2020 Reports Announcement of Full-Year Results Appendix 4E 2020 Annual Report PolyNovo Limited ABN 96 083 866 862 26 August 2020 Snapshot 2020 Worldwide NovoSorb BTM Revenue 2020 $19.06m 2019 $9.34m 104% United States NovoSorb BTM Revenue 2020 $15.57m 2019 $7.73m 102% Australia & New Zealand NovoSorb BTM Revenue 2020 $2.82m 2019 $1.57m 80% Announcement of Full-Year Results 26 August 2020 FY20 saw the more than doubling of NovoSorb BTM sales and we had a very strong Q4. $19.1 million in FY20 versus $9.3 million in FY19 (+104%). PolyNovo Limited reported revenue for year ended 30 June 2020 of $22.229 million an increase of 54.6% from FY19 $14.378 million. The net loss after tax (excluding share-based payments expense) of $2.132 million for FY20 is an improvement year-on-year of 31.1% over the prior year’s $3.092 million. The Group’s improved loss position included staff expansion, capital works program building the hernia factory, new market entries and upgrading facilities. The continued rise in NovoSorb BTM sales, improvements in gross profit, manufacturing efficiencies and sales force effectiveness enabled PolyNovo to continue to invest for growth. Cash on hand at 30 June 2020 is $11.6 million (FY19 $13.9M) and we have an unused debt facility of $2m. We have continued to invest in our sales and marketing teams in all regions. The US is our largest market and we have continued the expansion of sales and marketing teams in that market. We have also entered UK/ Ireland and Singapore/Malaysia as direct markets in FY20 and expect to see the results of that in FY21. The impact of CoVid19 has had little short-term impact on PolyNovo and we continue to plan for significant revenue and account growth. The year ahead is still uncertain. Total Revenue ($m) 0.1 3.5 0.2 2017 1.7 3.8 0.4 2018 9.3 4.0 1.0 2019 19.1 3.1 0.1 2020 Product Sales – BTM BARDA Contract Revenue Other For FY21 we anticipated doubling our sales revenues. NovoSorb BTM European markets will expand further in FY21 through a mix of distributor appointments and direct market entries. Asian markets are also anticipated to grow with new regulatory approvals forecast in Q2 and Q3. Our Australia/European burn trial and the US Feasibility trial results have been published. These trials have demonstrated the safety and effectiveness of NovoSorb BTM in the treatment of full thickness burns. We have also seen the publication of Professor John Greenwood et al treating a 95% TBSA burn patient with NovoSorb BTM and cultured composite skin grown in NovoSorb foam substrate. The BARDA funded pivotal trial is progressing through its US FDA approval process and we anticipate seeing an increased clinical workload and recruitment in late Q1 and Q2. Phase 1 of the Hernia factory build is complete and most of the manufacturing equipment is in hand. The development timeline has been impacted by CoVid19 with some machines being delayed in shipment and with international travel restrictions in place we have not been able to get European engineers on site to commission the new equipment. Our in-house teams are working through the commissioning process and we anticipate filing our US FDA 510(K) application around July 2021 with product on sale before the end of CY2021. Further details of the product pipeline can be found in our Annual Report. Further information Paul Brennan Managing Director Mobile +61 427 662 317 David Williams Chairman Mobile: +61 414 383 593 Appendix 4E – Rule 4.3A Preliminary Final report PolyNovo Limited ABN 96 083 866 862 1. Details of the reporting period and the previous corresponding period Reporting Period: Previous Corresponding Period: Year ended 30 June 2020 Year ended 30 June 2019 2. Results for announcement to the market 2.1. Total revenue 2.2. Loss after tax 2.3. Loss after tax attributable to members 2.4. Dividends 2.5. Record date for dividend entitlement 2.6. Brief explanation of figures in 2.1 to 2.3: Change from 2019 up up up 54.6% 31.5% 31.5% to to to 2020 $22,228,501 ($4,193,738) ($4,193,738) No dividend paid or declared in either period Not applicable Refer to (i) the enclosed announcement by the Chairman and Managing Director and (ii) the Chairman’s and Managing Directors’ Report and separate Directors’ Report contained in the enclosed 2020 Annual Report. 3. Net tangible assets Net tangible asset backing per ordinary security 4. Consolidated Statements of Comprehensive Income, Financial Position, Changes in Equity and Cash Flow are contained in the enclosed 2020 Annual Report. 5. Details of control gained or lost over entities during the period 6. Details of individual dividends and payment dates 7. Details of dividend reinvestment plans 8. Details of associates and joint venture entities 9. For foreign entities, which set of accounting standards is 9. This report is based on accounts which have been audited. The audit report, which is unmodified is contained in the enclosed 2020 Annual Report. Date: 26 August 2020 Jan Gielen Company Secretary 30 June 2020 30 June 2019 $0.036 $0.039 Not applicable Not applicable Not applicable Not applicable International Financial Reporting Standards Our vision taking shape Annual Report 2020 Improving outcomes. Changing lives. Contents Global Expansion Product Development Our Performance Chairman and MD Report Directors’ Report ESG Statement and Corporate Governance Remuneration Report – Audited Auditor’s Independence Declaration Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Additional Information Required by ASX Corporate Directory 2 4 5 6 8 19 20 28 29 30 31 32 33 69 70 76 77 “PolyNovo’s principal activity is the development of innovative medical devices for a number of applications, utilising the patented bioabsorbable polymer technology NovoSorb®.” Paul Brennan Managing Director PolyNovo Limited ABN 96 083 866 862 Annual Report 2020 Vision PolyNovo is prepared for an exciting future with expansion into new markets and continued growth in NovoSorb BTM production within our own facilities. The talent within our team continues to grow ensuring we have the resources to execute our strategy of bringing disruptive medical devices to market. These devices are all focused on our mission: Improving outcomes and changing people’s lives. PolyNovo Limited 1 Annual Report 2020 Global Expansion Strong sales performance and new market entries PolyNovo continues to double revenue from NovoSorb BTM. Sales force expansion continues with customer acquisition and deeper account penetration the focus. European and Asia new market entries are forecast for the year ahead. Hernia factory, stage 1, complete and further R&D resources being added. PolyNovo has invested in four key strategic areas 1. Sales team Sales and Marketing resources have been added to Australia, Singapore, USA and UK. Recruitment is in progress for further head office roles, an Irish sales team and further US sales roles to service new territories. FY20 has seen strong sales performances in the USA, Australia, New Zealand and Germany, Austria & Switzerland (DACH) region. Our depth of resources has improved significantly, and we have weathered the CoVid-19 pandemic very well. The maturity of our organisation and the empowerment of local teams has seen PolyNovo continue to deliver on our plan to double NovoSorb BTM revenue each year. FY21 has a solid foundation for further revenue growth through deeper penetration of our existing markets and the entry into new markets throughout Europe and Asia. The Company has shadowed the breakeven line throughout FY20 however we have chosen to reinvest in the expansion of the Sales and Marketing teams to drive our market penetration and realise the returns of high margin sales revenue. Our research and development programs are focused on near term commercialisation devices in Hernia, Breast, Sports Medicine and Chronic wounds. FY21 will be focused on completion of the commercial manufacturing process of Syntrel, our NovoSorb based hernia devices, whilst concurrently developing new devices with our enlarged Research & Development team. Establishing multiple revenue streams whilst sweating our production assets will provide PolyNovo with a strong and sustainable future. Achievements CE Mark Approval FDA Breakthrough Device Granted Singapore Regulatory Approval First $2 million Month for Product Sales ASX200 Achieved UK First BTM Surgeries January 2020 Germany First BTM Surgeries January 2020 2 PolyNovo Limited 2. Research and development The progress of the Syntrel hernia devices has been very good. The factory development program has been significant, and we have managed the CoVid-19 restrictions very well. Work has already commenced on sports medicine devices and we will see further work on these in FY21. PolyNovo’s breast product development continues in parallel with the hernia program. The manufacturing process will utilise many of the same machines. 3. Organisational talent building We continue to invest in our team. In FY20 we added Quality Assurance, Production, Engineering, Sales, Marketing, Clinical, Regulatory, Finance, Human Resources and Safety roles to the organisation. The depth of talent within the business continues to grow. This is enabling regions to become more proactive, self-sufficient and timely in their customer engagement. CRM is fully integrated across all regions and it is a central business tool and communication vehicle that drives our customer interactions. 4. Infrastructure/capital With the majority of the capital program now complete our Hernia factory will go through its validation and approvals process. This does not require a physical inspection by regulatory authorities however PolyNovo must complete a comprehensive suite of testing and documentation to meet the global standards. Further production expansion programs will follow bringing capacity into the NovoSorb BTM line and the ability to make other new devices in the medium term. Annual Report 2020 Australia USA Market Penetration The Australian sales performance was strong across a wide range of clinical indications. FY20 saw our expanded sales team covering all states and territories with NovoSorb BTM used in chronic wounds, reconstructive surgeries, trauma and burns. Now that we have a significant customer base the focus of FY21 will be on deeper account penetration. Production has been running two shifts since April 2020 and our production yields are up, production waste reduced and efficiency improvements have had a positive contribution to gross profit. The new hernia factory development has been intensive for many in the team and we are excited to be able to utilise this facility in FY21. Europe PolyNovo entered the UK and Irish markets with a direct sales organisation. We have expanded the team and have achieved our first sales in the National Health System (NHS) in the UK. FY21 holds great promise and we will continue to expand the sales and marketing resources in response to rising sales and customer demands. DACH distribution via PolyMedics Innovations GmbH (PMI) has been an outstanding success. We have good sales in all three countries and see a solid growth in the number of surgeries/applications. Our strategy has been to establish these two regions as a beachhead into Europe and we will now expand throughout Europe and the Nordics with a mix of direct sales and distribution partners. New Zealand PolyNovo has invested in improved warehousing and logistics processes in New Zealand. This was beneficial in our ability to service the White Island disaster. Our teams worked very closely with the hospital teams and we are pleased that so many of the patients benefited from NovoSorb BTM with some remarkable outcomes. FY21 will see continued investment in our New Zealand business as we anticipate launching Syntrel hernia devices in New Zealand immediately after the USA market and appointing a local sales representative The USA will remain PolyNovo’s largest market for all our medical devices. In the past year the expansion of both the sales and marketing teams has bought significant benefits through improved sales and self-reliance in the day to day running of PolyNovo North America LLC. Management and the team have demonstrated they can win new accounts in a CoVid lockdown and continue to grow our revenues. FY21 will see further growth in the sales organisation. Our BARDA program saw the completion of the feasibility burn trial and the filing of the pivotal trial integrated development environment (IDE). The US FDA also granted PolyNovo breakthrough technology status allowing us to have more frequent and direct interaction with the FDA teams. At this time we are awaiting final approval of the IDE. FY21 will see further marketing activities preparing for the launch of Syntrel hernia devices. Asia PolyNovo has entered Singapore and Malaysia with a direct sales team supported by the Australian marketing group. Four Hospitals in Singapore have evaluated NovoSorb BTM with several others in progress. Our first sales were achieved in July 2020. Middle East Our sales performance in the Middle East has been disappointing. This is being addressed through distribution partner review and expansion into additional countries in the region. We have also appointed a dedicated business development manager, based in England, to support our EU and Middle East/ Africa partners. South Africa Ascendis Medical (distributor) have filed several public hospital tenders with the outcomes of these expected in late Q1 of FY21. PolyNovo is also assisting Ascendis with data required by the private health insurance groups to achieve reimbursement within the private market. PolyNovo Limited 3 PolyNovo Limited 3 Annual Report 2020 Product Development Strength through innovation NovoSorb foam is used to encourage in-growth of new tissue to repair and reinforce the hernia area being repaired. The NovoSorb foam will resorb through hydrolysis. NovoSorb film is fully manufactured by PolyNovo. The NovoSorb film provides strength to the device, has low adhesion generation properties and acts as a reinforcement ‘wall’ whilst the reparative tissue integrates into the adjacent foam. PolyNovo will have two unique devices. One for intra-peritoneal repair and the other specifically for the retro-rectus muscle plane of repair. The entire NovoSorb Syntrel device will reabsorb leaving behind a strong repair without the lifelong compromises and discomfort of permanent hernia repair meshes. 4 PolyNovo Limited Annual Report 2020 Our Performance NovoSorb BTM Sales Total Revenue 103.9% 54.6% Cash on Hand -16.3% $19.06m 2020 $9.35m 2019 $22.23m 2020 $14.38m 2019 $11.65m 2020 $13.92m 2019 Net Cashflow Operating Activities 87.3% Total Employees Capital Expenditure 66.0% 36.0% -$0.43m 2020 -$3.37m 2019 78 people 2020 47 people 2019 $8.87m 2020 $6.52m 2019 Operating Loss Net Profit / (Loss) After Tax (Excl. Share Based Payments) (Excl. Share Based Payments) -59.4% -31.1% -$1.13m 2020 -$2.78m 2019 -$2.13m 2020 -$3.09m 2019 PolyNovo Limited 5 Annual Report 2020 Chairman and MD Report “Manufacturing improvements have seen a reduction in waste, improved yields and meaningful gains in gross profit whilst reducing our environmental impact.“ Manufacturing improvements have seen a reduction in waste, improved yields and meaningful gains in gross profit whilst reducing our environmental impact. We have a strong forward inventory position and sufficient capacity in our supply chain to address any potential CoVid-19 impacts or logistic challenges. We announced the results of our CE Burn trial and the US feasibility burn trial in Q3. These trials showed NovoSorb BTM to be very effective in treating full thickness burns. Professor John Greenwood also published an outstanding paper on the treatment of a patient with 95% TBSA burns. The use of NovoSorb BTM followed by his Cultured Composite Skin (grown in a NovoSorb substrate) was both remarkable and rewarding. The factory build and fit out that will enable us to commercially manufacture NovoSorb based hernia and breast devices has continued at pace with only minor delays in the building and some small delays in equipment delivery and commissioning due to suppliers impacted by CoVid-19 restrictions. FY21 promises to be another strong year of growth for PolyNovo in existing markets and the opportunity for further revenue contribution from new markets. We will continue to reinvest in our teams to ensure we can service these new customer demands and expand our research and development pipelines bringing new products closer to commercialisation. Clinical trials in FY21 Our $15m USD BARDA funded US pivotal trial will begin recruitment in circa November, post US FDA approval of the IDE. The number of patients, number of sites and end points will be announced once we have the IDE. PolyNovo is greatly appreciative of BARDA’s continued support and the extensive team of expert advisors they make available. The non-clinical toxicology and full degradation study has been concluded. The final report of this trial has been submitted to the US FDA. This trial provides PolyNovo with a wealth of data to support our marketing programs and the ultimate PMA submission post- pivotal trial conclusion. PolyNovo will begin a health economic and clinical trial for diabetic foot ulcers and venous leg ulcers to generate the data required by US health insurance groups for a reimbursement code. This process is not a regulatory requirement however it will generate supporting data for the use of NovoSorb BTM in the treatment of these wounds in an outpatient environment. This is anticipated to be a two-year program. Once reimbursement is achieved PolyNovo will establish a chronic wound sales team focused on outpatient facilities. However, NovoSorb BTM already has regulatory approval for use in all Chronic wound applications. Dear Shareholder, FY19 saw tremendous growth in our NovoSorb BTM and FY20 more than doubled that again. In the past year we have seen significant expansion of our sales and marketing resources, digital programs and new account acquisition. In addition, PolyNovo achieved sales in new markets of UK, Singapore and the DACH region. PolyNovo has strong sales in all our direct markets and the DACH region. The US makes our largest revenue contribution. In FY20 we have seen BTM used for a wide range of indications. The continued expansion in elective, trauma and reconstructive surgery brings the benefit of more predictable and consistent revenue streams. Burn usage is still a significant portion of our sales and the White Island volcano (NZ) disaster did see a rise in our December 2019 sales. The second half of the year was under a ‘CoVid-19 cloud’ however we continued to perform strongly winning new accounts, accelerating sales and ramping our production capacity. Our supply and logistics team worked well to find alternate routes to ensure air freight processes happened as a ‘matter of course’. CoVid-19 has provided many challenges but we had a strong second half and closed June 2020 with a record sales month in the US. Our digital programs with webinars, video calls, online learning systems and Customer Relationship Management software development has required our teams to be flexible and rapid in responding to the sales and marketing challenges. We are well positioned to continue these programs. We have worked diligently throughout FY20 on our Enterprise Resource Planning system and the advanced manufacturing module, supply chain metrics and our logistics systems. This has yielded significant efficiencies and process improvements that have a positive impact on our ability to service urgent customer demands and internal stakeholders’ information needs. 6 PolyNovo Limited Annual Report 2020 New Markets FY20 Since obtaining the CE Mark in December 2019, PolyNovo has been able to promote and sell NovoSorb BTM in the UK and Ireland and the DACH region. We added two sales representatives and a marketer in England and our first sales booked in July 2020. There are many NHS accounts in evaluation, and we see significant opportunity in the UK and Ireland in FY21. The DACH region is supported by our distribution partner PMI. We attended the DAV 38th Annual Meeting of the German-speaking Working Group for Burns Treatment) burns conference in January 2020 and achieved our first sale the day after. PMI have rapidly penetrated many of the DACH burn and trauma units and we now see several of their key opinion leaders hosting webinars outlining their NovoSorb BTM successes. In Singapore and Malaysia, PolyNovo has entered this market with a direct sales approach. The first evaluation cases have been completed with the surgeons very pleased with the outcomes. We achieved our first sale in July 2020 in Singapore. New markets for FY21 PolyNovo will enter Taiwan, Korea, Kuwait, UAE, Sweden, Norway, Finland, Benelux, France, Italy and Greece this financial year. Further markets may be added. We will utilise a mix of direct PolyNovo market entry and some via distributor partnerships. Hernia Our Hernia devices will be marketed under the Syntrel branding. These devices are different to NovoSorb BTM. They are constructed of a NovoSorb extruded film that is ultrasonically welded to NovoSorb foam. These Syntrel devices are fully resorbable implanted medical devices. Construction of the factory is complete. The next six months will involve commissioning equipment and validation work in preparation for lab and non- clinical testing. The US FDA 510(k) application is anticipated to be filed in July/August 2021 with the devices on sale at the end of calendar year 2021. As with all new product development, there is some inherent risk to the smooth progress of the program as we have been delayed by some European suppliers fulfilment due to CoVid-19 restrictions on their assembly and commissioning support. Breast The breast products will utilise many similar manufacturing techniques as the hernia devices featuring both film and foam expressions of the NovoSorb polymer. FY21 will see parallel development and refinement of manufacturing processes for these devices. Beta-Cell Diabetes application Beta-Cell (a non-related commercial entity) have repeated several animal studies with good outcomes. They are currently refining the surgical procedure for the injection of the islet/ beta cells before entering human trials. PolyNovo is supplying NovoSorb BTM in unique size and configuration for the program. New Product pipeline PolyNovo is in the early stages of developing products in the following fields: Sports medicine, drug elution polymer beads and anti-adhesion film for surgical sites. Summary Achieved in FY20: • Doubled our NovoSorb BTM revenues • Increased gross margin by 7.6% on product sales • Achieved our CE Mark for Europe • First sales in, Germany, Austria, Switzerland and Canada and first sales in July in England and Singapore • Significant expansion of our sales and marketing resources • Completed stage 1 of the hernia factory build • Announced both CE and Feasibility burn trial outcomes • Concluded the two year, BARDA funded, non-clinical toxicology and degradation study • Filed pivotal trial IDE with US FDA • Obtained $15m USD BARDA funding for the US pivotal burn trial. • Secured finance facilities totalling 9.3m with National Australia Bank (NAB) • Developed digital marketing programs in response to CoVid-19 restrictions and achieved sales growth and new accounts throughout the second half • Appointed two new non-executive directors to the board • Further upgraded the ERP system by enabling an advanced manufacturing module and established CRM in our direct markets • Granted 4 new patents for NovoSorb technology • Completed office refurbishment with capacity for future growth • Launched multi-region new website. David Williams Chairman Paul Brennan Managing Director PolyNovo Limited 7 Annual Report 2020 Mr David Williams B.Ec (Hons), M.Ec, FAICD Non-executive Chairman Dr Robyn Elliott BSc (Hons) Chemistry, PhD Inorganic Chemistry Non-executive Director 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 track record in business development and strategy, as well as in mergers and acquisitions and capital raising. He possesses 35 years’ experience working with and advising ASX-listed companies in the food, medical device and pharmaceutical sectors. Mr Williams is currently Chairman of ASX listed Medical Developments International Ltd (ASX: MVP), Chairman of RMA Global Limited and is Managing Director of corporate advisory firm Kidder Williams Ltd. Dr Elliott was appointed a Director of PolyNovo on 28 October 2019. Dr Elliott is currently Executive Director, Strategic Fractionation Program Delivery at CSL Behring, a global role that is responsible for business value delivery from a billion dollar capital expansion portfolio. Dr Elliott previously held Strategic Expansion and Quality Senior Director roles within CSL, was the Managing Director at IDT Australia and commenced her career at DBL Faulding. Dr Elliott has a proven track record in product development, clinical trials, regulatory affairs, audits, quality management, project management and operational strategy. Her worldwide experience in new facility delivery, production scale up, strategy, regulatory affairs and audit will be invaluable to PolyNovo as the company scales its operations globally. 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 2020 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. 8 PolyNovo Limited Annual Report 2020 Ms Christine Emmanuel BSc (Hons) Chemistry, MSc Enterprise, FIPTA, MAICD Non-executive Director Ms Emmanuel was appointed a Director of PolyNovo on 13 May 2020. Ms Emmanuel is an accomplished patent and trademark attorney, and a business development professional with more than 30 years’ local and international experience. Ms Emmanuel has a Bachelor of Science with a major in Economics (Hons: Chem) from Monash University, Certificate in Intellectual Property Law from Queen Mary College, University of London, Masters of Enterprise from Melbourne University. She is a member of the Chartered Institute of Patent Attorneys UK and has been on the Board of the Institute of Patent and Trade Mark Attorneys of Australia since 2010. She is on Springboard Enterprises Life Sciences Council, is a non-executive director on the board of Medical Developments International and is a member of the Australian Institute of Company Directors. Ms Emmanuel was most recently Executive Manager of Business Development and Commercial at the CSIRO, having founded and led the management of CSIRO’s IP portfolio for over 10 years and managed the growth of the CSIRO equity portfolio for the last 5 years. Previously she was in-house IP Counsel for Unilever in the UK and practised as a patent and trademark attorney for Wilson Gunn (UK) and Davies Collison Cave and Griffith Hack in Melbourne. Mr Leon Hoare GradDipBus, AssocDipAppSc(Ortho), GAICD Mr Max Johnston Non-executive Director Non-executive Director Mr Hoare was appointed a Director of PolyNovo on 27 January 2016. He is the Managing Director of Lohmann & Rauscher, Australia & New Zealand (ANZ), a private EU based medical device company. Previously he was Managing Director of Smith & Nephew ANZ (all divisions) until the end of 2015, one of Smith & Nephew’s largest global subsidiaries outside the USA. He served as President of Smith & Nephew’s Asia-Pacific Advanced Wound Management (AWM) businesses for 5 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. His career also included a senior role at Bristol-Myers Squibb (in surgical products), and as Vice Chair of Australia’s peak medical device body, Medical Technology Association of Australia. He is currently a Non-executive Director of Medical Developments International Ltd (ASX: MVP). 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), CannPal Limited (ASX:CP1), BARD1 Life Sciences Ltd (ASX:BD1) and was a former Non-executive Director of Enero Group Limited (ASX: EGG), Non-executive Chairman of Probiotec Ltd (ASX: PBP) and Non-executive chairman of AusCann Pty Ltd. PolyNovo Limited 9 Annual Report 2020 Directors' Report continued Dr David McQuillan BSc (Hons) Biochemistry, PhD Biochemisty Mr Philip Powell B.Comm (Hons), ACA, F.Fin, MAICD Mr Bruce Rathie B.Comm, LLB, MBA, FAIM, FAICD, FGIA Non-executive Director Non-executive Director 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. Previously he was a Fogerty Fellow at the NIH (Bethesda, MD), an NH&MRC Fellow at the University of Melbourne, and Associate Professor at Texas A&M University (Houston, TX) where he studied Tissue Engineering, Regenerative Medicine, and Biochemistry of the Extracellular Matrix. 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. He is currently a Non-executive Director for Cell Care Therapeutics Inc (a privately held stem cell company based in Monrovia, CA) and Non- executive Director and Co-Founder of ECM Technologies Inc (a privately held biotechnology company based in Houston, TX). 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), BARD1 Life Sciences Ltd (ASX: BD1) and RMA Global Ltd (ASX: RMY). Mr Rathie is an experienced Company Director with a finance and legal background. He practised as a partner in a large legal firm and acted as Senior Corporate Counsel to Bell Resources Limited in its early years. He then studied for his MBA in Geneva and embarked on his 15 year investment banking career. When Head of the Industrial Franchise Group at Salomon Smith Barney he led Salomon’s roles in the Federal Government’s privatisation of Qantas, Commonwealth Bank (CBA3) and Telstra (T1). He now has over 19 years’ experience as a full time professional Non-executive Director. He is currently Chairman of Capricorn Mutual Limited and a Non-executive Director of Capricorn Society Limited, Australian Meat Processors Limited and Netlinkz Limited (ASX: NET). In the medical device space, he is Chairman of ASX listed 4DMedical Limited (ASX: 4DX) and was previously Chairman of ASX listed Anteo Diagnostics Limited and a Director of Compumedics Limited and USCOM Limited. He has been a Non- executive Director of PolyNovo since February 2010. 10 PolyNovo Limited Annual Report 2020 Mr Ashok Srinivasan (BEng (Mechanical), MSc (Industrial Eng) Chief Operating Officer Mr Srinivasan was appointed Chief Operating Officer on 6 May 2019 and left the Group on 20 December 2019. Mr Paul Brennan MBA, BSc (Nursing) RN RM Managing Director Mr Jan Gielen CA, Bachelor Bus (Acc) Chief Financial Officer and Company Secretary Mr Brennan was appointed Chief Executive Officer (CEO) of PolyNovo Ltd on 13 February 2015. He was subsequently appointed Managing Director on 23 April 2020. 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 an 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. Mr Gielen joined PolyNovo on 12 December 2018. Mr Gielen holds a Bachelor of Business (Accounting) degree from Monash University, is a member of the Institute of Chartered Accountants and commenced his career with Pitcher Partners. Since then Mr Gielen has held senior finance roles for various businesses across a range of industries such as retail, ICT, logistics (3PL) & medical, both locally and internationally. Mr Gielen has extensive experience in CFO and Finance Director roles for fast growing PE and VC backed businesses and played an important part in expanding these businesses globally, both from a financial and operational perspective. Mr Gielen had a long involvement from inception with ICIX, a leading SaaS platform supporting global retailers and manufacturers where he served as Finance Director in Silicon Valley. Mr Gielen’s most recent role was CFO of CardioScan for 6 years, Australia’s largest cardiac reporting provider, which during his tenure expanded to HK, Singapore & North America. PolyNovo Limited 11 Annual Report 2020 Directors' Report continued Review of Operations 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 2020, PolyNovo Limited had six wholly owned subsidiaries: PolyNovo Biomaterials Pty Limited, NovoSkin Pty Ltd, NovoWound Pty Ltd, PolyNovo NZ Ltd, PolyNovo UK Ltd, and PolyNovo North America LLC (PNA LLC) and PolyNovo Singapore Private Ltd. Three subsidiary companies are Australian proprietary companies whilst PNA LLC is the trading and employment entity for our US commercial operations and PolyNovo UK Ltd will be both the employing and sales entity for UK and Ireland. PolyNovo NZ Ltd is the registered entity for the New Zealand business. Principal Activities and Operations PolyNovo’s principal activity is the development of innovative medical devices for a number of medical applications, utilising the patented bioabsorbable 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 bio absorb in a defined fashion in-situ to harmless by-products. NovoSorb has significant advantages over competitor bioabsorbable polymers in terms of its design flexibility and biocompatibility. PolyNovo can manufacture NovoSorb polymer devices with the ability to elute drugs, antimicrobials as well as be expressed in a variety of physical formats including: • Films • Foam • Coatings/sprays • Fibres • Plastic structures • Biologic carrier NovoSorb is currently covered by 56 patents all fully owned by PolyNovo. PolyNovo has no royalty or licence obligations to any other parties. A summary of PolyNovo’s lead projects is following below. 12 PolyNovo Limited Annual Report 2020 NovoSorb BTM NovoSorb Biodegradable Temporising Matrix (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 is commercially sold in Australia, USA, Canada (by exemption), New Zealand, United Kingdom, Ireland, Germany, Austria, Switzerland, Singapore, Malaysia, South Africa, India, Saudi Arabia and Israel. New markets in FY21 are expected to be Sweden, Finland, Norway, France, Benelux, Greece, Italy, Taiwan, Korea, UAE and Kuwait. Key attributes of the NovoSorb technology include an unparalleled range of mechanical properties and bio absorption times, excellent biocompatibility and safety profile and harmless degradants. Publications and videos relating to NovoSorb BTM applications can be found on our website: www.polynovo.com. NovoSorb BTM continues to feature in major clinical conference presentations around the world. Many new clinical papers have been published in peer review journals and the surgeon to surgeon referral of the benefits of NovoSorb BTM continues to accelerate. NovoSorb BTM indication for full thickness burns NovoSorb BTM is an innovative treatment for any loss of the dermis. NovoSorb BTM is indicated for full thickness/ third degree burns in markets outside of the USA. Full thickness burns treatment for US FDA regulatory ‘claim’ requires additional clinical evidence generation (trials). This pivotal trial is in progress and funded by BARDA. Successful completion of this trial will enable PolyNovo to file a PMA claim for full thickness burn use and may lead to BARDA acquiring a stockpile of NovoSorb BTM for disaster management. “NovoSorb BTM continues to feature in major clinical conference presentations around the world. Many new clinical papers have been published in peer review journals and the surgeon to surgeon referral of the benefits of NovoSorb BTM continues to accelerate.“ USA Burns Trial – BARDA Our Biomedical Advanced Research and Development Authority (BARDA) contract, funded by the U.S. Department of Health and Human Services (Office of the Assistant Secretary for Preparedness and Response) commenced on 28 September 2015. This feasibility trial concluded in March 2020 and the Company has announced the excellent result of this trial on 21 April 2020. PolyNovo completed the swine toxicology study mapping the full degradation pathway of the NovoSorb BTM during FY20. The data generated in this study will support our PMA application and add to the body of evidence demonstrating the mode of action of NovoSorb BTM. The pivotal trial will be funded by BARDA to US$15 million. PolyNovo will also contribute to the trial through provision of product, staff resources and infrastructure support. We are awaiting final approval of the investigational device exemption (IDE) by the US FDA and this will determine the final number of patients, number of sites and end points. These criteria define the timeline and we will announce the details of this as soon as we receive this approval. Successful completion of the pivotal trial will lead to a PMA application with the US FDA and the use of our scaffold in full thickness acute burns. The contract is a cost-plus monthly reimbursement basis. The finalised list of trial hospitals will be published via an ASX announcement later in the year. Dr Marcus Wagstaff is acting as PolyNovo Medical Director overseeing the clinical conduct of PolyNovo trials and providing valuable clinical support for our global medical teams. Regulatory approvals for NovoSorb BTM in FY20 CE Mark Certification PolyNovo UK achieved first sales in July 2020 to 5 NHS’s. Several others are in evaluation with strong customer interest and advocacy. Singapore and Malaysia PolyNovo has achieved regulatory approvals in Singapore and Malaysia during FY20. A direct sales force has also been appointed in Singapore and completed several surgeries utilising NovoSorb BTM. Hernia Repair PolyNovo completed the Stage 1 build of the factory and this will allow us to commercially manufacture Syntrel hernia devices. Stage 2 and 3 relate to further capacity increases and manufacturing redundancy capacity. These will be stages undertaken in FY21/22. Current timelines anticipate filing a US FDA 510(k) application in June/July 2021. This will allow an on-sale target of late 2021. There remains some risk in the timeline as we work through the scale up from R&D to commercial manufacturing transfer. PolyNovo Limited 13 Annual Report 2020 Directors' Report continued “PolyNovo has invested further into the upgrade of our Enterprise Resource Planning (ERP) system by enabling an advance manufacturing module and a Client Relationship Management (CRM) tool to actively manage the business and customer needs across multiple countries.“ Strategic Overview and Likely Developments PolyNovo’s focus over the next twelve months will be to: • Continue to accelerate revenue from NovoSorb BTM in the existing markets and expand our geographic reach as outlined • Conduct validation and verification processes for the hernia product leading to the filing of US FDA 510(K) • Commence recruitment for the US pivotal burn trial by end of Calendar Year 20 • Advance our sports medicine product • We look forwards making commercial grade prototypes of breast products with our new manufacturing machines and facility coming on stream in FY21. • Further develop NovoSorb drug eluting depot • Support the BetaCell expansion of NovoSorb BTM use as a dermal deposit for Type 1 diabetes • Begin recruitment for the US DFU/VLU reimbursement trial • Establish our first GPO/IDN agreements in the US • Continue the partnership with Skin TE on their Cultured Skin Composite utilising NovoSorb foam substrate within a bioreactor The expenditure program will be updated at the half year results as we have tender bidding in process for this program. Currently we rent space and facilities from Universal Biosensors to house our film production. This will come back to the Port Melbourne facility once Stage 2 is complete. PolyNovo has invested further into the upgrade of our Enterprise Resource Planning (ERP) system by enabling an advance manufacturing module and a Client Relationship Management (CRM) tool to actively manage the business and customer needs across multiple countries. The ERP system is also integrated into the CRM program to provide live sales against target and order dispatch reports to the sales team. This complete integration is bringing significant benefit to our teams and the efficiencies of the business in establishing new accounts and servicing customer needs. Paradigm eQMS system has also been installed and this program is undergoing validation processes. Once validation is complete this will greatly improve the electronic handling of the quality related activities. Significant Changes in the State of Affairs PolyNovo secured a $9.3m debt facility during the period, secured over 1/320 Lorimer St, Port Melbourne, to fund capital expenditure. Other than the above and except as otherwise set out in this report, the Directors are unaware of any significant changes in the principal activities of PolyNovo during the year ended 30 June 2020. Breast Device Developments PolyNovo has been developing breast products in partnership with Establishment Labs (EL). The focus in the past year has been on the breast ‘pocket’ device. This device will aid in the placement, orientation and reduce the risk of capsular contraction. PolyNovo sees good opportunities in both reconstructive and aesthetic market segments for these products. NovoSorb Dermal Beta Cell Implant PolyNovo is collaborating with BetaCell Technologies Pty Ltd, on a research project exploring the potential of integrated NovoSorb BTM to host pancreatic islets in the skin. Betacell have completed several swine studies with good results. They are currently refining the surgical procedure before determining the timeline to human trials. PolyNovo will manufacture unique shapes and sizes of NovoSorb BTM for the application. BetaCell, have funding supported by the Juvenile Diabetes Research Foundation (JDRF, US). BetaCell will manage the trial program. NovoSorb Drug Elution Depot (pellet) PolyNovo produced polymers with up to 45% of the weight being a bound drug. Our initial work is focused on low temperature extrusion for optimal drug stabilisation. Further development will continue in the coming year with the aim to develop a comprehensive technical dossier in preparation of clinical trials. PolyNovo is likely to license this technology to a pharmaceutical partner once we have established robust evidence to support the mode of action and stability of drug elution rates. Capital investment PolyNovo has completed the majority of our capital program with completion of Stage 1 being the construction of the hernia factory and purchase of production equipment. There are additional pieces of equipment to acquire in Q1 of FY21. Stage 2 of the hernia factory is the fitout. 14 PolyNovo Limited Annual Report 2020 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. The Group continues to monitor the impact of the pandemic (CoVid-19) and the response from governments in controlling outbreaks. The Group continues to take steps to mitigate an impact of the pandemic by increasing stock levels locally in all markets to avoid any potential supply chain impediments and focusing on digital sales and marketing campaigns. Announcements released by the Company after the balance date include: • 10 July 2020 – Pivotal Trial Protocol Update • 10 July 2020 – Trading Update • 14 July 2020 – BARDA Funding for Pivotal Trial Financial Results PolyNovo Limited reported revenue for the year ended 30 June 2020 of $22,228,501 an increase of $7,850,576 from the prior year’s $14,377,925. The net loss after tax (NLAT) of $4,193,738 for FY20 was an increase of $1,003,845 from the prior year’s $3,189,893. The NLAT included share-based payments expense of $2,061,772 (2019: $97,041). A number of factors contributed to the result as follows: • Revenue from the sale of commercial products for FY20 increased by 104% to $19,064,982 from the prior year’s $9,348,226 • Revenue from BARDA for FY20 decreased by 23% to $3,091,140 from the prior year’s $4,000,994. This decrease is reflective of the lower activity in the transition from feasibility to pivotal trial. Revenue is expected to increase in FY21 once the Pivotal trial commences following US FDA protocol approval. • Employee related expenses (increased by 76% to $15,073,365. This increase is due to share-based payments expense provided to key management personnel and headcount increases to drive growth primarily within marketing, sales, production, quality and human resources. • Included in revenue is interest income for FY20 of $35,311 which is $298,792 lower than prior year’s $334,103 due to a decrease in cash on hand. • Depreciation and amortisation increased by $527,575 attributable to 12 months depreciation of the acquired 320 Lorimer Street building and leased assets recognised under AASB 16 following transition as at 1 July 2019. • Corporate, administrative and overhead expenses increased by 58% to $6,271,861 reflecting the increased growth and activity in the business. R&D Tax Incentives During the 2020 financial year, the Company received a 43.5% refundable tax offset of $694,182 (cash) in relation to the FY19 R&D tax incentive scheme. PolyNovo will submit an application in relation to FY20. However, as the Company has exceeded the $20 million R&D cash tax threshold being the maximum revenue allowable for the claiming of a cash refund, a deduction is recognised against taxable income. PolyNovo Limited 15 Annual Report 2020 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. Directors' Report continued During the 2020 financial year, the Company has recognised a FY19 R&D tax incentive income of $36,956 (cash) which relates to a successful overseas application granted in the year. 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. Indemnification of Auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young Australia during or since the financial year. 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. Closing share price 30 June 2016 30 June 2017 30 June 2018 30 June 2019 30 June 2020 $0.28 $0.21 $0.54 $1.54 $2.54 A high of $3.15 was reached on 2 February 2020. Loss Per Share In Australian dollars $ Basic loss per share – cents Cents (0.63) Diluted loss per share – cents (0.63) As the Group made a loss for the year ended 30 June 2020, 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 dividend 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 2020, 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 16 PolyNovo Limited Annual Report 2020 Board and Committee Meetings Details of the number of meetings of the Board of Directors and Board committees, and Directors’ attendance at those meetings, during the year under review are set out in the table below. Full Board Audit and Risk Committee Remuneration Committee Meetings attended Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended Meetings eligible to attend 12 2 1 12 7 2 12 12 12 12 12 12 12 7 2 12 12 12 12 12 12 - - - - 2 - 2 2 - - - - - 2 - 2 2 - 1 - - 1 - - - - - 1 - - 1 - - - - - Directors Total number of meetings held Role Mr David Williams Non-Executive Director Dr Robyn Elliott Non-Executive Director Ms Christine Emmanuel Non-Executive Director Mr Leon Hoare** Non-Executive Director Mr Max Johnston Non-Executive Director Dr David McQuillan Non-Executive Director Mr Philip Powell* Non-Executive Director Mr Bruce Rathie Mr Paul Brennan Non-Executive Director Executive Director * Mr Philip Powell is Chair of the Audit Committee. ** Mr Leon Hoare is Chair of the Remuneration Committee. Directors’ Shareholdings and Declared Interests At 30 June 2020, the Directors of PolyNovo collectively hold 35,795,334 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 Dr Robyn Elliott Ms Christine Emmanuel Mr Leon Hoare Mr Max Johnston Dr David McQuillan Mr Philip Powell Mr Bruce Rathie Mr Paul Brennan Total Shares held directly Shares held indirectly - - - - - 608,313 - - 5,315,872 5,924,185 18,000,000 - - 1,280,220 1,533,612 - 1,266,667 3,605,555 4,185,095 29,871,149 As at 30 June 2020 and as at the date of this report, no Director has an interest in any contract or proposed contract with PolyNovo other than disclosed below or in the Groups 2020 Annual Report. Further details of the equity interests of Directors can be found in the Remuneration Report. PolyNovo Limited 17 Annual Report 2020 Directors' Report continued Auditor Ernst & Young (EY) continues in office in accordance with section 327b(2) of the Corporations Act 2001. $ Tax compliance services 172,537 Corporate secretarial services 36,156 Total 208,693 Non-audit Services During the year ended 30 June 2020, the amount received, or due and receivable for non-audit services provided by PolyNovo’s auditor Ernst & Young were as shown below. The directors are satisfied that the provision of non-audit services 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 Ernst & Young’s independence as auditor. The declaration is set out on page 30. 18 PolyNovo Limited Annual Report 2020 ESG Statement and Corporate Governance PolyNovo brings disruptive, innovative and regenerative medical device products to market that improve the clinical, functional and cosmetic outcomes for our patients. Our products offer significant health economic benefits to patients, surgeons and health systems. To date, no NovoSorb BTM treated area of our patients have had to undergo scar revision surgery. This reduces the social, economic, physiological and emotional demands of our patients allowing them to recover to their best possible lives. It is also encumbered upon us to realise our social and ecological responsibilities. At this early stage of our commercial development we cannot afford to invest in all endeavours however we strive to improve on all aspects of our business year on year. Our People PolyNovo provides a safe, functional and aesthetically pleasing environment for all of our staff. Our offices in Port Melbourne and San Diego have considered ergonomics, lighting, airflow and provision of creative spaces and well-equipped meeting rooms. We utilise LED lighting to ensure we minimise energy use but also provide excellent illumination for all work functions. All staff have an appraisal and development program to ensure we continue to develop our skill base, improve the productivity of the business and give our staff the opportunity of personal growth. Training is achieved through conference attendance, specific targeted educational programs and mentorship from colleagues and managers. Our Environment PolyNovo runs a cleanroom production facility for the manufacture of implantable medical devices. These facilities consume significant energy resources. PolyNovo offsets this by sourcing power through our provider, Red Energy, who are committed to renewable energy sourcing from solar, wind and Snowy hydro. Other measures to reduce energy and waste are: • LED lighting on a mix of timers and central shutdown switches • Ability to shut down air conditioning when not required by encapsulating work in progress device elements within sealed foiled storage pouches • A dedicated waste reduction program focused on high yield and full consumption of input ingredients • Recycling of paper and cardboard waste • Redundant chemical disposal via ToxFree, an accredited environmental waste recycling/disposal group • Sourcing raw materials in the smallest minimum order quality to meet production forecast, thereby minimising waste of expired input materials. This can cost more per kilo in the initial purchase however we save in waste, disposal and environmental impact • Using airfreight finished goods to global markets as our product is light weight and carbon output from shipping would be more significant • Minimising international travel to essential travel that drives significant business opportunities. This also reduces the impact on staff wellbeing. Video conferencing maintains interaction and reduces travel. • Utilising e-storage of files wherever possible and use electronic signature when legally possible to reduce printing and storage • Have introduced a sophisticated ERP, CRM and eQMS system to reduce paper use and waste • PolyNovo uses little water in the production of our products • Have a no smoking policy at our offices and external receptacles for cigarette butts (if people do smoke) to reduce these plastic items contaminating our waterways Our Community PolyNovo supports various social programs through sponsorships, advertising placement, staff and volunteer time. We are members of industry associations focused on developing the Biotech and medical device community and the talent pool this industry sector nurtures. We support medical professionals in their associations via sponsorships and educational programs. We are particularly pleased to support Angel Faces www.angelfaces.com. This group supports young women who have suffered significant burns to build social confidence, social networks and rehabilitate through peer-to-peer support. Our staff also attend and support local burn camps for children, actively dedicating their time in the support the children and their families. PolyNovo also provides free NovoSorb BTM for charity and reconstructive surgery cases around the world, enabling access to the best clinical outcomes. Modern Slavery PolyNovo only sources raw materials from reputable accredited suppliers. We regularly review our suppliers to ascertain they maintain full and current accreditation to international quality standards. 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 2020. 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 www.polynovo.com/company PolyNovo Limited 19 Annual Report 2020 Remuneration Report – Audited 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 2020. This Remuneration Report is audited. Variable pay arrangements to key management personnel are subject to the governance and approval of the Remuneration Committee and no variable pay has been made this period. This Remuneration Report forms part of the Directors’ Report and includes details of the Group’s remuneration strategy and arrangements for the 2020 financial year. Mr Paul Brennan received a discretionary bonus of $75,000 inclusive of superannuation relating to the financial year 2019. 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. The following are Key Management Personnel during the period unless otherwise stated. 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) • Dr Robyn Elliott – Non-executive Director (appointed 28 October 2019) • Ms Christine Emmanuel – Non-executive Director (appointed 13 May 2020) • Mr Leon Hoare – Non-executive Director (appointed 27 January 2016) • Mr Max Johnston – Non-executive Director (appointed 13 May 2014) • Dr David McQuillan – Non-executive Director (appointed 6 August 2012) • Mr Philip Powell – Non-executive Director (appointed 13 May 2014) • Mr Bruce Rathie – Non-executive Director (appointed 18 February 2010) Managing Director and Senior Managers • Mr Paul Brennan – Managing Director (appointed 13 February 2015) • Mr Jan Gielen – Chief Financial Officer/Company Secretary (appointed 12 December 2018) • Mr Ashok Srinivasan – Chief Operating Officer (appointed 6 May 2019, resigned 20 December 2019) 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 has predominantly been driven by research and development activities. 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 and with more of the Group’s activities slanted towards the commercialisation stage, additional milestones in relation to the achievement of product sales and production targets will be added to the traditional clinical trials and licensing deals milestones. 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 the Managing Director and Senior Managers. 20 PolyNovo Limited Annual Report 2020 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. 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 $600,000. Total Non-executive Directors’ fees (including superannuation but excluding share-based payments and consulting fees) for the year ended 30 June 2020 were $466,174. 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 Remuneration Committee 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 three 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 PolyNovo Employee Share Option Plan (the Plan) with share price thresholds to be achieved. 3. Short-term incentives, through a bonus scheme dependent upon performance against objectives and targets which are linked to PolyNovo’s overall corporate strategy. Fixed Annual Compensation Senior Managers are offered a market competitive base salary, which reflects their competencies, 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. Long term incentive plans are measured over 3 years. Short Term Incentives PolyNovo’s short term incentive policy for Senior Managers encourages high-quality performance in achieving key performance indicators during the current financial year. Bonus schemes are widely recognised as an effective way of providing performance incentives. Short term incentives are based on the Company exceeding budgeted total group revenue by at least ten percent (10%). The maximum incentive is twenty percent (20%) of salary. Mr Paul Brennan received a bonus of$75,000 inclusive of superannuation during the financial year 2020 in relation to services performed in the financial year 2019. Service Contracts Managing Director (MD) Mr Paul Brennan was appointed CEO of PolyNovo Limited on 23 February 2015. He was subsequently appointed MD on 23 April 2020. Effective 1 October 2019, his employment contract was updated to align with executive positions in other similar companies to improve retention and to reward performance in line with Company strategy. PolyNovo Limited 21 Annual Report 2020 Remuneration Report – Audited continued The key terms of his contract are as follows: • a salary of $388,127 per annum; • superannuation of 9.50%; • a short term annual performance bonus of up to 20% of salary inclusive of superannuation, dependent upon the Company’s performance against key targets; • a 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 ‘MD Performance Incentives’ section of the Remuneration Report and in Tables A, B, C and D below; • no fixed employment term; and • the Group may terminate the employment contract by providing three months’ notice or payment in lieu of notice. In the event of resignation, a notice period of three months is required. Company Secretary and Chief Financial Officer (CFO) Mr Jan Gielen was appointed CFO and Company Secretary on 12 December 2018. Effective 1 October 2019, his employment contract was updated to align with executive positions in other similar companies to improve retention and to reward performance in line with Company strategy. The terms of his contract are as follows: • a salary of $200,000 per annum; • superannuation of 9.50%; • a 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 ‘CFO Performance Incentives’ section of the Remuneration Report and in Tables A, B, C and D below; • no fixed employment term; and • the Group may terminate the employment contract by providing three months’ notice or payment in lieu of notice. In the event of resignation, a notice period of three months is required. Chief Operating Officer (COO) On 20 December 2019, Mr Ashok Srinivasan resigned as COO. MD Performance Incentives The performance evaluation of the MD is conducted by the Board. On 1 October 2019, PolyNovo granted shares up to the value of $10 million dollars in three equal tranches to the Managing Director, Mr Paul Brennan. Details of the three equal tranches are set out below. The vesting hurdles for the shares is aligned to PolyNovo’s market capitalisation reaching and maintaining at all times, $2 billion dollars for a minimum period of three consecutive months in the relevant financial year. This is equivalent to PolyNovo’s share price trading at all times above $3.03 for a continuous three-month period. 22 PolyNovo Limited Annual Report 2020 Once vested, the shares can be allotted in three tranches as follows: • Tranche 1: 1,100,110 shares, vest over 2 years; • Tranche 2: 1,100,110 shares, vest over 2 years; and • Tranche 3: 1,100,110 shares, vest over 3 years. Any unvested shares will be cancelled at expiry on 30 June 2023 or on the date of termination or cessation of employment. Once vested, fifty percent (50%) of the shares will be in escrow for twelve months and the remaining fifty percent (50%) for twenty-four months. The fair value of the shares relating to the incentive scheme was $4,891,089. The expense relating to the incentive scheme shares during the financial year was $1,633,713. CFO Performance Incentives The performance evaluation of the Chief Financial Officer is conducted by the Board. On 6 March 2019, PolyNovo issued an options package comprising three tranches totalling 1,000,000 options to the CFO, Mr Jan Gielen. Details of the three tranches are set out below. The vesting hurdle for the options is linked to Mr Gielen’s length of employment and the PolyNovo volume weighted average market price. The vesting hurdles are as follows: • First hurdle – 12 months of employment with the Company; and • Second hurdle – a share price of 90 cents must be sustained over a period of at least 90 consecutive calendar days. Once vested, the options can be exercised in three tranches as follows: • Tranche 1: 300,000 options – not to be exercised before 31 December 2020 and not later than 30 June 2021; • Tranche 2: 300,000 options – not to be exercised before 31 December 2021 and not later than 30 June 2022; and • Tranche 3: 400,000 options – not to be exercised before 31 December 2022 and not later than 30 June 2023. The options whether they have vested or not will be cancelled on the date of termination or cessation of employment. The exercise price is $0.60 per option tranche. All shares issued under the incentive scheme are escrowed for a period of 12 months from date of issue. Sixty percent (60%) of the shares issued on the exercise of options are restricted shares subject to rule 9 of the Employee Option Plan for a period of 12 months from the date of issue. The fair value of the options relating to the incentive scheme shares was $321,700. The expense relating to the incentive scheme shares during the financial year was $264,787 (2019: $56,913). The fair value of the option expense was fully incurred as at 30 June 2020. PolyNovo Limited 23 Annual Report 2020 Remuneration Report – Audited continued Remuneration of Key Management Personnel Details of the remuneration for key management personnel for the years ended 30 June 2020 and 30 June 2019 are set out in Table A below. Short term Post employ- ment Leave allow- ances1 Cash salary & fees $ Cash bonus $ Consu- ling fees2 $ Superan- nuation $ Annual and long service $ Termin- ation benefits3 $ Share- based payments Options and perfor- mance rights $ % perfor- mance based Total $ Table A Non-Executive Directors Mr David Williams 2020 84,133 (Chairman/Non-executive Director) Dr Robyn Elliott (Non-executive Director) Ms Christine Emmanuel (Non-executive Director) Mr Leon Hoare (Non-executive Director) Mr Max Johnston (Non-executive Director) Dr David McQuillan (Non-executive Director) Mr Philip Powell (Non-executive Director) Mr Bruce Rathie (Non-executive Director) 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 81,850 42,651 – 8,523 – 59,030 51,850 59,030 51,850 59,463 52,500 59,030 51,850 59,030 51,850 Subtotal compensation for Non-Executive Directors 2020 430,889 2019 341,750 Key management personnel – – – – – – – – – – – – – – – – – – – – – – – – – – – – 24,490 69,912 – – – – 7,993 7,776 4,052 – 810 – 5,608 4,926 5,608 4,926 – – 5,608 4,926 5,608 4,926 24,490 35,285 69,912 27,480 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 92,126 89,626 46,703 – 9,333 – 64,637 56,776 64,637 56,776 83,953 122,412 64,637 56,776 64,637 56,776 – 490,663 – 439,142 2020 359,589 68,493 40,668 31,524 – 1,633,713 2,133,987 Mr Paul Brennan (MD) Mr Jan Gielen Mr Ashok Srinivasan (COO) Mr Greg Lewis (CFO/Company Secretary) Subtotal compensation for other key management personnel Total compensation for all key management personnel – – – – – – – – – 2019 264,840 2020 195,662 2020 2019 2020 2019 69,231 26,862 – 83,144 – – – – – – – 25,160 25,871 18,588 13,135 9,655 6,577 2,552 – 8,275 2,272 – 7,259 6,334 – – – – 315,871 264,787 492,172 56,913 176,470 – – – 79,549 31,686 – (2,827) 93,910 – – – – 3,741 2020 624,482 68,493 65,833 44,659 3,741 1,898,500 2,705,708 2019 476,473 – 44,626 42,752 – 54,086 617,937 2020 1,055,370 68,493 24,490 101,118 44,659 3,741 1,898,500 3,196,371 2019 818,223 – 69,912 72,106 42,752 54,086 1,057,079 (CFO/Company Secretary) 2019 101,627 – – – – – – – – – – – – – – – – – – 80% – 54% 32% – – – 3% 73% 9% 62% 5% 1. Leave allowances: annual and long service: Reflects the employees’ entitlement for the 2020 financial year. 2. Mr David McQuillan: consulting fees: Services provided in relation to product development for the hernia project. The consulting fees are excluded from the aggregate Directors’ fee pool limit. 3. Mr Srinivasan: Annual leave paid on on termination of employment. 24 PolyNovo Limited Annual Report 2020 Options Granted as Part of Remuneration During the year ended 30 June 2020, 3,300,330 share options (2019: 1,000,000) were granted, no options were cancelled (2019: nil), and no options were forfeited (2019: 1,000,000). 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 B are set out below. Table B 2020 financial year Mr Paul Brennan Grant date Grant number 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 Value of shares received upon exercise of options $ Fair value of options included in remun- eration during the year $ % compen- sation consisting of options during the year Value of options yet to be exercised $ Shares Shares Shares Sub-total Mr Jan Gielen Options Options Options Sub-total Total 1-Oct-19 1,100,110 $0.51400 1,696,369 1-Oct-19 1,100,110 $0.49300 1,627,063 1-Oct-19 1,100,110 $0.47500 1,567,657 3,300,330 – 4,891,089 6-Mar-19 300,000 $0.23600 6-Mar-19 300,000 $0.31100 6-Mar-19 400,000 $0.39400 1,000,000 4,300,330 – – 4,891,089 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,696,369 634,396 – 1,627,063 608,477 – 1,567,657 390,840 – 4,891,089 1,633,713 – – – – 70,800 51,920 93,300 76,565 157,600 136,302 321,700 264,787 – 5,212,789 1,898,500 30% 29% 18% 11% 16% 28% Options and shares granted in year ended 30 June 2020 The fair value of share options granted during the year, as included in Table B, was determined using a Monte Carlo simulation based pricing model due to it analysing options where the exercise condition is dependent on outcomes associated with factors other than or in addition to, the share price. The fair value of the options included in remuneration during the year was $1,633,713. This represents 80% allocation to the year ended 30 June 2020 as the options have not yet vested. Options granted in year ended 30 June 2019 The fair value of options granted during the year, as included in Table B, was determined using a Monte Carlo simulation based pricing model due to it analysing options where the exercise condition is dependent on outcomes associated with factors other than or in addition to, the share price. The fair value of options included in remuneration during the year was $56,913. This represents 32% allocation to the year ended 30 June 2019 as the options have not yet vested. Options expiry dates Participant Mr Paul Brennan • Tranche 1 • Tranche 2 • Tranche 3 Date 30 June 2023 30 June 2023 30 June 2023 Other terms of the share options include: • Vesting hurdles – the Company market capitalisation reaching and maintaining $2 billion for a minimum period of three consecutive months in the relevant financial year. This is equivalent to the Company’s share price trading at all times above $3.03 for a continuous three-month period. • Allocation – if market capitalisation is not achieved in the relevant financial year, the share options are available in the following year. • Escrow period – once vested, fifty percent (50%) of the share options will be in escrow for a period of 12 months and the remaining fifty percent (50%) will be in escrow for a period of 24 months. PolyNovo Limited 25 Annual Report 2020 Remuneration Report – Audited continued Participant Mr Jan Gielen Tranche 1 Tranche 2 Tranche 3 Date 30 June 2021 30 June 2022 30 June 2023 Other terms of the share options include: • Vesting hurdles – 12 months of employment with the Company and a share price of 90 cents must be sustained over a period of at least 90 consecutive calendar days. • Exercise price – $0.60 per option tranche. • Escrow period – 12 months from date of issue with sixty percent (60%) of the shares issued on the exercise of options are restricted shares subject to rule 9 of the Employee Option Plan for a period of 12 months from the date of issue. 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 20193 Granted as compen- sation On exercise of options Net change other1,2 Balance at 30 June 2020 Balance at end of year – directly held Balance at end of year – indirectly held Table C Directors Mr David Williams 16,600,000 Dr Robyn Elliott Ms Christine Emmanuel Mr Leon Hoare Mr Max Johnston Dr David McQuillan Mr Philip Powell Mr Bruce Rathie – – 1,280,220 1,511,112 1,000,000 1,266,667 3,555,555 Other key management personnel Mr Paul Brennan 10,100,967 – – – – – – – – – – – – – – – – – – 1,400,000 18,000,000 – 18,000,000 – – – – – 1,280,000 22,500 1,533,612 – – – – – – 1,280,000 1,533,112 (391,687) 608,313 608,313 – – 1,266,667 50,000 3,605,555 – – 1,266,667 3,605,555 (600,000) 9,500,967 5,315,872 4,185,095 1. ‘Net Change Other’ reflects shares privately acquired or disposed during the period. 2. Disposal of shares by Mr Paul Brennan occurred during the period before he was appointed Managing Director. 3. Opening balance has been revised to exclude shares held by closely related parties where there is no control or significant influence by the KMP. 26 PolyNovo Limited Annual Report 2020 Options and performance rights of key management personnel The option and share holdings of key management personnel for the year ended 30 June 2020 are set out in the following table. Balance at 1 July 2019 Granted as compen- sation Options exercised Net change other Balance at 30 June 2020 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 Table D Directors Mr Paul Brennan – 3,300,330 Other key management personnel Mr Jan Gielen 1,000,000 – Total 1,000,000 3,300,330 – – – – 3,300,330 – – 3,300,330 – – 1,000,000 1,000,000 – 4,300,330 1,000,000 1,000,000 4,300,330 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 David McQuillan and Associates LLC, an entity associated with Dr David McQuillan was contracted to provide hernia consulting services, this contract ended in October 2019. No other transactions between the Group and any of the Directors of PolyNovo or any other key management personnel have been identified. This Directors’ Report, incorporating the Corporate Governance Statement and Remuneration Report, has been signed in accordance with a Resolution of the Directors made on 26 August 2020. Mr David Williams Chairman 26 August 2020 PolyNovo Limited 27 Annual Report 2020 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 Audit or’s independence declarat ion t o t he Direct ors of PolyNovo Limit ed As lead auditor for the audit of the financial repor t of PolyNovo Limited for the financial year ended 30 June 2020, 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 26 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 28 PolyNovo Limited Annual Report 2020 Consolidated Statement of Comprehensive Income For the year ended 30 June 2020 Revenue from contracts with customers Other income Research and development tax benefit Interest income Other income Total revenue Changes in inventories of finished goods and work in progress Operating Leases Employee-related expenses Research and development expenses Depreciation and amortisation expense Corporate, administrative and overhead expenses Lease liability interest expenses Finance costs Net loss for the period before tax Income tax expense Net loss for the period after tax Other comprehensive income Loss on translation of foreign operation Total comprehensive income/(loss) for the period Loss for the period is attributable to: Owners of the parent Total comprehensive loss for the period attributable to: Owners of the parent Loss attributable to members of the parent Loss per share Basic loss per share – cents Diluted loss per share – cents Notes 30 June 2020 $ 30 June 20191 $ 4(a) 22,156,123 13,349,220 4(f) 4(b) 36,956 35,311 111 694,602 334,103 – 22,228,501 14,377,925 (1,703,521) (1,294,146) – (193,597) 4(c) (15,073,365) (8,549,240) 4(d) 4(e) 16 17 (2,352,698) (3,248,426) (837,175) (309,600) (6,271,861) (3,972,809) (98,977) (18,000) – – (4,127,096) (3,189,893) 5 (66,642) – (4,193,738) (3,189,893) 18(b) (152,132) (216,639) (4,345,870) (3,406,532) (4,193,738) (4,193,738) (3,189,893) (3,189,893) (4,345,870) (4,345,870) (3,406,532) (3,406,532) 7 7 (0.63) cents (0.48) cents (0.63) cents (0.48) cents 1. The Group has initially applied AASB 16 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying AASB 16 is recognised in retained earnings (refer to note 16). The accompanying notes form part of these financial statements. PolyNovo Limited 29 Annual Report 2020 Consolidated Statement of Financial Position As at 30 June 2020 Current assets Cash and cash equivalents Inventories Receivables and contract assets Prepayments Other financial assets Total current assets Non-current assets Property, plant and equipment Intangible assets Right of use asset Other assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liability Interest-bearing loans and borrowings Income tax payable Deferred tax liability Provisions Total current liabilities Non-current liabilities Provisions Lease liability Interest-bearing loans and borrowings Deferred rent liability Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Parent interests Total equity Notes 30 June 2020 $ 30 June 20191 $ 8 9 10 11 24 12 13 16 11 14 16 17 5 5 15(a) 15(b) 16 17 11,647,701 13,920,695 1,217,042 3,921,519 2,441,740 50,000 1,215,450 4,405,047 310,321 50,000 19,278,002 19,901,513 13,890,380 1,900,168 2,646,521 141,870 6,008,219 2,148,016 – 170,767 18,578,939 8,327,002 37,856,941 28,228,515 3,171,995 323,876 5,304,372 54,729 10,837 608,722 1,751,829 – – – – 312,172 9,474,531 2,064,001 166,834 2,420,058 1,983,494 – 4,570,386 47,738 – – 17,297 65,035 14,044,917 2,129,036 23,812,024 26,099,479 18(a) 18(b) 18(c) 139,070,502 139,070,502 (4,602,269) (6,511,909) (110,656,209) (106,459,114) 23,812,024 23,812,024 26,099,479 26,099,479 1. The Group has initially applied AASB 16 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying AASB 16 is recognised in retained earnings (refer to note 16). The accompanying notes form part of these financial statements. 30 PolyNovo Limited Annual Report 2020 Consolidated Statement of Changes in Equity For the year ended 30 June 2020 Contributed Equity $ Other Reserves $ Acquisition of Non- Controlling Interest Reserves $ Retained Earnings $ Owners of the Parent $ Total $ As at 30 June 2018 138,120,502 2,901,645 (9,293,956) (103,269,221) 28,458,970 28,458,970 Loss for the period – Issue of shares on exercise of options 950,000 – – Translation of foreign operations Share based payments – – (216,639) 97,041 – – – – (3,189,893) (3,189,893) (3,189,893) – – – 950,000 950,000 (216,639) (216,639) 97,041 97,041 As at 30 June 2019 139,070,502 2,782,047 (9,293,956) (106,459,114) 26,099,479 26,099,479 Adjustment related to new accounting standards Adjusted balance as at 1 July 20191 Loss for the period Translation of foreign operations Share based payments – – – (3,357) (3,357) (3,357) 139,070,502 2,782,047 (9,293,956) (106,462,471) 26,096,122 26,096,122 – – – – (152,132) 2,061,772 – – – (4,193,738) (4,193,738) (4,193,738) – – (152,132) (152,132) 2,061,772 2,061,772 As at 30 June 2020 139,070,502 4,691,687 (9,293,956) (110,656,209) 23,812,024 23,812,024 1 The Group has initially applied AASB 16 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying AASB 16 is recognised in retained earnings (refer to note 16). The accompanying notes form part of these financial statements. PolyNovo Limited 31 Annual Report 2020 Consolidated Cash Flow Statement For the year ended 30 June 2020 Cash flows from operating activities Receipts from customers Receipts from BARDA reimbursements Receipts of research and development income tax credit Receipts from royalty revenue Payment of interest on lease liabilities Payments to suppliers and employees Net cash outflows from operating activities Cash flows from investing activities Interest received Payments for purchase of property, plant and equipment Transferred to cash and cash equivalents Net cash outflows used in investing activities Cash flows from financing activities Net cash flows from financing activities Payment of principal on lease liabilities Proceeds from debt loan facility Proceeds from the exercise of options Cash flows from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of period Notes 30 June 2020 $ 30 June 20191 $ 18,419,968 3,385,242 694,182 245 (98,977) 7,768,050 4,323,872 794,256 245 – (22,827,983) (16,256,156) 8 (427,323) (3,369,733) 24,759 581,566 (8,869,219) (6,520,204) – 19,000,000 (8,844,460) 13,061,362 (260,584) 7,287,866 – 7,027,282 – – 950,000 950,000 (2,244,501) 10,641,629 13,920,695 3,147,081 Effects of exchange rate changes on cash and cash equivalent Cash and cash equivalents at end of period (28,493) 131,985 8 11,647,701 13,920,695 1. The Group has initially applied AASB 16 using the modified retrospective approach. Under this approach, comparative information is not restated} and the cumulative effect of initially applying AASB 16 is recognised in retained earnings (refer to note 16). The accompanying notes form part of these financial statements. 32 PolyNovo Limited Annual Report 2020 Notes to the Financial Statements For the year ended 30 June 2020 1. Corporate Information The Financial Report of PolyNovo Limited (the Company) and its controlled entities (the Group) for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the Directors on 26 August 2020. 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 the medical device and healthcare industry and has operations in Australia, New Zealand, United Kingdom and the USA. 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. The Financial Report is presented in Australian dollars. The financial statements have been prepared in compliance with Legislative Instrument 2016/191 ‘ASIC Corporations (Rounding in Financial/Directors’ Reports)’ and rounded to the nearest dollar. 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 effects of unsuccessful research, development and commercialisation of the Group’s projects. The Group considered the impact of COVID-19 pandemic in making their going concern assessment assuming how the business, research and development activities might be affected as well as the Group's ability to meet its debts and obligations during such environment taking into account all available information about the future. The Group has taken steps to mitigate any impact of the pandemic by increasing production capacity and output, increasing stock levels locally in all markets and focusing on digital sales and marketing campaigns. (b) Statement of compliance The Financial Report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board 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 2019. 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 preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. In preparing the consolidated financial statements, the significant estimates, judgements and assumptions made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the most recent consolidated financial statements. As at 30 June 2020, there were no new judgments, estimates or assumptions other than those mentioned in the notes to the financial statements (refer to (v) below). As at 30 June 2020, there were no new judgements, estimates or assumptions other than those mentioned in the notes to the financial statements (refer to Note 2). The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2019. • AASB 23 Uncertainty Over Income Tax Treatment (AASB 23) • AASB 16 Leases (AASB 16) PolyNovo Limited 33 Annual Report 2020 2. Summary of Significant Accounting Policies continued (c) Changes in accounting policy, disclosures, standards and interpretations continued AASB 23 Uncertainty Over Income Tax Treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of the recognition and measurement criteria in AASB 112 Income Taxes. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances The Group has assessed whether the Interpretation had an impact on its consolidated financial statements. Upon adoption of the Interpretation, the Group considered whether it had any uncertain tax positions with no impact on the consolidated financial statements of the Group. AASB 16 Leases The Group adopted AASB 16 Leases using the modified retrospective approach from 1 July 2019. The impact that this initial application of AASB 16 has on the consolidated financial statements, is described below. AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. AASB 16 replaces existing leases guidance, including AASB 117 Leases, Interpretation 4 Determining whether an Arrangement contains a Lease, Interpretation 115 Operating Leases – Incentives and Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Leases in which the Group is a lessee The Group will recognise new assets and liabilities for its operating leases of its office premises and office equipment. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Group also applied the available practical expedients wherein it: • Applied the practical expedient not reassess whether a contract is, or contains, a lease at 1 July 2019 • Relied on its assessment of whether leases are onerous immediately before the date of initial application • For lease payments the Group applies the practical expedient wherein it does not separate non-lease components from lease components, and instead accounts for each lease component and any associated non-lease components as a single lease component • Applied the short-term leases exemptions to leases with lease term that ends within 12 months or less • Applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. Summary of new accounting policies Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. 34 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate and amounts expected to be paid under residual value guarantees. Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. The adoption of AASB 16 required the Group to make several judgements, estimate and assumptions, these included: • The estimated lease term – The term of each lease was based on the non-cancellable lease unless management was ‘reasonably certain’ to exercise options to extend the lease. • The discount rate used to determine the lease liability –The Group used an incremental borrowing rate of 3.9% for Australian based lease arrangements and 3.9% for US based lease arrangements at the lease commencement date as the interest rate implicit in the leases are not readily determinable. As the Group had no observable debt and no specific interest rates in existing lease contracts in place as at 1 July 2019, market information was used. • Interest payments on lease liabilities have been recorded in cash flows from operating activities within the Statement of Cash Flows. Transition The application date of AASB 16 for the Group is 1 July 2019. Using the modified retrospective approach the right-of-use assets for operating leases was recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. Therefore, the cumulative effect of adopting AASB16 is recognized as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The Group applies the following transition practical expedients: • Applied the practical expedient not to reassess whether a contract is, or contains a lease; • A single discount rate to a portfolio of leases with reasonable similar characteristics; • Applied a short-term lease exemption to leases with leases term that ends within 12 months at the date of initial application; • Excluded the initial direct costs from the measurement of the right-of-use asset at the date of the initial application. The transitional impact upon initial adoption of AASB 16 as at 1 July 2019 is: • Inclusion of right of use asset of $2.5m; • Inclusion of a lease liability of $2.5m; • Decrease in retained earnings by $0.004m. The weighted average borrowing rate used upon adoption of AASB 16 Leases was 3.6%. The lease liabilities as at 1 July 2019 can be reconciled to the operating lease commitments as of 30 June 2019, as follows: Lease commitments reconciliation Minimum lease payments contracted for as at 30 June 2019 Payments in optional extension periods not recognised as at 30 June 2019 Less: short term leases not recognised as a liability Gross lease commitments as at 1 July 2019 Weighted average incremental borrowing rate at 1 July 2019 Lease liabilities at 1 July 2019 as a result of initial application of AASB 16 $ 3,005,377 – (23,074) 2,982,303 3.6% 2,516,582 Current lease liabilities of $323,876 and non-current lease liabilities of $2,420,058 are shown in The Statement of Financial Position. The total cash outflow for leases in the Consolidated Cash Flow Statement for the year ended 30 June 2020 was $260,584 shown as payment of principle and $98,977 as payment of interest on lease liabilities Previously, the Group recognised an operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. Leases in which the Group is a lessee The Group did not enter into any arrangements as at transition date where it was considered as lessor. PolyNovo Limited 35 Annual Report 2020 2. Summary of Significant Accounting Policies continued (d) Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 30 June 2020. The Group controls an investee if and only if the Group has: • power over the investee (that is, 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; and • the Group’s voting rights and potential voting rights. The Group re-assesses 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. If the Group loses control over a subsidiary, it: • de-recognises the assets (including goodwill) and liabilities of the subsidiary; • de-recognises the carrying amount of any non-controlling interests; • de-recognises 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 combinations 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 re-measured 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. 36 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (f) Revenue from Contracts with Customers The Group is in the business of designing, manufacturing and selling biomedical devices. Revenue from contracts with customers is recognised when performance obligations pursuant to that contract are satisfied by the Group. The Group has identified the following main categories of revenue: Commercial product sales The group revenue primarily consists of the sale of its NovoSorb BTM product. Revenue is recorded when the customer takes possession of the product. All contracts with customers are standardised and satisfy the criteria of transaction approval, identification of each party’s rights, payment terms, commercial substance, and probable collection based on the customer’s ability and intention to pay. Revenue is recognised at a point in time when control over the product transfers to the customer, which is assessed to be at the time of receipt of goods by the customer. Distribution sales The group sells its BTM product in certain overseas territories via a distributor model. The sales are made direct to a distributor being the customer of PolyNovo Limited, with the distributor permitted to resell the BTM product to an end user. The group has assessed these arrangements to consider that control passes to the distributor at the point the distributor takes possession of the product. The group consider themselves to be acting as principal in the sale of goods to distributors and recognise revenue on a gross basis. All contracts with distributors are standardised, and satisfy the criteria of transaction approval, identification of each party’s rights, payment terms, commercial substance, and probable collection based on the customer’s ability and intention to pay. Revenue is recognised at a point in time when control over the product transfers to the distributor as the customer, which is assessed to be at the time of receipt of goods by the distributor. BARDA revenue The BARDA arrangement requires the group to provide to BARDA a solution for severe thermal burns, with the performance obligation as defined in the terms of the arrangement being to perform research and development for specific clinical and trial tasks to support the product development of Biodegradable Temporal Matrix (BTM) for severe thermal burns. Judgement has been applied to consider that the license of intellectual property and research and development activities are not distinct. Revenue is recognised over time based on input measures of specified costs, with the performance obligations being achieved through delivery to BARDA of the contracted clinical studies and trial tasks to support the development of the BTM product for severe thermal burns. BARDA is considered a customer in accordance with AASB 15 as the nature of services performed by PolyNovo are considered part of the group’s licence of intellectual property and normal research and development operating activities and in exchange, consideration is to be paid as the group progresses with its research and development of a mass scalable severe thermal burns product. Licence revenue The Group entered into a fixed term licence arrangement with a customer to provide use of specific intellectual property owned by the group to permit certain research and development activity to be performed by the customer with the objective to develop new commercial products. The arrangement’s performance condition is satisfied on delivery of the licence, with no further requirements to enhance the intellectual property. The revenue recognised reflects the consideration to which the Group expects to be entitled to for transfer of the licence, and is recognised on a point in time basis, based on control of the licence being transferred and there being no further ongoing obligations required over the licence term. The Group is entitled to further revenue from the delivery of the licence upon the customer’s achievement of certain milestones. However, given there is uncertainty as to whether these milestones will be achieved, revenue is currently constrained and will be recognised when uncertainty is resolved. Contract balances contract asset A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. As at 30 June 2020, the Group has disclosed in Note 4(a) contract assets. The Group did not recognise any contract liabilities as at 30 June 2020 (30 June 2019: Nil). Trade receivables A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e. only the passage of time is required before payment of the consideration is due). PolyNovo Limited 37 Annual Report 2020 2. Summary of Significant Accounting Policies continued (g) 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 had an initial indefinite useful life on acquisition. In the prior period, and following the first commercial sales of NovoSorb BTM, amortisation was recognised across the finite life of the intangible assets. See Note 13 for further detail. Internally generated intangible assets are not capitalised, excluding capitalised development costs, and expenditure is recognised in the Statement of Comprehensive Income (profit or loss) in the year in which the expenditure is incurred. (h) 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 including definite lived intangible 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 impairment assessment 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 which is based on – 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. (i) Share-based payments The Group 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 2020. 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 model 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, and/or Note 6. All option and performance right arrangements are settled in equity. 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 vesting period. The employee benefit expense recognised each period takes into account the most recent estimate of the number of options that are expected to vest. (j) Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. (k) Right of use assets The Group recognises right of use assets at the commencement of a lease. Right of use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement liabilities. The cost of right of use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right of use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful life of the assets, as follows: Property Office equipment Manufacturing Equipment 4 to 10 years 4 to 5 years 3 years 38 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (l) 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: Property Office equipment Laboratory plant and equipment Leasehold improvements 25 years 3 to 10 years 3 to 13.33 years 3 to 10 years The Group has reassessed the useful life of Property from 40 to 25 years effective 1 July 2019. The useful life revision is accounted for prospectively in accordance with AASB 108. (m) 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 de-recognised 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 de-recognition 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. (n) Research and development costs Research and development 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. (o) Cash and cash equivalents Cash at bank and short-term deposits are stated at nominal value. Cash at bank and short-term deposits are amounts with a maturity of three months or less. If greater than three months, these amounts are recognised within ‘other financial assets’. (p) 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. (q) Interest income Interest income is recognised when the Group has the right to receive the interest payment using the effective interest rate method. (r) Inventory Inventory is measured at cost for raw materials and packaging materials. A standard cost has been derived for finished goods and semi-finished goods. The standard cost includes an allocation of materials, direct labour and manufacturing overheads. The value of finished goods and semi-finished goods may include an allocation of manufacturing variances incurred during the period if it is determined that the relevant production remains in inventory at balance date. (s) 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 income tax revenue is recognised when there is reasonable assurance of receipt. PolyNovo Limited 39 Annual Report 2020 2. Summary of Significant Accounting Policies continued (t) 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. (u) 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. Income tax expense of $66,642 has been recognised for the New Zealand trading subsidiary after absorbing all carried forward tax losses. 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). (v) Significant accounting, estimates and assumptions Deferred taxes 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 whether these are probable of realisation and the amount of the DTA that can be used to offset the impact of the DTL. Judgment is also required in assessing whether any deferred tax assets can be recorded for unbooked tax losses and other timing differences. 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 considers indicators of impairment and if an indicator exists, will determine the recoverable amount of the intangible asset. An estimate is provided on the useful life of the current intangible asset based on the existing patent period. The assessment for the current period is further explained in Note 13. Expected Credit Loss Estimating the expected credit loss (ECL) for trade receivables and contract assets requires selection of an appropriate method and significant judgement to determine the amount. The method applied categorises trade receivables and contract assets into various customer segments, then to determine the ECL amount, an assessment of the correlation between historical observed default rates and forecast economic conditions is applied. Further details on expected credit loss are disclosed in Note 10. (w) 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; and • receivables and payables, which 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 Cash Flow Statement on a gross basis (that is, 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 are classified as operating cash flows. Commitments and contingencies are disclosed exclusive of the amount of GST recoverable from, or payable to, the taxation authority. 40 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (x) 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. (y) 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. (z) Foreign currency translation The functional currency of each of the entities in the Group must reflect the primary economic environment in which the entity operates. Accordingly, the relevant functional currencies are Australian dollars for Australian entities and US dollars for the US entity. 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. • On consolidation, the assets and liabilities of the foreign operation are translated into Australian dollars at the rate of exchange prevailing at the reporting date except for retained earnings which is translated at a historic rate of exchange pertaining to the relevant financial year. The Statement of Comprehensive Income is translated at an average exchange rate over the financial year. • The exchange difference arising on translation for consolidation are recognised in the balance sheet as a foreign currency translation reserve. On disposal of a foreign operation, the reserve is reclassified to profit or loss. (aa) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (ab) Security deposits Security deposits are recorded at amortised cost in the Statement of Financial Position. (ac) Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial Assets Classification and measurement Except for certain trade receivables, the group initially measures a financial asset at its fair value. Financial assets are subsequently measured at fair value through profit or loss (FVPL), amortised cost, or fair value through other comprehensive income (FVOCI). The classification is based on two criteria: The Group’s business model for managing the assets; and whether the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the principal amount outstanding (the SPPI criterion). Impairment The Group recognises an allowance for expected credit losses (ECLs). ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate. For trade and other receivables, the Group has applied the standard’s simplified approach and has calculated ECLs based on lifetime expected credit losses. The Group has established a provision matrix that is based on the Group’s historical credit loss experience, adjusted for forward looking factors specific to the debtors and the economic environment. For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns. PolyNovo Limited 41 Annual Report 2020 2. Summary of Significant Accounting Policies continued (ac) Financial Instruments continued The provision matrix is initially based on the Group’s historical observed default rates. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. Generally, trade receivables are written off if past due for more than one year. The total expected credit loss is disclosed in note 10. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group has assessed forecast economic conditions and impact of the pandemic (Covid-19) in all regions. This assessment is reflected in the application of the provision matrix to calculate ECL’s. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. Financial Liabilities Classification and measurement The Group’s financial liabilities are classified at fair value through loans and borrowings and payables as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include loans and borrowings. For the purposes of subsequent measurement, after initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit and loss. For more information, refer to Note 17. 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 is the Managing Director of PolyNovo Limited. 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 chief operating decision maker monitors the operating results of the Group for the purpose of making decisions about resource allocation in order to progress the commercialisation of the PolyNovo technology. During the period, sales to BARDA in the United States of America, represented 14% of total sales revenue from contracts with customers. Revenue from contracts with customers Geographical areas United States of America Australia and New Zealand Rest of World Non-current assets Geographical areas United States of America Australia and New Zealand 42 PolyNovo Limited 30 June 2020 $ 30 June 2019 $ 18,665,595 2,822,146 668,382 22,156,123 11,729,101 1,572,088 48,031 13,349,220 30 June 2020 $ 30 June 2019 $ 722,817 15,930,338 16,653,155 72,907 8,254,095 8,327,002 Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 4. Revenues and Expenses (a) Revenue from Contracts with Customers Below is set out the disaggregation of group revenue from contracts with customers. Commercial product sales BARDA revenue (b) Finance revenue Term deposit interest Bank account interest Other (c) Employee-related expenses Wages and salaries (including sales commission) Superannuation Share-based payments expense (see Note 6) Other 30 June 2020 $ 30 June 2019 $ 19,064,983 3,091,140 9,348,226 4,000,994 22,156,123 13,349,220 30 June 2020 $ 30 June 2019 $ 22,905 10,067 2,339 35,311 341,392 – (7,289) 334,103 30 June 2020 $ 30 June 2019 $ (10,522,502) (6,494,587) (532,366) (2,061,772) (1,956,725) (355,097) (97,041) (1,602,515) (15,073,365) (8,549,240) Included in other employee related expenses are directors’ fees of $466,174 (2019:$369,230) and payroll taxes of $502,851 (2019: $300,985). (d) Depreciation and amortisation expense Depreciation – property, plant and equipment Depreciation – laboratory equipment Depreciation – leasehold improvements Depreciation – lease asset Amortisation – intangible assets Depreciation of property, plant and equipment is also included in the cost of inventory. 30 June 2020 $ 30 June 2019 $ (121,973) (46,955) (76,798) (343,601) (247,848) (837,175) (61,752) – – – (247,848) (309,600) PolyNovo Limited 43 Annual Report 2020 4. Revenues and Expenses continued (e) Corporate, administrative and overhead expenses Insurances Accounting and audit fees Investor relations and share registry expenses Consultants and contractors Travel Marketing costs Communication expenses Foreign exchange gain Other 30 June 2020 $ (1,003,364) 30 June 2019 $ (613,934) (476,386) (459,685) (559,962) (365,531) (203,618) (300,520) (1,320,545) (1,321,801) (801,401) (191,002) 57,798 (1,517,314) (828,463) (82,251) 345,216 (601,907) (6,271,861) (3,972,809) Included in other administrative expenses are software licences $165,243 (2019: $150,484), 3PL fees $279,258 (2019: $114,019) and freight $357,158 (2019: $42,495). (f) Research and development tax benefit Research and development tax benefit income of $36,956 (2019: $694,602) was recognised as other income in the Statement of Comprehensive Income. $36,956 (2019: $694,602) is receivable, as recognised in the Statement of Financial Position, as it relates to last financial year. 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 Reconciliation of income tax expense to prima facie tax payable Net loss before income tax expense Prima facie tax calculated at 27.5% (2019: 27.5%) Tax effect of amounts which are not included in accounting loss: Research and development Non-assessable R&D income tax credit Tax effect of amounts which are not deductible: Share-based payments Current year tax losses not brought to account/utilised in the period Current year temporary differences not brought to account Income tax benefit/(income tax expense) 44 PolyNovo Limited 30 June 2020 $ 30 June 2019 $ (66,642) – (66,642) – – – – – 4,127,096 (1,134,951) 3,189,893 (877,220) 399,879 (87,142) 567,057 (255,158) 343,386 (154,870) (66,642) 439,116 (191,016) 26,686 (602,434) 778,965 (176,532) – Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (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 Tax effect of new accounting standard changes 30 June 2020 $ 30 June 2019 $ 565,994 (565,994) – – 518,580 47,414 435,521 (435,521) – – 435,521 – Amount recognised due to acquisition of PolyNovo (intangibles) (565,994) (435,521) 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 – – – – – – – – – – 30 June 2020 $ 30 June 2019 $ Unrecognised, unconfirmed tax losses for which no deferred tax asset has been recognised 95,483,316 92,462,871 Deductible temporary differences – no deferred tax asset has been recognised Potential tax benefit at 27.5% 563,162 641,934 96,046,478 93,104,805 26,412,781 25,603,821 General note for DTA/DTL Deferred tax assets and liabilities are recognised for temporary differences at the rates expected to be applied when the assets are recovered, or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits. Deferred tax assets are recognised for deductible temporary differences including AASB 16 changes, provision for employee entitlements, other provisions and accrued expenses. Deferred tax liabilities are recognised for taxable temporary differences including prepayments, differences in accounting and tax base of intangible assets and depreciable assets, and the deferred recognition of income for tax purposes. (d) Current tax liability Provision for Income Tax 30 June 2020 $ 30 June 2019 $ 54,729 – 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 2020 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. PolyNovo Limited 45 Annual Report 2020 5. Income Tax continued (d) Current tax liability continued Given the Group’s history of recent losses (with the exceptions of the benefit noted in (d) below) the Group has not recognised a net 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. (e) 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. 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 2020 and 30 June 2019 were $2,061,772 and $97,041 respectively. (b) Share-based payments for the year ended 30 June 2020 During the 2020 financial year, 4,300,330 options were issued. Details of the share options granted pursuant to the terms of the PolyNovo Employee Share Option Plan (ESOP) are as follows: • On 13 August 2019, the Company granted employee share options to Sr VP Sales & Marketing (Americas), Mr Ed Graubart. He was granted 1,000,000 options exercisable at $1.55. The options vest upon 12 months of employment with the Company and a share price of $1.55 being sustained over a period of 90 consecutive calendar days. Once vested, the options can be exercised as follows: • Tranche 1: not to be exercised before 13 August 2021 and not later than 13 August 2022. • Tranche 2: not to be exercised before 13 August 2022 and not later than 13 August 2023. • Tranche 3: not to be exercised before 13 August 2023 and not later than 13 August 2024. • Tranche 4: not to be exercised before 13 August 2024 and not later than 13 August 2025. If not exercised the options become void. The options package will expire on 13 August 2025. The expense relating to the options package during the year was $163,272. Should Mr Graubart leave employment prior to the exercise date, the share options will be forfeited and option expenses will be reversed. • On 1 October 2019, the Company granted up to the value of $10 million dollars of employee shares to the Managing Director, Mr Paul Brennan. He was granted 3,300,330 shares at $3.03. The shares vest upon the Company market capitalisation reaching and maintaining at all times, $2 billion dollars for a minimum period of three consecutive months in the relevant financial year. Once vested, the shares can be allocated as follows: • Tranche 1: 1,100,110 shares, to vest over 2 years. • Tranche 2: 1,100,110 shares, to vest over 2 years. • Tranche 3: 1,100,110 shares, to vest over 3 years. The shares package will expire on 30 June 2023. The expense in relation to the shares package during the year was $1,633,713. Any unvested shares will be cancelled on the date of termination or cessation of Mr Brennan’s employment. The expense relating to the incentive scheme shares recognised in the Statement of Comprehensive Income during the 2020 financial year was $2,061,772. 46 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 Balance at 1 July 2019 Granted as compen- sation Options exercised 2020 Net change other (forfeited, lapsed, expired) Balance at 30 June 2020 Total vested at end of year Total exer- cisable at end of year Total not exer- cisable at end of year Total vested during year Share- based pay- ments expense $ Key management personnel Mr Paul Brennan – 3,300,330 Mr Jan Gielen 1,000,000 – Other employees – 1,000,000 – – – – 3,300,330 – – 3,300,330 – 1,633,713 – 1,000,000 1,000,000 – 1,000,000 1,000,000 264,787 – 1,000,000 – – 1,000,000 163,272 Total 1,000,000 4,300,330 – 5,300,330 1,000,000 – 5,300,330 1,000,000 2,061,772 The fair value of options granted during 2020, as included in the above table, were 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. Options issued during the period Grant date Number of options Exercise Price Vesting hurdle Risk-free interest rate Volatility Expiry* 13 August 2019 1,000,000 $1.55 12 months service T1 0.66% 47.04% 13-Aug-22 period and 3 months share price exceeds $1.55 T2 0.67% T3 0.68% T4 0.73% 57.03% 13-Aug-23 59.30% 13-Aug-24 61.59% 13-Aug-25 * Each tranche must be exercised by the expiry date and 13 August of the preceding year otherwise they become void. Dividend yield Average fair value per option – – – – $0.423 $0.588 $0.704 $0.720 Key valuation assumptions for the Employee Share Options: Parameters Assumptions Valuation date Grant Date Share price Closing share price as at the valuation Date – Source: Bloomberg. Expected life Assumed Share Appreciation Rights will be exercised at the first opportunity i.e. as early as possible. Risk-free interest rate The risk free interest rates are derived from the Australian Government Bonds as at Valuation Date. The terms to maturity have been selected to align with the expected life of the options. Dividend yield The dividend yield is the rate of dividend expressed as a continually compounded percentage of the share price. In determining an appropriate dividend yield, forecasted dividend information provided by the management of Polynovo Limited has been relied upon. Expected volatility A share’s volatility measure captures the charateristics of fluctuations in the share’s price. The value of options is extremely sensitive to the volatility measure and as a result great care should be taken in determining the appropriate volatility percentage. To accurately value options, a volatility measure should be selected that is most likely to represent the future volatility of the shares during the life of the options: the implied volatility. Accordingly, in determining the expected volatility, the historical market volatility has been taken into account. Other Other assumptions that have not been incorporated into our valuation model include: (i) any change of control events and reorganisation of capital during the relevant performance periods or service periods. (ii) any dilution effect from the issue of options noting that they will not likely have a material impact on the Polynovo Limited security price. PolyNovo Limited 47 Annual Report 2020 6. Share-based Payments continued (b) Share-based payments for the year ended 30 June 2020 continued Grant Date Number of shares 1 October 2019 3,300,330 Vesting Hurdle Company market capitalisation $2 billion for three consecutive months Risk-free interest rate 0.66% Volatility 48.64% Average fair value per share T1 $0.514 T2 $0.493 T3 $0.475 Parameters Assumptions Valuation date Grant Date Share price Closing share price as at the valuation Date – Source: Bloomberg. Expected life Assumed Share Appreciation Rights will be exercised at the first opportunity i.e. as early as possible. Risk-free interest rate The risk free interest rates are derived from the Australian Government Bonds as at Valuation Date. The terms to maturity have been selected to align with the expected life of the options. Dividend yield The dividend yield is the rate of dividend expressed as a continually compounded percentage of the share price. Expected volatility In determining an appropriate dividend yield, forecasted dividend information provided by the management of Polynovo Limited has been relied upon. A share’s volatility measure captures the charateristics of fluctuations in the share’s price. The value of options is extremely sensitive to the volatility measure and as a result great care should be taken in determining the appropriate volatility percentage. To accurately value options, a volatility measure should be selected that is most likely to represent the future volatility of the shares during the life of the options: the implied volatility. Accordingly, in determining the expected volatility, the historical market volatility has been taken into account. Retesting Vesting Hurdle Any shares that have not yet been allocated will be available for allocation at the next allocation date, subject to the vesting hurdle being met. For unallocated shares to be allocate the vesting hurdle meeds to be met in the relevant financial year. Number of Shares Allocated The total number of shares available for allocation will be calculated by dividing the $10M granted by the issue price. The issue price is the share price which equates to a $2 billion market capitalisation. Other Other assumptions that have not been incorporated into our valuation model include: (i) any change of control events and reorganisation of capital during the relevant performance periods or service periods. (ii) any dilution effect from the issue of options noting that they will not likely have a material impact on the Polynovo Limited security price. (c) Share-based payments for the year ended 30 June 2019 During the 2019 financial year, 1,000,000 options were issued and 3,000,000 were exercised. Details of the share options granted pursuant to the terms of the PolyNovo Employee Share Option Plan (ESOP) are as follows: • On 6 March 2019, the Company granted employee share options to Mr Jan Gielen. He was granted 1,000,000 options exercisable at $0.60. The options vest upon 12 months of employment with the Company and a share price of $0.90 being sustained over a period of 90 consecutive calendar days. Once vested, the options can be exercised as follows: • Tranche 1: not to be exercised before 31 December 2020 and not later than 30 June 2021. • Tranche 2: not to be exercised before 31 December 2021 and not later than 30 June 2022. • Tranche 3: not to be exercised before 31 December 2022 and not later than 30 June 2023. If not exercised the options become void. The options package will expire on 30 June 2023. The expense relating to the options package during the year was $56,913. Should the CFO leave employment prior to the exercise date, the share options will be forfeited and option expenses will be reversed. The weighted average share price of the options exercised in the period was $0.32. The expense relating to the incentive scheme shares recognised in the Statement of Comprehensive Income during the 2019 financial year was $97,041. 48 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 Balance at 1 July 2018 Granted as compen- sation Options exercised Net change other (for- feited, lapsed, expired)* Balance at 30 June 2019 Total vested at end of year Total exer- cisable at end of year Total not exer- cisable at end of year Total vested during year Share- based pay- ments expense $ 2019 Directors Mr Leon Hoare 1,000,000 – 1,000,000 – – Other key management personnel Mr Jan Gielen – 1,000,000 – – 1,000,000 Mr Greg Lewis 1,000,000 – – (1,000,000) Other employees 2,000,000 – 2,000,000 – – – Total 4,000,000 1,000,000 3,000,000 (1,000,000) 1,000,000 – – – – – * The net change reflects share options forfeited in the period by the former CFO. Options issued during the period – – – 1,000,000 – – – – – – – 56,913 – – (2,000,000) 40,128 – 1,000,000 (2,000,000) 97,041 Grant date Number of options 6 March 2019 1,000,000 Exercise Price Vesting hurdle $0.60 12 months service period and 3 months share price exceeds $0.90 Risk-free interest rate T1 1.67% T2 1.60% T3 1.65% Volatility Expiry* 45.9% 30-Jun-21 54.8% 30-Jun-22 59.7% 30-Jun-23 Dividend yield Average fair value per option – – – $0.236 $0.311 $0.394 * Each tranche must be exercised by the expiry date and 31 December of the preceding year otherwise they become void. 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 2020 (0.63) cents per share 30 June 2019 (0.48) cents per share Diluted EPS: 30 June 2020 (0.63) cents per share 30 June 2019 (0.48) cents per share PolyNovo Limited 49 Annual Report 2020 7. Earnings Per Share (EPS) continued 30 June 2020 $ 30 June 2019 $ 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 (4,193,738) (3,189,893) Weighted average number of ordinary shares on issue used in the calculation of basic EPS 661,088,044 659,663,386 Potential weighted average number of ordinary shares on issue plus all unexercised share options used in the calculation of diluted EPS 663,088,044 660,663,386 At 30 June 2020 there existed share options that if vested, would result in the issue of additional ordinary shares over the period to FY2023. In the current period, these potential ordinary shares are considered antidilutive as their conversion to ordinary shares would reduce the loss per share. Accordingly, they have been excluded from the dilutive earnings per share calculation. There were no further transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements. 8. Cash and Cash Equivalents Reconciliation of cash at the end of the year Cash at bank(i) Cash and cash equivalents are denominated in: Australian dollars US dollars NZ dollars Euros 30 June 2020 $ 30 June 2019 $ 11,647,701 13,920,695 6,260,340 5,291,876 93,112 2,373 10,464,990 3,233,959 221,746 – 11,647,701 13,920,695 (i) Cash at bank earns interest at floating rates based on daily bank deposit rates. For the purpose of the Consolidated Cash Flow Statement cash and cash equivalents comprises cash at bank and investments in short-term deposits as listed above. Reconciliation of net loss after income tax to net cash flow from operating activities Net Loss Adjustments for non-cash items: Depreciation and amortisation Share-based payment expense Finance cost Interest Unrealised foreign exchange rate differences Change in assets and liabilities during the financial year: (Increase)/decrease in prepayments (excluding manufacturing equipment) (Increase)/decrease in trade receivables (Increase)/decrease in inventory (Increase)/decrease in other assets Increase/(decrease) in payables Increase/(decrease) in provisions Increase/(decrease) in other liabilities Net cash outflows from operating activities 50 PolyNovo Limited 30 June 2020 $ 30 June 2019 $ (4,193,738) (3,189,893) 837,175 2,061,772 18,000 (35,311) 152,132 (259,946) (870,525) (1,592) 28,897 691,033 97,041 – (247,463) (348,625) (145,556) (1,007,641) (131,864) (962,522) 1,030,247 1,567,567 415,646 389,919 54,925 253,265 (427,323) (3,369,733) Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 9. Inventories Inventories comprise of the following: Finished goods Provision for finished goods Work in progress Raw materials and other (at cost) 30 June 2020 $ 30 June 2019 $ 907,441 (87,041) 820,400 323,594 1,143,994 73,048 1,217,042 947,926 – 947,926 218,719 1,166,645 48,805 1,215,450 The total of inventory is held at lower of cost or net realisable value (NRV). During the period, the Group has written off work in progress for a total of $191,724 as a result of product expiry dates and quality issues in two batches. 10. Receivables and Contract Assets (Current) Trade receivables Contract assets R&D tax concession Interest receivable GST recoverable Sundry receivables 30 June 2020 $ 30 June 2019 $ 2,901,346 2,483,424 782,716 36,956 330 179,386 20,785 442,405 694,602 – 43,755 740,861 3,921,519 4,405,047 Trade receivables and contract assets relates to invoices to customers for sale of goods and PolyNovo’s BARDA project representing invoiced and un-invoiced services for labour and sub-contractor expenses. The changes in the balances of trade receivables and the information about the credit exposures are disclosed in Note 24(e). Contract assets Contract assets are initially recognised for revenue earned from the provision of research and development services as receipt of consideration is conditional on the acceptance by the customer. Upon completion of the milestone and acceptance by the customer, the amounts recognised as contract assets are reclassified to trade receivables. As at 30 June 2020, the Group has contract assets of $782,716 (2019: $442,405). Amounts are invoiced in the month following satisfaction of the performance obligation. There are no significant expected credit losses related to the contract assets. The Group has an agreement with BARDA to provide research and development services which has been extended until August 2025 for the Pivotal Trial. BARDA has committed funding of $USD 15m for the Pivotal trial. Expected credit loss Based on the business failure rates by class of customers and Dun & Bradstreet credit score the Expected Credit Losses relating to trade receivables and contract assets the Group has recognised $40,412 as at 30 June 2020 (2019: $27,076). No trade receivables or contract assets were written off during the period. PolyNovo Limited 51 Annual Report 2020 10. Receivables and Contract Assets (Current) continued Contract assets continued As described in note 2(c), the Group uses a provision matrix to measure its expected credit loss. The Group has considered the impact of CoVid-19 in assessing the expected credit loss. Set out below is information about the credit risk exposure on the Group’s trade receivables and contract assets using a provision matrix as at 30 June 2020: Expected credit loss rate Estimated total gross carrying amount at default Expected credit loss Trade Receivables and Contract Assets June 0-30 Days $ 0.3% May 60-90 Days $ Apr 60-90 Days $ 0.2% 0.0% Mar+ 90+ Days $ 44.6% Total $ 3,140,721 8,789 508,746 1,070 6,463 – 68,544 30,553 3,724,474 40,412 Contract assets and trade receivables due in less than 30 days and other financial assets have an expected credit loss which are not significant. 11. Other Assets During the period the Group has prepaid for the purchase of property plant and equipment of $1,871,475 (2019: $310,321) required for the new manufacturing facility. Security deposit Closing balance 30 June 2020 $ 30 June 2019 $ 141,870 141,870 170,767 170,767 The non-current security deposit relates predominantly to PolyNovo’s long-term lease of premises in Port Melbourne and San Diego. 12. Property, Plant and Equipment Property (i) Cost Opening balance Additions Closing balance (ii) Accumulated depreciation Opening balance Depreciation for the year Closing balance Net book value – property 30 June 2020 $ 30 June 2019 $ 4,894,863 443,459 5,338,322 – 4,894,863 4,894,863 – (103,003) (103,003) – – – 5,235,319 4,894,863 During FY19, the group acquired a freehold property in Port Melbourne for total cost $4,894,863 inclusive of non-refundable purchase taxes. Depreciation on the building commenced from 1 July 2019. 52 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 Office equipment (i) Cost Opening balance Additions Disposals Closing balance (ii) Accumulated depreciation Opening balance Depreciation for the year Closing balance Net book value – office equipment Laboratory plant and equipment (i) Cost Opening balance Additions Disposals Closing balance (ii) Accumulated depreciation Opening balance Depreciation for the year Disposals Closing balance Net book value – laboratory plant and equipment Leasehold improvements (i) Cost Opening balance Additions Closing balance (ii) Accumulated depreciation Opening balance Depreciation for the year Closing balance Net book value – leasehold improvements 30 June 2020 $ 30 June 2019 $ 562,707 713,692 – 1,276,399 (388,255) (120,473) (508,728) 767,671 509,733 54,991 (2,017) 562,707 (328,203) (60,052) (388,255) 174,452 30 June 2020 $ 30 June 2019 $ 1,681,908 198,411 (9,298) 1,386,301 295,607 – 1,871,021 1,681,908 (1,183,473) (1,101,441) (127,511) 4,183 (82,032) – (1,306,801) (1,183,473) 564,220 498,435 30 June 2020 $ 30 June 2019 $ 1,942,780 140,511 2,083,291 1,936,560 6,220 1,942,780 (1,561,610) (1,263,284) (46,223) (1,607,833) 475,458 (298,326) (1,561,610) 381,170 PolyNovo Limited 53 Annual Report 2020 12. Property, Plant and Equipment continued Construction in Progress (i) Cost Opening balance Additions Closing balance Net book value – construction in progress Net book value – property, plant and equipment 30 June 2020 $ 30 June 2019 $ 59,299 6,788,413 6,847,712 6,847,712 – 59,299 59,299 59,299 13,890,380 6,008,219 13. Intangible Assets Intangible assets, comprising intellectual property, were acquired through the business combination with PolyNovo Biomaterials Pty Ltd on 17 December 2008. The acquired intangible assets were initially recognised at fair value. Following the consistent commercial sales of NovoSorb BTM, amortisation of intangible assets commenced in FY2018 over the remaining finite life through to March 2028 being the remaining patent life period over which economic benefits will be consumed. No indicators of impairment related to the NovoSorb technology have been identified as at 30 June 2020. Intangibles (i) Cost Opening balance Additions Closing balance (ii) Accumulated amortisation Opening balance Amortisation for the year Closing balance Net book value 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. 30 June 2020 $ 30 June 2019 $ 2,519,788 2,519,788 – – 2,519,788 2,519,788 (371,772) (247,848) (619,620) (123,924) (247,848) (371,772) 1,900,168 2,148,016 30 June 2020 $ 30 June 2019 $ 1,611,945 1,560,050 3,171,995 581,698 1,170,131 1,751,829 54 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 15. Provisions (a) Current provisions Annual leave Long service leave Total current provisions (b) Non-current provisions Long service leave Make good Total non-current provisions 30 June 2020 $ 30 June 2019 $ 530,973 77,749 608,722 91,834 75,000 166,834 245,739 66,433 312,172 47,738 – 47,738 16. Right of Use Assets Group as a lessee The Group has lease contracts for various items of property, office equipment and lease equipment used in its operations. Leases of property generally have lease terms between 3 and 10 years, while office and manufacturing equipment generally have lease terms between 3 and 5 years. Refer to note 2 (c) for more detail on the Groups adoption of AASB16. Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period: Reconciliation of carrying amounts Transition adjustment at 1 July 2019 Additions (net) Depreciation expense As at 30 June 2020 Right-of-use assets Office Equipment $ Manufacturing Equipment $ Total $ 16,395 (7,567) 8,828 22,374 21,012 (11,581) 31,804 2,499,923 490,199 (343,601) 2,646,521 Property $ 2,461,155 469,187 (324,453) 2,605,889 The following are the amounts recognised in profit or loss in addition to low value and short term leases of $3,044 per month: Depreciation expense of right-of-use assets Interest expense on lease liabilities Total amount recognised in profit or loss 2020 $ 343,601 98,977 363,350 2019 $ – – – The Group had total cash outflows for leases of $359,561 in 2020. The Group also had non-cash additions to right-of-use assets and lease liabilities of $389,959 in 2020. There are no new leases to commence therefore the future cashflows of leases yet to commence is Nil. Group as Lessor The Group has not entered into any leases as lessor. PolyNovo Limited 55 Annual Report 2020 17. Financial Liabilities: interest bearing loans and borrowings (a) Interest bearing facility details The Group has secured two finance facilities during the current period with National Australia Bank (NAB). The facilities detailed below are used to fund capital expenditure items. Current interest-bearing loans and borrowings Non-current interest bearing loans and borrowings Facility Amount $ Interest rate % Repayment Terms Maturity 30 June 2020 $ 30 June 2019 $ 30 June 2020 $ 30 June 2019 $ Financing Facilities Trade finance* 6,000,000 BBSY +1.7 Interest only 30 April 2021 4,808,499 Equipment finance* 9,300,000 3.16 5 years P&I Total 15,300,000 495,873 5,304,372 – – – 1,983,494 – 1,983,494 – – – * Drawdown on the facilities commenced in late June 2020, therefore no interest has been paid nor has any interest expense been accrued. Trade finance facility The purpose of this facility is to fund deposits and progress payments for capital expenditure items. The facility is an interest only facility and repayment of the facility is funded by drawing down on the equipment finance facility. The facility has a limit of $6 million and was made available on the 22 May 2020. The facility limit reduces to $1m on 30 September 2020 and matures on 30 April 2021. The limit reduction to $1m on 30 September 2020 is tailored to meet capital expenditure requirements. This facility is secured over the property at 1/320 Lorimer St, Port Melbourne VIC 3207. Equipment finance facility Purpose of this facility is to fund repayment of the trade finance facility used for purchasing capital expenditure items such as hernia manufacturing equipment and construction of the cleanroom. The facility has a limit of $9.3 million and was made available on the 22 May 2020. Repayments are made over 5 years and comprise of principal and interest. The facility currently attracts an interest rate of 3.16% p.a. The facility is secured over the property at 1/320 Lorimer St, Port Melbourne VIC 3207. As required by NAB’s terms and conditions the parent entity PolyNovo Limited, has provided a cross-guarantee in conjunction with wholly owned subsidiaries Novoskin Pty Ltd and Novowound Pty Ltd for the facilities. The aggregate amount payable by the cross- guarantors is limited to $15,300,000 excluding interest and penalties. 56 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (b) Changes in liabilities arising from financing activities 1-Jul-19 $ Cash Flows $ Foreign Exchange Movement $ New leases $ Other $ 30-Jun-20 $ Current interest-bearing loans and borrowings (excluding items listed below) – – – – 5,304,372 5,304,372 Current lease liabilities (Note 16) 236,663 (260,584) (6,490) 99,748 254,539 323,876 Non-current interest-bearing loans and borrowings (excluding items listed below) – Non-current lease liabilities (Note 16) 2,279,919 – – – – 1,983,494 1,983,494 (46,455) 441,133 (254,539) 2,420,058 Total liabilities from financing activities 2,516,582 (260,584) (52,945) 540,881 7,287,866 10,031,800 Other: represents the reclassification of lease liabilities from non-current to current. Current interest-bearing loans and borrowings (excluding items listed below) Current lease liabilities (Note 16) Non-current interest-bearing loans and borrowings (excluding items listed below) Non-current lease liabilities (Note 16) Total liabilities from financing activities 1-Jul-18 $ Cash Flows $ Foreign Exchange Movement $ New leases $ Other $ 30-Jun-19 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – PolyNovo Limited 57 Annual Report 2020 18. Contributed Equity and Reserves (a) Movement in contributed equity Contributed equity at beginning of year Exercise of options Contributed equity at end of year On issue at start of year Exercise of options On issue at end of year (b) Reserves Share-based payments reserve (i) Foreign currency translation reserve (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 2020 $ 30 June 2019 $ 130,070,502 138,120,502 – 950,000 139,070,502 139,070,502 Number of Shares 661,088,044 658,088,044 – 3,000,000 661,088,402 661,088,044 30 June 2020 $ 30 June 2019 $ 5,219,758 (528,071) (9,293,956) (4,602,269) 3,157,986 (375,939) (9,293,956) (6,511,909) 3,157,986 2,061,772 5,219,758 3,060,945 97,041 3,157,986 This reserve represents the nominal consideration paid for subscriber or employee options and the fair value of options and performance rights. (ii) Foreign currency translation reserve Opening balance Translation of foreign operations Balance at end of period (375,939) (152,132) (528,071) (159,300) (216,639) (375,939) This reserve represents on consolidation, the translation of the foreign operation into Australian dollars. The exchange difference is recognised in the balance sheet as a reserve. Please refer to Note 2(y) for further information. (iii) Acquisition of non-controlling interest reserve Opening balance Balance at end of year (9,293,956) (9,293,956) (9,293,956) (9,293,956) This reserve represents the premium paid by PolyNovo Limited for the non-controlling interest in a previous period in subsidiary entities PolyNovo Biomaterials Pty Ltd, NovoSkin Pty Ltd and NovoWound Pty Ltd. 58 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 (c) Accumulated losses Accumulated losses at beginning of year Net loss attributable to members of the parent Adjustment relating to new accounting standards Accumulated losses at end of financial year 30 June 2020 $ 30 June 2019 $ (106,462,471) (103,269,221) (4,193,738) (3,189,893) – (3,357) (110,656,209) (106,462,471) 19. Commitments and Contingencies Manufacturing equipment commitments The Group has entered into new contractual agreements with suppliers for the supply of manufacturing equipment. The equipment will be received in FY21 and the remaining balance of $734,802 will be paid accordingly. Contingencies The Directors are not aware of any other contingent liabilities or contingent assets at 30 June 2020. There has been no change in this assessment up to the date of this report. 20. Related Party Disclosures Related party transactions are disclosed under key management personnel (Note 25). 21. 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 announced to the ASX 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. Post year end, further lockdown restrictions were imposed in Australia as a result of CoVid-19 and other countries around the globe are starting to experience second waves of the virus. The Group continues to monitor the impact of the pandemic (CoVid-19) and the response from governments in controlling outbreaks. The Group continues to take steps to mitigate any impact of the pandemic by increasing stock levels locally in all markets to avoid any potential supply chain impediments and focusing on digital sales and marketing campaigns. Stage 2 of the factory build, which will be used to manufacture hernia and breast devices, will commence in the September 2020 quarter and is expected to be completed by March 2021. PolyNovo Limited 59 Annual Report 2020 22. 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: Auditor's Remuneration Fees to Ernst & Young (Australia) Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities Fees for other services – Tax compliance Total fees to Ernst & Young (Australia) Fees to other overseas member firm of Ernst & Young (Australia) Fees for auditing the financial report of any controlled entities Fees for other services – Tax compliance – Corporate secretariat support Total fees to overseas member firms of Ernst & Young (Australia) Total fees to Ernst & Young 30 June 2020 $ 30 June 2019 $ 171,401 145,577 22,000 193,401 12,500 157,077 10,395 – 150,537 36,156 197,089 390,489 106,830 – 106,830 264,907 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’s independence was not compromised. 23. Parent Entity Information Current assets Total assets Current liabilities Total liabilities Issued capital Retained earnings Total reserves Total shareholders’ equity Loss of the parent entity Total comprehensive loss of the parent entity 30 June 2020 $ 30 June 2019 $ 47,527,016 53,558,589 2,689,410 2,689,410 47,644,550 53,676,752 1,433,889 1,433,889 139,070,502 139,070,502 (87,456,861) (84,021,405) (744,462) (2,806,234) 50,869,179 52,242,863 (3,435,457) (3,435,457) (491,215) (491,215) Details of lease contracts entered into by PolyNovo Limited are provided in Note 16. In accordance with the terms and conditions of the NAB facility arrangements disclosed in note 17, the parent entity, PolyNovo Limited, has provided a cross-guarantee in conjunction with wholly owned subsidiaries Novoskin Pty Ltd and Novowound Pty Ltd. The aggregate amount payable by the cross-guarantors is limited to $15,300,000 excluding interest and penalties. 60 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 24. 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 and other financial liabilities. Cash and cash equivalents Trade and other receivables Other financial assets1 Trade and other payables Lease liabilities Trade finance facility Equipment finance facility 30 June 2020 $ 30 June 2019 $ 11,647,701 3,921,519 50,000 3,171,995 2,743,934 4,808,499 2,479,367 13,920,695 4,405,047 50,000 1,751,829 – – – 1. At 30 June 2020 $50,000 is held in a term deposit maturing on 16 March 2021 at an interest rate of 1.31% (b) 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. (c) 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. (d) 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 debt and equity attributed to equity holders of the Group comprising contributed equity, reserves and accumulated losses as disclosed in Note 18. 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. PolyNovo Limited 61 Annual Report 2020 24. Financial Risk Management Objectives and Policies continued (e) Financial risk management The key financial risks the Group is exposed to through its operations are: • interest rate risk; • credit risk; • liquidity risk; and • foreign currency 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 and its trade finance and equipment finance facilities. 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 with particular focus on the timing of cash requirements. 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. The Group’s exposure to interest rate risk and the interest rates (current at the end of each year) on the Group’s financial assets and financial liabilities as at 30 June 2020, along with prior year comparatives, was as follows: Weighted average effective interest rate Floating interest rate $ Fixed interest rate 0 to 90 days $ Fixed interest rate 91 to 365 days $ Fixed interest rate 1 to 5 years $ Fixed interest rate over 5 years $ Non- interest bearing $ Total $ 2020 Financial assets Cash and cash equivalents 0.27% 11,647,701 Other financial assets Receivables 1.43% – – – Total financial assets – 11,647,701 Financial liabilities Trade and other payables – – Trade Finance Facility BBSY+1.7% 4,808,499 Equipment Finance Facility 3.16% 2,479,367 Total financial liabilities – 7,287,866 – – – – – – – – – 50,000 – 50,000 – – – – – – – – – – – – – – 11,647,701 – 50,000 – 3,921,519 3,921,519 – 3,921,519 15,619,220 – 3,171,995 3,171,995 – – 4,808,499 – 2,479,367 – 3,171,995 10,459,861 62 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 Weighted average effective interest rate Floating interest rate $ Fixed interest rate 0 to 90 days $ Fixed interest rate 91 to 365 days $ Fixed interest rate 1 to 5 years $ Fixed interest rate over 5 years $ Non- interest bearing $ Total $ 2019 Financial assets Cash and cash equivalents 1.39% 13,920,695 Other financial assets Receivables 2.64% – – – Total financial assets – 13,920,695 Financial liabilities: Trade and other payables Total financial liabilities – – – – – – – – – – – 50,000 – 50,000 – – – – – – – – – – – 13,920,695 – 50,000 – 3,680,081 3,680,081 – 3,680,081 17,650,776 – – 1,751,829 1,751,829 1,751,829 1,751,829 There has been a change to the Group’s exposure to interest rate risk due to taking out trade finance and equipment finance facilities and the fact that cash holdings are lower than at the previous year’s end. As noted above, cash is invested in term deposits of varying maturity terms to maximise interest income as well as to meet the timing of operational cash flow requirements. All term deposits are with the NAB, 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 the closing balance of financial assets was to fluctuate by the margins below, assuming all other variables had remained constant: + 0.5% (50 basis points) - 0.5% (50 basis points) Loss (higher)/ lower Equity higher/(lower) 2020 $ Loss (higher)/ lower Equity higher/(lower) 2019 $ 58,239 (58,239) 139,707 (139,707) The range of +0.5%/-0.5% as an assumption is based on current macro-market economic conditions in which the group holds its cash and cash equivalent balances. 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 2020, the contract asset at 30 June 2020 includes $782,716 owing by BARDA, a US government agency as detailed in Note 10. BARDA is contractually obliged to reimburse the Group for services provided and is considered to be a low credit risk customer. PolyNovo Limited 63 Annual Report 2020 24. Financial Risk Management Objectives and Policies continued (e) Financial risk management In 2020, the trade receivables balance at 30 June 2020 includes $2,901,346 owing by customers. Trade receivables has grown and this is expected to continue as commercial product sales to hospitals and distributors increase. The ageing analysis of trade and other receivables is as follows. 2020 Trade and other receivables 3,306,739 507,676 6,463 63,356 3,884,234 0-30 days $ 30-60 days $ 60-90 days $ 90+ day $ Total $ 2019 Trade and other receivables 2,452,198 323,983 66,079 143,219 2,985,479 The above total trade and other receivable amounts as at 30 June 2020 and 30 June 2019 do not include the R&D tax credit receivable amounts of $36,956 and $694,602 respectively. The Group considers the maximum credit risk from potential default of the counter party to be equal to the carrying amount of the asset. Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to credit loss is not significant. 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 and its trade finance and equipment finance facilities. Responsibility for managing liquidity risk rests with the Board, who regularly review liquidity risk by monitoring the undiscounted cash flow forecasts and actual cash flows provided to them 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 other available external sources. The Board may also review the timing of internal programs if necessary to moderate cash requirements. A maturity analysis of trade and other payables is set out below: Year ended 30 June 2020 On demand $ Less than 3 months $ 3 to 12 months $ 1 to 5 years $ > 5 years $ Total $ Interest-bearing loans and borrowings* – 4,808,499 495,873 1,983,494 – 7,287,866 (excluding items below) Lease Liabilties (Note 16) Trade and other Payables – 104,219 319,831 1,869,319 906,590 3,199,959 50,070 3,121,925 – – – 3,171,995 50,070 8,034,643 815,704 3,852,813 906,590 13,659,820 *$4,808,499 is the trade finance balance which is funded at maturity by drawing down on the equipment finance facility Year ended 30 June 2019 Interest-bearing loans and borrowings (excluding items below) Lease Liabilties (Note 16) Other Financial Liabilities Trade and other Payables On demand $ Less than 3 months $ 3 to 12 months $ 1 to 5 years $ > 5 years $ Total $ – – – – – – – – 409,186 1,342,643 409,186 1,342,643 – – – – – – – – – – – – – – – – – – – – – – 1,751,829 1,751,829 64 PolyNovo Limited Annual Report 2020Notes to the Financial Statements continuedFor the year ended 30 June 2020 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, NZD and EURO. To reduce foreign currency risk exposure, the Group maintains an amount of cash and cash equivalents in USD, NZD and EURO. The Group receives payment from its overseas customers in USD, NZD and EURO and pays US, NZD and EURO trade payables from its USD, EURO and NZD funds. GBP and SGD denominated payable balances carry some foreign currency risk, however these payable balances are typically infrequent and low in value and are therefore considered to expose the Group to minimal risk. At 30 June 2020 the Group had a EURO and GBP denominated prepaid balance of $1,376,134 and $232,018 respectively, representing non-refundable deposits on R&D manufacturing equipment the Group will receive in FY21. The Company has subsequently opened a EURO and GBP bank account to mitigate foreign currency exposure. The holdings of cash and cash equivalents, trade receivables and trade payables analysed by nominated currency at 30 June 2020, along with prior year comparatives, were as follows. Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated EURO $ Denominated In GBP $ Denominated In SGD $ Total $ 2020 Financial assets Cash and cash equivalents 6,260,340 5,291,876 Receivables 408,753 3,139,094 93,112 9,673 Total financial assets 6,669,093 8,430,970 102,785 2,373 335,321 337,694 – 27,582 27,582 11,647,701 1,096 3,921,519 1,096 15,569,220 Financial liabilities Trade and other payables 1,969,251 1,135,066 Total financial liabilities 1,969,251 1,135,066 19,100 19,100 1,465 1,465 35,009 35,009 12,104 3,171,995 12,104 3,171,995 A hypothetical 10% strengthening in the exchange rate of the Australian dollar against the local currencies of the Parents' overseas subsidiaries (as at 30 June 2020) with all other variables held constant would have the following effect on the loss and equity for the 2020 financial year for the Group: Country United States of America United Kingdom New Zealand Singapore Total $ (61,782) unfavourable 136,343 favourable (22,443) unfavourable (21,357) unfavourable 30,761 favourable PolyNovo Limited 65 Annual Report 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 24. Financial Risk Management Objectives and Policies continued A 10% strengthening in the exchange rate has been applied based on current market economic conditions. 2019 Financial assets Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated EURO $ Denominated In GBP $ Total $ Cash and cash equivalents 10,464,990 Receivables 964,175 3,233,959 2,759,895 Total financial assets 11,429,165 5,993,854 221,746 8,768 230,514 – 672,209 672,209 13,920,695 – 4,405,047 18,325,742 Financial liabilities Trade and other payables Total financial liabilities 668,452 668,452 1,040,821 1,040,821 27,436 27,436 – – 15,120 15,120 1,751,829 1,751,829 A hypothetical 10% strengthening in the exchange rate of the Australian dollar against the US dollar (as at 30 June 2019) with all other variables held constant would have a $65,950 unfavourable effect on the loss and equity for the 2019 financial year. A 10% strengthening in the exchange rate has been applied based on current market economic conditions. 25. 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 2020 and 2019 financial years. Unless otherwise indicated they were key management personnel during the whole of the financial years. PolyNovo’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 30 June 2020 $ 30 June 2019 $ 1,148,354 101,118 44,659 1,898,500 3,741 888,135 72,106 42,752 54,086 – 3,196,372 1,057,079 Short term Post-employment – superannuation Leave allowances Share-based payments Termination benefits 66 PolyNovo Limited Annual Report 2020 (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 2019 2019 2019 2019 2019 2019 Expiry date Exercise price 2020 number outstanding 2019 number outstanding 30/06/21 30/06/22 30/06/23 1/10/22 1/10/22 1/10/22 $0.60 $0.60 $0.60 – – – 300,000 300,000 400,000 1,100,110 1,100,110 1,100,110 300,000 300,000 400,000 – – – 4,300,330 1,000,000 (d) Loans to key management personnel No loans have been made to Directors of PolyNovo or to any other key management personnel, including their personally related entities. (e) Other transactions with Directors There were transactions with Directors during the year ended 30 June 2020 as follows: • David McQuillan and Associates LLC, an entity associated with Dr David McQuillan, received payments in the amount of $24,490 (2019: $69,912). These payments were in respect to consulting services provided to PolyNovo North America LLC in relation to advisory and consulting services for the hernia project. No other transactions between the Group and any of the Directors of PolyNovo or any other key management personnel have been identified. PolyNovo Limited 67 Annual Report 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 26. 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: Country of incorporation Percentage owned 30 June 2020 % 30 June 2019 % Company: PolyNovo Limited Subsidiaries of PolyNovo Limited: PolyNovo North America LLC PolyNovo Biomaterials Pty Ltd NovoSkin Pty Ltd NovoWound Pty Ltd PolyNovo NZ Limited PolyNovo Singapore Private Ltd PolyNovo UK Limited Australia United States Australia Australia Australia New Zealand Singapore United Kingdom 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – 100% 68 PolyNovo Limited Annual Report 2020 Directors’ Declaration For the year ended 30 June 2020 In accordance with a resolution of the Directors of PolyNovo Limited, I state that: • In the opinion of the Directors: • 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: • giving a true and fair view of the Company and the Group’s financial position as at 30 June 2020 and of their performance for the year ended on that date; • complying with Australian Accounting Standards and Corporations Regulations 2001; and • complying with International Financial Reporting Standards as issued by the International Accounting Standards Board. • 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. • 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 2020. On behalf of the Board, Mr David Williams Chairman 26 August 2020 PolyNovo Limited 69 Annual Report 2020 Independent Auditor’s Report For the year ended 30 June 2020 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 Audit or's Report t o t he Members of PolyNovo Limit ed Report on t he Audit of t he Financial Report Opinion We have audited the financial report of PolyNovo Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equit y and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a t rue and fair view of the consolidated financial position of the Group as at 30 June 2020 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (t he Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other et hical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Mat t ers Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 70 PolyNovo Limited Annual Report 2020 2 Recognit ion of revenue Why significant How our audit addressed t he key audit mat t er The Group has recognised revenue from the sale of commercial products and revenue from services performed in respect of research and development. For sales of commercial products, revenue is recognised upon delivery of the product to the customer. The Group sells to customers in various territories. Commercial product sales have significantly increased this financial year. Services revenue is recognised as the services are delivered. Notes 2, 3 and 4 of the financial statements outline the Company’s accounting policies with respect to revenue recognition and revenue disclosures. Revenue recognition was considered a key audit matter due to the increasing sales profile of the Group. Our audit procedures with respect to the Group’s revenue recognition included: ► assessing new contracts with customers for ter ms and conditions that could impact the timing of recognition and measurement of revenue; ► assessing the operating effectiveness of the Group’s controls by testing a sample of controls with respect to the initiation and recording of commercial sales transactions; ► assessing on a sample basis, whether revenue was correctly recognised based on the products delivered as at 30 June 2020 with reference to supporting documentation including contracts, purchase orders proof of delivery, cash receipts and credit notes; ► assessing the Group’s performance obligations under the services contract to check that revenue is recognised only for services provided during the year and at the contracted rate; ► comparing subsequent cash receipts to balances outstanding at year end on a sample basis; and ► assessing whether the Company’s revenue disclosures as outlined in Notes 2, 3 and 4 are complete and meet the requirements of Australian Accounting Standards. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation PolyNovo Limited 71 Annual Report 2020 Independent Auditor’s Report continued For the year ended 30 June 2020 3 Exist ence and valuat ion of invent ory Why significant How our audit addressed t he key audit mat t er At 30 June 2020, the Group held inventory of $1.21 million which comprised raw materials, work in progress and finished goods. The disclosure in respect of inventor y is included in note 9, Material inventories were held at a central warehouse in Australia and by third-party logistics providers in the United States of America (‘US’). The cost of inventory is determined based on the standard cost of production and, where applicable, capitalisable manufacturing variances. The net realisable value of the inventory is assessed at year end considering inventory sales, forecast usage, expiry dates of products and quality assessments. The existence and valuation of inventory was considered a key audit matter given the significance to the group of inventory and the judgements required in determining the valuation of inventory. Our procedures with respect to existence and valuation of inventory included: ► attending the inventor y counts that occurred, reperforming the inventory counts and agreeing count results into the year end inventor y listing. Due to travel and social distancing restrictions resulting from the COVID-19 pandemic, we could not physically attend these inventor y counts. However, we observed the inventory counts using video and other technologies; ► assessing that the nature of costs included in inventory, including allocations of labour and manufacturing overheads, were consistent with the requirements of Australian Accounting Standards; ► agreeing, on a sample basis, the amount of costs capitalised in inventory to supporting documentation; ► assessing and recalculating the Group’s judgements related to manufacturing variances; and ► assessing the inventory net realisable values with reference to the ageing of inventory, expiry dates, gross margins achieved, sales forecasts and outcomes of quality assessments. ► Assessing the disclosures in respect of inventory in the financial statements. Account ing for share based payment arrangement s Why significant How our audit addressed t he key audit mat t er During the year, the Group issued options to certain employees, including the Managing Director, under share based payment arrangements. The share based payment arrangements included both market based and non-market based vesting conditions. In determining the value of the new arrangements, the Group used the services of a third-par ty valuation specialist. The Group also has existing share based payment arrangements with the Chief Financial Officer that are being expensed over their vesting period. The share based payments expense recorded for the year ended 30 June 2020 is $2.06 million. Our procedures with respect to share based payment arrangements included: ► agreeing the terms of the share based payment arrangements issued during the year to contracts; ► assessing, in conjunction with our valuation specialists, the appropriateness of the valuation methodology used by management’s specialist and the key input assumptions such as volatility rates, expected life and probability of achieving the market- based performance conditions; ► assessing the Group’s judgements in relation to the probability of achieving non-mar ket based vesting conditions; ► recalculating the share based payments expense recor ded in the Statement of Comprehensive Income over the relevant vesting periods; and A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 72 PolyNovo Limited Annual Report 2020 4 ► assessing the disclosures in Note 6 and the Remuneration Report in relation to the share based payment arrangements. Details of these share based payment arrangements are disclosed in Note 6 of the financial report and the Remuneration Report with respect to the arrangements with the Managing Director and Chief Financial Officer. There is judgement involved in determining the fair value of share based payment arrangements and the subsequent recording of the fair value as an expense over the estimated vesting period. As a result, and given the magnitude of the expense in the current year, the audit of the share based payment arrangements was considered a key audit matter. Informat ion Ot her t han t he Financial Report and Audit or’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2020 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection wit h our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilit ies of t he Direct ors for t he Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement , whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation PolyNovo Limited 73 Annual Report 2020 Independent Auditor’s Report continued For the year ended 30 June 2020 5 Audit or's Responsibilit ies for t he Audit of t he Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whet her due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance wit h the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to t he audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s abilit y to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, st ructure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit . We remain solely responsible for our audit opinion. We communicate wit h the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 74 PolyNovo Limited Annual Report 2020 6 We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on t he Audit of t he Remunerat ion Report Opinion on t he Remunerat ion Report We have audited the Remuneration Report included in pages 20 to 27 of the directors' report for the year ended 30 June 2020. In our opinion, the Remuneration Report of PolyNovo Limited for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilit ies The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Joanne Lonergan Partner Melbourne 26 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation PolyNovo Limited 75 Annual Report 2020 Additional Information Required by ASX For the year ended 30 June 2020 Additional information required by the Australian Securities Exchange is as follows: Ordinary Shares As at 14 August 2020 there were 661,088,044 ordinary shares on issue held by 20,708 shareholders. Each ordinary share carries one vote per share. Top 20 Shareholders as at 14 August 2020 Shareholder HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED MOGGS CREEK PTY LTDLATERAL INNOVATIONS PTY LTD NATIONAL NOMINEES LIMITED MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED MR ANTHONY SHANE KITTEL + MRS MICHELE THERESE KITTEL BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMINEES PTY LTD SANDHURST TRUSTEES LTD BNP PARIBAS NOMS PTY LTD MS SIMONE MAREE BEKS MR PAUL GERARD BRENNAN COMMONWEALTH SCIENTIFIC AND INDUSTRIAL RESEARCH ORGANISATION NETWEALTH INVESTMENTS LIMITED MR PAUL JAMES LAPPIN + MS SIOBHAN CATHERINE LYONS MR LAURENT FOSSAERT MR DAVID KENLEY DR MARCUS JAMES DERMOT WAGSTAFF + MRS LARA KATE WAGSTAFF Total No. of shares 66,551,382 50,570,980 19,619,513 17,400,000 10,924,103 9,834,664 9,308,685 7,922,500 6,625,645 6,186,654 5,688,623 5,375,513 4,185,095 4,185,095 4,081,250 3,809,451 3,254,631 3,214,172 3,139,855 3,056,377 244,934,188 % 10.07 7.65 2.97 2.63 1.65 1.49 1.41 1.20 1.00 0.94 0.86 0.81 0.63 0.63 0.62 0.58 0.49 0.49 0.47 0.46 37.05 Unquoted Securities Options over unissued shares As at 30 June 2020, a total of 5,300,330 options over ordinary shares are on issue held by three individuals including the Managing Director. Options do not carry a right to vote. PolyNovo issued 4,300,330 options during the year ended 30 June 2020. Details of the options issued are included in Note 6. The range of shareholders based on number of shares held as at 14 August 2020 is as follows: Range of units 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number of holders with less than a marketable parcel No. of holders 6,025 7,187 2,841 3,943 712 779 No. of shares 3,368,850 20,021,934 22,689,098 122,906,278 492,101,884 102,303 Voting Rights Clauses 45 to 54 of the Company’s Constitution stipulate the voting rights of members. In summary but without prejudice to the provisions of the Constitution, every member present in person or by representative, proxy or attorney shall have one vote on a show of hands and on a poll have one vote for each share held by the member. Substantial Shareholders Name of shareholding HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 66,551,382 50,570,980 No. of shares 10.07 7.65 Quotation of the Company’s Shares PolyNovo has been granted official quotation for its shares on the Australian Securities Exchange (ASX Code: PNV). 76 PolyNovo Limited Annual Report 2020 Corporate Directory ABN 96 083 866 862 Non-executive Chairman Mr David Williams Non-executive Directors Dr Robyn Elliott Ms Christine Emmanuel Mr Leon Hoare Mr Max Johnston Dr David McQuillan Mr Philip Powell Mr Bruce Rathie Managing Director Mr Paul Brennan Company Secretary Mr Jan Gielen Registered Office Unit 2/320 Lorimer Street Port Melbourne Victoria 3207 T (03) 8681 4050 F (03) 8681 4099 Share Registry Computershare Investor Services Pty Ltd Yarra Falls 452 Johnston Street Abbotsford, Victoria 3067 T 1300 850 505 Auditors Ernst & Young 8 Exhibition St Melbourne Victoria 3000 Website www.polynovo.com Australian Securities Exchange PolyNovo shares are quoted on ASX Limited (ASX Code: PNV) PolyNovo Limited 77 Annual Report 2020 2/320 Lorimer Street Port Melbourne Victoria Australia 3207 T +613 8681 4050 F +613 8681 4099 polynovo.com