John Clifford Philpott 600,000 0.59 Total 51,994,018 51.24 Balance of register 49,485,419 48.76 Grand total 101,479,437 100.00 Unmarketable parcels 568 554,246 Citicorp Nominees Pty Limited 614,239 Annual Report for the Year Ended 30 June 2017 54 ASX ADDITIONAL INFORMATION Unquoted options and warrants Options issued under the options plans total 6,850,000 and warrants issued total 12,122,237. Voting rights Options and warrants No voting rights. Distribution of unlisted options and warrants Exercise price: Expiry date: Holding ranges: 1 – 5,000 5,001 – 10,000 Options $0.62 24/11/17 Options $0.56 26/02/19 Options $0.62 12/10/19 Options $0.64 12/12/19 Options $0.55 13/12/19 Options $0.59 10/03/20 Options $0.41 19/06/20 Warrants $0.58 19/11/20 Options held (Holders) Options held (Holders) Options held (Holders) Options held (Holders) Options held (Holders) Options held (Holders) Options held (Holders) Warrants held (Holders) nil nil nil 20,000 (2) 160,000 (6) nil nil nil 10,001 – 100,000 520,000 (11) 100.001 & over Totals 3,000,000 (8) 1,170,000 (6) 3,520,000 (19) 1,350,000 (14) 650,000 (3) 650,000 (3) nil nil 190,000 (2) 130,000 (2) 490,000 (4) nil nil nil 600,000 (1) 600,000 (1) nil nil 40,000 (1) nil 40,000 (1) nil nil nil 200,000 (1) 200,000 (1) nil nil 273,834 (6) 11,848,403 (8) 12,122,237 (14) All unlisted options were issued pursuant to the Company’s employee option acquisition plan or to directors pursuant to shareholder approval. Holders of great than 20% of unlisted warrants are listed below: Warrant holder Warrants held % Empery Asset Master Ltd 2,993,478 24.7 Annual Report for the Year Ended 30 June 2017 55 

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