Annual Report
2016
Contents
02 Chairman and Chief Executive Officer’s Report
04 Directors’ Report
12 Corporate Governance
13 Remuneration Report
20 Auditor’s Independence Declaration
21 Consolidated Statement of Comprehensive Income
22 Consolidated Statement of Financial Position
23 Consolidated Statement of Changes in Equity
24 Consolidated Cash Flow Statement
25 Notes to the Financial Statements
52 Directors’ Declaration
53 Independent Auditor’s Report
55 Additional Information required by ASX
57 Corporate Directory
PolyNovo is a Melbourne-based
medical device company that designs,
develops and manufactures solutions
for standalone and combination devices
using its NovoSorb™ biodegradable
polymer technology.
PolyNovo’s current focus is on the
development and commercialisation
of innovative medical devices using its
NovoSorb™ technology in the treatment
of burns, surgical wounds and Negative
Pressure Wound Therapy.
01
PolyNovo Limited Annual Report 2016 Chairman and Chief Executive Officer’s Report
Dear Shareholder,
The year past has been one of building a
team and a business to take our technology
to the world.
We significantly expanded the resources
within the Company with additional staff
in regulatory, finance, clinical and business
development. We expect further hires to be
made in the near future to build a first class
team. We also added a new Board Director,
Mr. Leon Hoare ex Smith&Nephew.
Our corporate structure was consolidated
with the acquisition of the minority interests
in NovoSkin™/ NovoWound™. This provides
PolyNovo with full control of the entities
and flexibility to negotiate commercial
agreements. The roll-up made Professor
Greenwood and Mr Burton significant
shareholders in PolyNovo and more closely
aligns their contribution to developing
our technology.
To fund this, we raised $8.47m from
institutional investors and a further
$4.37m from a Share Purchase Plan.
This broadened the shareholder base
and improved the liquidity of the shares.
Our share price over the year has gone
from 9 cents to 28 cents.
Obtaining US FDA 510(k) approval for
the use of NovoSorb™ BTM in surgical
wounds now enables sales into the US
and several other markets. We expect
to announce our market entry strategy
for the US before the AGM.
The Royal Adelaide Hospital (RAH) initial
patient trial concluded. This trial provided
valuable data which informs clinical
applications of the BTM and enabled us
to establish a new and larger clinical trial.
Post the RAH trial, Professor John Greenwood
and Dr Marcus Wagstaff continue to use
the BTM under the TGA Prescribers
Exemption Scheme. Dr Wagstaff from
RAH was appointed PolyNovo’s Clinical
Director advising on the CE and BARDA
trial programs.
“Apart from building the business and our clinical
data, the focus over the second half of the year
was on the commercialisation of NovoSorb™
BTM by prioritising entry into the US, South
Africa and New Zealand markets.”
The CE Mark trials have been slow to
recruit patients, but we have accelerated
patient recruitment by modifying the
Protocol. We are also in the process of
enrolling three additional Australian sites.
This will accelerate our recruitment and
we expect completing patient enrolment
by January 2017.
Our BARDA funded feasibility trial has
formally commenced now the US FDA has
approved the Protocol. Patient recruitment
will begin in August 2016. The feasibility
trial is anticipated to conclude before June
2017. Concurrent with this trial, BARDA
exercised their option to award PolyNovo
a non-clinical trial contract to investigate
the full bio-reabsorption of the polymer.
The data from this study will add considerable
weight to our safety and toxicity data for
further regulatory submissions.
Apart from building the business and our
clinical data, the focus over the second half
of the year was on the commercialisation
of NovoSorb™ BTM by prioritising entry
into the US, South Africa and New Zealand
markets. We had a strong presence at the
American Burn Association meeting and
received enthusiastic interest from surgeons
and distributors, from the US and many
other countries. We are currently in the
process of detailing our US market entry
plan and expect to announce this before
the AGM.
Our divestment of Metabolic to Lateral
Pharma Pty Ltd required Lateral to invest
$1m in the development of the compound.
We are pleased to inform shareholders that
Lateral has met the investment requirement.
The sale preserved some upside for us if
Lateral is successful.
At the same time, we have pursued the
development of new products for Hernia
and Breast reconstructions. These products
have reached the early prototype stage.
Development of these products will
continue and will include engagement
with key opinion leaders to refine the final
products. Regulatory and commercialisation
phases of these products are scheduled
to commence in 2017.
David Williams
Chairman
Paul Brennan
Chief Executive Officer
02
PolyNovo Limited Annual Report 2016 03
PolyNovo Limited Annual Report 2016 Directors’ Report
The Directors of PolyNovo Limited (PolyNovo) present the Directors’ Report, together with the Financial Report, of the Company and its
controlled entities (the Group) for the year ended 30 June 2016 and the related Auditor’s Report.
Board of Directors and Senior Management
The details of Directors and Senior Management during the year and until the date of this report are set out below. Directors were in office
for the entire period unless otherwise stated.
Mr Bruce Rathie
BComm, LLB, MBA, FAIM, FAICD
Non-executive Director
Mr Rathie is an experienced
Company Director and lawyer. He
practised as a partner in a large legal
firm and acted as Senior In-house
Counsel to Bell Resources Limited
from 1980 to 1985. He studied for
his MBA in Geneva and embarked
on his investment banking career in
1986. He was Head of the Industrial
Franchise Group at Salomon Smith
Barney in the late 1990s and led
Salomon’s roles in the Federal
Government’s privatisation of
Qantas, Commonwealth Bank
(CBA3) and Telstra (T1). He has
over 15 years’ experience as a
professional Non-executive
Company Director. He is currently
Chairman of DataDot Technology
Limited (ASX: DDT), Vice Chairman
of Capricorn Society Limited and
Chairman of Capricorn Mutual
Limited. In the medical device space,
he was previously Chairman of
Anteo Diagnostics Limited and a
Director of Compumedics Limited
and USCOM Limited. He has been a
Non-executive Director of PolyNovo
since February 2010.
Mr Max Johnston
Non-executive Director
Mr Johnston was appointed a
Director of PolyNovo on 13 May
2014. Mr Johnston held the position
of President and Chief Executive
Officer of Johnson & Johnson Pacific,
a division of the world’s largest
medical, pharmaceutical and
consumer healthcare company for
11 years. Prior to joining Johnson
& Johnson, Mr Johnston’s career
also included senior roles with
Diageo and Unilever in Europe.
Mr Johnston has also held several
prominent industry roles as a past
President of ACCORD Australasia
Limited, a former Vice Chairman
of the Australian Food and Grocery
Council and a former member of
the board of ASMI. Mr Johnston has
had extensive overseas experience
during his career in leading businesses
in both Western and Central-Eastern
Europe and Africa as well as the
Asia-Pacific region. Mr Johnston is
currently a Non-executive Director
of Medical Developments
International Ltd (ASX: MVP) and
Enero Group Limited (ASX: EGG),
and Non-executive Chairman of
Probiotec Ltd (ASX: PBP).
Mr David Williams
B.Ec (Hons), M.Ec, FAICD
Non-executive Chairman
Dr David McQuillan
PhD
Non-executive Director
Dr McQuillan was appointed a
Director of PolyNovo on 6 August
2012. He has extensive technical,
medical, scientific and regulatory
knowledge, as well as merger and
acquisition expertise. Dr McQuillan
was with LifeCell Inc/Kinetic
Concepts Inc (KCI) for 12 years,
holding a number of senior roles,
including Vice President for Research
and Development at LifeCell and
Senior Vice President of Advanced
Research and Technology at KCI. He
was Chief Science Officer for TELA
Bio, a VC-funded development-stage
biotechnology company from
2013 to 2015.
Mr Williams was appointed as
a Non-executive Director on
28 February 2014 and Chairman
on 13 March 2014. Mr Williams
is an experienced Director and
investment banker with a proven
track record in business development
and strategy, as well as in corporate
initiatives specialising in mergers
and acquisitions and capital raising.
He possesses 30 years’ experience
working with and advising ASX-
listed companies in the food,
medical device and pharmaceutical
sectors. Mr Williams was previously
the Managing Director of Challenger
Corporate Finance, Head of Mergers
& Acquisitions – Melbourne, Société
Générale Hambros, Head of Mergers
& Acquisitions at ANZ McCaughan,
and Australian Head of Mergers &
Acquisitions Arthur Andersen & Co.
He has been Chairman of Tassal
Group Ltd and Austin Group Ltd
and held numerous other
Directorships including with Amcal
Ltd and Select Harvests Ltd. Mr
Williams is currently Chairman of
ASX-listed Medical Developments
International Ltd (ASX: MVP), and
is Managing Director of corporate
advisory firm Kidder Williams Ltd.
Mr Williams resigned as Non-
executive Director of IDT (ASX: IDT)
on 19 May 2015.
04
PolyNovo Limited Annual Report 2016 Mr Philip Powell
BComm (Hons), ACA, F.Fin, MAICD
Non-executive Director
Mr Powell was appointed a Director
of PolyNovo on 13 May 2014
and was Acting Managing Director
from 15 July 2014 to 13 February
2015. Mr Powell has many years’
experience in investment banking
specialising in capital raisings, Initial
Public Offerings (IPOs), mergers and
acquisitions and other successful
corporate finance assignments across
a diverse range of sectors including
utilities, IT, pharma, financial services,
food and agriculture. He spent
10 years in senior financial roles
at OAMPS Ltd, a former ASX-listed
financial services group, and 10 years
in audit with Arthur Andersen & Co
in Melbourne, Sydney and Los
Angeles. Mr Powell is currently a
Non-executive Director of Medical
Developments International Ltd
(ASX: MVP).
Mr Leon Hoare
Non-executive Director
Mr Hoare was appointed a Director
of PolyNovo on 27 January 2016.
Mr Hoare is also Managing Director
of Lohmann & Rauscher (Australia
and New Zealand), a privately
owned, multinational medical device
company. Previously Mr Hoare was
Managing Director of Smith &
Nephew (Aus/NZ) until the end
of 2015, one of Smith & Nephew’s
largest global subsidiaries outside
the US. He served as President
of Smith & Nephew’s Asia-Pacific
Advanced Wound Management
(AWM) business for five years
and was a member of the Global
Executive Management for the
AWM Division. In his 24 years with
Smith & Nephew, he also held roles
in marketing, divisional and general
management. Mr Hoare’s career
also includes a senior role at
Bristol-Myers Squibb in surgical
products, and Vice Chair of
Australia’s peak medical device body,
Medical Technology Association
of Australia. Mr Hoare is currently a
Non-executive Director of Medical
Developments International Ltd
(ASX: MVP).
Mr Paul Brennan
MBA, BSc (Nursing) RN, RM
Chief Executive Officer
Ms Andrea Goldie
CPA ACA CTA GIA (Cert)
CFO and Company Secretary
Ms Goldie was appointed as Chief
Financial Officer (CFO) and Company
Secretary on 28 October 2015.
Ms Goldie has over 14 year’s
corporate governance experience
with multinational companies within
the pharmaceutical and healthcare
industries. Her areas of expertise
include financial accounting,
statutory reporting, auditing, tax
compliance, management reporting
and corporate governance. These
skills have been applied across a
number of geographic regions
including Europe, the Middle East,
Africa, the Asia-Pacific region and
North America. Ms Goldie is a
Chartered Accountant, a Chartered
Tax Adviser and a certificated
member of the Governance Institute
Australia. Ms Goldie holds a Bachelor
of Economics (Accounting) and
an MBA (Finance).
Mr Brennan was appointed Chief
Executive Officer (CEO) of PolyNovo
Ltd on 13 February 2015. Mr Brennan
has extensive knowledge, exposure
and understanding of the health
system through his clinical
background and commercial
exposure with various multinational
companies. He has co-ordinated
the marketing, global strategy
development, new product
development and regulatory
processes for the Asia-Pacific region
for industry-leading organisations
in relation to medical products and
devices. Mr Brennan has an intimate
knowledge of the manufacturing
and production processes. Previously
he was Marketing Director Australia
and New Zealand and Sales Director
New Zealand for Smith & Nephew
Healthcare from 2008 to his
commencement with PolyNovo in
February 2015. Mr Brennan holds
a MBA from Swinburne University,
a Bachelor of Science (Nursing) from
the University of New England in
NSW, Certificate in Midwifery
Central Coast Area Health Service
NSW, and General Nursing certificate
from St Vincent’s Hospital
Darlinghurst NSW.
05
PolyNovo Limited Annual Report 2016 Directors’ Report continued
Corporate and
Organisational Structure
PolyNovo Limited, the ultimate parent
entity of the PolyNovo Group, is a public
company listed on the Australian Securities
Exchange. As at 30 June 2016, PolyNovo
Limited had three wholly owned subsidiaries:
PolyNovo Biomaterials Pty Limited, NovoSkin
Pty Ltd and NovoWound Pty Ltd. All three
subsidiary companies are Australian
proprietary companies.
Subsidiaries: acquisition
of non-controlling interests
On 24 November 2015, the Company
entered into an agreement with the owners
of the 20% non-controlling interests in
PolyNovo’s subsidiary companies, NovoSkin
Pty Ltd and NovoWound Pty Ltd, to acquire
those interests. The acquisition received
shareholder approval at the 2015 AGM
and the acquisition was completed on 22
December 2015. The advantages of the
acquisition were significant and included:
• gaining full control over marketing of the
BTM and other NovoPore™ products;
• entitlement to 100% of all revenues;
• meeting the requirements of BARDA and
other parties, that wish to deal with the
head company;
• simplifying the corporate and reporting
structure; and
• improving the ability to utilise tax losses
from trials and product development.
Capital injection
During the period, the Company raised
capital to fund its ongoing and future
operations. On 28 November 2015,
$8,474,816 was raised from private
placement to sophisticated investors and
institutions, and on 23 December 2015
$4,373,000 was raised via the Company’s
Share Purchase Plan (SPP) offer. Funds
raised have been used and will be used to:
• fund a 22 patient trial for full thickness
burns at The Alfred Hospital in Melbourne
and at St Anne Hospital in Toulon, France.
Successful completion of this trial will
help PolyNovo to achieve CE Mark
certification in Europe, South East Asia,
Australia and New Zealand, and to sell
in these markets;
06
Principal Activities
and Operations
PolyNovo’s principal activity is the
development of innovative medical devices
for a number of medical applications,
utilising the patented biodegradable
polymer technology NovoSorb™.
NovoSorb™ is a family of proprietary
medical grade polymers that can be utilised
to manufacture novel medical devices
designed to support tissue repair and which
then degrade in a defined fashion in-situ to
harmless by-products. NovoSorb™ has
significant advantages over competitor
biodegradable polymers in terms of its
design flexibility. PolyNovo is able to
manufacture NovoSorb™ polymer devices
with a range of mechanical properties and
flexible degradation times from months to
years that are suitable for many different
medical applications.
• support activities for trials for full
thickness burns in the US. These activities
may include manufacturing scale-up and
any required consulting expenses not
covered by our BARDA funding;
• increase the depth and breadth of the
organisational structure. Staff numbers
and costs will increase as PolyNovo
progresses towards commercialisation
and increases development of product
outside the BTM;
• settle the cash component for the
purchase of the non-controlling
interest shareholders in NovoSkin™
and NovoWound™;
• meet regulatory requirements, such
as the filing of the CE Mark in Europe,
Australia, South East Asia, and scope
possible filing of regulatory submissions
in new regions such as South Africa, UAE,
Indonesia, New Zealand and India;
• meet the cost of accelerating the progress
of products and associated trials in
respect to pelvic floor repair and hernia
and breast reconstruction; and
• satisfy general working capital
requirements.
PolyNovo Limited Annual Report 2016 Key attributes of the NovoSorb™
technology include an unparalleled range
of mechanical properties and degradation
times, excellent biocompatibility and safety
profile and harmless degradation. The
technology can be utilised as a foam,
coating or a thermoplastic structure, with
the potential to deliver drugs, biological
agents, antimicrobials and cells. In addition,
the technology is scalable in terms of
manufacturing and processing.
A summary of PolyNovo’s lead projects
is set out below:
BTM surgical wounds
NovoSorb™ BTM is used in a fully debrided
clean surgical wound to physiologically
‘close the wound”. With the BTM scaffold
in place, the dermal layer is regenerated
within the scaffold. Once fully integrated,
the outer layer is delaminated and the
wound closes through secondary intention
(smaller wounds) or through application
of a split skin graft. The BTM has been
demonstrated in human use for closure
of free flap deficits and full thickness
burns. Several publications relating to these
applications can be found on our website:
www.polynovo.com.au.
In December 2015, our polymer was
awarded US FDA 510(k) approval for use
in surgical wound repair. This opens the
North American market to PolyNovo for
commercial sales.
PolyNovo now seeks to commercialise
NovoSorb™ through different channels
including:
• direct market entry where the
investment and return are attractive;
• licensing with specialist external
distributors;
• partnering with groups that have
complementary skills and expertise; and
• entering into joint ventures to develop
products internally.
PolyNovo is in the process of gaining
commercial entry to markets in the US,
New Zealand and South Africa. Other
geographic markets will follow as the
Group establishes distribution agreements
or its own sales teams.
Key attributes of the NovoSorb™ technology
include an unparalleled range of mechanical
properties and degradation times, excellent
biocompatibility and safety profile and harmless
degradation. The technology can be utilised
as a foam, coating or a thermoplastic structure,
with the potential to deliver drugs, biological
agents, antimicrobials and cells.
BTM for full thickness burns
This BTM is an innovative treatment for
full thickness burns as distinct from
surgical wounds.
The pathway for US regulatory approval
of the BTM requires extensive clinical trials
to support a Premarket Approval (PMA)
application. An outline of the clinical trial
process in set out below.
BARDA
Our BARDA contract, funded by the US
Department of Health and Human Services
(Office of the Assistant Secretary for
Preparedness and Response), commenced
on 28 September 2015. This is a non-
dilutive contract that supports a projected
five-year clinical pathway, which will lead
to a PMA application with the US FDA and
the use of our polymer in full thickness
acute burns. The contract is a cost-plus-
fixed-fee contract and it will progress in
specific stages that cover the base work
and two optional segments. The total cost
is US$28m, through to July 2021.
The first of the trials is a feasibility trial,
currently in progress, and the first patients
are expected to enrol in September/
October 2016. In addition, PolyNovo
announced on 31 May 2016 that BARDA
is funding a concurrent swine study looking
at mapping the full degradation pathway
of the BTM. This will provide valuable data
to support our PMA application.
07
PolyNovo Limited Annual Report 2016 Directors’ Report continued
Principal Activities
and Operations continued
CE Mark certification
PolyNovo is also conducting CE Mark
clinical trials in burns. The sites are St
Anne’s Hospital, Toulon (France) and The
Alfred Hospital, Melbourne (Australia). The
recruitment of patients has been slower
than anticipated. To accelerate recruitment
we have expanded the inclusion criteria
from patients with burns to 20–50% of
total body surface area (TBSA) to 10–70%
TBSA. The Company is adding further
Australian sites to the program.
Professor John Greenwood has completed
a five patient BTM burn trial at the Royal
Adelaide Hospital. The clinical outcomes of
these five patients have been outstanding
and there are several related publications
available on our website, including an
online peer review journal, ePlasty. The
information gained in this trial has informed
our current clinical program. Publication of
the results will occur after October 2016
which will mark 12 months post BTM
implementation on the last patient.
Hernia repair and breast
sling development
PolyNovo has developed a new fabric
utilising our patented polymer. This will
form the basis of the prototypes that will
be assessed by key opinion leaders in the
field of application. We anticipate moving
to laboratory testing in the coming months
followed by non-clinical assessment.
Our goal is to have these products ready
for US FDA 510(k) submission by 2018.
Topical Negative Pressure Wound
Therapy (tNPWT)
tNPWT is the application of a wound
interface under suction from a mechanical
pump. This creates a negative pressure,
thereby exerting positive pressure on the
wound to stimulate angiogenesis while
evacuating excess wound exudate. This
process encourages new tissue growth
and increases blood supply while providing
a mechanical means of contracting the
wound. PolyNovo has developed NovoPore™
foam, which can act as the wound/pump
interface. The market opportunity is as a
component supplier of foam to a tNPWT
distributor within its wound kits. PolyNovo
views access to this market segment as
largely opportunistic.
Bone void filler
Whilst PolyNovo has an agreement with
Smith & Nephew for the use of the bone
void filler in orthopaedic applications,
this has not progressed in the past year.
Smith & Nephew remains interested in
developing the product within the
orthopaedic applications and PolyNovo
will pursue advancement of this licence.
Other
The range of applications for our polymer
technology is considerable; however,
we are focused on commercialisation
of the applications outlined above in
the near term.
Metabolic
On 30 May 2015, PolyNovo completed
the sale of Metabolic Pharmaceuticals
Pty Ltd to Lateral Pharma Pty Ltd. Terms
of the sale included that Lateral Pharma
must subsequently meet certain obligations
within an agreed timeframe. Lateral Pharma
has met these obligations. PolyNovo retains
its right to a percentage of Metabolic’s
future licensing revenues and royalties
which may be converted to equity in the
event of a future IPO of Metabolic; or,
alternatively a share of the proceeds
from any sale of the Metabolic business.
Capital investment
PolyNovo completed validation of the
expanded cleanroom factory and invested
in equipment in the 2016 financial year.
This means that production can be scaled up
as demand increases and further automation
of the process is possible over time.
Significant Changes in the
State of Affairs
Except as otherwise set out in this report,
the Directors are unaware of any significant
changes in the state of affairs or principal
activities of PolyNovo during the year
ended 30 June 2016.
Strategic Overview and
Likely Developments
PolyNovo’s focus over the next 12 months
will be to:
• finalise details of our US market entry
plan that we expect to announce before
the AGM;
• finalise commercial partnerships for
the BTM product in markets where the
US FDA 510(k) is recognised, such as
New Zealand, South Africa, United Arab
Emirates (UAE), the Middle East, Hong
Kong and India;
• continue the CE Mark trial being conducted
at The Alfred Hospital and St Anne
Hospital in Toulon (France);
• pursue a commercial supply arrangement
for NovoPore™ in the tNPWT market;
• develop advanced hernia prototypes
for non-clinical and clinical trials;
• develop advanced breast sling prototypes
for non-clinical and clinical trials;
• continue our bone void filler agreement
with Smith & Nephew towards a
commercial application;
• pursue strategies for the expansion of
applications or development of other
new fields of NovoSorb™; and
• continue the BARDA trial and progress
to pivotal period.
Significant Events After
the Balance Date
The Directors are not aware of any other
matters or circumstances since the end
of the financial year other than those
described above, nor otherwise dealt with
in this report, which have significantly
affected, or may significantly affect, the
operations of the Group, the results of
those operations or the state of affairs of
the Group in subsequent financial years.
Financial Results
PolyNovo reported a net loss after tax
of $3,355,594 for the 2016 financial
year, compared to the prior year loss of
$1,414,321. This represents an increased
loss of $1,941,273. A number of factors
contributed to the increased loss in 2016
as follows:
• The result for the 2015 financial year
includes non-recurring income of $1.5m
in relation to the sale of a subsidiary.
• Research and development (R&D) and
corporate, administrative and overhead
expenses increased by $1,659,887 and
$1,140,900 respectively in 2016. The
increases are predominantly attributable
to the Company’s BARDA activities,
R&D activities and growth in headcount.
08
PolyNovo Limited Annual Report 2016 • Revenue earned from the Company’s
contract with BARDA commenced in
September 2015. A total of $3,274,927
was recognised as BARDA revenue for
the 2016 financial year.
• Interest income increased in 2016 as a
result of increased levels of cash, following
the capital raisings in November and
December 2015.
• Employee-related expenses have increased
by 45% year on year. Headcount has
increased from 8 to 15 full time employees
during the year in order to meet the
resource requirements of the BARDA
contract and to prepare for commercial
manufacturing and sales of the FDA-
approved BTM surgical wound product.
R&D tax incentives
During the 2016 financial year, the
Company submitted an application for
the Research and Development Tax
Incentive scheme managed by AusIndustry
and the Australian Taxation Office (ATO).
In October 2015, the Company applied
to claim eligible 2015 R&D expenditure
and in November 2015 received a 45%
refundable tax offset of $885,180 (cash).
PolyNovo is now in the process of preparing
its application for submission to claim
eligible expenditure for 2016 R&D
activities, as disclosed in the notes
to the financial statements.
PolyNovo’s share price was $0.09 as at
1 July 2015 and $0.28 as at 30 June 2016.
Loss Per Share
In Australian dollars $
Basic loss per share
Diluted loss per share
Cents
(0.62)
(0.62)
As the Group made a loss for the year
ended 30 June 2016, potential ordinary
shares, being options or performance rights
to acquire ordinary shares, are considered
non-dilutive and therefore not included in
the diluted earnings per share calculation.
Dividends
No amounts have been recommended
by the Directors to be paid by way of
dividends during the current financial year.
No cash dividends have been paid or
declared by PolyNovo since the beginning
of the financial year.
Indemnification and Insurance
of Directors and Officers
During the year ended 30 June 2016,
the Company indemnified its Directors,
Company Secretary and Executive Officers
in respect of any acts or omissions giving
rise to a liability to another person (other
than the Company or a related party)
unless the liability arose out of conduct
involving a lack of good faith. In addition,
the Company indemnified the Directors and
the Company Secretary against any liability
incurred by them in their capacity as
Directors or Company Secretary in
successfully defending civil or criminal
proceedings in relation to the Company.
No monetary restriction was placed on
this indemnity.
The Company has insured its Directors,
Company Secretary and Executive Officers
for the period under review. Under the
Company’s Directors’ and Officers’ Liability
Insurance Policy, the Company shall not
release to any third party or otherwise
publish details of the nature of the liabilities
insured by the policy or the amount of the
premium. Accordingly, the Company relies
on section 300(9) of the Corporations Act
2001 to exempt it from the requirement to
disclose the nature of the liability insured
against and the premium amount of the
relevant policy.
Inherent Risks of Investment
in Biotechnology Companies
There are many inherent risks associated
with the development of pharmaceutical
and medical products to a marketable
stage. The clinical trial process is designed
to assess the safety and efficacy of a drug
or medical device prior to commercialisation
and a significant proportion of drugs and
medical devices fail one or both of these
criteria. Other risks include uncertainty of
patent protection and proprietary rights,
whether patent applications and issued
patents will offer adequate protection to
enable product development, the obtaining
of necessary regulatory authority approvals
and difficulties caused by the rapid
advancements in technology.
Companies such as PolyNovo are
dependent on the success of their research
projects and their ability to attract funding
to support these activities. Investment in
research and development projects cannot
be assessed on the same fundamentals as
other trading enterprises and access to
capital and funding for the Group and its
projects going forward cannot be
guaranteed. Investment in companies
specialising in research projects, such as
PolyNovo, should be regarded as highly
speculative. PolyNovo strongly recommends
that professional investment advice
be sought prior to individuals making
such investments.
Forward-looking statements
Certain statements in this Annual Report
contain forward-looking statements
regarding the Company’s business and the
therapeutic and commercial potential of its
technologies and products in development.
Any statement describing the Company’s
goals, expectations, intentions or beliefs
is a forward-looking statement and should
be considered an at-risk statement. Such
statements are subject to certain risks and
uncertainties, particularly those risks or
uncertainties inherent in the process of
discovering, developing and commercialising
drugs and medical devices that can be
proven to be safe and effective for use in
humans, and in the endeavour of building a
business around such products and services.
PolyNovo undertakes no obligation to
publicly update any forward-looking
statement, whether as a result of new
information, future events or otherwise.
Actual results could differ materially from
those discussed in this Annual Report. As a
result, readers of this report are cautioned
not to rely on forward-looking statements.
Environmental Regulation
PolyNovo is not subject to significant
environmental regulations.
Board Monitoring
The Board monitors PolyNovo’s overall
performance, from the implementation
of its strategic plan through to the
performance of the Group against
operating plans and financial budgets.
For further details regarding PolyNovo’s
Board and Committees, refer to the
Corporate Governance Statement on
the Company’s website.
09
PolyNovo Limited Annual Report 2016 Directors’ Report continued
Board and Committee Meetings
Details of the number of meetings of the Board of Directors and Board Committees, and Director’s attendance at those meetings, during
the year under review are set out in the table below.
Directors
Total number of meetings held
Mr David Williams
Mr Bruce Rathie
Dr David McQuillan
Mr Philip Powell
Mr Max Johnston
Mr Leon Hoare2
Full Board
Meetings
attended
Meetings
eligible to
attend
11
Audit and
Risk Committee
Remuneration
Committee1
Meetings
attended
Meetings
eligible to
attend
3
Meetings
attended
Meetings
eligible to
attend
1
11
11
11
11
11
5
11
11
11
11
11
5
–
3
–
3
3
–
–
3
–
3
3
–
1
1
1
1
1
–
1
1
1
1
1
–
1. PolyNovo does not have an established Remuneration Committee. Due to the small size of the business the Board acts as the Remuneration Committee
and addresses such issues during the year as they arise.
2. Mr Leon Hoare was appointed a Non-executive Director on 27 January 2016.
Directors’ Shareholdings and Declared Interests
At 30 June 2016, the Directors of PolyNovo collectively hold 10,651,310 shares in the Company.
As at the date of this report, the interests of the Directors in the Company’s shares are:
Name
Directors
Mr David Williams
Mr Bruce Rathie
Dr David McQuillan
Mr Max Johnston
Mr Philip Powell
Mr Leon Hoare
Total
Shares held
directly
Shares held
indirectly
–
–
7,727,038
1,841,882
500,000
–
–
–
–
261,112
211,112
110,166
500,000 10,151,310
As at 30 June 2016 and as at the date of this report, no Director has an interest in any contract or proposed contract with PolyNovo
other than as disclosed below or in the Group’s 2016 Annual Report. Further details of the equity interests of Directors can be found
in the Remuneration Report.
Kidder Williams Limited, an advisory firm specialising in capital raising, assisted PolyNovo during the process of capital raising in November
and December 2015 when PolyNovo raised a total of $12.4m from a placement to sophisticated investors, followed by a Share Purchase
Plan. PolyNovo paid a flat fee of $100,000 plus GST to Kidder Williams for its services. Kidder Williams Limited is a company associated with
the Chairman of the Board of PolyNovo, Mr David Williams, as Mr David Williams is the owner and Managing Director of Kidder
Williams Limited.
10
PolyNovo Limited Annual Report 2016 Auditor
Ernst & Young (EY) continues in office in
accordance with section 327b(2) of the
Corporations Act 2001.
Non-audit Services
During the year ended 30 June 2016, the
amount received or due and receivable for
non-audit services provided by PolyNovo’s
auditor, Ernst & Young, were:
Tax compliance services
$12,500
Research and development
tax benefit application
$23,250
The Directors are satisfied that the
provision of non-audit services during
the current period is compatible with the
general standard of independence for
auditors imposed by the Corporations Act
2001. The nature and scope of each type
of non-audit service provided means that
auditor independence was not compromised.
Auditor’s Independence
Declaration
The auditor has provided a written
declaration that no professional engagement
for the Group has been carried out during
the financial year that would impair EY’s
independence as auditor. This declaration
is set out on page 20.
11
PolyNovo Limited Annual Report 2016 Corporate Governance
Overview
The Board of PolyNovo is responsible for
the corporate governance of the Group and
guides and monitors the business on behalf
of its shareholders. The Board has strived
to reach a balance between industry best
practice and appropriate policies for PolyNovo
in terms of its size, stage of development
and role in the biotechnology industry.
PolyNovo performed a review of its Board
policies and governance practices with
reference to the eight Principles of Good
Corporate Governance (Principles) and
the Best Practice Recommendations
(Recommendations) established by the
ASX Corporate Governance Council. The
Recommendations are not mandatory and
cannot, in themselves, prevent corporate
failure or poor corporate decision-making.
They are intended to provide a reference
point for companies regarding their corporate
governance structures and practices.
The Directors have considered each of
the core Principles and Recommendations
applicable for the year ended 30 June 2016.
There are instances where the Group would
not benefit from compliance with the
Recommendations, and in some instances
the Group has not had the resources to
comply. The Recommendations that were
not adopted are discussed in the Corporate
Governance Statement located on the
Company’s website.
PolyNovo’s Corporate Governance
Statement, which summarises the Group’s
corporate governance practices and
incorporates the disclosures required by
the ASX Principles, can be viewed on the
Company’s website at http://www.
polynovo.com.au/about/corporate-
governance
12
PolyNovo Limited Annual Report 2016 Remuneration Report
The Directors of PolyNovo present the Remuneration Report prepared in accordance with section 300A of the Corporations Act 2001
for the Company and its controlled entities (the Group) for the year ended 30 June 2016. This Remuneration Report is audited.
This Remuneration Report forms part of the Directors’ Report and includes details of the Group’s remuneration strategy and arrangements
for the 2016 financial year.
This report outlines the compensation arrangements for the key management personnel of PolyNovo and explains how these arrangements
are linked to Company performance.
Key Management Personnel
Key management personnel are those persons who are responsible for planning, directing and controlling the activities of the Group. The
Board has determined that the key management personnel of the Group are the Non-executive Directors and Senior Managers (Executives)
of PolyNovo, whose details are set out below.
Non-executive Directors
• Mr David Williams – Non-executive Chairman (appointed as Non-executive Director on 28 February 2014 and Non-executive Chairman
on 13 March 2014)
• Mr Bruce Rathie – Non-executive Director (appointed 18 February 2010)
• Dr David McQuillan – Non-executive Director (appointed 6 August 2012)
• Mr Max Johnston – Non-executive Director (appointed 13 May 2014)
• Mr Philip Powell – Non-executive Director (appointed 13 May 2014)
• Mr Leon Hoare – Non-executive Director (appointed 27 January 2016)
Senior Managers
• Mr Paul Brennan – Chief Executive Officer (appointed 13 February 2015)
• Mr Christopher Mews – Chief Financial Officer/Company Secretary (resigned 28 October 2015)
• Ms Andrea Goldie – Chief Financial Officer/Company Secretary (appointed 28 October 2015)
Remuneration Strategy
PolyNovo has designed its compensation policies to ensure significant linkage between rewards and specific achievements that are intended
to improve shareholder wealth. In assessing the link between Group performance and compensation policy, it must be recognised that
biotechnology companies generally do not make a profit until a drug or device is licensed or commercialised, either of which takes a
number of years.
Furthermore, the biotechnology sector as a whole is highly volatile, significantly driven by market sentiment and inherently high risk.
Therefore, the direct correlation of compensation policy and key financial performance measures such as total shareholder return (TSR),
net earnings per share or Company earnings, in the view of the Board, are inappropriate. As an alternative, key milestones are a more
meaningful measure of performance to correlate levels of compensation. These milestones are discrete achievements that can be used
to evaluate PolyNovo’s progress towards commercialising its various projects.
PolyNovo’s annual expenditure is predominantly impacted by research and development expenses. The Group has not made a profit and
therefore no dividends have been declared, nor has there been a return of capital. The Group’s performance is based on its key milestones,
such as progress towards clinical trials, securing funding and licensing deals. Such milestones are directly linked to performance conditions
set within the short-term incentives that form a significant proportion of Senior Management compensation. The Board continues to review
the Group’s compensation policy to ensure competitive and appropriate rewards that endeavour to result in greater shareholder wealth.
PolyNovo’s compensation policy for key management personnel is designed to provide competitive and appropriate rewards that are
transparent and fully aligned to shareholder interests. In accordance with corporate governance best practice, the Company has a
compensation policy for Non-executive Directors and a separate policy for Senior Managers.
13
PolyNovo Limited Annual Report 2016 Remuneration Report continued
Non-executive Director Remuneration
The compensation of Non-executive Directors is based on market practice, Directors’ duties and the level of Director accountability. The
compensation policy is designed to attract and retain competent and suitably qualified Non-executive Directors and aims to align Directors’
interests with the interests of shareholders. Non-executive Directors are paid a set fee plus statutory superannuation, where appropriate,
and are reimbursed for out-of-pocket expenses. In addition, as medium and long-term incentives, Non-executive Directors may be invited
to participate in the PolyNovo Employee Share Option Plan (the Plan). Non-executive Directors are encouraged to own shares in PolyNovo.
Non-executive Directors’ fees are determined within an aggregate Directors’ fee pool limit, which is approved by shareholders. This limit
has been set at $300,000.
Total Non-executive Directors’ fees (including superannuation) for the year ended 30 June 2016 were $295,481. The Directors’ fees
are considered within the average range for similar sized companies in the biotechnology industry and are reviewed periodically.
Executive Remuneration
PolyNovo’s compensation policy for its Senior Managers is determined by the Board and is designed to link performance and retention
strategies to ensure that:
• the balance between fixed and variable (performance) components for each position is appropriate in light of internal and external factors;
• the objectives set for each person will result in sustainable beneficial outcomes for PolyNovo;
• all variable (performance) components are appropriately linked to measurable personal, business unit or Company outcomes; and
• total compensation (the sum of fixed and variable components) for each Senior Manager is fair, reasonable and market competitive.
Generally, there are two components of Senior Management compensation, as follows:
1. Fixed annual compensation comprising salary and benefits, superannuation and non-monetary benefits.
2. Medium and long-term incentives, through participation in the Plan with share price thresholds to be achieved.
Fixed Annual Compensation
Senior Managers are offered a market competitive base salary, which reflects their competencies and job description as well as the size
of the Group. Base salaries are reviewed against market data for comparable positions. Adjustments to base salary are made based on
significant role responsibility changes, pay relativities to market and relative performance in the role.
Medium and Long-term Incentives
PolyNovo’s medium and long-term incentive policy for Senior Managers encourages high-quality performance and long-term retention.
Carefully designed and performance-linked equity incentive plans are widely recognised as an effective way of providing performance incentives.
14
PolyNovo Limited Annual Report 2016 Service Contracts
Chief Executive Officer – PolyNovo Limited
Mr Paul Brennan was appointed Chief Executive Officer of PolyNovo Limited on 13 February 2015.
The key terms of his contract are as follows:
• Salary of $270,000 per annum inclusive of superannuation.
• Short-term incentive bonus of up to 20% of total package upon achieving set key performance indicators (KPIs). To achieve this bonus
Mr Brennan must meet value-creating targets for the financial year, which may include:
− Develop and implement a three to five year corporate and product strategy;
− Align clinical strategy with regulatory and commercial outcomes;
− Commercialisation of wounds and burns products; and
− Advance the use of NovoSorb™ in other areas.
• Long-term incentive plan in the form of equity interest. Details of the options package and the fair value of options and other
compensation are included in the CEO Performance Incentives section of the Remuneration Report and in Tables A, B, C and D below.
• No fixed employment term.
• Termination payment of three months’ salary; three-month period of notice.
Company Secretary and Chief Financial Officer
Ms Andrea Goldie was appointed Company Secretary and CFO on 28 October 2015. Terms of her contract are as follows:
• Salary of $175,000 per annum.
• Superannuation of 9.50%.
• No fixed employment term.
• Termination payment of three months’ salary; six-month period of notice.
CEO Performance Incentives
The performance evaluation of the Chief Executive Officer is conducted by the Board.
On 6 August 2015, PolyNovo issued an options package compromising three tranches of 4,185,095 share options (a total of 12,555,285
options), to the CEO, Mr Paul Brennan.
The vesting hurdle for the options is linked to the PolyNovo volume weighted average market price. The vesting hurdles for each tranche
are as follows:
• $0.18 per share for tranche 1;
• $0.25 per share for tranche 2; and
• $0.35 per share for tranche 3.
The share price must be sustained over a period of at least 90 consecutive calendar days. Any vested options are exercisable at 9 cents
and may be exercised within 90 days of vesting. The options package will expire on 5 August 2018.
The first tranche of options vested and were exercised in April 2016, when the volume weighted average share price of PolyNovo was
above $0.18 for more than 90 consecutive calendar days. The second and third tranches of options had not vested as at 30 June 2016.
All shares issued under the incentive scheme are escrowed for a period of 12 months commencing on the date of issue. The expense
relating to the incentive scheme shares during the financial year was $308,602.
15
PolyNovo Limited Annual Report 2016 Remuneration Report continued
Remuneration of Key Management Personnel
Details of the remuneration for key management personnel for the years ended 30 June 2016 and 30 June 2015 are set out in Table A below.
Short-term
Post
employ-
ment
Long-
term
Table A
Directors
Cash
salary
and fees
Cash
bonus
Consul-
ting fees
Super-
annuation
Long
service
leave
Termin-
ation
benefits
Share-
based
payments
Options
and
perfor-
mance
rights
%
Perform-
ance
based
Total
Mr David Williams
(Chairman/Non-executive
Director)
2016 75,000
2015
75,000
Mr Bruce Rathie
(Non-executive Director)
Dr David McQuillan
(Non-executive Director)
Dr Roger Aston
Mr Max Johnston
(Non-executive Director)
Mr Philip Powell
(Non-executive Director)
Mr Leon Hoare
(Non-executive Director)
Subtotal compensation
for Directors
2016 45,000
2015
45,000
2016 45,000
2015
53,125
2016
2015
–
8,884
2016 45,000
2015
45,000
2016 45,000
2015 132,019
2016 18,750
2015
–
2016 273,750
2015 359,028
Key management personnel
Mr Paul Brennan (CEO)
2016 246,575
2015
91,788
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Mr Christopher Mews
2016 93,280
10,000
2015 186,558
10,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,125
7,125
4,275
4,275
–
–
–
844
4,275
4,275
4,275
12,541
1,781
–
– 21,731
–
29,060
– 23,425
–
8,719
– 13,447
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,132
1,538
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
82,125
82,125
– 49,275
21,436
70,711
– 45,000
21,436
74,561
–
–
–
9,728
– 49,275
48,372
97,647
– 49,275
48,372 192,932
– 20,531
–
–
– 295,481
–
–
–
30%
–
29%
–
–
–
50%
–
25%
–
–
–
– 139,616 527,704
26%
– 308,602 582,734
53%
–
– 102,045
2016
2015
2016
–
–
–
2015 140,460
2016 117,340
2015
–
– 53,815
–
–
–
– 239,528
–
–
–
–
–
–
–
–
17,723
3,397
–
–
–
–
–
–
–
–
–
–
20,464
28,801 128,661
11,147
1,972
–
–
–
–
– 170,542
– 217,678
–
–
– 239,528
–
–
– 318,386
– 130,459
–
–
2016 457,195
10,000
– 48,019
6,104
53,815 308,602 883,735
35%
2015 418,806
10,000 239,528
46,906
33,736 128,661
– 877,637
–
2016 730,945
10,000
– 69,750
6,104
53,815 308,602 1,179,216
2015 777,834
10,000 239,528
75,966
33,736 128,661 139,616 1,405,341
27%
10%
–
–
–
–
–
–
–
–
–
Mr David Kenley
Mr Laurent Fossaert
Ms Andrea Goldie
(CFO/Company Secretary)
Subtotal compensation
for other key
management personnel
Total compensation for
all key management
personnel
16
PolyNovo Limited Annual Report 2016 Options Granted as Part of Remuneration
During the year ended 30 June 2016, 12,555,285 options (2015: 3,000,000) were granted, no options were cancelled (2015: nil),
and no options were forfeited (2015: nil). These options were issued pursuant to the PolyNovo Employee Share Option Plan.
Details of the share-based payment component included in total remuneration in Table A are set out below.
Table B
2016
financial
year
Grant date
Grant
number
Mr David Williams
Average
fair value
per option
at grant
date
Fair value
of options
granted
during
the year
Value of
options
forfeited/
lapsed
during
the year
Value of
options
exercised
during
the year
Number
of shares
issued
upon
exercise
of options
Value of
shares
received
upon
exercise
of options
Value of
options
yet to be
expensed
Fair value
of options
included
in remun-
eration
during
the year
%
Compen-
sation
consisting
of options
during
the year
Options 19-May-14 2,500,000 $0.03300
Options 19-May-14 7,500,000 $0.05300
Mr Bruce Rathie
Options 20-Nov-12
500,000
$0.01730
Options 17-Nov-14
500,000 $0.04300
Dr David McQuillan
Options 20-Nov-12
500,000
$0.01730
Options 17-Nov-14
500,000 $0.04300
Mr Philip Powell
Options 17-Nov-14
500,000 $0.04300
Options 17-Nov-14
500,000 $0.05400
Mr Max Johnston
Options 17-Nov-14
500,000 $0.04300
Options 17-Nov-14
500,000 $0.05400
Mr Paul Brennan
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $397,500 7,500,000 $2,100,000
–
–
–
–
–
–
–
–
$8,650
500,000 $80,000
–
–
–
$8,650
500,000 $95,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Options 6-Aug-15
4,185,095 $0.04944 $206,070
– $206,070 4,185,095 $1,234,603
– $206,070
Options 6-Aug-15
4,185,095
$0.04326 $181,028
Options 6-Aug-15
4,185,095
$0.03692 $154,532
Total
27,055,285
$541,630
–
–
–
–
–
–
–
–
–
–
–
–
$125,714
$55,314
$107,314
$47,218
– $308,602
35%
10%
8%
53%
The fair value of options granted during the year, as included in Table B, was determined using a Monte Carlo simulation based model.
A Monte Carlo simulation based model simulates the path of the share price according to a probability distribution assumption. After a large
number of simulations, the arithmetic average of the outcomes, discounted to the valuation date, is calculated to represent the option value.
This model can accommodate complex exercise conditions when the number of options exercised depends on some function of the whole
path followed by the share price.
Each tranche of options has an expiry date of three months after vesting, and the options package will expire on 5 August 2018. Shares
issued upon exercise of options are escrowed for a period of 12 months from issue. The option-pricing model values each of the vesting
portions separately. Accordingly the amortised share-based compensation disclosed in Table A includes the apportioned value of the options
during the year. A breakdown of the fair value of each grant of option included in key management personnel share-based compensation is
set out in Table B.
17
PolyNovo Limited Annual Report 2016
Remuneration Report continued
Key Management Personnel Disclosures
Movements in shares of the Company
The movement during the reporting period in the number of shares in the Company held either directly or indirectly by each of the key
management personnel, including their related parties, is set out in the table below:
Balance at
1 July 2015
Granted as
compen-
sation
On exercise
of options
Net change
other
Balance at
30 June
2016
Balance at
end of year
– directly
held
Balance at
end of year
– indirectly
held
Table C
Directors
Mr David Williams
Mr David Franklyn*
Mr Bruce Rathie
Dr David McQuillan
Mr Max Johnston
Mr Philip Powell
Mr Leon Hoare
2,190,000
980,050
1,230,770
–
150,000
100,000
–
Other key management personnel
Mr Paul Brennan
Mr Christopher Mews
Ms Andrea Goldie
244,929
1,618,680
–
–
–
–
–
–
–
–
–
–
–
7,500,000
(1,962,962) 7,727,038
500,000
(1,477,850)
2,200
111,112
1,841,882
500,000
500,000
–
–
–
7,727,038
2,200
1,841,882
–
500,000
500,000
–
–
–
–
111,112
111,112
110,166
261,112
211,112
110,166
–
–
–
261,112
211,112
110,166
4,185,095
22,223 4,452,247
162,577
4,289,670
–
–
(189,049) 1,429,631
1,429,631
–
225,905
225,905
–
225,905
Options and performance rights of key management personnel
The option holdings of key management personnel for the year ended 30 June 2016 is set out in the following table. No performance rights
were granted during the year.
Balance at
1 July
2015
Granted as
compen-
sation
Options
exercised
Net
change
other
Balance at
30 June
2016
Total
vested
at end
of year
Total
exercisable
at end
of year
Total not
exercisable
at end
of year
Total
vested
during
year
Table D
Directors
Mr David Williams
10,000,000
Mr David Franklyn*
500,000
Mr Bruce Rathie
1,000,000
Dr David McQuillan
1,000,000
Mr Max Johnston
1,000,000
Mr Philip Powell
1,000,000
Mr Leon Hoare
–
Other key management personnel
–
–
–
–
–
–
–
7,500,000
500,000
500,000
500,000
–
–
–
–
–
–
–
–
–
–
2,500,000
–
500,000
500,000
1,000,000
1,000,000
–
–
–
–
–
–
–
–
2,500,000
–
500,000
500,000
1,000,000
1,000,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Mr Paul Brennan
Mr Christopher
Mews
Ms Andrea Goldie
– 12,555,285
4,185,095
–
8,370,190
4,185,095
–
8,370,190
4,185,095
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
14,500,000 12,555,285 13,185,095
– 13,870,190 4,185,095 5,500,000 8,370,190 4,185,095
* Mr David Franklyn is former Chairman of the Company who retired in 2013.
18
PolyNovo Limited Annual Report 2016 Loans to Key Management Personnel
No loans have been made to Directors of PolyNovo or to any other key management personnel, including their personally related entities.
Other Key Management Personnel Transactions
Kidder Williams Limited, an advisory firm specialising in capital raising, assisted PolyNovo during the process of capital raising in November
and December 2015 when PolyNovo raised a total of $12.4m from a placement to sophisticated investors followed by a Share Purchase
Plan. PolyNovo paid a flat fee of $100,000 plus GST to Kidder Williams for its services. Kidder Williams Limited is a company associated with
the Chairman of the Board of PolyNovo, Mr David Williams, as Mr David Williams is the owner and Managing Director of Kidder
Williams Limited.
During 2015, Lateral Innovations Pty Ltd, of which David Kenley is a Director, was engaged by PolyNovo Limited to provide consulting
services to Metabolic Pharmaceuticals Pty Ltd. Consulting and Director fees of $239,528 (2014: $237,455) were paid by PolyNovo
during the 2015 financial year.
This Directors’ Report, incorporating the Corporate Governance Statement and Remuneration Report, has been signed in accordance with
a resolution of the Directors made on 22 August 2016.
Mr David Williams
Chairman
22 August 2016
19
PolyNovo Limited Annual Report 2016 Auditor’s Independence Declaration
Ernst & Young
8 Exhibition Street
Melbourne VIC 3000 Australia
GPO Box 67 Melbourne VIC 3001
Tel: +61 3 9288 8000
Fax: +61 3 8650 7777
ey.com/au
Auditor’s Independence Declaration to the Directors of PolyNovo Limited
As lead auditor for the audit of PolyNovo Limited for the financial year ended 30 June 2016, I declare to
the best of my knowledge and belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of PolyNovo Limited and the entities it controlled during the financial year.
Ernst & Young
Joanne Lonergan
Partner
22 August 2016
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
20
PolyNovo Limited Annual Report 2016 Consolidated Statement of Comprehensive Income
for the year ended 30 June 2016
Revenue
Interest income/finance revenue
BARDA revenue
Sale of materials
Royalty revenue
Total revenue
Other operating income
Government grant income
Other income
Research and development tax benefit
Profit on sale of available-for-sale and other assets
Profit on sale of subsidiary
Operating leases
Employee related expenses
Research and development expenses
Depreciation and amortisation expense
Corporate administrative and overhead expenses
Loss on revaluation of available-for-sale assets
Impairment of fixed assets
Net loss before income tax
Income tax benefit
Net loss for the period
Other comprehensive income that may be reclassified subsequently to profit and loss
Net fair value gains on available-for-sale assets
Reclassification to profit and loss
Total comprehensive income/(loss) for the period
Loss for the period is attributable to:
Non-controlling interest
Owners of the parent
Total comprehensive income/(loss) for the period is attributable to:
Non-controlling interest
Owners of the parent
Basic loss per share (cents per share)
Diluted loss per share (cents per share)
The accompanying notes form part of these financial statements.
30 June
2016
$
30 June
2015
$
Notes
4(A)
193,366
118,382
4(B) 3,274,927
2,112
165
–
3,000
19,339
3,470,570
140,721
4(C)
–
2,002
4(H)
846,818
78,925
75,000
10,144
819,282
38,715
–
1,500,000
4(F)
(352,966)
(305,143)
4(D) (2,604,262)
(1,789,123)
(2,698,557)
(1,038,670)
4(E)
4(G)
(219,685)
(205,159)
(1,774,689)
(633,789)
–
–
(3,750)
(22,550)
(3,251,844)
(1,414,321)
5
–
–
(3,251,844)
(1,414,321)
11
11
45,000
(148,750)
–
–
(3,355,594)
(1,414,321)
17
(189,970)
(111,875)
(3,061,874)
(1,302,446)
(3,251,844)
(1,414,321)
17
(189,970)
(111,875)
(3,165,624)
(1,302,446)
(3,355,594)
(1,414,321)
7 (0.62) cents
(0.33) cents
7 (0.62) cents
(0.33) cents
21
PolyNovo Limited Annual Report 2016 Consolidated Statement of Financial Position
as at 30 June 2016
Current assets
Cash and cash equivalents
Receivables
Prepayments
Other financial asset
Total current assets
Non-current assets
Available-for-sale financial assets
Property, plant and equipment
Intangible assets
Other assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Provisions
Total current liabilities
Non-current liabilities
Provisions
Deferred rent liability
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained earnings/(accumulated losses)
Parent interests
Non-controlling interest
Total equity
The accompanying notes form part of these financial statements.
22
30 June
2016
$
30 June
2015
$
Note
8 10,746,691
3,460,454
9
1,556,275
850,872
23
11
12
13
10
38,665
50,000
11,061
60,000
12,391,631
4,382,387
–
98,750
992,676
1,007,723
2,519,788
2,519,788
120,774
117,142
3,633,238
3,743,403
16,024,869
8,125,790
14
15(A)
590,614
115,219
417,513
71,565
705,833
489,078
15(B)
16,016
191,294
30,150
213,256
207,310
243,406
913,143
732,484
15,111,726
7,393,306
16(A) 114,099,712 94,870,080
16(B)
(6,698,911)
1,912,597
16(C) (92,289,075) (89,227,201)
15,111,726
7,555,476
17
–
(162,170)
15,111,726
7,393,306
PolyNovo Limited Annual Report 2016 Consolidated Statement of Changes in Equity
for the year ended 30 June 2016
Gains/
(losses) on
available-
for-sale
financial
assets
$
Acquisition
of non-
controlling
interest
Reserve
$
Other
reserves
$
Contributed
equity
$
Retained
earnings
$
Owners
of the
parent
$
Non-
controlling
interest
$
Total
$
As at 30 June 2014 94,870,080
103,750
2,146,827
(477,596) (87,924,755) 8,718,306
(50,295) 8,668,011
Loss for the period
Other comprehensive
income
Total comprehensive
income for the period
Share-based payments
–
–
–
–
–
–
–
–
–
–
–
139,616
–
–
–
–
(1,302,446)
(1,302,446)
(111,875)
(1,414,321)
–
–
–
–
(1,302,446)
(1,302,446)
(111,875)
(1,414,321)
–
139,616
–
139,616
As at 30 June 2015 94,870,080
103,750
2,286,443
(477,596) (89,227,201) 7,555,476
(162,170) 7,393,306
Loss for the period
Other comprehensive
income
Total comprehensive
income for the period
–
–
–
–
(103,750)
(103,750)
Issue of shares
12,092,973
Issue of shares on
exercise of options
Issue of shares on
acquisition of non-
controlling interest
Acquisition of non-
controlling interest
Share-based payments
1,216,659
5,920,000
–
–
As at 30 June 2016 114,099,712
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8,816,360)
308,602
–
(3,061,874)
(3,061,874)
(189,970)
(3,251,844)
–
(103,750)
–
(103,750)
(3,061,874)
(3,165,624)
(189,970)
(3,355,594)
–
–
–
–
–
12,092,973
1,216,659
–
–
12,092,973
1,216,659
5,920,000
–
5,920,000
(8,816,360)
352,140
(8,464,220)
308,602
2,595,045 (9,293,956) (92,289,075) 15,111,726
The accompanying notes form part of these financial statements.
–
308,602
– 15,111,726
23
PolyNovo Limited Annual Report 2016 Consolidated Cash Flow Statement
for the year ended 30 June 2016
Payments to suppliers and employees
Receipt of government grants
Income from sale of materials
Receipts from research and development tax benefit
Receipts from BARDA reimbursements
Receipts from royalty revenue
Net cash outflows from operating activities
Interest received
Payments for purchase of property, plant and equipment
Proceeds from sales of available-for-sale financial assets
Proceeds from the sale of fixed assets
Term deposits now classified as cash and cash equivalents
Sale of investment in Metabolic Pharmaceuticals Pty Ltd
Net cash inflows/(outflows) from investing activities
Proceeds from the issue of shares (net of costs)
Payments for acquisition of non-controlling interest (including associated costs)
Proceeds from exercise of options
Cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Effects of foreign exchange rate changes
Note
30 June
2016
$
30 June
2015
$
(7,000,582)
(3,615,321)
–
2,323
82,500
2,992
885,180
939,461
2,552,442
–
4,218
23,087
8 (3,556,419) (2,567,281)
189,734
127,389
(204,689)
(317,429)
73,925
–
–
41,415
10,000
–
–
1,510,000
68,970
1,361,375
12,092,973
(2,544,221)
1,216,659
10,765,411
–
–
–
7,277,962
(1,205,906)
3,460,454
4,666,360
8,275
–
Cash and cash equivalents at end of period
8 10,746,691
3,460,454
The accompanying notes form part of these financial statements
24
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements
for the year ended 30 June 2016
1. Corporate Information
The Financial Report of PolyNovo Limited (the Company) and its controlled entities (the Group) for the year ended 30 June 2016
was authorised for issue in accordance with a resolution of the Directors on 22 August 2016.
PolyNovo Limited, a for-profit entity, is a Company incorporated in Australia, whose shares are publicly traded on ASX Limited (ASX code: PNV).
The Company operates predominantly in one industry and one geographical segment, being the medical device and healthcare industry and
Australia respectively.
2. Summary of Significant Accounting Policies
(a) Basis of preparation
The Financial Report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations
Act 2001, applicable Accounting Standards and other mandatory professional reporting requirements.
The Financial Report has been prepared on a historical cost basis, except for available-for-sale financial assets, which have been measured
at fair value.
The financial statements have been prepared in compliance with Class Order Instrument 2016/191 ‘ASIC Corporations (Rounding in
Financial/Directors’ Reports)’.
The Financial Report is presented in Australian dollars.
The financial statements of the Group have been prepared on a going concern basis. The Group’s operations are subject to major risks due
primarily to the nature of the research, development and commercialisation to be undertaken. These risks may materially impact the financial
performance and position of the Group, including the value of recorded assets and the future value of its shares, options and performance
rights. The financial statements take no account of the consequences, if any, of the inability of the Company to obtain adequate funding or
of the effects of unsuccessful research, development and commercialisation of the Group’s projects.
(b) Statement of compliance
The Financial Report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board (AASB) and
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
The Group has adopted all applicable new and amended Australian Accounting Standards and AASB Interpretations that apply as of 1 July 2015.
Those Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not
been adopted. Details of the new and amended Standards adopted, along with a summary of the new and amended Standards that are not
yet effective, are set out below.
(c) Changes in accounting policy, disclosures, Standards and Interpretations
The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2015.
• AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities
• AASB 2013-4 Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (AASB 139)
• AASB 1031 Materiality
• AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments
• AASB 2014-1 Part A – Annual Improvements 2010–2012 Cycle
• AASB 2014-1 Part A – Annual Improvements 2011–2013 Cycle
• AASB CF 2013-1 Amendments to the Australian Conceptual Framework
The above new and amended Australian Accounting Standards and AASB Interpretation did not have any material impact on the accounting
policies, financial position or performance of the Group.
25
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
2. Summary of Significant Accounting Policies continued
(c) Changes in accounting policy, disclosures, Standards and Interpretations continued
The following new Australian Accounting Standards have been issued by the AASB but are not yet effective for the period ended
30 June 2016. They have not been adopted by the Group for the year ended 30 June 2016.
• AASB 9 Financial Instruments: this replaces AASB 139. AASB 9 is effective for annual periods beginning on or after 1 January 2018.
• AASB 15 Revenue from Contracts with Customers: this replaces the existing revenue recognition standards. AASB 15 is effective
for annual reporting periods commencing on or after 1 January 2018.
• AASB 16 Leases: supersedes AASB 117. AASB 16 will be effective for annual periods beginning on or after 1 January 2019.
• AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality.
The potential effects of adoption of the above Standards are currently being assessed. The Company has not decided whether to early
adopt any or all of these Standards at this point in time.
In addition, the following amendments to existing Standards (issued but not yet effective) are not expected to result in significant changes
to the Company’s accounting policies in the future:
• AASB 2014-4 Clarification of Acceptable Methods of Depreciation and Amortisation
• AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle
• AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101
• AASB 2015-5 Amendments to Australian Accounting Standards – Investment Entities: Applying the Consolidation Exception
• AASB 2015-9 Amendments to Australian Accounting Standards – Scope and Application Paragraphs [AASB 8, AASB 133 & AASB 1057]
• AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses
• AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107
(d) Basis of consolidation
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 30 June 2016. The Group
controls an investee if and only if the Group has:
• power over the investee (i.e. rights that give it the ability to direct the relevant activities of the investee);
• exposure, or rights, to variable returns from its involvement with the investee; and
• the ability to use its power over the investee to affect its returns.
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances
in assessing whether it has power over an investee, including:
• the contractual arrangement with the other vote holders of the investee;
• rights arising from other contractual arrangements; or
• the Group’s voting rights and potential voting rights.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate a change in one or more of the three
elements of control. Consolidation of a subsidiary commences when the Group obtains control over the subsidiary and ceases when the
Group loses control of the subsidiary. The assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year
are included in the Statement of Comprehensive Income from the date the Group gains control until the date the Group ceases to control
the subsidiary.
Items of profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent
Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary,
adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting
policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the
Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for
as an equity transaction.
26
PolyNovo Limited Annual Report 2016 If the Group loses control over a subsidiary, it:
• derecognises the assets (including goodwill) and liabilities of the subsidiary;
• derecognises the carrying amount of any non-controlling interests;
• derecognises the cumulative translation differences recorded in equity;
• recognises the fair value of the consideration received;
• recognises the fair value of any investment retained;
• recognises any surplus or deficit in profit or loss; and
• reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would
be required if the Group had directly disposed of the related assets or liabilities.
(e) Business combination
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the
consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each
business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate
share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.
If the business combination is achieved in stages, any previously held equity interest is remeasured at its acquisition date fair value and any
resulting gain or loss is recognised in profit or loss. It is then considered in the determination of goodwill.
(f) Intangible assets
Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a
business combination is its fair value as at the date of acquisition. The intangible assets carried by the Group, being intellectual property assets,
have an indefinite useful life and are subject to annual impairment testing (see Note 2(F) for methodology). Following initial recognition, intangible
assets are carried at cost less any impairment losses.
Internally generated intangible assets are not capitalised and expenditure is recognised in the Statement of Comprehensive Income (profit
or loss) in the year in which the expenditure is incurred.
(g) Impairment of intangible and other assets
Intangible assets that have an indefinite useful life are not subject to amortisation. They are tested annually for impairment or more frequently
if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable.
The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of
impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored
to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.
(h) Share-based payments
The Company provides benefits to employees in the form of share-based payment transactions, whereby employees render services in
exchange for shares or rights over shares.
The PolyNovo Employee Share Option Plan was in place for the year ended 30 June 2016. Information relating to this Plan is set out in Note
6 and in the Remuneration Report section of the Directors’ Report.
The cost of share-based payments under the terms of the Share Option Plan is measured by reference to the fair value of options at the
date at which they are granted. The fair value of options granted is determined by using the Monte Carlo simulation or the binomial option
valuation model. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in the
Remuneration Report.
The fair value of options is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured
at grant date and recognised over the period during which the employee becomes conditionally entitled to the option. At each reporting
date, the number of options that are expected to vest is revisited. The employee benefit expense recognised each period takes into
account the most recent estimate of the number of options that are expected to vest.
27
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
2. Summary of Significant Accounting Policies continued
(i) Plant and equipment
Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line
basis over the estimated useful life of the asset as follows:
Office equipment
Laboratory plant and equipment
Leasehold improvements
3 to 10 years
3 to 13.33 years
12 years
(j) Plant and equipment impairment
Impairment
The carrying values of plant and equipment are reviewed for impairment at each reporting date, when events or changes in
circumstances indicate that the carrying value may be impaired. An asset is impaired when its carrying value exceeds its estimated
recoverable amount. In this instance, the asset is written down to its recoverable amount and the impairment loss recognised in the
Statement of Comprehensive Income.
For impairment testing purposes, the recoverable amount of an asset is estimated as the higher of its fair value less cost of disposal and
its ‘value-in-use’. Value-in-use is calculated by discounting the estimated future cash flows derived from use of the asset, using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Disposal
Plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of
the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the item) is recognised in the Statement of Comprehensive Income.
(k) Research and development costs
Research and patent costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is
recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available-for-use
or sale. No development expenditure has been capitalised.
(l) Investments
Available-for-sale investments
After initial recognition, investments classified as available-for-sale are measured at fair value. For investments that are actively traded
in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business
on balance date. Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment
is disposed of. At this point, the cumulative gain or loss previously reported in other comprehensive income (equity) is included in the
Statement of Comprehensive Income (profit and loss).
The Group had no available-for-sale investments as at 30 June 2016.
(m) Cash and cash equivalents
Cash at bank and short-term deposits mature in three months or less and are stated at nominal value.
(n) Employee leave benefits
Liabilities for wages, salaries and annual leave expected to be settled within 12 months of the reporting date and pro-rata long service leave
for employees with over seven years of service are recognised in current liabilities. Wages, salaries, annual leave and long service leave are
measured at the amounts expected to be paid when the liabilities are settled.
Liabilities for pro-rata long service leave for employees with less than seven years of service are recognised in non-current liabilities and are
measured as the present value of the expected future payments to be made.
(o) Operating leases
The minimum lease payments of operating leases, where the lessor retains substantially all of the risks and benefits of ownership of the
leased items, are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the lease term.
28
PolyNovo Limited Annual Report 2016 (p) Revenue recognition
Revenue is recognised when it is probable that future economic benefits will flow to the entity and the revenue can be reliably measured.
The amount of revenue arising on the BARDA contract is determined by the BARDA agreement between PolyNovo and BARDA. Revenue
is measured in accordance with the criteria set out in the contract and is assessed based on employee timesheets, sub-contractor invoices,
direct BARDA expenses and other indirect rates as defined in the contract or otherwise agreed with BARDA. The BARDA contract is a
cost-plus-fixed-fee contract of a reimbursement nature and has a pre-agreed contract period and contract value. The customer, being
the US Government, has low or no credit risk.
Interest revenue is recognised when the Group has the right to receive the interest payment. Interest receivable and GST recoverable are
recorded at amortised cost. Due to the short-term nature of these receivables, amortised cost equates to face value.
Sales of materials are recognised when they are shipped to suppliers.
(q) Government grants
Government grants are recognised at their fair value when the grant is received and all attaching conditions have been complied with.
Research and development tax benefit revenue is recognised when there is reasonable assurance of receipt.
(r) Trade and other payables
Trade and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to
the end of the financial year that are unpaid. The amounts are unsecured and are normally settled on 30-day terms. Due to the short-term
nature of these payables amortised cost equates to fair value.
(s) Income tax
Deferred income tax is provided on all temporary differences at balance date, calculated as the difference between the tax cost base of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profit will
be available against which the deductible temporary differences can be utilised. The same criteria apply for recognition of tax assets relating
to unused tax losses.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised
or the liability is settled, based on tax rates (and tax laws) effective at balance date.
Income taxes relating to items recognised directly in equity are recognised in other comprehensive income (equity) and not in the Statement
of Comprehensive Income (profit and loss).
(t) Significant accounting, estimates and assumptions
Deferred tax liability
The deferred tax liability (DTL) arising from the carrying value of PolyNovo’s intangible assets is offset by deferred tax assets (DTAs) recognised
for unused tax losses, where the continuity of ownership test is satisfied. Significant management judgement is required to determine the
amount of the DTA that can be used to offset the impact of the DTL. Further details on deferred taxes are disclosed in Note 5.
Share-based payments
Estimating fair value for share-based payment transactions requires selection of the most appropriate valuation model, which in turn is
dependent on the terms and conditions of the share-based payment granted. Determination of the most appropriate inputs to the valuation
model, including the expected life of the share option, volatility and dividend yield, is also required. The models and related assumptions used
for estimating the fair value of share-based payment transactions are disclosed in Note 6 and in the Remuneration Report.
Impairment of intangibles
Impairment exists when the carrying value of an asset exceeds its recoverable amount. PolyNovo determines the recoverable amount
of an intangible asset by assigning a value to each project in the pipeline, using a probability adjusted net present value method. The key
assumptions used to determine the recoverable amount for the different assets is further explained in Note 13.
29
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
2. Summary of Significant Accounting Policies continued
(u) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of GST except:
• Where the GST incurred on purchase of goods and services is not recoverable from the taxation authority, in which case the GST
is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable.
• Receivables and payables are stated with the amount of GST (if any) included.
The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the
Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis (i.e. including GST) and the GST
component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority
is classified as operating cash flows. Commitments and contingencies are disclosed exclusive of the amount of GST recoverable from,
or payable to, the taxation authority.
(v) Earnings per share (EPS)
Basic EPS is calculated as the net profit/(loss) attributable to shareholders, adjusted to exclude costs of servicing equity (other than dividends),
divided by the weighted average number of ordinary shares.
Diluted EPS is calculated as the net profit/(loss) attributable to members, adjusted for:
• the costs of servicing equity (other than dividends);
• the after-tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and
• other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares.
The resultant net profit/(loss) is divided by the weighted average number of ordinary shares and dilutive potential ordinary shares.
As the Group incurred a loss for the period under review and in the prior year, potential ordinary shares, being options and performance
rights to acquire ordinary shares, are considered non-dilutive and therefore not included in the diluted earnings per share calculation.
(w) Contributed equity
Ordinary shares are classified as equity and recognised at the fair value of the consideration received by the Company. Any transaction costs
arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.
(x) Foreign currency translation
The functional currency of each of the entities in the Group is Australian dollars as it reflects the primary economic environment in which
the entity operates.
Foreign currency items are translated to Australian currency on the following basis:
• Transactions are converted at exchange rates approximating those in effect at the date of the transaction.
• Foreign currency monetary items that are outstanding at the reporting date are translated using the spot rate at the end of the financial year.
Exchange differences relating to monetary items are included in the Statement of Comprehensive Income (profit and loss).
(y) Comparatives
Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures.
(z) Security deposits
Security deposits are recorded at amortised cost in the Statement of Financial Position.
30
PolyNovo Limited Annual Report 2016 3. Segment Information
Business segment
PolyNovo has only one business segment, being the development of the NovoSorb™ technology for use in a range of biodegradable
medical devices.
The chief operating decision-maker from 13 February 2015 onwards has been the Chief Executive Officer. The chief operating decision
maker was previously the Joint Acting Managing Directors and the Chairman.
The chief operating decision-maker reviews the results of the business on a single entity basis. For financial results refer to the Statement
of Comprehensive Income and Statement of Financial Position.
The Board monitors the operating results of the Group for the purpose of making decisions about resource allocation to each project. Projects
are evaluated based on progressing the PolyNovo technology in accordance with budgeted Company expenditure. For a description of PolyNovo’s
current projects, refer to the Directors Report.
Geographical areas
The Group operated in only one geographical area during the years ended 30 June 2015 and 2016.
4. Revenues and Expenses
(a) Interest income/finance revenue
Term deposit interest
Bank account interest
Interest income – other
(b) BARDA revenue
Revenue from contract with BARDA
30 June
2016
$
174,785
14,949
3,632
30 June
2015
$
111,661
6,721
–
193,366
118,382
3,274,927
–
During the 2016 financial year, PolyNovo recognised $3,274,927 revenue from its contract with BARDA. The contract is a cost plus fixed
fee reimbursement contract that was awarded on 28 September 2015. The contract is to fund the full cycle of clinical trial activities
relating to commercialisation of the Company’s BTM in deep tissue burns.
(c) Government grant income
Government grants
–
75,000
In the 2015 financial year, PolyNovo received $75,000 from the Victorian State Government to fund a feasibility study at The Alfred
Hospital. The Group did not benefit directly from any other forms of government assistance in either 2016 or 2015.
31
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
4. Revenues and Expenses continued
(d) Employee related expenses
Wages and salaries
Superannuation
Share-based payments (expense) (see Note 6)
Directors’ fees
Severance payments (including superannuation)
Long service leave provision
Annual leave provision
Payroll taxes and administration
Employee welfare
Recruitment fees
(e) Depreciation and amortisation expense
Depreciation – office equipment
Depreciation – laboratory equipment
Depreciation – leasehold improvements
(f) Rental expense relating to operating leases
Rental expense and outgoings – laboratory and administration
(g) Corporate administrative and overhead expenses
Insurances
Accounting and audit fees
Investor relations and share registry expenses
Legal fees
Consultants and contractors
Travel
Communication expenses
Other
30 June
2016
$
(1,464,853)
(169,538)
(308,602)
30 June
2015
$
(957,815)
(120,738)
(139,616)
(295,481)
(272,289)
(53,815)
(128,661)
(1,895)
(27,625)
(66,639)
(14,846)
(200,968)
(15,111)
(14,346)
(70,983)
(2,378)
(67,186)
(2,604,262)
(1,789,123)
(24,326)
(62,949)
(15,415)
(77,152)
(132,410)
(112,592)
(219,685)
(205,159)
(352,966)
(305,143)
(352,966)
(305,143)
(59,411)
(67,939)
(167,706)
(129,640)
(114,570)
(48,605)
(140,753)
(121,031)
(877,882)
(129,003)
(42,034)
(33,889)
(63,957)
(23,304)
(243,330)
(145,424)
(1,774,689)
(633,789)
The increase in Consultant and contractor costs are predominantly attributable to the Company’s BARDA activities that started in
September 2015.
(h) Research and development tax benefit
Research and development tax benefit income of $846,818 (2015:$819,282) was recognised as income in the Statement of Comprehensive
Income. $783,308 is receivable, as recognised in the Statement of Financial Position, with respect to the year ended 30 June 2016.
32
PolyNovo Limited Annual Report 2016
5. Income Tax
(a) Income tax benefit/(income tax expense)
Current income tax
Current income tax charge
Deferred income tax
Relating to origination and reversal of temporary differences
Income tax benefit/(income tax expense)
Income tax recognised directly in equity
Deferred tax expense
Available-for-sale asset
Reconciliation of income tax expense to prima facie tax payable
Net loss before income tax expense
Prima facie tax calculated at 30% (2015: 30%)
Tax effect of amounts that are not included in accounting loss:
Research and development
Non-assessable rental deposit
Non-assessable grant income
Tax effect of amounts that are not deductible:
Share-based payments
Other
Current year tax losses not brought to account
Current year temporary differences not brought to account
Income tax benefit/(income tax expense)
30 June
2016
$
30 June
2015
$
–
–
–
–
–
–
–
–
–
–
3,251,844
1,414,321
(975,553)
(424,295)
522,205
546,188
(1,090)
(3,043)
(234,992)
(245,785)
92,581
–
(596,850)
786,555
41,885
978
(84,072)
249,984
(189,705)
(165,912)
–
–
33
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
5. Income Tax continued
(b) Deferred tax assets and liabilities
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets/(liabilities)
Deferred tax balances reflects temporary differences attributable to:
Amounts recognised in profit and loss
Recognised tax losses
Recognised on temporary differences
Interest receivable
Amount recognised due to acquisition of PolyNovo
Net deferred tax assets/(liabilities)
Movement in temporary differences during the year:
Balance as of 1 July
Credit to profit and loss
Charged to equity
Net deferred tax assets/(liabilities) as 30 June
(c) Deferred tax assets not brought to account
Unrecognised, unconfirmed tax losses for which no deferred tax asset has been recognised
Deductible temporary differences – no deferred tax asset has been recognised
Potential tax benefit at 30%
30 June
2016
$
987,631
30 June
2015
$
761,967
(987,631)
(761,967)
–
–
867,320
120,311
653,602
108,365
(231,695)
(6,030)
(755,936)
(755,936)
–
–
–
–
–
–
–
–
–
–
82,521,187
80,037,015
189,705
212,402
82,710,892
80,249,418
24,813,268
24,074,825
The availability of the tax losses in future periods is uncertain and will be dependent on the Group satisfying strict requirements with respect
to continuity of ownership and the same business test, imposed by income tax legislation. The recoupment of available tax losses as at
30 June 2016 is contingent upon the following:
• the Group deriving future assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised;
• the conditions for deductibility imposed by tax legislation continuing to be complied with; and
• there being no changes in tax legislation that would adversely affect the Group from realising the benefit from the losses.
Given the Group’s history of recent losses (with the exceptions of the benefit noted in (D) below), the Group has not recognised a deferred
tax asset with regard to unused tax losses, as it has not been determined that the Group will generate sufficient taxable profit against which
the unused tax losses can be utilised.
In the prior year, consideration was given to PolyNovo’s ability to satisfy the tax loss recoupment tests for losses incurred in 2003 and earlier
income years. Based on reassessment, tax losses of approximately $26m were forfeited.
(d) Income tax benefit
The income tax benefit arises due to the recording of deferred tax assets that are available in the current year to offset against deferred
tax liabilities from temporary differences.
34
PolyNovo Limited Annual Report 2016 6. Share-based Payments
(a) Employee share-based payment plans
The Company provides benefits to employees and Non-executive Directors in the form of share-based payment transactions, whereby
employees and Non-executive Directors render services in exchange for shares or rights over shares.
The expense recognised in the Statement of Comprehensive Income for the years ended 30 June 2016 and 30 June 2015 were $308,602
and $139,616, respectively.
(b) Share-based payments for the year ended 30 June 2016
During the 2016 financial year, on 6 August 2015 an options package compromising three tranches of 4,185,095 share options (a total
of 12,555,285 options) were granted to the CEO, Mr Paul Brennan, pursuant to the terms of the PolyNovo Employee Share Option Plan.
The vesting hurdle for the options is linked to the PolyNovo volume weighted average market price. The vesting hurdles for each tranche
are as follows:
• $0.18 per share for tranche 1;
• $0.25 per share for tranche 2; and
• $0.35 per share for tranche 3.
The share price must be sustained over a period of at least 90 consecutive calendar days. Any vested options are exercisable at 9 cents
and may be exercised within 90 days of vesting. The options package will expire on 5 August 2018.
The first tranche of options vested and were exercised in April 2016, when the volume weighted average share price of PolyNovo was above
$0.18 for more than 90 consecutive calendar days. The second and third tranches of options had not vested as at 30 June 2016. All shares
issued under the incentive scheme are escrowed for a period of 12 months commencing on the date of issue. The expense relating to the
incentive scheme shares during the 2016 financial year was $308,602.
Balance at
1 July
2015
Granted
as comp-
ensation
Options
exercised
2016
Other key management personnel
Net
change
other
(forfeited,
lapsed,
expired)
Balance
at 30
June
2016
Total
vested at
end of
year
Total
exercis-
able at
end of
year
Total not
exercis-
able at
end of
year
Total
vested
during
year
Share-
based
payments
expense
Mr Paul Brennan
– 12,555,285 4,185,095
– 8,370,190 4,185,095
– 8,370,190 4,185,095
308,602
The fair value of options granted during the year, as included in the above table, was determined using a Monte Carlo simulation based
model. A Monte Carlo simulation based model simulates the path of the share price according to a probability distribution assumption.
After a large number of simulations, the arithmetic average of the outcomes, discounted to the valuation date, is calculated to represent
the option value. This model can accommodate complex exercise conditions when the number of options exercised depends on some
function of the whole path followed by the share price.
35
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
6. Share-based Payments continued
(c) Share-based payments for the year ended 30 June 2015
During the 2015 financial year, on 17 November 2014 3,000,000 options were issued to certain Directors of the Company. These options
vested immediately. 1,000,000 options had an exercise price of $0.14 and an expiry of 17 November 2017, and 2,000,000 options had
an exercise price of $0.20 and an expiry date of 17 November 2017. The expense recognised in the Statement of Comprehensive Income
during the 2015 financial year was $139,616.
Balance
at 1 July
2014
Granted
as comp-
ensation
Options
exercised
2015
Directors
Net
change
other
(forfeited,
lapsed,
expired)
Balance at
30 June
2015
Total
vested at
end of
year
Total
exercis-
able at
end of
year
Total not
exercis-
able at
end of
year
Total
vested
during
year
Share-
based
payments
expense
Mr Bruce Rathie
500,000
500,000
Dr David McQuillan 500,000
500,000
Mr Max Johnston
Mr Philip Powell
– 1,000,000
– 1,000,000
Total
1,000,000 3,000,000
–
–
–
–
–
– 1,000,000
500,000 1,000,000
– 1,000,000
500,000 1,000,000
–
–
500,000
21,436
500,000
21,436
– 1,000,000 1,000,000 1,000,000
– 1,000,000
48,372
– 1,000,000 1,000,000 1,000,000
– 1,000,000
48,372
– 4,000,000 3,000,000 4,000,000
– 3,000,000
139,616
During the 2016 financial year, 1,000,000 options were exercised of the total 3,000,000 options granted during the 2015 financial year.
The weighted average share price during the 2016 reporting period was $0.23 (2015: $0.09).
7. Earnings Per Share (EPS)
Basic EPS amounts are calculated by dividing the net loss for the year by the weighted average number of ordinary shares outstanding
during the year.
Diluted EPS amounts are calculated by dividing the net loss for the year by the weighted average number of ordinary shares outstanding
during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential
ordinary shares into ordinary shares.
Basic EPS:
30 June 2016
(0.62) cents per share
30 June 2015
(0.33) cents per share
Diluted EPS:
30 June 2016
(0.62) cents per share
30 June 2015
(0.33) cents per share
The following reflects the income and share data used in the calculation of basic and diluted EPS:
Net loss used in calculating basic and diluted EPS attributable to equity holders of the parent entity
($3,061,874) ($1,302,446)
Weighted average number of ordinary shares on issue used in the calculation of basic EPS
493,258,179 418,509,426
Potential ordinary shares that are not dilutive and are excluded from the calculation of diluted EPS
–
–
There were no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion
of these financial statements.
30 June
2016
30 June
2015
36
PolyNovo Limited Annual Report 2016 8. Cash and Cash Equivalents
Reconciliation of cash at the end of the year
Cash at bank and in hand(i)
Short-term deposits(ii)
Cash and cash equivalents are denominated in:
Australian dollars
US dollars
30 June
2016
$
3,246,691
30 June
2015
$
260,454
7,500,000
3,200,000
10,746,691
3,460,454
9,269,572
3,460,454
1,477,119
–
10,746,691
3,460,454
Notes:
(i) Cash at bank earns interest at floating rates based on daily bank deposit rates.
(ii) Short-term deposits with varying maturity terms and interest rates at 2.92% to 2.98% (2015: short-term deposit maturing within three months and interest
rate at 2.87%).
For the purpose of the Cash Flow Statement, cash and cash equivalents comprises cash at bank and investments in short-term deposits as
listed above. The Group has no borrowings.
Reconciliation of net loss after income tax to net cash flow from operating activities
Net loss
Adjustments for non-cash items:
Depreciation/amortisation
Share-based payment expense
Interest
Revaluation of available-for-sale assets
Gain on disposal of available-for-sale assets
Unrealised foreign exchange rate differences
Change in assets and liabilities during the financial year:
Profit on sale of assets
Impairment of assets
Sale of Metabolic Pharmaceuticals Pty Ltd
(Increase)/decrease in prepayments
(Increase)/decrease in receivables
(Increase)/decrease in other assets
Increase/(decrease) in payables
Increase/(decrease) in provisions
Increase/(decrease) in other liabilities
Net cash outflows from operating activities
30 June
2016
$
30 June
2015
$
(3,251,844)
(1,414,321)
219,685
308,602
205,159
139,616
(3,632)
(118,382)
–
3,750
(78,925)
(7,949)
–
–
–
–
–
(38,715)
22,550
(1,500,000)
(27,605)
(693,576)
(201,535)
368,398
29,520
(217,558)
478
145,951
(10,148)
41,751
(41,882)
(3,088)
(3,556,419)
(2,567,281)
37
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
9. Receivables (Current)
Accrued income – BARDA
Research and development tax concession
Interest receivable
GST recoverable
Royalty revenue receivable
Sundry receivables
30 June
2016
$
697,058
783,308
74,238
–
1,019
652
30 June
2015
$
–
822,298
13,590
7,755
6,511
718
1,556,275
850,872
Accrued income relates to PolyNovo’s BARDA project and represents unbilled labour and subcontractor expenses incurred in June 2016.
10. Other Assets (Non-current)
Non-current
Security deposit
The non-current security deposit relates to PolyNovo’s long-term lease of premises in Port Melbourne.
11. Available-for-sale Financial Asset – Investment in Shares
Balance at beginning of year
Gain/(impairment) of available-for-sale financial asset
Sale of financial assets
Balance at end of year
30 June
2016
$
120,774
30 June
2015
$
117,142
30 June
2016
$
98,750
45,000
30 June
2015
$
102,500
(3,750)
(143,750)
–
–
98,750
The Company’s available-for-sale financial asset comprised fully paid ordinary shares held in Neuren Pharmaceuticals Limited (Neuren)
a company listed on the Australian Securities Exchange.
On 8 June 2016, PolyNovo sold all ordinary shares in Neuren for net proceeds of $73,925. The cumulative balance of other comprehensive
income previously recognised in equity was transferred to profit and loss on disposal.
38
PolyNovo Limited Annual Report 2016 12. Plant and Equipment
Office equipment
(i) Cost
Opening balance
Reclassification
Additions
Disposals and write-off of equipment
Closing balance
(ii) Accumulated depreciation
Opening balance
Reclassification
Depreciation for the year
Closing balance
Net book value – office equipment
Laboratory plant and equipment
(i) Cost
Opening balance
Reclassification
Additions
Impairment
Closing balance
(ii) Accumulated depreciation
Opening balance
Reclassification
Depreciation for the year
Closing balance
Net book value – laboratory plant and equipment
30 June
2016
$
30 June
2015
$
209,640
180,242
44,825
27,514
–
–
29,398
–
281,979
209,640
(152,000)
(136,585)
(44,823)
(24,395)
–
(15,415)
(221,218)
(152,000)
60,761
57,640
784,414
313,502
177,174
–
1,275,090
685,231
–
121,733
(22,550)
784,414
(588,102)
(510,950)
(304,666)
–
(62,930)
(77,152)
(955,698)
(588,102)
319,392
196,312
39
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
12. Plant and Equipment continued
Leasehold improvements
(i) Cost
Opening balance
Additions
Closing balance
(ii) Accumulated depreciation
Opening balance
Reclassification
Depreciation for the year
Closing balance
Net book value – leasehold improvements
Net book value – plant and equipment
30 June
2016
$
30 June
2015
$
1,461,848
1,327,257
–
134,591
1,461,848
1,461,848
(708,077)
(595,485)
(8,838)
(132,410)
(112,592)
(849,325)
(708,077)
612,523
753,771
992,676
1,007,723
During the year, a number of reclassification entries were recorded in order to correctly represent the nature of assets. The net effect of
reclassification entries is nil.
13. Intangible assets
Intangible assets
30 June
2016
$
30 June
2015
$
2,519,788
2,519,788
Intangible assets, comprising intellectual property, were acquired through the business combination with PolyNovo Biomaterials Pty Ltd
on 17 December 2008. These assets are indefinite lived and are subject to impairment testing on an annual basis or whenever there is
an indication of impairment.
The impairment assessment at 30 June 2016 and 30 June 2015 was based on a valuation report prepared by an independent third party.
The valuation report was prepared by assigning a value to projects in the Group’s pipeline on a probability-weighted basis, based on future
cash flows. In arriving at a valuation for each project, assumptions were made on a project-by-project basis. The assumptions used for each
project are outlined below:
30 June 2016
30 June 2015
2%
30 June 2016
20%
not applicable
5% to 8%
5% to 7.5%
3%
30 June 2014
not applicable
28.57%
4%
5% to 10%
Growth rate
Valuation date
After tax discount rate
Pre-tax discount rate
Royalty on sales
Market penetration
40
PolyNovo Limited Annual Report 2016 Growth rate: derived from published data on growth prospects and historical growth of products being sold into those conditions.
Royalty on sales: based on available industry data.
Market penetration: a best estimate, taking into consideration the quality of proposed products relative to competitive offerings, where
competitors exist, number of competitive products and what commercial partners would expect to justify further investment in development.
Consideration was also given to recent transactions in the field of each project and the market capitalisation of ASX-listed companies with
similar technology. The report concluded that the value of the intellectual property is in excess of its current carrying value.
No reasonable possible changes in the assumptions were identified that could cause an impairment of the identified intangible assets
except for a failure in clinical trials. Due to the nature of the business, the cash flows were assessed on a short-term 12-month basis
with assumptions applied to future models to assess the recoverable amount of identified intangibles.
The recoverable amount has been determined using a value-in-use method.
The Directors considered this valuation report and it is the opinion of the Directors that PolyNovo’s intangible assets are not impaired
as at 30 June 2016.
14. Trade and Other Payables
Trade creditors and payables
Other payables
Total trade and other payables
Trade payables are non-interest bearing and are normally settled on 30-day terms.
15. Provisions
(a) Current provisions
Annual leave
Long service leave
Total current provisions
(b) Non-current provisions
Long service leave
Total non-current provisions
30 June
2016
$
406,311
184,303
590,614
30 June
2015
$
133,197
284,316
417,513
30 June
2016
$
69,737
45,482
115,219
30 June
2015
$
42,112
29,453
71,565
16,016
16,016
30,150
30,150
41
PolyNovo Limited Annual Report 2016
Notes to the Financial Statements continued
for the year ended 30 June 2016
16. Contributed Equity and Reserves
(a) Movement in contributed equity
Contributed equity at beginning of year
Shares issued: capital raising
Costs of share issue
Shares issued on acquisition of non-controlling interest
Exercise of options
Contributed equity at end of year
On issue at start of year
Shares issued: capital raising
Shares issued on acquisition of non-controlling interest
Exercise of options
On issue at end of year
(b) Reserves
Share-based payments reserve (i)
Gains/(losses) on available-for-sale financial assets (ii)
Acquisition of non-controlling interest reserve (iii)
Balance at end of period
(i) Share-based Payments Reserve
Balance at beginning of period
Share-based payments movement
Balance at end of period
30 June
2016
$
30 June
2015
$
94,870,080
94,870,080
12,847,816
(754,843)
5,920,000
1,216,659
–
–
–
–
114,099,712
94,870,080
Number of shares
418,509,426 418,509,426
95,169,394
32,000,000
13,185,095
–
–
–
558,863,915 418,509,426
30 June
2016
$
30 June
2015
$
2,595,045
2,286,443
–
103,750
(9,293,956)
(477,596)
(6,698,911)
1,912,597
2,286,443
2,146,827
308,602
139,616
2,595,045
2,286,443
This reserve represents the nominal consideration paid for subscriber or employee options and the fair value of options and performance rights.
42
PolyNovo Limited Annual Report 2016 (ii) Gains/(losses) on available-for-sale financial assets reserve
Opening balance
Unrealised gain/(loss) on available-for-sale financial assets
Reclassification to profit and loss on disposal of assets
Balance at end of period
Refer Note 11 for details of the purpose of this reserve account.
(iii) Acquisition of non-controlling interest reserve
Opening balance
Acquisition of non-controlling interest
Balance at end of year
30 June
2016
$
30 June
2015
$
103,750
45,000
(148,750)
103,750
–
–
103,750
(477,596)
(477,596)
(8,816,360)
–
(9,293,956)
(477,596)
This reserve represents the premium paid by PolyNovo Limited for the non-controlling interest in subsidiary entities PolyNovo Biomaterials
Pty Ltd, NovoSkin Pty Ltd and NovoWound Pty Ltd.
(c) Accumulated losses
Accumulated losses at beginning of year
Net loss attributable to members of the parent
Accumulated losses at end of financial year
17. Non-controlling Interests
Opening balance
Current year share of accumulated losses
Acquisition of non-controlling interest
Balance at end of year
30 June
2016
$
30 June
2015
$
(89,227,201) (87,924,755)
(3,061,874)
(1,302,446)
(92,289,075) (89,227,201)
30 June
2016
$
(162,170)
30 June
2015
$
(50,295)
(189,970)
(111,875)
352,140
–
–
(162,170)
During the financial year ended 30 June 2016, the Group acquired the non-controlling interest in subsidiary entities NovoSkin Pty Ltd
and NovoWound Pty Ltd. The PolyNovo Group, as at 30 June 2016, is a wholly owned group of companies.
43
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
18. Commitments and Contingencies
Operating lease commitments
The Group has entered into a commercial office and laboratory lease. This lease has an initial term of 12 years, from 2008 to 2020,
with a further five-year option. Future minimum rentals payable under the non-cancellable operating lease is as follows:
Not later than one year
Later than one year, but not later than five years
30 June
2016
$
275,539
841,158
30 June
2015
$
264,065
1,139,510
1,116,697
1,403,575
Contingencies
The Directors are not aware of any other contingent liabilities or contingent assets at 30 June 2016. There has been no change in this
assessment up to the date of this report.
19. Related Party Disclosures
As set out in the disclosures under key management personnel (Note 24), transactions with related parties during the year were as follows:
• Kidder Williams Ltd, an entity associated with Mr David Williams, received payments in the amount of $110,000 (2015: nil). These payments
were in respect to consulting services provided to PolyNovo Limited in relation to the capital raising.
Other than as noted above, there were no transactions with related parties during the year ended 30 June 2016.
20. Events After the Balance Sheet Date
The Directors are not aware of any other matters or circumstances since the end of the financial year other than those described above,
nor otherwise dealt with in this report, which have significantly affected, or may significantly affect, the operations of the Group, the results
of those operations or the state of affairs of the Group in subsequent financial years.
21. Auditor’s Remuneration
The auditor of PolyNovo Limited is Ernst & Young. The amounts received or due and receivable by Ernst & Young for audit and other services
were as follows:
An audit or review of the Financial Reports of the entity:
– Half-year and full-year audits
Other services in relation to the entity:
– Tax compliance services
– Preparation and lodgement of research and development tax benefit application,
AusIndustry review and overseas applications
Total auditor’s remuneration
30 June
2016
$
30 June
2015
$
93,000
87,000
12,500
12,500
23,250
128,750
22,500
122,000
The Directors are satisfied that the provision of non-audit services during the current period is compatible with the general standard of
independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means
that auditor independence was not compromised.
44
PolyNovo Limited Annual Report 2016 22. Parent Entity Information
Current assets
Total assets
Current liabilities
Total liabilities
Issued capital
Retained earnings
Total reserves
Total shareholders’ equity
Profit/(loss) of the parent entity
Total comprehensive income/(loss) of the parent entity
Details of operating leases entered into by PolyNovo Limited are provided in Note 18.
30 June
2016
$
30 June
2015
$
21,443,043
3,748,358
27,492,777
15,259,362
86,322
86,322
167,097
181,701
114,099,711
94,870,080
(83,324,082)
(82,182,612)
(3,369,175)
2,390,193
27,406,455
15,077,661
(1,141,714)
(1,799,424)
(1,245,464)
(1,799,424)
23. Financial Risk Management Objectives and Policies
(a) Financial instruments
The Group’s financial instruments comprise cash and cash equivalents, trade and other receivables, trade and other payables, other financial
assets and available-for-sale financial assets.
Cash and cash equivalents
Trade and other receivables
Other financial assets (classified as held to maturity)1
Trade and other payables
30 June
2016
$
30 June
2015
$
10,746,691
3,460,454
1,556,275
50,000
590,614
850,872
60,000
417,513
1. At 30 June 2016 and 30 June 2015, the carrying value of these held-to-maturity assets approximated fair value.
(b) Available-for-sale financial assets – investment in shares
Available-for-sale financial assets
–
98,750
The Group’s available-for-sale financial assets at 30 June 2015 comprised 1,250,000 fully paid ordinary shares in Neuren Pharmaceuticals
Limited (Neuren), a company listed on the Australian Securities Exchange. The Company sold all its shares in Neuren in June 2016.
(c) Risk Management Policy
The Group has a formal Risk Management Policy and framework. The Group’s approach to risk management involves identifying, assessing
and managing risk, including consideration of identified risks, in the context of the Group’s values, objectives and strategies. The Board is
responsible for overseeing the implementation of the risk management system and reviews and assesses the effectiveness of the Group’s
implementation of that system.
The Group seeks to ensure that its exposure to risks that are likely to impact its financial performance, continued growth and survival are
minimised in a cost-effective manner.
45
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
23. Financial Risk Management Objectives and Policies continued
(d) Significant accounting policies
Details of the significant accounting policies and methodologies adopted in respect of each class of financial asset, financial liability and equity
instrument are disclosed in Note 2.
Details in relation to interest revenue earned on holdings of cash and cash equivalents are disclosed in Note 4.
(e) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern and to maintain an optimal
capital structure so as to maximise shareholder value. In order to maintain an optimal capital structure, the Group may issue new shares or
reduce its capital, subject to the provisions of the Company’s Constitution and any relevant regulatory requirements. The capital structure
of the Group consists of equity attributed to equity holders of the Group comprising contributed equity, reserves and accumulated losses
as disclosed in Note 16. The Board monitors the need to raise additional equity from the equity markets based on its ongoing review
of PolyNovo’s actual and forecast cash flows, which are provided by management.
(f) Financial risk management
The key financial risks the Group is exposed to through its operations are:
• Interest rate risk
• Credit risk
• Liquidity risk
• Foreign currency risk
• Other price risk.
Interest rate risk
Interest rate risk arises when the value of a financial instrument fluctuates as a result of changes in market interest rates.
The Group is exposed to interest rate risks in relation to its holdings in cash and cash equivalents. The objective of managing interest rate
risk is to minimise the Group’s exposure to fluctuations in interest rates. To manage this risk, the Group locks a portion of the Group’s cash
and cash equivalents into term deposits. The required maturity period of term deposits is determined based on the Group’s cash flow forecast.
In addition, the Group considers the lower interest rate received on cash held in the Group’s operating account compared to placing funds
on term deposit. Account is also taken of the costs associated with early withdrawal of a term deposit should access to cash and cash
equivalents be required.
46
PolyNovo Limited Annual Report 2016 The Group’s exposure to interest rate risk and the weighted average interest rates on the Group’s financial assets and financial liabilities
as at 30 June 2016, along with prior year comparatives, was as follows:
Weighted
average
effective
interest
rate
Floating
interest
rate
$
Fixed
interest
rate
0–90
days
$
Fixed
interest
rate
91–365
days
$
Fixed
interest
rate
1–5
years
$
Fixed
interest
rate
over 5
years
$
Non-
interest
bearing
$
Total
$
2016
Financial assets
Cash and cash equivalents
2.05% 3,246,691 1,000,000 6,500,000
Other financial assets
2.94%
Receivables
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
–
–
–
–
–
–
–
50,000
–
3,246,691 1,000,000 6,550,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 10,746,691
–
50,000
– 1,556,275
1,556,275
– 1,556,275 12,352,966
–
–
590,614
590,614
590,614
590,614
Weighted
average
effective
interest
rate
Floating
interest
rate
$
Fixed
interest
rate
0–90
days
$
2015
Financial assets
Cash and cash equivalents
Other financial assets
2.87%
2.35%
Receivables
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
–
–
260,454 3,200,000
–
–
–
–
260,454 3,200,000
60,000
–
–
–
–
–
–
Fixed
interest
rate
91–365
days
$
–
60,000
–
Fixed
interest
rate
1–5
years
$
Fixed
interest
rate
over 5
years
$
–
–
–
–
–
–
–
–
–
–
–
–
Non-
interest
bearing
$
Total
$
– 3,460,454
–
60,000
850,872
850,872
850,872 4,371,326
382,513
382,513
382,513
382,513
47
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
23. Financial Risk Management Objectives and Policies continued
(f) Financial risk management continued
Interest rate risk continued
There has been no change to the Group’s exposure to interest rate risk, other than the fact that cash holdings are higher than at the previous
year end. As noted above, cash is invested in term deposits of varying maturity terms to maximise interest income as well as meet operational
cash flow requirements. All term deposits are with the National Australia Bank, to ensure market interest rates are achieved without
compromising the security of funds on deposit.
The analysis below details the impact on the Group’s loss after tax and equity if the interest rate associated with financial assets was to fluctuate
by the margins below, assuming all other variables had remained constant:
+ 1% (100 basis points)
- 1% (100 basis points)
Loss (higher)/lower
equity higher/(lower)
2016
$
Loss (higher)/lower
equity higher/(lower)
2015
$
107,967
(107,967)
35,204
(35,204)
Credit risk
Credit risk arises when a counterparty defaults on its contractual obligations, resulting in a financial loss to the Group.
The Group is exposed to credit risk via its cash and cash equivalents and receivables. To reduce risk exposure in relation to its holdings of
cash and cash equivalents, they are placed on deposit with the Group’s main bankers, the National Australia Bank (S&P Rating AA/A-1+,
Moody’s rating Aa1/P-1). A change to the Group’s bankers requires Board approval.
In previous years the Group has had minimal trade and other receivables, with the majority of its cash being provided via shareholder investment.
In 2016, with the commencement of the Company’s contract with BARDA, the receivables balance at 30 June 2016 includes accrued income
of $697,058 from this agency in relation to services provided. BARDA is contractually obliged to reimburse the Company for these services.
BARDA, being a US government agency, is considered to be a low credit risk customer.
The ageing analysis of trade and other receivables is as follows.
2016
Trade and other receivables
2015
Trade and other receivables
0–30
days
$
697,984
30–60
days
$
10,041
21,305
7,269
60–90
days
$
90+
days
$
Total
$
–
–
64,942
772,967
–
28,574
Liquidity risk
Liquidity risk arises if the Group encounters difficulty in raising funds to meet its financial liabilities.
The Group is exposed to liquidity risk via its trade and other payables. Responsibility for managing liquidity risk rests with the Board, which
regularly reviews liquidity risk by monitoring the undiscounted cash flow forecasts and actual cash flows provided to it by management. This
process is undertaken to ensure that the Group continues to be able to meet its debts as and when they fall due. Contracts are not entered
into unless the Board is satisfied that there is sufficient cash flow to fund the additional commitment. The Board determines when reviewing
the undiscounted cash flow forecasts whether the Group needs to raise additional working capital from its existing shareholders, the equity
capital markets or any other available sources.
48
PolyNovo Limited Annual Report 2016 A maturity analysis of trade and other payables, based on contractual terms, is set out below:
2016
Trade and other payables
2015
Trade and other payables
0–30
days
$
30–60
days
$
513,147
64,967
60–90
days
$
12,500
90+
days
$
Total
$
–
590,614
99,147
318,366
–
–
417,513
Foreign currency risk
Foreign currency risk arises when foreign currency exchange rates fluctuate against the Australian dollar, resulting in a foreign currency
exchange loss or gain to the Group.
The Group is exposed to foreign currency risk via its cash and cash equivalents, trade receivables and trade payables as part of its normal business.
The Group incurs foreign currency expenses predominantly in USD and EUR. To reduce foreign currency risk exposure, the Group maintains
an amount of cash and cash equivalents in USD. The Group receives payment from its overseas customer (BARDA) in USD and pays USD
trade payables from its USD funds. EUR denominated payable balances carry some foreign currency risk; however, these payable balances
are typically low in value (nil balance at 30 June 2016) and are therefore considered to expose the Group to minimal risk.
The holdings of cash and cash equivalents, trade receivables and trade payables analysed by nominated currency at 30 June 2016, along
with prior year comparatives, were as follows.
2016
Financial assets
Cash and cash equivalents
Receivables
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
Denominated
in AUD
$
Denominated
in USD
$
Denominated
in EUR
$
Total
$
9,269,572
1,477,119
859,217
697,058
10,128,789
2,174,177
173,474
173,474
417,140
417,140
–
–
–
–
–
10,746,691
1,556,275
12,302,966
590,614
590,614
A hypothetical 10% strengthening in the exchange rate of the Australian dollar against the US dollar with all other variables held constant
would have $175,704 favourable effect on the loss and equity for the 2016 financial year.
2015
Financial assets
Cash and cash equivalents
Receivables
Total financial assets
Financial liabilities
Trade and other payables
Total financial liabilities
Denominated
in AUD
$
Denominated
in USD
$
Denominated
in EUR
$
3,460,454
850,872
4,311,326
417,513
417,513
–
–
–
–
–
–
–
–
–
–
Total
$
3,460,454
850,872
4,311,326
417,513
417,513
49
PolyNovo Limited Annual Report 2016 Notes to the Financial Statements continued
for the year ended 30 June 2016
23. Financial Risk Management Objectives and Policies continued
(f) Financial risk management continued
Other price risk – available-for-sale financial asset
The Group’s available-for-sale financial asset at 30 June 2015 consisted of 1,250,000 fully paid ordinary shares held in Neuren Pharmaceuticals
Limited (Neuren), a company listed on the Australian Securities Exchange (ASX Code: NEU). This investment was subject to price risk
associated with fluctuations in the market price of the Neuren shares.
The Company sold all shares in Neuren Pharmaceuticals Limited in June 2016, therefore the price risk associated with the fluctuations
in the market price of the shares has been eliminated.
24. Key Management Personnel Disclosures
The key management personnel compensation disclosures required by the Corporations Act 2001 are provided in the Remuneration Report
in the Directors’ Report.
(a) Details of key management personnel
The key management personnel of the Group are those persons having the authority and responsibility for planning, directing and controlling
the activities of the Group, directly or indirectly, during the 2016 and 2015 financial years. Unless otherwise indicated, they were key
management personnel during the whole of the financial years.
Poloynovo’s key management personnel are its Directors and members of the senior management team. Details of each Director and Senior
Executive, who are classified as key management personnel, are provided in the Remuneration Report.
(b) Compensation by category: key management personnel
Short-term
Post-employment – superannuation
Long-term
Share-based payments
Termination benefits
30 June
2016
$
30 June
2015
$
740,944
1,027,362
69,750
6,104
308,602
53,815
75,966
33,736
139,616
128,661
1,179,216
1,405,341
(c) Interests held by key management personnel
Share options held by key management personnel to purchase ordinary shares have the following expiry dates and exercise prices:
Issue date
Expiry date
Exercise price
2016 number
outstanding
2015 number
outstanding
2012
2014
2014
2014
2014
2015
20/11/15
03/07/17
03/07/17
17/11/17
17/11/17
05/08/18
$0.110
$0.090
$0.200
$0.140
$0.20
$0.09
–
–
2,500,000
1,000,000
2,000,000
8,370,190
13,870,190
1,500,000
7,500,000
2,500,000
1,000,000
2,000,000
–
14,500,000
(d) Loans to key management personnel
No loans have been made to Directors of PolyNovo or to any other key management personnel, including their related entities.
(e) Other transactions with Directors
Details of other transactions with Directors have been provided as part of the key management personnel disclosures in the
Remuneration Report.
50
PolyNovo Limited Annual Report 2016 25. Controlled Entities
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance
with the accounting policy in Note 2:
Company:
PolyNovo Limited
Subsidiaries of PolyNovo Limited:
PolyNovo Biomaterials Pty Ltd
NovoSkin Pty Ltd
NovoWound Pty Ltd
Country of incorporation
Australia
Australia
Australia
Australia
Percentage owned
2016
%
2015
%
100
100
100
100
80
80
PolyNovo completed the acquisition of non-controlling interests in subsidiary companies NovoSkin Pty Ltd and NovoWound Pty Ltd
on 22 December 2015.
Consideration for the acquisition comprised 32,000,000 PolyNovo shares, which remained in escrow until 31 May 2016, and cash
payments as follows: $500,000 at settlement, $1,000,000 payable on 1 March 2016, $500,000 payable on 31 May 2016 and
$500,000 payable on 29 June 2016. The attributed value of consideration paid in shares, based on the closing share price on the
22 December 2015, was $5,920,000.
51
PolyNovo Limited Annual Report 2016 Corporate Directory
ABN 96 083 866 862
Non-executive Chairman
Mr David Williams
Non-executive Directors
Mr Bruce Rathie
Dr David McQuillan
Mr Philip Powell
Mr Max Johnston
Mr Leon Hoare
Chief Executive Officer
Mr Paul Brennan
Company Secretary
Ms Andrea Goldie
Registered office
Unit 2/320 Lorimer Street
Port Melbourne
Victoria Australia 3207
T (03) 8681 4050
F (03) 8681 4099
Share registry
Computershare Investor Services Pty Ltd
Yarra Falls
452 Johnston Street
Abbotsford
Victoria Australia 3067
T 1300 850 505
Auditors
Ernst & Young
8 Exhibition St
Melbourne Victoria 3000
Website
www.polynovo.com.au
Australian Securities Exchange
PolyNovo shares are quoted on ASX Limited
(ASX Code: PNV)
PolyNovo Limited Annual Report 2016
57
2/320 Lorimer Street
Port Melbourne
Victoria Australia 3207
T +613 8681 4050
F +613 8681 4099
polynovo.com.au
PolyNovo Limited (ABN 96 083 866 862)
Directors' Declaration
for the year ended 30 June 2016
In accordance with a resolution of the Directors of PolyNovo Limited, I state that:
1. In the opinion of the Directors:
(a) The Financial Report and the Remuneration Report included in the Directors’ Report, of the Company and of the Group are in accordance
with the Corporations Act 2001, including:
(i) giving a true and fair view of the Company and the Group’s financial position as at 30 June 2016 and of their performance for
the year ended on that date;
(ii) complying with Australian Accounting Standards and Corporations Regulations 2001; and
(iii) complying with International Financial Reporting Standards as issued by the International Accounting Standards Board.
(b) There are reasonable grounds to believe that the Company and the Group will be able to pay their debts as and when they become
due and payable.
2. This declaration has been made after receiving the declarations required to be made to Directors in accordance with section 295A
of the Corporations Act 2001 for the financial period ended 30 June 2016.
On behalf of the Board,
Mr David Williams
Chairman
22 August 2016
52
PolyNovo Limited Annual Report 2016 Independent Auditor's Report
for the year ended 30 June 2016
Ernst & Young
8 Exhibition Street
Melbourne VIC 3000 Australia
GPO Box 67 Melbourne VIC 3001
Tel: +61 3 9288 8000
Fax: +61 3 8650 7777
ey.com/au
Independent auditor's report to the members of PolyNovo Limited
Report on the financial report
We have audited the accompanying financial report of PolyNovo Limited, which comprises the
consolidated statement of financial position as at 30 June 2016, the consolidated statement of
comprehensive income, the consolidated statement of changes in equity and the consolidated statement
of cash flows for the year then ended, notes comprising a summary of significant accounting policies and
other explanatory information, and the directors' declaration of the consolidated entity comprising the
company and the entities it controlled at the year's end or from time to time during the financial year.
Directors' responsibility for the financial report
The directors of the company are responsible for the preparation of the financial report that gives a true
and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for
such internal controls as the directors determine are necessary to enable the preparation of the financial
report that is free from material misstatement, whether due to fraud or error. In Note 2, the directors
also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that
the financial statements comply with International Financial Reporting Standards.
Auditor's responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our
audit in accordance with Australian Auditing Standards. Those standards require that we comply with
relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain
reasonable assurance about whether the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial report. The procedures selected depend on the auditor's judgment, including the assessment
of the risks of material misstatement of the financial report, whether due to fraud or error. In making
those risk assessments, the auditor considers internal controls relevant to the entity's preparation and
fair presentation of the financial report in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal controls. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by the directors, as well as evaluating the overall
presentation of the financial report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Independence
In conducting our audit we have complied with the independence requirements of the Corporations Act
2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a
copy of which is included in the directors’ report.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
53
PolyNovo Limited Annual Report 2016 Independent Auditor's Report continued
for the year ended 30 June 2016
2
Opinion
In our opinion:
a.
the financial report of PolyNovo Limited is in accordance with the Corporations Act 2001,
including:
i
ii
giving a true and fair view of the consolidated entity's financial position as at 30 June 2016
and of its performance for the year ended on that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001;
and
b.
the financial report also complies with International Financial Reporting Standards as disclosed in
Note 2.
Report on the remuneration report
We have audited the Remuneration Report included in pages 13 to 19 of the directors' report for the year
ended 30 June 2016. The directors of the company are responsible for the preparation and presentation
of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our
responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
Opinion
In our opinion, the Remuneration Report of PolyNovo Limited for the year ended 30 June 2016, complies
with section 300A of the Corporations Act 2001.
Ernst & Young
Joanne Lonergan
Partner
Melbourne
22 August 2016
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
54
PolyNovo Limited Annual Report 2016 Additional Information Required by ASX
for the year ended 30 June 2016
Additional information required by the Australian Securities Exchange is as follows:
Ordinary Shares
As at 17 August 2016, there were 558,863,915 ordinary shares on issue held by 5,828 shareholders. Each ordinary share carries
one vote per share.
Top 20 holders as at 17 August 2016
Shareholder
The Trust Company (Australia) Limited
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