Globally recognised medical innovation Annual Report 2021 Vision PolyNovo is prepared for an exciting future with expansion into new markets and continued growth in NovoSorb BTM production within our 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 focused on our mission: Improving outcomes and changing people’s lives. CONTENTS Global Reach Our Performance World Leading — Life Changing Clinical Trials Chairman and Managing Director 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 Shareholder Information Corporate Directory PolyNovo Limited ABN 96 083 866 862 02 04 06 07 08 10 21 26 37 38 39 40 41 42 72 73 79 81 Scan this QR code with your smartphone camera to find out about our new state-of-the-art facility 01 01 PolyNovo Limited | Annual Report 2021 GLOBAL REACH PolyNovo has continued to invest in expanding sales teams throughout the pandemic. In FY21 this strategy has generated new account acquisitions, significant growth in sales, greater geographical coverage, and achievement of a small profit (excluding non-cash items) FY22 has started strong with excellent sales performance in July 2021. FY21 has been challenging with restricted travel, customer access for face-to-face interactions and reduced hospital activity due to COVID-19 congestion. Our early pivoting to digital sales and marketing strategies has been very rewarding. We have conducted many webinars across a wide variety of surgical applications that have allowed our surgeons to share their excellent outcomes with their peers. We have continued to win new accounts, expand existing account sales, and enter new geographies. Our European market entries have been outstanding throughout FY21. This has laid the foundations for strong sales growth in FY22 as these distributors win hospital accounts. This profitable strategy enables PolyNovo to reinvest in new markets and support the general business expansion. Logistics to support sales growth has required extra effort with freight routing and forecasting however we have stayed ahead of future demands with high stock holdings in all our markets. We will have greater flexibility and market responsiveness in FY22 with our EU 3PL Movianto coming on stream in Belgium. Our US business is rapidly expanding in both personnel and sales revenue. We have continued the investment in sales and marketing roles throughout FY21. The US business is profitable, and we see further expansion of our sales team in FY22. Our Clinical Trial programs continue with the BARDA pivotal burn trial and chronic wound reimbursement trial. Our SynPath chronic wound scaffold will allow us to service the $US400M Chronic wound segment in FY23. Iceland United States +49% US FY21 sales growth in local currency USD United States Our US business is profitable and our largest revenue contributor. We have continued to expand our sales and marketing team. We see further investment in expanding the capacity to drive revenue growth. The NovoSorb SynPath chronic wound study has completed the first 10 patients and we now embark on the second phase of this clinical trial. Our BARDA funded pivotal trial is in progress with 20 sites being enrolled and a further five Canadian sites to be added. Scan QR code to view a short performance summary by Ed Graubart – Sr. Vice President Sales & Marketing Europe Our European expansion has been significant in FY21. Our distributor model in Europe is allowing PolyNovo to rapidly expand across Europe without significant cost and should generate profit in FY22. We have a new 3PL partner for Europe commencing 1 Sept ‘21 allowing us to efficiently service many markets. Scan QR code to view a short performance summary by David Hollis – EMEA Business Development Manager South Africa Our South African distributor, Ascendis Medical, is achieving reasonable sales through the public hospital system. Access to the Private Health system has been limited due to reimbursement constraints of health insurers. We will continue to support Ascendis in their endeavours for reimbursement. Scan QR code to view a short performance summary by David Hollis - EMEA Business Development Manager PolyNovo Limited | Annual Report 2021 02 Sweden Finland Austria Norway Denmark Poland Luxembourg United Kingdom Ireland Belgium Poland Netherlands Greece Switzerland Germany Italy Saudi Arabia Israel Turkey +53% Global Distributors FY21 sales growth India Taiwan First sales achieved in Taiwan and Singapore. South Africa Singapore +25% Australia FY21 sales growth Australia New Zealand Asia Direct sales in Singapore are progressing well with eight hospitals purchasing NovoSorb BTM for use in a wide range of elective and trauma cases in FY21. We also appointed a distributor in Taiwan in October 2020 with a first sale in December 2020. Taiwan is an advanced medical market, and we anticipate FY22 to be a strong year. Surgeon feedback is excellent. UK / Ireland Until January UK/Ireland has been highly restricted by COVID-19. We are seeing a gradual increase in surgical activity and the re-engagement of face-to-face sales calls. Sales are trending well, and we have added a sales role in Ireland, and a further three roles in the UK. Ireland has seen a rapid uptake of NovoSorb BTM and we see good growth opportunities throughout UK/Ireland. Australia Very strong sales growth in FY21 despite COVID-19 restrictions. Our penetration of the burn market is significant, and we have achieved solid growth in elective surgery with sales to many public and private hospitals. We added two additional salespeople and see strong growth continuing throughout FY22. Scan QR code to view a short performance summary by Andy Eakins – Marketing Manager UK & EMEA Scan the QR code to view a short performance summary by Valerie Young – Sales Director, Australia / New Zealand Middle East Good potential delayed due to COVID-19. As vaccination programs allow greater access, we anticipate market entries in H2 FY22. New Zealand Strong sales growth in New Zealand across all major hospitals. The expansion of BTM use across a wide variety of surgical applications has been exciting with market penetration expected to continue in FY22. Peer to peer referrals are strong and the surgical outcomes are outstanding. Scan QR code to view a short performance summary by David Hollis – EMEA Business Development Manager Scan QR code to view a short performance summary by Valerie Young – Sales Director Australia/New Zealand 03 PolyNovo Limited | Annual Report 2021 OUR PERFORMANCE NovoSorb BTM USA Sales ($USD) 49.0% 2021: $15.5m 2020: $10.4m Net Profit / (Loss) After Tax EXCLUDING NON-CASH ITEMS* EBITDA EXCLUDING NON-CASH ITEMS* 121.5% 2021: $0.2m 2020: -$1.2m 161.1% 2021: $0.6m 2020: -$1.0m Cash on Hand FY21 / 1H21 NovoSorb BTM Group Sales 0.4% FY21: $7.69m 1H21: $7.66m 33.8% 2021: $25.5m 2020: $19.1m * Non-cash items comprises of unrealised forex losses, share based payments and depreciation & amortisation 04 PolyNovo Limited | Annual Report 2021 BARDA Revenue Employee Related Expenditure EXCLUDING SHARE BASED PAYMENTS 18.1% 2021: $3.7m 2020: $3.1m 28.7% 2021: $16.7m 2020: $13.0m Cash on Hand YoY Capital Expenditure -34.0% 2021: $7.7m 2020: $11.6m -59.8% 2021: $3.6m 2020: $8.9m Total Employees Inventory Value 35.9% 2021: 106 2020: 78 61.0% 2021: $2.0m 2020: $1.2m Total Group Revenue Net Loss After Tax INCLUDING NON-CASH ITEMS 9.8% 2021: -$4.6m 2020: -$4.2m 32.0% 2021: $29.3m 2020: $22.2m Net Cash Outflow Operating Activities -41.4% 2021: -$0.3m 2020: -$0.4m 05 PolyNovo Limited | Annual Report 2021 WORLD LEADING — LIFE CHANGING Robust in the presence of infection Does not act as a food source for infections, often allowing retention while the infection is treated. Generation of a neodermis over exposed tendons and bones Can offer alternative treatment for complex wounds. Designed to minimise contracture over functionally important areas and improve cosmesis (uniformity of texture) Compared with primary skin grafting. Dermal repair to support limb salvage By creating a vascularised neodermis for definitive closure. 06 PolyNovo Limited | Annual Report 2021 CLINICAL TRIALS USA Burns Trial Approval for the Pivotal Trial to commence, comprising up to 150 full thickness burn patients was received from the FDA on 8 January 2021. The clinical research team is currently working to initiate all 25 North American and 5 Canadian research sites, which are a mixture of prestigious academic institutions and ABA verified burn centers. Three sites are currently actively screening potential subjects, with another 3 study sites coming on-board in August. The first patient to be recruited into the study is imminent, with a two-year enrollment period to recruit all subjects. The virtual investigator meeting was a great success and was attended by over 98 study personnel over the course of two days. Dr Tina Palmieri, UC Davis, Sacramento, CA., our Co-Principal Investigator provided a clear overview of the study protocol in conjunction with our other Co-Principal Investigator Dr. Blome Ebverwein, Lehigh Valley Hospital, Allentown, PA. Representatives from our industry partners and government sponsor also attended the meeting and provided a clear message on the importance of this study to both the burn community and the US Government. The 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) originally commenced on 28 September 2015 funding our feasibility study which concluded in March 2020. The Company has previously announced the result of this trial on 21 April 2020. The completion of the pivotal study is the final piece to fulfill the BARDA contract which will end in 2025. Patients were seen weekly from their baseline visit until healing, for up to 12 weeks, and a 2-week post healing (confirmation of closure assessment) in those that healed. If a participant’s foot ulcer healed before the final 12-week visit, they attended a healing confirmation visit two weeks post the original heal date. The initial results appear positive with 70% of ulcers achieving complete closure. The median time to healing was 7 weeks (range 3-13 weeks). The initial clinician’s feedback was that SynPath appeared to have a high degree of clinical efficacy and helped promote wound closure in many hard to heal DFU’s in a faster time period compared to conventional standard of care treatments in this patient population. The full study results from this pilot study will be available in late August / early September 2021, before moving onto the next phase in the project which is a randomised control trial (RCT) of 100 patients compared to the Standard of Care. “SynPath has exceeded our expectations in this pilot and is a very viable treatment for diabetic wounds, we look forward to the final statistical analysis of the pilot and the upcoming RCT ,” said Charles Zelen, DPM, principal investigator, Podiatry Section Chief; Department of Orthopedics; HCA Lewis-Gale Medical Center. The data from this study will be used to submit for insurance reimbursement coverage for chronic wound applications in the US market. This market segment has a total addressable market of USD $400m with market entry anticipated in 2024. The pivotal trial will be funded by BARDA up to USD $15 million. PolyNovo will also contribute to the trial through provision of product, staff resources, and infrastructure support. The contract is on a cost-plus monthly reimbursement basis. Successful completion of the pivotal trial will lead to a PMA application with the US FDA for the use of our scaffold in full thickness acute burns. 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. On completion of the trial and approval of our application for a PMA from the US FDA we anticipate the US Government may add NovoSorb BTM to its national stockpile for critical healthcare products. SynPathTM DFU Pilot Study A Single Arm Pilot Study Evaluating Wound Closure with Application of SynPath™ in the Treatment of Non-Healing Diabetic Foot Ulcers. The purpose of this pilot study was to assess the safety and clinical efficacy of SynPath™ to promote wound closure in non-healing diabetic foot ulcers, DFU, and to collect patient outcome data and clinician feedback in the first formal evaluation of SynPath in this chronic wound etiology. Ten eligible subjects who presented with a Wagner Grade 1 Diabetic Foot ulcer, and who met the inclusion/exclusion criteria of the protocol were enrolled into the evaluation. All patients that consented to taking part in the study were treated with SynPath over a period of 12 weeks, or until 100% wound closure. 07 PolyNovo Limited | Annual Report 2021 CHAIRMAN AND MANAGING DIRECTOR REPORT Dear Shareholder, COVID-19 in FY21 had a significant impact on hospital trauma, burn and elective surgery activity. Notwithstanding limited hospital access, lockdowns, and travel restrictions, we adapted our business and had continued material sales growth with global BTM sales up by 33.8% (AUD), US BTM sales up by 49.0% in local currency (USD) and the Group achieved a small underlying profit (excluding non-cash items) of $258,756. We signed three General Purchasing Organisation (GPO) contracts during the year to 30 June 2021 with further negotiations currently in progress. These contracts will enable faster account acquisition and deeper US market penetration in FY22. We continued our investment in building our platform for post COVID-19 growth with personnel growing from 78 to 106. Growth in our sales team was a significant driver of our sales momentum. Advanced digital programs including webinar and promotional activities are now part of our “normal” business processes. Many virtual trade shows have been conducted where we established new leads, presented NovoSorb BTM to large audiences, and reached new markets. Sales in all our direct markets continue to grow with the second half providing strong improvement in revenues, new account acquisitions and sales team expansion. Importantly PolyNovo achieved a small profit (excluding non-cash items) and was cash breakeven, a significant company milestone. Our cash on hand position is strong as at 30 June 2021 and forward cashflows are building despite forecast expenditure required for growing sales teams and investing in new product development. Continued manufacturing of inventory completed during FY21 means we have stock available for customers in all markets. Production capacity is high, and we increased capacity including redundancy through the completion of our new manufacturing facility. This new facility will house our polymer laboratories, film extrusion, new foam cutting machinery and ultrasonic welding capabilities. Our new equipment and skills in production enable PolyNovo to rapidly develop new medical devices constructed from our existing NovoSorb polymers. “FY22 has begun with positive sales momentum, continued sales force expansion, Syntrel VP (hernia) study commencement and improved customer access with the (hopefully) receding of COVID-19 restrictions.“ The new manufacturing facility has been commissioned and is currently undergoing internal qualification which is expected to be completed by the end of September. New, smaller NovoSorb BTM sizes will enter specific markets in October 2021 addressing the European, UK, Australia and New Zealand demands for economically treating lesion excisions, diabetic foot ulcers, arterial ulcers and venous leg ulcers. Recent publications and presentations by Flinders University (South Australia) demonstrate great promise for the role of NovoSorb BTM in arterial leg ulcers. PolyNovo is supporting further investigations of this application. The first phase of a diabetic foot ulcer study in the US concluded in July 2021 with enrolment of the first ten patients. We will now review the progress of these patients and adjust any trial protocols to embark on the recruitment of the next 40 patients. The data from this study will be used to submit for insurance reimbursement coverage for chronic wound applications in the US market. This market segment has a total addressable market of USD $400 million with market entry anticipated in 2024. The BARDA funded pivotal burn trial has commenced and we are in the process of enrolling 20 US based and 5 Canadian based burn centres in performing the pivotal burn trial. BARDA revenues are expected to increase commensurate with the trial activity in the year ahead. The R&D team has demonstrated an ability to adapt by producing finalised hernia devices called Syntrel VP in FY21. We commenced a large animal study in July 2021 to generate the data on resorption, toxicology and biocompatibility that will support our dossier submission to the US FDA in approximately March/April 2023 for our hernia product. We anticipate gaining approval to sell in the US by August 2023. FY22 has begun with positive sales momentum, continued sales force expansion, Syntrel VP (hernia) animal study commencement and improved customer access with the expectation of receding of COVID-19 restrictions. Clinical Trials FY21 Our $15m USD BARDA funded US pivotal burns trial is underway. This trial will compare NovoSorb BTM with the selected hospitals’ standard of care looking at wound closure together with cosmetic and functional outcomes. Enrolling Canadian burn centres into the program will also facilitate our market entry to Canada in FY22. PolyNovo will continue the 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 clinical data will ultimately lead to entering the US chronic wound care market and generate supporting clinical data for NovoSorb BTM in the treatment of these wounds in all markets. NovoSorb BTM already has regulatory approval for use in all chronic wound applications in all markets we are in. New Markets FY21 PolyNovo has expanded its European and Asian markets during the period to 30 June 2021. To enable faster EU penetration, we have adopted a distributor model in key European countries supported by our existing UK based marketing and business development team. We have entered Belgium, Luxembourg, Netherlands (Benelux), Norway, Denmark, Finland, Sweden, Poland, Italy, Turkey, and Greece. Although European markets have also been impacted by COVID-19, we have seen NovoSorb BTM sales with continued growth over the six months to 30 June 2021. 08 PolyNovo Limited | Annual Report 2021 We have taken a direct market entry into the Irish market in FY21 and have realised NovoSorb BTM sales following entry. We anticipate the Irish market will grow strongly in FY22. Taiwan has been added to our Asian markets and we see great potential in this advanced market. New Markets for FY22 PolyNovo is currently working on market entry in Canada, France, Kuwait, UAE, Cyprus, Lebanon, and further Middle Eastern markets this financial year. Japan is an attractive market, and whilst we are exploring the best market entry strategy for this market, it may take until 2023 for market entry due to complex regulatory requirements. Hernia - Syntrel Our Syntrel hernia devices are being manufactured in our new facility. These devices are currently undergoing biocompatibility, toxicology, and resorption studies. Data from this trial is required for the US FDA regulatory dossier which we anticipate submitting in March/April 2023 and gaining approval to sell in the US by August 2023. Much of the pre-clinical trial data relating to our NovoSorb film and ultrasonic welding processes from this development activity will be applicable to other devices in development. PolyNovo’s development teams have worked with our global suppliers to commission complex machinery throughout COVID-19. Consequently, the teams have developed new and advanced skillsets which will provide ongoing benefits to our other new product development programs. Tissue Reinforcement PolyNovo has employed additional scientific and marketing support to drive this program. Tissue reinforcement is the use of the NovoSorb foam that can be used alone or with the NovoSorb film reinforcement to fill internal tissue defects. We are currently scoping the unmet needs of surgeons so that we can capture their requirements within the design of novel NovoSorb products. We will share an estimated development timeline with the market once we have reached later stage gate milestones. Beta-Cell Diabetes application 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. Animal studies have demonstrated that NovoSorb foam is a safe and viable environment for Islet cell transplants. BetaCell has secured funding and plans to start human trials using NovoSorb BTM in FY22 for Type I diabetics who have undergone renal transplants. New Product pipeline PolyNovo sees multiple device development opportunities for NovoSorb applications, and we are actively screening near term programs. Summary of FY21 • Annual NovoSorb BTM revenue growth of 33.8% • Annual US revenue growth in $USD of 49.0% • Annual Distributor sales growth of 53.1% • Increased gross margin by 2.8% on product sales • Commenced the $15M ($USD) BARDA funded Pivotal trial • Signed three General Purchasing Organisations (GPO’s) in the US • Achieved profitability/breakeven (excluding non-cash Items) • Staff increased from 78 to 106 with a US sales team of 36 • Appointed a Director of R&D • Signed Taiwan distributor and achieved first sales • Signed 6 European distributors which covers an additional 8 markets • Expanded German distributor’s territory to include Belgium, Netherlands, Luxemburg, and Sweden • Implemented advanced digital marketing strategies to drive sales and marketing during COVID-19 • Completed the build of the new production facility for hernia, film, foam, and polymer (redundancy capacity for BTM) • Implemented Business Intelligence software including an electronic Quality Management System • Initiated a US chronic wound study for health insurance reimbursement • Initiated a chronic wound study with Flinders University South Australia David Williams Chairman Paul Brennan Managing Director 09 PolyNovo Limited | Annual Report 2021 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 2021 and the related Auditor’s Report. Board of Directors and Senior Management The details of Directors and Senior Management during the year and until the date of this report are set out below. Directors were in office for the entire period unless otherwise stated. Mr 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 as well as in mergers and acquisitions and capital raising. He has 30+ years’ experience working with and advising ASX-listed companies in the food, medical device, and pharmaceutical sectors. Mr Williams is currently a Director 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. 10 PolyNovo Limited | Annual Report 2021 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 Vice President of the Board of the Institute of Patent and Trade Mark Attorneys of Australia 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 is currently IP & Commercialisation manager at RMIT University and was previously 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. Mr Leon Hoare GradDipBus, AssocDipAppSc (Ortho), GAICD Dr David McQuillan BSc (Hons) Biochemistry, PhD Biochemisty Non-executive Director Non-executive Director Mr Hoare was appointed a Director of PolyNovo on 27 January 2016. He is currently 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 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 has also included a senior role at Bristol-Myers Squibb (medical devices), 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). 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 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). 11 PolyNovo Limited | Annual Report 2021 DIRECTORS' REPORT CONTINUED Mr Bruce Rathie B. Comm, LLB, MBA, FAIM, FAICD, FGIA Non-executive Director Mr Andrew Lumsden MA (Hons) in Accountancy & Finance, CA, AGIA ACG, MAICD Non-executive Director Mr Paul Brennan MBA, BSc (Nursing) RN RM Managing Director Mr Lumsden was appointed a Director of PolyNovo on 4 June 2021. He is an accomplished Chartered Accountant and finance executive with more than 20 years’ experience locally and internationally. He holds a Master of Arts in Accountancy and Finance (First Class Hons), is an Associate of The Chartered Governance Institute and a member of the Australian Institute of Company Directors. Mr Lumsden is currently Global Chief Operating Officer of Wellcom Group Pty Ltd (formerly Wellcom Group Limited) having previously held the roles of Chief Financial Officer and Company Secretary. Prior to joining Wellcom, Mr Lumsden was a Senior Manager within the Audit and Assurance practice of PricewaterhouseCoopers. Mr Rathie was appointed a Director of PolyNovo on 18 February 2010. He 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 20 years’ experience as a full time professional Non-executive Director. He is currently Chairman of Capricorn Mutual Limited and a Non-executive Director of ASX listed Cettire Limited (ASX:CTT), Capricorn Society Limited and Australian Meat Processors Limited. In the medical device space, he is currently 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. Mr Brennan was appointed Chief Executive Officer (CEO) of PolyNovo Limited 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. 12 PolyNovo Limited | Annual Report 2021 Mr Jan Gielen CA, Bachelor Bus (Acc) Chief Financial Officer and Company Secretary Dr Anthony Kaye BSc (Hons) Chemistry PhD Organic Chemistry Chief Operating Officer Dr Anthony Kaye joined PolyNovo on 9 November 2020. Dr Kaye holds a Ph.D. in Synthetic Organic Chemistry from Latrobe University and commenced his career with Biota holdings undertaking post-Doctoral research. Since then, Dr Kaye has held senior operational roles in the pharmaceutical and advanced materials industries initially at IDT Australia and Boron Molecular. Most recently Dr Kaye held senior operational and capital expansion project roles with CSL Behring, based at the Broadmeadows manufacturing facility. Dr Kaye has extensive experience in product development, process scale-up, advanced manufacturing, process automation, end to end supply chain and cleanroom facility design. Mr Gielen joined PolyNovo Limited 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. 13 PolyNovo Limited | Annual Report 2021 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 2021, PolyNovo Limited had eight wholly owned subsidiaries: PolyNovo Biomaterials Pty Limited, NovoSkin Pty Ltd, NovoWound Pty Ltd, PolyNovo NZ Ltd, PolyNovo UK Ltd, PolyNovo North America LLC (PNA LLC), PolyNovo Singapore Private Ltd and PolyNovo Ireland Ltd. The first three subsidiary companies listed above are Australian proprietary companies whilst the other entities are the trading and employment entities for those countries. PolyNovo NZ Ltd does not employ direct staff and is currently managed by the Australian sales team. 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 on next page. PolyNovo Limited | Annual Report 2021 14 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. BTM is commercially sold in Australia, USA, Canada (by exemption), New Zealand, United Kingdom, Ireland, Germany, Austria, Switzerland, Sweden, Finland, Norway, Benelux, Italy, Poland, Singapore, Malaysia, South Africa, India, Saudi Arabia, Israel, Greece, and Taiwan. Further markets are under consideration for FY22. 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.“ Regulatory approvals for NovoSorb BTM in FY21 Taiwan PolyNovo achieved Taiwan FDA regulatory approval for NovoSorb BTM in FY21. First sales followed in Q2 FY21. South Korea PolyNovo successfully passed the South Korean FDA audit in Q3 of FY21. Regulatory application for approval as a class III device for NovoSorb BTM is now in progress. Hernia Repair PolyNovo has completed the building and commissioning of the Unit 1 facility, and the internal qualification is expected to be completed by end of September. This facility enables PolyNovo to manufacture a wide variety of NovoSorb products including polymer, pellets, extruded films and fully converted medical devices such as Syntrel VP (hernia) devices. Pre-clinical trials are currently underway to develop the biocompatibility, toxicology and resorbsion data required for regulatory filings. We anticipate submitting for a US FDA 510(k) in March/April 2023 and gaining approval to sell in US by August 2023.There remains some risk in the timeline as we work through the regulatory processes and trials. 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. The 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 NovoSorb BTM during FY20. The data generated in this study will support our Premarket Approval (PMA) application and add to the body of evidence demonstrating the mode of action of NovoSorb BTM. The pivotal trial is funded by BARDA to USD $15 million after extending the contract in FY21. PolyNovo will also contribute to the trial through provision of product, staff resources and infrastructure support. We are currently recruiting patients into the trial through a planned 20 US burn centres and five Canadian burn centres. 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. 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. Dr Tina Palmieri, UC Davis Sacramento, and Dr Sigrid Eberwein, Lehigh Valley, are the principal investigators for this study. 15 PolyNovo Limited | Annual Report 2021 DIRECTORS' REPORT CONTINUED Tissue Reinforcement (Breast) PolyNovo’s internal development program for a portfolio of products for use in reconstructive and aesthetic surgery is well defined and has shared technologies. Our Hernia product is exciting but importantly it serves as an effective building block for tissue reinforcement products in orthopaedics, breast, etc. We anticipate that manufacturing processes and the technology will be shared across a range of new 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 has completed several swine studies with good results. It is 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, has funding supported from 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 with the addition of further research and development resources. Capital Investment PolyNovo has completed the majority of our capital program with completion of the Unit 1 manufacturing facility. We have a low capital investment program for FY22. The Unit 1 facility brings a wealth of new capacity and manufacturing technologies to PolyNovo, such as NovoSorb film extrusion, microsphere “PolyNovo has invested further into the upgrade of our Enterprise Resource Planning (ERP) system by enabling an advanced manufacturing module and a Client Relationship Management (CRM) tool to actively manage the business and customer needs across multiple countries.“ manufacturing, ultrasonic welding, higher speed foam cutting, NovoSorb BTM manufacturing redundancy/capacity and high-volume polymer manufacturing. PolyNovo has invested in enhanced IT systems that bring increased efficiencies in finance, quality management and building/manufacturing operations. We will, in FY22, further add to our IT infrastructure enabling faster global data transfer and business intelligence through fully encrypted cloud-based systems. COVID-19 COVID-19 in FY21 had a significant impact on hospital trauma, burn and elective surgery activity. Hospital and surgeon access was restricted due to the priority in treating patients with COVID-19, the many lockdowns and travel restrictions imposed across all geographies. To maintain customer engagement and drive sales we adapted our business to reduce the impact on traditional sales techniques and achieved 33.8% BTM sales growth globally. Notably in the US revenue was up by 49% in local currency (USD). In markets such as the US, high vaccination rates have led to population movement and lifestyles being “COVID- resilient”, which in turn increased sales with record results in Q4. The growth achieved is significant when considering the impact of COVID-19 globally. Focusing on digital sales and marketing campaigns was effective in servicing existing customers and winning new customers in all markets we operate. Status of Markets: US • Vaccinations are increasing hospital capacity. Some areas in the US remain challenging with low vaccination rates but overall the country’s vaccination rate is amongst the highest globally. • In many states people are moving around freely and activities potentially leading to trauma events are occurring. • Improved face to face access for sales teams and access to operating rooms, however sales calls will be a mix of digital and face to face. UK/Ireland • Hospital access has improved. Elective surgery rates are recovering. Steady revenue improvements reflecting high vaccination rates and removing of restrictions. Australia • Maintaining surgeon engagement in Australia, however we continue to see fluctuations in elective surgery rates due to lockdowns. Vaccination rates are increasing which should lead to relaxation of restrictions. New Zealand • Intermittent access to NZ from Australia, good digital engagement, good growth in sales and wide indications use. EU • Continued expansion in FY22. Virtual market support throughout FY21 however we see improving face to face access. PolyNovo Limited | Annual Report 2021 16 Forecasting revenue is more challenging due to COVID-19 but we have a well- established demand forecasting process in place. To counteract any demand planning and supply chain issues caused by COVID-19, stock levels in all direct markets have been increased and continue to be maintained at high levels. Logistics costs have increased and we update our cash flow forecasts to include the impact of changes in costs. The Group has a level of discretion in managing cash outflows in response to changes to the impact of COVID-19. A global COVID-safe plan has been implemented across the business in line with government guidelines to ensure the safety of staff and minimise business interruption. The Group will continue to monitor the impact of COVID-19 and adapt where required to ensure customer service is maintained, and business expansion plans are executed. Significant Changes in the State of Affairs 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 2021. 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 Syntrel hernia devices leading to the filing of US FDA 510(K) March/April 2023 • Establish 20 US and 5 Canadian recruitment sites for the US pivotal burn trial • Advance our new product pipeline with the addition of scientist and other resources • Support the BetaCell expansion of NovoSorb BTM use as a dermal deposit for Type 1 diabetes Financial Results PolyNovo Limited reported revenue for the year ended 30 June 2021 of $29,339,324 an increase of $7,110,823 from the prior year’s $22,228,501. The net loss after tax (NLAT) of $4,605,032 for FY21 was an increase of $411,294 from the prior year’s $4,193,738. Excluding non-cash items of share-based payments $2,626,897, unrealised forex loss $1,120,568, and depreciation & amortisation $1,116,323 the underlying net profit after tax is $258,756 (2020: loss $1,204,839). Several factors contributed to the result as follows: • Revenue from the sale of commercial products for FY21 increased by 34% to $25,507,859 from the prior year’s $19,064,983. • Finalise recruitment of the next patient’s cohort in the US DFU/VLU reimbursement trial • Exploit our GPO/IDN agreements in the US to further accelerate sales revenue • Establish a European warehousing and logistics hub with 3PL provider Movianto in Belgium which will enable customer order fulfilment from 1 September 2021. Significant Events After the Balance Date Trade finance facility was extended to 31 August 2021. 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. 17 PolyNovo Limited | Annual Report 2021 DIRECTORS' REPORT CONTINUED • Revenue from BARDA for FY21 increased by 18% to $3,650,065 from the prior year’s $3,091,140. This increase is reflective of the commencement of the pivotal trial. Revenue is expected to increase in FY22 as patients are recruited into the Pivotal trial. • Included in other income is payments from the Australian Government for COVID-19 assistance for $180,034. • Employee related expenses increased by 29% to $19,376,331. This increase is due to share-based payments expense provided to key management personnel and headcount increase to drive growth primarily within sales, marketing, production, quality, and finance. • Depreciation and amortisation increased by $126,165 attributable to property, plant and equipment acquired for the new manufacturing facility. • Corporate, administrative, and overhead expenses increased by 29% to $8,068,493 reflecting the increased growth and activity in the business. R&D Tax Incentives During the 2021 financial year, the Company received a 38.5% non- refundable tax offset of $506,381 (non-cash) in relation to the FY20 R&D tax incentive scheme. As the Company has exceeded the $20.0 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. Closing share price Date 30 June 2017 30 June 2018 30 June 2019 30 June 2020 30 June 2021 $ $0.21 $0.54 $1.54 $2.54 $2.82 A high of $4.01 was reached on 29 December 2020. 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. 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. Loss Per Share In Australian dollars $ Basic loss per share – cents Diluted loss per share – cents Cents (0.69) (0.69) As the Group made a loss for the year ended 30 June 2021, 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. As at 30 June 2021, there are 2,700,000 share options and 3,300,330 share awards unissued. 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 2021, the Company indemnified its Directors, Company Secretary and Executive Officers in respect of any acts or omissions giving rise to a liability to another person (other than the Company or a related party) unless the liability arose out of conduct involving a lack of good faith. In addition, the Company indemnified the Directors and the Company Secretary against any liability incurred by them in their capacity as Directors or Company Secretary in successfully defending civil or criminal proceedings in relation to the Company. No monetary restriction was placed on this indemnity. The Company has insured its Directors, Company Secretary and Executive Officers for the period under review. Under the Company’s Directors’ and Officers’ Liability Insurance Policy, the Company shall not release to any third party or otherwise publish details of the nature of the liabilities insured by the policy or the amount of the premium. 18 PolyNovo Limited | Annual Report 2021 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. 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. Board and Committee Meetings 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 Dr David McQuillan Non-Executive Director Mr Leon Hoare* Non-Executive Director Mr Bruce Rathie** Non-Executive Director Mr Andrew Lumsden Non-Executive Director Mr Paul Brennan Executive Director Mr Max Johnston*** Non-Executive Director Mr Philip Powell*** Non-Executive Director 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 11 2 3 11 11 10 11 11 11 1 11 4 4 11 11 11 11 11 11 1 11 4 4 - 1 - - - 2 - - 1 1 - 1 - - - 2 - - 1 1 3 - 2 - 3 - - - - - 3 - 2 - 3 - - - - - * Mr Leon Hoare is Chair of the Remuneration Committee. ** Mr Bruce Rathie is Chair of the Audit Committee. *** Mr Max Johnson and Mr Philip Powell resigned on 13 November 2020. Directors’ Shareholdings and Declared Interests At 30 June 2021, the Directors of PolyNovo collectively hold 33,039,500 shares in the Company. As at the date of this report the interests of the Directors in the Company’s shares are: Name Directors Mr David Williams Mr Bruce Rathie Dr David McQuillan Mr Leon Hoare Dr Robyn Elliott Ms Christine Emmanuel Mr Andrew Lumsden Mr Paul Brennan Total 19 Shares held directly - - 608,313 - - - - Shares held indirectly 18,900,000 3,050,000 - 1,180,220 - - - 5,115,872 4,185,095 5,724,185 27,315,315 PolyNovo Limited | Annual Report 2021 DIRECTORS’ REPORT CONTINUED As at 30 June 2021 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 2021 Annual Report. Further details of the equity interests of Directors can be found in the Remuneration Report. Auditor Ernst & Young (EY) continues in office in accordance with section 327b(2) of the Corporations Act 2001. Non-audit Services During the year ended 30 June 2021, 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. Non-audit services $ Tax compliance and corporate secretarial services 93,461 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 37. 20 PolyNovo Limited | Annual Report 2021 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 our knowledge 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. We strive to improve on all aspects of our business year on year in line with our phase of commercial development. Our Approach to ESG PolyNovo acknowledges the importance of an integrated and consistent approach to Environmental, Social and Governance (ESG) risk factors across our business. We have added additional resources dedicated to delivering a holistic and integrated robust ESG framework and package. Environment PolyNovo acknowledges we have an important role in protecting the environment and recognises the contribution we can make towards transitioning to a low carbon economy. Our BTM manufacturing process is already low emitting, with approximately 560 grams of carbon emitted per batch. We are currently in the process of gaining Climate Active Certification and will be developing a carbon reduction strategy upon achieving certification. PolyNovo is fully committed to achieving carbon neutral certification by the end of FY23. PolyNovo only utilises environmentally certified commercial waste disposal providers, with minimal waste produced in our manufacturing process. To further improve our waste management processes, we have engaged a specialised third-party consultancy to develop a waste management and reduction plan in FY22. We are committed to reducing our operational waste and water use. Our recycling programs will be further enhanced by the ongoing migration to paperless documentation systems in our business support functions. PolyNovo’s Environment Policy can be found on its website: https://polynovo. com/about-us/ Social Our People At PolyNovo, every employee plays a role in our success. Working together, we develop new opportunities for our customers and products, communities, and shareholders. The company has a strong focus on learning and development. All staff at PolyNovo 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 for personal and professional growth. Training is achieved through targeted educational programs and mentorship from colleagues and managers. 21 PolyNovo Limited | Annual Report 2021 ESG STATEMENT AND CORPORATE GOVERNANCE CONTINUED “ PolyNovo acknowledges the importance of an integrated and consistent approach to Environmental, Social and Governance (ESG) risk factors across our business.” “PolyNovo is fully committed to achieving carbon neutral certification by the end of FY23.” 22 PolyNovo Limited | Annual Report 2021 PolyNovo’s Gender Diversity Profile PolyNovo aims to provide an inclusive workplace where everyone is valued and treated with respect, without discrimination or bias. We have developed a company- wide Diversity Profile, which is actively monitored to ensure we are a leading example of a diverse organisation in the industry in which we operate. We celebrate religious and cultural events of our teams with learnings from these informing our international operations. Embracing our existing national and international diversity makes PolyNovo an interesting, exciting, and dynamic workplace where alternative thinking provides us with an innovative edge. The following graphs and table highlight the proportion of women and men on the Board, in senior management positions as well as all employees across the whole organisation as of 13 August 2021. Health & Safety Safety is central to the responsible operation of our business, and the health and safety of our employees and contractors is our top priority. We maintain a strong focus on preventing injuries and continuously improving our practices. Our Health & Safety Policy affirms our aspiration to avoid harm, empower our people to perform their tasks safely and responsibly, and continuously improve our performance. In FY21, we started measuring our safety performance monthly to track progress and enable comparison with published industry data. Over the financial year reporting period, there was one (1) lost time injury and zero (0) medical treatment injuries to our employee and contractor workforce. The company Total Recordable Injury Frequency Rate (TRIFR) for this base year is 5.62. This number may appear high however it is a result of a small workforce that amplifies the ratio. PolyNovo’s Health & Safety Policy can be found on its website: https://polynovo. com/about-us/ COVID-19 Our manufacturing operations continued as an “essential service” throughout the COVID-19 pandemic. Sales and account acquisition in FY21 was strong in all our direct markets. We continued to build inventories throughout lockdowns and successfully navigated logistical challenges to ensure ample stock was available for our customers. With the safety of our personnel at the forefront, PolyNovo responded to COVID-19 dynamically, whilst simultaneously and successfully meeting customer demand, we expanded hygiene and safety measures, implemented ‘work from home’ arrangements and redesigned our office spaces to enable physical distancing. Figure 2 Total Recordable Injury Frequency Rate (TRIFR) Figure 1 All Employees Managers / Supervisors Board of Directors 36% 38% 64% 62% 29% 71% Male Female Male Female Male Female 5.62 6.00 5.00 4.00 3.00 2.00 1.00 0.00 FY21 Total Recordable Injury Frequency Rate (TRIFR) is the rate of injuries resulting in a fatality, lost time from work of one day/shift or more, and medical treatment beyond first aid. Calculation method: TRIFR = (# Injuries) x (1,000,000) / (Hours Worked). Data is calculated over a rolling 12-month period of time. Total Staff by Dept Staff #s Female Sales Marketing Rest of Company Total Staff Managers/Supervisors C Suite 43 9 58 110 35% 26 4 15 4 21 40 10 0 Middle East / African 1 1 5 7 1 0 Middle East / African 2% 11% 9% 6% 4% 0% Hispanic Asian 2% 0% 3% 3% 0% 0% 9% 11% 48% 30% 31% 0% Hispanic Asian Female 4 1 28 33 8 0 35% 44% 36% 36% 38% 0% 1 0 2 3 0 0 23 PolyNovo Limited | Annual Report 2021 ESG STATEMENT AND CORPORATE GOVERNANCE CONTINUED Our Community We support a number of charitable and community-based programs, whose principles align with PolyNovo’s, including organisations that advance the lives of those in disadvantaged social situations. An example of this engagement is our partnership with Angel Faces, a charity focused on the social and personal recovery of young women who have suffered burn injuries. We are committed to engaging with research and clinical activities that advance the quality of life for those impacted by burn, trauma, and infectious diseases. We are proud to provide NovoSorb BTM at no-cost for surgical applications when surgeons are participating in charitable or out-reach programs. Bioethics PolyNovo is committed to upholding best-practice bioethics principles and conducts its operations in accordance with the highest standards of bioethics, including in the conduct of clinical trials. PolyNovo only commissions animal testing where required for regulatory approval. Any necessary animal studies required are conducted externally through specialised providers and institutes, under ethics committee approval. Such studies meet audited GLP standards and have the appropriate level of oversight in place from health regulators, including the US Food and Drug Administration (FDA). PolyNovo’s Commercial Code of Conduct can be found on its website: https:// polynovo.com/about-us/ Modern slavery PolyNovo respects ethical labour practices and takes a zero-tolerance approach to any form of human rights abuses, including modern slavery in our operations and supply chains. We expect that all our employees, suppliers, subcontractors, and agents uphold these values. PolyNovo has developed a Modern Slavery Statement that outlines our process for complying with local and international Modern Slavery laws. PolyNovo surveys suppliers for compliance to this policy and only sources materials from accredited manufacturers. PolyNovo’s Slavery Statement can be found on its website: https://polynovo. com/about-us/ Figure 3 Principle 1 Lay solid foundations for management and oversight 2 Structure the board to be effective and add value 3 Instil a culture of acting lawfully, ethically, and responsibly 4 Safeguard the integrity of corporate reports 5 Make timely and balanced disclosure 6 Respect the rights of security holders 7 Recognise and manage risk 8 Remunerate fairly and responsibly Governance PolyNovo recognises the importance of good corporate governance and the part it plays ensuring business is conducted honestly, fairly, and legally. PolyNovo is committed to adopting corporate governance policies to achieve the objectives of acting ethically and responsibly, safeguarding the integrity in corporate reporting, making timely and balance disclosures, and recognising and managing risk. The Board of PolyNovo reviews its policies and governance practices in reference to the eight Principles of Good Corporate Governance (Principles) established by the ASX Corporate Governance Council. The policies and governance practices in place are listed under Principles of Good Corporate Governance below: PolyNovo Policy PolyNovo Board Charter PolyNovo Board Charter Commercial Code of Conduct Whistle-blower Policy Gender Diversity Policy Share Trading Policy Environment Policy Modern Slavery Statement Audit and Risk Committee Charter Market Disclosure Protocol Communications Policy PolyNovo Risk Management Policy Health and Safety Policy Remuneration and Nomination Committee Charter PolyNovo’s Corporate Governance Statement and policies can be found on its website https://polynovo.com/about-us/ 24 PolyNovo Limited | Annual Report 2021 25 PolyNovo Limited | Annual Report 2021 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 2021 This Remuneration Report is audited. Variable pay arrangements to key management personnel are subject to the governance and approval of the Remuneration Committee. This Remuneration Report forms part of the Directors’ Report and includes details of the Group’s remuneration strategy and arrangements for the 2021 financial year. This report outlines the compensation arrangements for the key management personnel of PolyNovo and explains how these arrangements are linked to Company performance. Key management personnel Key management personnel are those persons who are responsible for planning, directing and controlling the activities of the Group. The Board has determined that the key management personnel of the Group are the Non‑executive Directors and Senior Managers (Executives) of PolyNovo, whose details are set out below. The following are Key Management Personnel during the period unless otherwise stated. Non‑executive Directors • Mr David Williams – Non‑executive Chairman • Dr Robyn Elliott – Non‑executive Director • Ms Christine Emmanuel – Non‑executive Director • Mr Leon Hoare – Non‑executive Director • Mr Max Johnston – Non‑executive Director (resigned 13 November 2020) • Dr David McQuillan – Non‑executive Director • Mr Philip Powell – Non‑executive Director (resigned 13 November 2020) • Mr Bruce Rathie – Non‑executive Director • Mr Andrew Lumsden – Non‑executive Director (appointed 4 June 2021) Managing Director and Senior Managers • Mr Paul Brennan – Managing Director • Mr Jan Gielen – Chief Financial Officer/Company Secretary • Dr Anthony Kaye – Chief Operating Officer (appointed 9 November 2020) 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. 26 PolyNovo Limited | Annual Report 2021 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 $850,000 (2020: $600,000). Total Non‑executive Directors’ fees (including superannuation but excluding share‑based payments and consulting fees) for the year ended 30 June 2021 were $511,409 (2020: $490,663). 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 achieving budgeted total group revenue and EBITDA and exceeding budgeted total group revenue and EBITDA by at least ten percent (10%). The maximum incentive is twenty percent (20%) of salary. Mr Anthony Kaye is entitled for a bonus of $19,433 inclusive of superannuation during the financial year 2021 in relation to service performed in the financial year 2021. 2727 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 REMUNERATION REPORT – AUDITED CONTINUED 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 2020, 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 key terms of his contract are as follows: • a salary of $400,160 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 Long‑term incentive plan and the fair value of awards 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 2020, 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 $210,000 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) Mr Anthony Kaye was appointed COO on 9 November 2020. His employment contract is aligned 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 $228,311 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 ‘COO 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. 2828 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 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 hurdle for the share awards 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. 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 $2,184,268 (2020: $1,633,713). Amendment to Managing Director’s Long Term Incentive (subject to shareholder approval) The Group issued an ASX announcement on 7 July 2021 outlining the proposed modification to the MD’s existing share awards addressing issues relating to the strike against the prior year’s Remuneration Report. The modification is being taken to shareholders for approval at the upcoming AGM on 26 October 2021. Given shareholder approval for modification of the award has not yet been obtained, there has been no change to initial share award expense recognised in the period to 30 June 2021. 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 Jan 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 continuous 3 months. 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 option expense in the period was $nil, as the option expense fully incurred as at 30 June 2020. 2929 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 REMUNERATION REPORT – AUDITED CONTINUED COO Performance Incentives The performance evaluation of the Chief Operating Officer is conducted by the Board. On 9 November 2020, PolyNovo issued an options package comprising three tranches totalling 500,000 options to the COO, Mr Anthony Kaye. Details of the three tranches are set out below. The vesting hurdle for the options is linked to Mr Anthony Kaye’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 $2.25 must be sustained over a period of at least continuous 3 months. Once vested, the options can be exercised in three tranches as follows: • Tranche 1: 150,000 options – not to be exercised before 9 November 2021 and not later than 31 December 2024; • Tranche 2: 150,000 options – not to be exercised before 9 May 2022 and not later than 31 December 2024; and • Tranche 3: 200,000 options – not to be exercised before 9 November 2022 and not later than 31 December 2024. The options whether they have vested or not will be cancelled on the date of termination or cessation of employment. The exercise price is $2.25 per option tranche. Once vested, sixty percent (60%) of the shares will be in escrow for a period of 12 months from date of issue and are restricted shares subject to rule 9 of the Employee Option Plan. The remaining forty percent (40%) are available immediately. The fair value of the options relating to the incentive scheme shares was $418,450. The expense relating to the incentive scheme shares during the financial year was $211,660 (2020: $nil). 3030 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Remuneration of Key Management Personnel Details of the remuneration for key management personnel for the years ended 30 June 2020 and 30 June 2021 are set out in Table A below. Short‑Term Cash salary & fees $ Cash bonus $ Con‑ sulting fees $ Non‑ mone‑ tary benefits $ Post employ‑ ment Super‑ annuat‑ ion $ Leave allow‑ ance Annual and long service leave $ Termin‑ ation benefits $ Share‑ based pay‑ ments Share options & share awards $ % Perfor‑ mance based Total $ 2020 84,133 2021 100,457 2020 59,030 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 63,927 59,463 63,927 59,030 23,767 59,030 23,767 59,030 63,927 42,651 63,927 8,523 2021 2020 63,927 – 2021 5,081 2020 430,889 2021 472,708 – – – – – – – – – – – – – – – – – – – – – – – – 24,490 – – – – – – – – – – – – – 24,490 – – – – – – – – – – – – – – – – – – – – – 7,993 9,410 5,608 6,073 – – 5,608 2,258 5,608 2,258 5,608 6,073 4,052 6,073 810 6,073 – 483 35,285 38,701 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 92,126 – 109,867 – – – – – – – – – – – – – – – – – 64,637 70,000 83,953 63,927 64,637 26,025 64,637 26,025 64,637 70,000 46,703 70,000 9,333 70,000 – 5,564 490,663 – 511,409 – – – – – – – – – – – – – – – – – – – – Table A Directors Mr David Williams (Chairman/ Non‑Executive Director) Mr Bruce Rathie (Non‑Executive Director) Dr David McQuillan (Non‑Executive Director)1 Mr Max Johnston (Non‑Executive Director)2 Mr Philip Powell (Non‑Executive Director)2 Mr Leon Hoare (Non‑Executive Director) Ms Robyn Elliott (Non‑Executive Director) Ms Christine Emmanuel (Non‑Executive Director) Mr Andrew Lumsden3 (Non‑executive Director) Subtotal compensation for Directors 3131 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 REMUNERATION REPORT – AUDITED CONTINUED Short‑Term Post employ‑ ment Long‑ term Cash salary & fees $ Cash bonus $ Con‑ sulting fees $ Non‑ mone‑ tary benefits $ Super‑ annuat‑ ion $ Annual and long service $ Termin‑ ation benefits $ Share‑ based pay‑ ments Options and Perfor‑ mance rights $ % Perfor‑ mance based Total $ Table A (continued) KMP Key Management Personnel 2020 359,589 68,493 Mr Paul Brennan (MD) 2021 397,152 2020 195,662 2021 207,500 2020 2021 2020 69,231 – – – – – – – – 2021 147,231 19,433 2020 624,482 68,493 2021 751,883 19,433 2021 1,055,370 68,493 24,490 – – – – – – – – – – – – – – – – – – – – 40,668 31,524 – 1,633,713 2,133,987 37,729 18,588 3,751 13,135 19,712 8,275 6,577 – – – – – 2,184,268 2,622,900 – – 3,741 – – 264,787 492,172 – 235,488 79,549 – – – – 13,987 6,688 – 211,660 398,999 65,833 44,659 3,741 1,898,500 2,705,708 71,429 18,713 – 2,395,928 3,257,387 101,118 44,659 3,741 1,898,500 3,196,371 80% 83% 54% – – – – 53% 73% 74% 62% Mr Jan Gielen (CFO/Company Secretary) Mr Ashok Srinivasan (COO)4 Mr Anthony Kaye5 (COO) Subtotal compensation for Other Key Management Personnel Total compensation for all Key Management Personnel 2021 1,224,591 19,433 – – 110,130 18,713 – 2,395,928 3,768,795 64% Notes 1. Mr 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. The consulting fees were excluded from the aggregate Directors’ fee pool limit. 2. Mr Max Johnston and Mr Philip Powell resigned on 13 November 2020. 3. Mr Andrew Lumsden was appointed as Non‑executive Director on 4 June 2021. 4. Mr Ashok Srinivasan resigned on 20 December 2019 and annual leave balance was paid on termination of employment. 5. Mr Anthony Kaye was appointed as Chief Operating Officer on 9 November 2020. 3232 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Share options and awards granted as part of remuneration During the year ended 30 June 2021, 500,000 share options (2020: nil) and nil share awards (2020: 3,300,330) were granted, no share options and awards were cancelled (2020: nil), and no share options and awards were forfeited (2020: nil). The options issued are 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. Fair Value of options and awards granted during the year $ Number of shares and awards issued upon exercise of options Value of options and awards exercised during the year2 $ Value of shares received upon exercise of options and awards3 $ Value of options and awards yet to be expensed $ Average fair value per option at grant date1 $ Grant number Table B Grant date Mr Paul Brennan Share awards Share awards Share awards Subtotal Mr Jan Gielen Options Options Options Subtotal Mr Anthony Kaye Options Options Options Subtotal Total Table B (continued) Mr Paul Brennan Share awards Share awards Share awards Subtotal Mr Jan Gielen Options Options Options Subtotal Mr Anthony Kaye Options Options Options Subtotal 01/10/2019 01/10/2019 01/10/2019 06/03/2019 06/03/2019 06/03/2019 09/08/2020 09/08/2020 09/08/2020 1,100,110 1,100,110 1,100,110 3,300,330 300,000 300,000 400,000 1,000,000 150,000 150,000 200,000 500,000 4,800,330 0.514 0.493 0.475 0.236 0.311 0.394 0.789 0.838 0.872 – – – – – – – – 118,350 125,700 174,400 418,450 418,450 – – – – 300,000 – – 300,000 – – – – 300,000 – – – – 543,000 – – 543,000 – – – – 543,000 – – – – 213,789 205,054 654,264 1,073,107 723,000 – – 723,000 – – – – – – – – 58,403 61,752 86,635 206,790 723,000 1,279,898 Fair Value of options and awards included in remuneration during the year $ % compensation consisting of options and awards during the year % 848,185 813,531 522,552 2,184,268 – – – – 59,947 63,948 87,765 211,660 2,395,928 32% 31% 20% 83% – – – – 24% 26% 36% 86% – Note: 1. Determined at the time of grant per AASB 2. For details on the valuation of the options, including models and assumptions used, please refer to not 34. 2. Determined at the time of exercise at the intrinsic value. Exercise price was $0.6, market price was $2.41. 3. Determined at the time of exercise at the market value. 4. Nil options were forfeited or lapsed during the year. Refer to note 34. 3333 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 REMUNERATION REPORT – AUDITED CONTINUED Share options and awards granted in year ended 30 June 2020 The fair value of share awards 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 share awards included in remuneration during the year was $1,633,713. This represents 80% allocation to the year ended 30 June 2020 as the share awards have not yet vested. Share options granted in year ended 30 June 2021 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 $211,660. This represents 86% allocation to the year ended 30 June 2021 as the options have not yet vested. Share awards and options expiry dates Participant Mr Paul Brennan • Tranche 1 • Tranche 2 • Tranche 3 Expiry Date 30 June 2023 30 June 2023 30 June 2023 Other terms of the share awards 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 awards are available in the following year. • Escrow period – once vested, fifty percent (50%) of the share awards 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. Participant Mr Jan Gielen • Tranche 1 • Tranche 2 • Tranche 3 Expiry 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 –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. Participant Mr Anthony Kaye • Tranche 1 • Tranche 2 • Tranche 3 Expiry Date 31 December 2024 31 December 2024 31 December 2024 3434 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Other terms of the share options include: • Vesting hurdles – 12 months of employment with the Company. • Exercise price – $2.25 per option tranche. • Escrow period –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 remaining forty percent (40%) are available immediately. 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 20202 Granted as compen‑ sation On exercise of options Net change other1 Balance at 30 June 2021 Balance at end of year – directly held Balance at end of year – indirectly held Table C Directors Mr David Williams 18,000,000 Dr Robyn Elliott Ms Christine Emmanuel Mr Leon Hoare Dr David McQuillan Mr Bruce Rathie Mr Andrew Lumsden Other key management personnel Mr Paul Brennan Mr Jan Gielen Mr Anthony Kaye – – 1,280,220 608,313 3,605,555 – 9,500,967 – – – – – – – – – – – – – – – – – – – – 900,000 18,900,000 – – – – (100,000) 1,180,220 – – – – – 608,313 608,313 (555,555) 3,050,000 – – – – 18,900,000 – – 1,180,220 – 3,050,000 – (200,000) 9,300,967 5,115,872 4,185,095 300,000 – – – 300,000 300,000 – – – – Note: 1. ‘Net Change Other’ reflects shares privately acquired or disposed during the period. 2. Opening balance excludes shares held by closely related parties where there is no control or significant influence by the KMP. Share options and awards of key management personnel The share options, share awards and share holdings of key management personnel for the year ended 30 June 2021 are set out in the following table: Balance at 1 July 2020 Granted as compen‑ sation Options exercised Balance at 30 June 2021 Total vested at end of year Total exercisable at end of year Total not exercisable at end of year Total vested during year Table D Other Key Management Personnel Mr Paul Brennan 3,300,330 Mr Jan Gielen 1,000,000 – – Mr Anthony Kaye – Total 4,300,330 500,000 500,000 – 3,300,330 300,000 – 700,000 500,000 – 700,000 – 300,000 4,500,330 700,000 – – – – 3,300,330 700,000 500,000 4,500,330 – – – – 3535 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 REMUNERATION REPORT – AUDITED CONTINUED 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 2021. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors Mr David Williams Chairman 26 August 2021 3636 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 AUDITOR’S INDEPENDENCE DECLARATION Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Auditor’s independence declaration to the directors of PolyNovo Limited As lead auditor for the audit of the financial report of PolyNovo Limited for the financial year ended 30 June 2021, 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 Ashley Butler Partner 26 August 2021 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 37 PolyNovo Limited | Annual Report 2021 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2021 Revenue Revenue from contracts with customers Research and development tax benefit Interest income Other income Expenses Changes in inventories of finished goods and work in progress Employee‑related expenses Research and development expenses Depreciation and amortisation expenses Corporate, administrative and overhead expenses Interest expense Finance costs Loss before income tax expense Income tax expense Loss after income tax expense for the year attributable to the owners of PolyNovo Limited Other comprehensive income Items that may be reclassified subsequently to profit or loss Gain/ (Loss) on translation of foreign operation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of PolyNovo Limited Earnings per share for loss attributable to the owners of PolyNovo Limited Basic earnings per share Diluted earnings per share Consolidated 30 June 2021 $ 30 June 2020 $ Note 4 5 6 7 29,157,924 22,156,123 – 1,103 180,297 36,956 35,311 111 29,339,324 22,228,501 (1,555,393) (1,703,521) 8 (19,376,331) (15,073,365) 9 10 11 22 12 (3,647,424) (2,352,698) (920,684) (837,175) (8,068,493) (6,271,861) (321,403) – (98,977) (18,000) (4,550,404) (4,127,096) (54,628) (66,642) (4,605,032) (4,193,738) 338,156 338,156 (152,132) (152,132) (4,266,876) (4,345,870) Cents Cents 33 33 (0.69) (0.69) (0.63) (0.63) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 38 PolyNovo Limited | Annual Report 2021 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2021 Assets Current assets Cash and cash equivalents Trade and other receivables Contract cost assets Inventories Other financial assets Prepayments Total current assets Non‑current assets Contract cost assets Property, plant and equipment Right‑of‑use assets Intangibles Other assets Total non‑current assets Total assets Liabilities Current liabilities Trade and other payables Interest‑bearing loans and borrowings Lease liability Income tax payable Provisions Deferred tax liability Total current liabilities Non‑current liabilities Interest‑bearing loans and borrowings Lease liability Provisions Total non‑current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Consolidated 30 June 2021 $ 30 June 2020 $ Note 13 14 15 16 25 20 15 17 18 19 20 21 22 18 12 23 22 18 23 7,688,554 5,667,055 146,315 1,959,835 50,000 732,403 11,647,701 3,921,519 – 1,217,042 50,000 2,441,740 16,244,162 19,278,002 475,522 – 17,584,398 13,890,380 2,238,759 1,652,320 144,137 22,095,136 38,339,298 2,646,521 1,900,168 141,870 18,578,939 37,856,941 4,961,148 2,525,006 350,368 74,093 739,010 – 3,171,995 5,304,372 323,876 54,729 608,722 10,837 8,649,625 9,474,531 5,058,338 2,063,331 215,959 7,337,628 15,987,253 22,352,045 1,983,494 2,420,058 166,834 4,570,386 14,044,917 23,812,024 24 24 24 139,250,502 139,070,502 (1,637,216) (4,602,269) (115,261,241) (110,656,209) 22,352,045 23,812,024 The above statement of financial position should be read in conjunction with the accompanying notes. 39 PolyNovo Limited | Annual Report 2021 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2021 Consolidated Balance at 1 July 2019 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Share‑based payments (note 34) Balance at 30 June 2020 Consolidated Balance at 1 July 2020 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Contributed Equity $ Other Reserves $ Acquisition of Non‑ Controlling Interest Reserves $ Accumulated Losses $ Total equity $ 139,070,502 2,782,047 (9,293,956) (106,462,471) 26,096,122 – – – – – (152,132) (152,132) 2,061,772 – – – – (4,193,738) (4,193,738) – (152,132) (4,193,738) (4,345,870) – 2,061,772 139,070,502 4,691,687 (9,293,956) (110,656,209) 23,812,024 Contributed Equity $ Other Reserves $ Acquisition of Non‑ Controlling Interest Reserves $ Accumulated Losses $ Total equity $ 139,070,502 4,691,687 (9,293,956) (110,656,209) 23,812,024 – – – – 338,156 338,156 – – – – – – (4,605,032) (4,605,032) – 338,156 (4,605,032) (4,266,876) – – 180,000 2,626,897 Exercise of options 180,000 Transactions with owners in their capacity as owners: Share‑based payments (note 34) – 2,626,897 Balance at 30 June 2021 139,250,502 7,656,740 (9,293,956) (115,261,241) 22,352,045 The above statement of changes in equity should be read in conjunction with the accompanying notes. 40 PolyNovo Limited | Annual Report 2021 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2021 Cash flows from operating activities Receipts from customers Receipts from BARDA reimbursements and advances Receipts of research and development benefit Receipts from royalty revenue Payment of interest on borrowings Payment of interest on lease liabilities Payments to suppliers and employees Consolidated 30 June 2021 $ 30 June 2020 $ Note 24,780,651 18,419,968 4,379,446 36,956 289 (211,916) (98,771) 3,385,242 694,182 245 – (98,977) (29,136,876) (22,827,983) Net cash used in operating activities 13 (250,221) (427,323) Cash flows from investing activities Payments for property, plant and equipment Interest received 17 (3,568,717) (8,869,219) 1,484 24,759 Net cash used in investing activities (3,567,233) (8,844,460) Cash flows from financing activities Proceeds from borrowings Repayment of principal on borrowings Repayment of principal on lease liabilities Proceeds from the exercise of options Net cash from/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 7,253,987 (7,141,826) (362,528) 180,000 7,287,866 – (260,584) – (70,367) 7,027,282 (3,887,821) (2,244,501) 11,647,701 13,920,695 (71,326) (28,493) Cash and cash equivalents at the end of the financial year 13 7,688,554 11,647,701 The above statement of cash flows should be read in conjunction with the accompanying notes. 41 PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS 30 June 2021 Note 1. Corporate Information The Financial Report of Polynovo Limited (the Company) and its controlled entities (the Group) for the year ended 30 June 2021 was authorised for issue in accordance with a resolution of the Directors on 26 August 2021. 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, Ireland, Singapore and the USA. Note 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 Australian 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 consolidated financial statements provide comparative information in respect of the previous period. Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (b) Going concern 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, and the ongoing need to fund these activities through the Group’s working capital movements, budgeted growth in sales and existing finance facilities. 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 a level of discretion in managing cash outflows in a response to changes of the impact of the pandemic, together with continuing to consider possible geographic licensing expansion and capital management strategies if required. (c) 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 2020. Those Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective, have not been adopted. (d) 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 disclosed in note 2 (v). (e) Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 30 June 2021. 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. 42 PolyNovo Limited | Annual Report 2021 (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. (g) Contract cost asset A contract cost asset is the costs incurred in fulfilling a contract with a customer. The costs relate directly to a contract that the Group can specifically identify, enhance resources of the Group that will be used in satisfying performance obligations in the future and are expected to be recovered. (h) 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). 4343 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED (i) 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 19 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. (j) 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. (k) 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 2021. Information relating to this Plan is set out in note 34 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 34. 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 (l) 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. 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 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. 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. 4444 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 (m) Plant and equipment Construction in progress is stated at cost, net of accumulated impairment losses. Plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses. 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 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 until there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. 4545 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS 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. 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 12. 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 34 and in the Remuneration Report. Contract cost assets Estimating the utilisation of contract cost assets requires selection of an appropriate amortisation method. The Group adopted straight line method to amortise contract cost assets over the period of the contract, consistently with the transfer of the services to which the asset relates. Further details on contract cost assets are disclosed in note 15. 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 19. Expected Credit Loss Estimating the expected credit loss (ECL) for trade receivables and BARDA income receivables requires selection of an appropriate method and significant judgement to determine the amount. The method applied categorises trade receivables and BARDA income receivables 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 14. (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. 4646 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 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. (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, Singapore dollars for Singapore entity, New Zealand dollars for New Zealand entity and Euro for European entities. 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) Security deposits Security deposits are recorded at amortised cost in the Statement of Financial Position. (ab) 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 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. 4747 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS 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 14. 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 include loans and borrowings and payables that are classified at fair value through profit or loss 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. 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 22. Note 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 Consolidated Statement of Comprehensive Income and Consolidated 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 13% (2020: 14%) of total sales revenue from contracts with customers. Revenue from contracts with customers Geographical areas United States of America Australia and New Zealand Other countries Non‑current assets Geographical areas United States of America Australia and New Zealand Other countries 4848 Consolidated 30 June 2021 $ 30 June 2020 $ 24,323,537 18,665,595 3,243,920 1,590,467 2,822,146 668,382 29,157,924 22,156,123 Consolidated 30 June 2021 $ 30 June 2020 $ 500,612 722,817 21,569,409 15,930,338 25,115 – 22,095,136 16,653,155 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 4. Revenue from contracts with customers BARDA revenue Commercial product sales Note 5. Research and development tax benefit Research and development tax benefit Consolidated 30 June 2021 $ 30 June 2020 $ 3,650,065 3,091,140 25,507,859 19,064,983 29,157,924 22,156,123 Consolidated 30 June 2021 $ 30 June 2020 $ – 36,956 Research and development tax benefit was not refundable in FY2021, as the aggregated turnover of the Group exceeded $20 million. Receivable of $36,956 was recognised as other income in the Statement of Comprehensive Income in last financial year, as it related to financial year 2019. Note 6. Interest income Term deposit interest Bank account interest Other Note 7. Other income Other income Consolidated 30 June 2021 $ 30 June 2020 $ – 974 129 1,103 22,905 10,067 2,339 35,311 Consolidated 30 June 2021 $ 30 June 2020 $ 180,297 111 During the year the Group received government support of $180,034 (2020: $nil) in response to COVID‑19. The support was provided in the form of a cash flow boost to reduce cash liabilities and to assist with retaining employees during a period of economic uncertainty. Note 8. Employee‑related expenses Wages and salaries (including sales commission) Superannuation Share‑based payments expense Other Consolidated 30 June 2021 $ 30 June 2020 $ 13,438,931 10,522,502 705,162 2,626,897 2,605,341 532,366 2,061,772 1,956,725 19,376,331 15,073,365 Included in other employee related expenses are directors’ fees of $520,738 (2020: $466,174), payroll taxes and employer contribution of $784,456 (2020: $515,073) and health insurance contribution of $422,982 (2020: $301,830). 4949 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Note 9. Depreciation and amortisation expenses Depreciation – property, plant and equipment Depreciation – laboratory equipment Depreciation – leasehold improvements Subtotal Depreciation – lease assets Amortisation – intangible assets Consolidated 30 June 2021 $ 30 June 2020 $ 165,057 60,817 115,492 341,366 331,470 247,848 920,684 121,973 46,955 76,798 245,726 343,601 247,848 837,175 In addition to the depreciation and amortisation expenses listed above, depreciation relating to manufacturing of $195,639 ($127,061 for depreciation of fixed assets and $68,578 for depreciation of lease assets) is included in the cost of inventory. Total depreciation and amortisation expenses amount in FY21 is $1,116,323. Refer to note 17 for property, plant and equipment reconciliation and note 18 for lease assets reconciliation. Note 10. Corporate, administrative and overhead expenses Insurances Accounting and audit fees Investor relations and share registry expenses Consultants and contractors Communication expenses Travel Marketing costs Realised foreign exchange (gain)/ loss Unrealised foreign exchange (gain)/ loss Other Consolidated 30 June 2021 $ 30 June 2020 $ 1,438,629 1,003,364 498,799 473,763 826,471 292,173 617,034 802,135 142,343 1,120,568 1,856,578 8,068,493 476,386 459,685 559,962 191,002 1,320,545 801,401 5,234 (63,031) 1,517,313 6,271,861 Included in other administrative expenses are software licences $144,124 (2020: $165,243), third party logistic fees $292,438 (2020: $279,258) and freight $597,063 (2020: $357,158). Note 11. Interest expense Lease liability interest expenses Loan facility interest expense Consolidated 30 June 2021 $ 30 June 2020 $ 98,771 222,632 321,403 98,977 – 98,977 The Group has lease contracts for various items of property, office equipment and lease equipment used in its operation. Further details on leases are disclosed in note 18. The Group has secured two finance facilities, further details on loan facility are disclosed in note 22. 5050 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 12. Income tax expense (a) Income tax expense Current income tax Deferred income tax Relating to origination and reversal of temporary differences Aggregate income tax expense Reconciliation of income tax expense to prima facie tax payable Loss before income tax expense Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Research and development Non‑assessable R&D income tax credit Share‑based payments Meals and entertainment Other Current year tax losses not recognised Current year temporary differences not recognised Income tax expense (b) Deferred tax assets and liabilities Deferred tax assets Deferred tax liabilities Deferred tax balance reflects temporary differences attributable to: Amounts recognised in profit and loss Recognised on temporary differences Tax effect of new accounting standard changes Amount recognized due to acquisition of PolyNovo (intangibles) Net deferred tax assets/ (liabilities) as 30 June Consolidated 30 June 2021 $ 30 June 2020 $ 54,628 66,642 – – – – 54,628 66,642 (4,550,404) (1,251,361) (4,127,096) (1,134,951) – (164,790) 722,397 22,612 (54,256) (725,398) 459,752 320,274 54,628 399,879 (87,142) 567,056 – – (255,158) 476,670 (154,870) 66,642 Consolidated 30 June 2021 $ 30 June 2020 $ 437,318 (437,318) – 565,994 (565,994) – (437,318) – (437,318) – (518,580) (47,414) (565,994) – 5151 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED (c) Deferred tax assets not brought to account Deferred tax assets not recognised Deferred tax assets not recognised comprises temporary differences attributable to: Unrecognised, unconfirmed tax losses for which no deferred tax asset has been recognised 93,031,756 95,483,316 Consolidated 30 June 2021 $ 30 June 2020 $ Deductible temporary differences – no deferred tax asset has been recognised Unrecognised, unconfirmed R&D offsets for which no deferred tax asset has been recognised Total Potential tax benefit at 27.5% 757,592 1,083,147 563,162 – 94,872,495 96,046,478 Consolidated 30 June 2021 $ 30 June 2020 $ 26,875,218 26,412,781 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 leases, 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. 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 2021 is contingent upon the following: • the Group deriving future assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised; • the conditions for deductibility imposed by tax legislation continuing to be complied with; and • there being no changes in tax legislation that would adversely affect the Group from realising the benefit from the losses. Given the Group’s history of recent losses, 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. (d) Current tax liability Provision for Income Tax Consolidated 30 June 2021 $ 30 June 2020 $ 74,093 54,729 5252 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 13. Cash and cash equivalents Cash and cash equivalents are denominated in: Australian dollars US dollars NZ dollars GBP Consolidated 30 June 2021 $ 30 June 2020 $ 1,299,765 5,585,170 420,571 383,048 6,260,340 5,291,876 93,112 2,373 7,688,554 11,647,701 (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 before income tax to net cash flow from operating activities Consolidated 30 June 2021 $ 30 June 2020 $ (4,550,404) (4,193,738) 1,116,323 2,626,897 – 10,716 56,606 711,087 (1,745,536) 896,623 (621,837) (742,793) (2,267) 837,175 2,061,772 18,000 (35,311) 87,722 152,132 (870,525) (347,668) – (1,592) 28,897 1,789,153 1,030,247 179,413 25,798 (250,221) 415,646 389,920 (427,323) Net loss Adjustments for non‑cash items: Depreciation and amortisation Share‑based payment expense Finance cost Interest Loss on inventory write‑off Unrealised foreign exchange rate differences Change in assets and liabilities during the financial year: (Increase)/decrease in trade receivables (Increase)/decrease in prepayments (Increase)/decrease in contract cost assets (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 5353 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Note 14. Trade and other receivables Trade receivables R&D tax concession BARDA Income Receivables GST recoverable Sundry receivables Interest receivables Consolidated 30 June 2021 $ 30 June 2020 $ 5,022,587 2,901,346 – 201,852 – 442,564 52 36,956 782,716 179,386 20,785 330 5,667,055 3,921,519 Trade receivables 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. Short‑term deposits of $418,980 was recognised as sundry receivables during the period, including deposits for hernia packaging tools and other machines. The changes in the balance of trade receivables and the information about the credit exposure are disclosed in note 25. BARDA Income Receivables BARDA income receivables 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 BARDA income receivables are reclassified to trade receivables. As at 30 June 2021, the Group has BARDA income receivables of $201,852 (2020: $782,716). Amounts are invoiced in the month following satisfaction of the performance obligation. There are no significant expected credit losses related to the BARDA income receivables. The Group has an agreement with BARDA to provide research and development services which was extended during the period 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 BARDA income receivables the Group has recognised $6,306 as at 30 June 2021 (2020: $40,412). $nil trade and other receivables were written off during the year. The Group uses a provision matrix to measure its expected credit loss. The Group has considered the impact of COVID‑19 in assessing the expected credit loss. Set out below is information about the credit risk exposure on the Group’s trade receivables and BARDA income receivables using a provision matrix as at 30 June 2021: Trade and other receivables Not due June 1‑30 Days May 30‑60 Days Apr 60‑90 Days Mar+ 90+ Days Total Expected credit loss rate (average) 0% 0.57% 0.43% Gross carrying amount ($) 4,052,737 707,751 170,424 Expected credit loss ($) Net balance ($) – (4,018) (733) 1.42% 95,192 (1,354) 7.2% 2,789 5,028,893 (201) (6,306) 5,022,587 Trade and other receivables which are not due as at 30 June 2021 was $4,052,737, which was not expected to have any credit loss. Trade receivables and BARDA income receivables due in less than 30 days and other financial assets have an expected credit loss which are not significant. 5454 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 15. Contract cost assets Contract cost assets (Current) Contract cost assets (Non‑current) Consolidated 30 June 2021 $ 30 June 2020 $ 146,315 475,522 621,837 – – – In FY2021, the Group engaged subcontractor to fulfill specific performance obligations with regards to the Group’s BARDA arrangement. The Group was required to prepay a specific amount to the subcontractor upfront to support the delivery of the Group’s responsibility under the BARDA contract. Amortisation is calculated on a straight‑line basis over the life of the contract. Note 16. Inventories Raw materials Work in progress Finished goods Provision for finished goods Subtotal ‑ finished goods Consolidated 30 June 2021 $ 30 June 2020 $ 49,121 420,539 1,504,792 (14,617) 1,490,175 1,959,835 73,048 323,594 907,441 (87,041) 820,400 1,217,042 The total of inventory is held at lower of cost or net realisable value (NRV). During the period, the loss on inventory write off was $1,160. Note 17. Property, plant and equipment Reconciliations of the carrying amount at the beginning and end of the current and previous financial year are set out below: Land and Buildings Laboratory Plant & Equipment Office Equipment Leasehold Improve‑ ments Construction in Progress Total As at 30 June 2021 Cost 5,338,322 1,984,386 1,408,060 2,099,893 10,745,338 21,575,999 Accumulated depreciation (212,536) (1,447,365) (670,588) (1,661,112) – (3,991,601) Carrying amount at 30 June 2021 Carrying amount at 1 July 2020 Additions (at cost) Disposals (at cost) Depreciation expense 5,125,786 537,021 737,472 438,781 10,745,338 17,584,398 5,235,319 – – 564,220 113,363 – 767,671 148,324 – 475,458 6,847,712 13,890,380 16,598 3,897,626 4,175,910 – (109,533) (140,562) (165,057) (53,275) – – – – (468,427) (13,466) Foreign exchange difference – – (13,466) – Carrying amount at 30 June 2021 5,125,786 537,021 737,472 438,781 10,745,338 17,584,398 5555 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Carrying amount at 30 June 2020 Carrying amount at 1 July 2019 Additions (at cost) Disposals (at cost) Depreciation expense NOTES TO THE FINANCIAL STATEMENTS CONTINUED Land and Buildings Laboratory Plant & Equipment Office Equipment Leasehold Improve‑ ments Construction in Progress Total As at 30 June 2020 Cost 5,338,322 1,871,021 1,276,399 2,083,291 6,847,712 17,416,745 Accumulated depreciation (103,003) (1,306,801) (508,728) (1,607,833) – (3,526,365) 5,235,319 564,220 767,671 475,458 6,847,712 13,890,380 4,894,863 443,459 – 498,435 198,411 (9,298) 174,452 713,692 – 381,170 140,511 – (103,003) (123,328) (121,971) (46,223) 59,299 6,008,219 6,788,413 8,284,486 – – – (9,298) (394,525) 1,498 Foreign exchange difference – – 1,498 – Carrying amount at 30 June 2020 5,235,319 564,220 767,671 475,458 6,847,712 13,890,380 Note 18. Right‑of‑use assets Group as a lessee Right‑of‑use assets (Non‑current) Lease liability (Current) Lease liability (Non‑current) Consolidated 30 June 2021 $ 30 June 2020 $ 2,238,759 2,646,521 Consolidated 30 June 2021 $ 30 June 2020 $ 350,368 2,063,331 2,413,699 323,876 2,420,058 2,743,934 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. Set out below are the carrying amounts of right‑of‑use assets recognised and the movements during the period: Reconciliation of carrying amounts Balance as at 1 July 2020 Additions Depreciation expense Exchange difference Balance as at 30 June 2021 Reconciliation of carrying amounts Transition adjustment t 1 July 2019 Additions Depreciation expense As at 30 June 2020 Property $ 2,605,889 – (372,622) (39,981) 2,193,284 Property $ 2,461,155 469,187 (324,453) 2,605,889 Office Equipment $ Manufacturing Equipment $ Motor Vehicle $ Total $ 8,828 – 31,804 – 2,646,521 – 32,294 32,294 (7,563) (12,714) (7,149) (400,048) – 1,265 – (27) (40,008) 19,093 25,117 2,238,759 Office Equipment $ Manufacturing Equipment $ Motor Vehicle $ 16,395 – (7,567) 8,828 5656 22,374 21,011 (11,581) 31,804 – – – – Total $ 2,499,924 490,198 (343,601) 2,646,521 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 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 The Group had total cash outflows for leases of $461,299 (2020: $359,561). Group as Lessor The Group has not entered into any leases as lessor. Consolidated 30 June 2021 $ 30 June 2020 $ 400,048 98,771 498,819 343,601 98,977 442,578 Note 19. Intangibles 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 2021. Intangibles (i) Cost Opening balance Additions Closing balance (ii) Accumulated amortisation Opening balance Amortisation for the year Closing balance Net book value Note 20. Other assets Security deposits Consolidated 30 June 2021 $ 30 June 2020 $ 2,519,788 2,519,788 – – 2,519,788 2,519,788 (619,620) (247,848) (867,468) (371,772) (247,848) (619,620) 1,652,320 1,900,168 Consolidated 30 June 2021 $ 30 June 2020 $ 144,137 141,870 The non‑current security deposit relates predominantly to PolyNovo’s long‑term lease of office premises in Port Melbourne and San Diego, USA. The current prepayment relates predominantly to prepaid insurance $335,144 (2020: $283,621). 5757 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Note 21. Trade and other payables Trade payables Other payables Consolidated 30 June 2021 $ 30 June 2020 $ 1,814,219 3,146,929 4,961,148 1,611,945 1,560,050 3,171,995 Trade payables are non‑interest bearing and are normally settled on 30‑day terms. Included in other payables are deferred income on upfront fees paid under BARDA contract of $857,006 (2020: $nil), accrued commission of $460,539 (2020: $514,009), accrued other liabilities of $410,015 (2020: $265,643). BARDA contract liability will be recognised over the period of the contract. Revenue recognised in FY21 was $85,936 in relation to the BARDA contract deferred income. Note 22. Interest‑bearing loans and borrowings Current Equipment Finance Trade Finance Total current interest‑bearing loans and borrowings Non‑Current Equipment Finance Trade Finance Total non‑current interest‑bearing loans and borrowings Consolidated 30 June 2021 $ 30 June 2020 $ 1,466,246 1,058,760 2,525,006 495,873 4,808,499 5,304,372 5,058,338 1,983,494 – – 5,058,338 1,983,494 (a) Interest bearing facility details The Group had secured two finance facilities in FY20 with National Australia Bank (NAB). The facilities detailed below are used to fund capital expenditure items. Facility Amount $ Interest rate $ Repayment Terms Maturity Date** Financing Facilities Trade finance* Equipment finance* 6,000,000 9,300,000 BBSY+1.7 Interest only 2.82% 5 years principal and interest from initial drawdown 31 July 2021 June‑Dec 2025 Total 15,300,000 Interest amount during the period $ 67,105 155,527 222,632 * Drawdown on the facilities commenced in late June 2020, therefore no interest has been paid nor has any interest expense been accrued in FY20. Finance cost of $18,000 incurred in FY20 to set up the loan facilities. ** In July 2021, the Trade finance facility was extended to 31 August 2021. 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 $6.0 million and was made available on the 22 May 2020. The facility limit reduced to $1.0 million on 30 September 2020 and the facility was extended to 31 August 2021. The facility will be closed on this date. The limit reduction to $1.0 million 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. 5858 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 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. The facility is non‑revolving. In FY21, a total of $7,253,987 has been drawn down. Repayments are made over 5 years and comprise of principal and interest. The facility currently attracts an interest rate of 2.82% 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. Note 23. Provisions Current provisions Annual leave Long service leave Total current provisions Non‑current provisions Long service leave Make good Total non‑current provisions Consolidated 30 June 2021 $ 30 June 2020 $ 654,364 84,646 739,010 140,959 75,000 215,959 530,973 77,749 608,722 91,834 75,000 166,834 Provisions are recognised when all three of the following conditions are met: • The Group has a present or constructive obligation arising from a past transaction or event • It is probable that an outflow of resources will be required to settle the obligation • A reliable estimate can be made of the obligation Provisions recognised reflect our best estimate of the expenditure required to settle the present obligation at the reporting date. Note 24. Reserves (a) Movement in contributed equity Contributed equity at beginning of year Exercise of options Contributed equity at end of year Number of shares authorized and fully paid On issue at beginning of year Exercise of options On issue at end of year 5959 Consolidated 30 June 2021 $ 30 June 2020 $ 139,070,502 139,070,502 180,000 – 139,250,502 139,070,502 661,088,044 661,088,044 300,000 – 661,388,044 661,088,044 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED (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 year Share‑based payments movement Balance at end of year Consolidated 30 June 2021 $ 30 June 2020 $ 7,846,655 (189,915) 5,219,758 (528,071) (9,293,956) (9,293,956) (1,637,216) (4,602,269) Consolidated 30 June 2021 $ 30 June 2020 $ 5,219,758 2,626,897 7,846,655 3,157,986 2,061,772 5,219,758 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 Consolidated 30 June 2021 $ 30 June 2020 $ (528,071) 338,156 (189,915) (375,939) (152,132) (528,071) 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. (iii) Acquisition of non‑controlling interest reserve Opening balance Balance at end of year Consolidated 30 June 2021 $ 30 June 2020 $ (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. (c) Accumulated losses Accumulated losses at beginning of year Net loss attributable to members of the parent Accumulated losses at end of financial year Consolidated 30 June 2021 $ 30 June 2020 $ (110,656,209) (106,462,471) (4,605,032) (4,193,738) (115,261,241) (110,656,209) 6060 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 25. 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 Consolidated 30 June 2021 $ 30 June 2020 $ 7,688,554 5,225,292 50,000 11,647,701 3,921,519 50,000 (3,611,201) (3,171,995) (2,413,700) (2,743,934) (1,058,760) (4,808,499) (6,524,584) (2,479,367) 1. As at t 30 June 2021 $50,000 is held in a term deposit maturing on 16 March 2022 at an interest rate of 0.36%. (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 24. 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. (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. 6161 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 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 2021, 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 2021 Financial assets Cash and cash equivalents 0.05% 7,688,554 Other financial assets 0.36% Trade and other receivables Total financial assets Financial liabilities Trade and other payables – – 7,688,554 – Trade Finance Facility BBSY +1.7% 1,058,760 Equipment Finance Facility Leases liabilities 2.82% 6,524,584 3.90% 2,413,700 Total financial liabilities 9,997,044 2020 Financial assets Cash and cash equivalents 0.27% 11,647,701 Other financial assets 1.43% Receivables Total financial assets Financial liabilities Trade and other payables – – – – 11,647,701 – Trade Finance Facility BBSY+1.7% 4,808,499 Equipment Finance Facility Equipment Finance Facility 3.16% 2,479,367 7,287,866 – – – – – – – – – – 50,000 – 50,000 – – – – – – – – – – – – – – – – – 7,688,554 – 50,000 – 5,225,292 5,225,292 – 5,225,292 12,963,846 – 3,611,201 3,611,201 – – – – 1,058,760 – 6,524,584 – 2,413,700 – 3,611,201 13,608,245 – – – – – – – – – 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 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 $ 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. 6262 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 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) 2021 $ Loss (higher)/lower Equity higher/(lower) 2020 $ 38,943 (38,943) 58,239 (58,239) 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. BARDA income receivables have low credit risk as it is a project with USA government. In 2021, 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. 0‑30 days $ 30‑60 days $ 60‑90 days $ 90+ days $ Total $ 2021 Trade and other receivables 4,959,176 169,690 93,838 2,588 5,225,292 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 2021 Less than 3 months $ 3 to 12 months $ 1 to 5 years $ over 5 years $ Total $ Interest‑bearing loans and borrowings1 1,421,199 1,103,807 5,058,338 – 7,583,344 Lease Liabilities Trade and other payables Year ended 30 June 2020 Interest‑bearing loans and borrowings1 Lease Liabilities Trade and other Payables 86,624 263,744 1,206,118 857,214 2,413,700 3,611,201 – – – 3,611,201 5,119,024 1,367,551 6,264,456 857,214 13,608,245 Less than 3 months $ 4,808,499 104,219 3,121,925 8,034,643 3 to 12 months $ 495,873 319,831 – 1 to 5 years $ 1,983,494 1,869,319 – over 5 years $ – 906,590 – Total $ 7,287,866 3,199,959 3,121,925 815,704 3,852,813 906,590 13,609,750 * Interest‑bearing loans and borrowings include Trade finance loan facility ($1,058,760) and Equipment finance loan facility ($6,524,584). 6363 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 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, GBP and EURO. The Group receives payment from its overseas customers in USD, NZD, GBP and EURO and pays US, NZD, GBP, SGD and EURO trade payables from its 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. The Company had opened a EURO and GBP bank account to mitigate foreign currency exposure and will open a SGD bank account in near future. The holdings of cash and cash equivalents, trade receivables and trade payables analysed by nominated currency at 30 June 2021, along with prior year comparatives, were as follows. Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated in GBP $ Denominated in EUROP $ Denominated in SGD $ Total $ 2021 Financial assets Cash and cash equivalents 1,349,765 5,585,170 420,571 383,048 Trade and receivables 1,389,545 3,476,854 Total financial assets 2,739,310 9,062,024 156,176 576,747 48,560 431,608 – 105,016 105,016 – 7,738,554 49,141 5,225,292 49,141 12,963,846 Financial liabilities Trade and other payables (1,670,994) (1,725,514) (64,409) (87,634) (20,012) (42,638) (3,611,201) Total financial liabilities (1,670,994) (1,725,514) (64,409) (87,634) (20,012) (42,638) 3,611,201 Total headroom/ (shortfall) 2020 Financial assets 1,068,316 7,336,510 512,338 343,974 85,004 6,503 9,352,645 Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated in GBP $ Denominated in EURO $ Denominated in SGD $ Total $ 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) (19,100) (1,465) (35,009) (12,104) (3,171,995) Total headroom/ (shortfall) 4,699,842 7,295,904 83,685 336,229 (7,427) (11,008) 12,397,225 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 2021) with all other variables held constant would have the following effect on the loss and equity for the 2021 financial year for the Group: Country United States of America United Kingdom New Zealand Singapore Ireland Total $ (361,849) Unfavourable (92,195) Unfavourable 25,870 Favourable (19,409) Unfavourable (2,372) Unfavourable (449,955) A 10% strengthening in the exchange rate has been applied based on current market economic conditions. 6464 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 26. Key management personnel disclosures (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 2021 and 2020 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 Short term Post‑employment – superannuation Leave allowances Share‑based payments Termination benefits Consolidated 30 June 2021 $ 30 June 2020 $ 1,244,024 1,148,354 110,130 18,713 101,118 44,659 2,395,928 1,898,500 – 3,741 3,768,795 3,196,372 (c) Interests held by key management personnel Share options and awards held by key management personnel to purchase ordinary shares have the following expiry dates and exercise prices: Issue date Jan Gielen 01/10/2019 01/10/2019 01/10/2019 Paul Brennan 06/03/2019 06/03/2019 06/03/2019 Anthony Kaye 09/08/2020 09/08/2020 09/08/2020 Expiry date 30/06/2021 30/06/2022 30/06/2023 30/06/2023 30/06/2023 30/06/2023 31/12/2024 31/12/2024 31/12/2024 Exercise price 2021 number outstanding 2020 number outstanding $0.60 $0.60 $0.60 – – – $2.25 $2.25 $2.25 – 300,000 400,000 700,000 1,100,110 1,100,110 1,100,110 300,000 300,000 400,000 1,000,000 1,100,110 1,100,110 1,100,110 3,300,330 3,300,330 150,000 150,000 200,000 500,000 150,000 150,000 200,000 500,000 4,500,330 4,800,330 (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 2021 as follows: • David McQuillan and Associates LLC, an entity associated with Dr David McQuillan, provided consulting service to PolyNovo North America LLC in last financial year. The consulting service was in relation to advisory and consulting services for the hernia project and it was completed in this financial year, $nil was charged in this financial year (2020: $24,490). No other transactions between the Group and any of the Directors of PolyNovo or any other key management personnel have been identified. 6565 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Note 27. 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: During the financial year the following fees were paid or payable for services provided by Ernst & Young, the auditor of the company, and its network firms: Fees to Ernst & Young (Australia) Audit or review of the financial statements Fees for other services: • Tax compliance Fees for assurance services that are required by legislation to be provided by the auditor Fees for other assurance and agreed‑upon‑procedures services under other legislation or contractual arrangements where there is discretion as to whether the service is provided by the auditor or another firm Total fees to Ernst & Young (Australia) Fees to other overseas member firm of Ernst & Young (Australia) Audit or review of the financial statements Other services: • Tax compliance and secretarial support Fees for assurance services that are required by legislation to be provided by the auditor Fees for other assurance and agreed‑upon‑procedures services under other legislation or contractual arrangements where there is discretion as to whether the service is provided by the auditor or another firm Total fees to overseas member firms of Ernst & Young (Australia) Consolidated 30 June 2021 $ 30 June 2020 $ 231,650 171,401 35,010 22,000 – – – – 35,010 266,660 22,000 193,401 19,825 10,395 93,461 186,693 – – – – 93,461 113,286 186,693 197,088 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. Note 28. 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 $386,801 will be paid accordingly during FY22. Contingencies The Directors are not aware of any other contingent liabilities or contingent assets at 30 June 2021. There has been no change in this assessment up to the date of this report. Note 29. Related party transactions Related party transactions are disclosed under note 26 Key management personnel. 6666 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Note 30. Parent entity information Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital General reserve Accumulated losses Total equity Parent 30 June 2021 $ 30 June 2020 $ (4,231,283) (4,231,283) (3,435,457) (3,435,457) Parent 30 June 2021 $ 30 June 2020 $ 47,751,864 47,527,016 53,783,437 53,558,589 4,516,166 4,516,166 2,689,410 2,689,410 139,250,502 139,070,502 1,882,436 (744,462) (91,865,667) (87,456,861) 49,267,271 50,869,179 In accordance with the terms and conditions of the NAB facility arrangements disclosed in note 22, 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. Note 31. Controlled Entities The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name 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 PolyNovo Ireland Ltd Principal place of business / Country of incorporation 30 June 2021 % 30 June 2020 % Ownership interest Australia United States Australia Australia Australia New Zealand Singapore United Kingdom Ireland 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% – Note 32. Events after the reporting period In July 2021, the trade financial facility was extended to 31 August 2021. The Group is in the process of drawing down on the equipment facility to close out the trade finance facility. Details refer to note 22. Other than above, no matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. 6767 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Note 33. Earnings per share Loss after income tax attributable to the owners of PolyNovo Limited Consolidated 30 June 2021 $ 30 June 2020 $ (4,605,032) (4,193,738) Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 661,189,962 661,088,044 Adjustments for calculation of diluted earnings per share: Unexercised share options and awards 2,193,151 2,700,000 Weighted average number of ordinary shares used in calculating diluted earnings per share 663,383,113 663,788,044 Basic earnings per share Diluted earnings per share Cents (0.69) (0.69) Cents (0.63) (0.63) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of PolyNovo Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. At 30 June 2021 there existed share options that if vested, would result in the issue of additional ordinary shares over the period to FY2026. 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. Between the reporting date and the issue date of the 30 June 2021 Financial Report, there have been no transactions involving ordinary shares or potential ordinary shares that would impact the calculation of EPS disclosed in the table above. Note 34. 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 2021 and 30 June 2020 were $2,626,897 and $2,061,772 respectively. (b) Share‑based payments for the year ended 30 June 2021 During the 2021 financial year, 1,000,000 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 9 November 2020, the Company granted employee share options to the Chief Operating Officer, Mr Anthony Kaye. He was granted 500,000 options exercisable at $2.25. The options vest upon 12 months of employment with the Company and a share price of $2.25 being sustained over a period of at least 3 months. Once vested, the options can be exercised as follows: • Tranche 1: 150,000 options – not to be exercised before 9 November 2021 and not later than 31 December 2024; • Tranche 2: 150,000 options – not to be exercised before 9 May 2022 and not later than 31 December 2024; and • Tranche 3: 200,000 options – not to be exercised before 9 November 2022 and not later than 31 December 2024. The options package will expire on 31 December 2024. The expense relating to the options package during the year was $211,660. Any unvested options will be cancelled on the date of termination or cessation of employment. 6868 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 On 10 May 2021, the Company granted employee share options to the Director of Research and Development, Mr Joshua Cheetham. He was granted 500,000 options exercisable at $2.74. The options vest upon 12 months of employment with the Company and a share price of $2.74 being sustained over a period of at least 3 months. Once vested, the options can be exercised as follows: • Tranche 1: 150,000 options – not to be exercised before 10 May 2022 and not later than 30 May 2026; • Tranche 2: 150,000 options – not to be exercised before 10 November 2022 and not later than 30 May 2026; and • Tranche 3: 200,000 options – not to be exercised before 10 May 2023 and not later than 30 May 2026. The options package will expire on 30 May 2026. The expense in relation to the options package during the year was $42,380. Any unvested options will be cancelled on the date of termination or cessation of employment. 2021 Balance at 1 July 2020 Granted as compen‑ sation Options exercised Balance at 30 June 2021 Total vested at end of year Total not exercisable at end of year Total vested during year Share‑ based payments expense $ Key management personnel Mr Paul Brennan 3,300,330 Mr Jan Gielen 1,000,000 – – – 3,300,330 – 3,300,330 300,000 700,000 700,000 700,000 Mr Anthony Kaye – 500,000 – 500,000 – 500,000 4,300,330 500,000 300,000 4,500,330 700,000 4,500,330 Other employees Mr Ed Graubart 1,000,000 – – 1,000,000 Mr Joshua Cheetham – 500,000 1,000,000 500,000 – 500,000 – 1,500,000 – – – 1,000,000 500,000 1,500,000 Total 5,300,330 1,000,000 300,000 6,000,330 700,000 6,000,330 – – – – – – – – 2,184,268 – 211,660 2,395,928 188,589 42,380 230,969 2,626,897 The fair value of options granted during FY21, 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 Anthony Kaye Grant date Number of options Exercise Price Vesting hurdle Risk‑free interest rate Volatility Expiry 09/11/2020 500,000 $2.25 12 months T1 0.30% 55.15% 31 Dec 2024 service period and 3 months share price exceeds $2.25 T2 0.30% 55.15% 31 Dec 2024 T3 0.30% 55.15% 31 Dec 2024 Joshua Cheetham Grant Date Number of options Exercise Price Vesting hurdle Risk‑free interest rate Volatility Expiry 10/05/2021 500,000 $2.74 12 months T1 0.80% 54.23% 30 May 2026 service period and 3 months share price exceeds $2.74 T2 0.80% 54.23% 30 May 2026 T3 0.80% 54.23% 30 May 2026 Dividend yield Average fair value per option – – – $0.789 $0.838 $0.872 Dividend yield Average fair value per option – – – $0.779 $0.863 $0.954 6969 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Key valuation assumptions for the Employee Share Options: Parameters Valuation date Share price Expected life Assumptions Grant Date. Closing share price as at the valuation Date. Assumed that the 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 characteristics 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 price 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. (c) Share‑based payments for the year ended 30 June 2020 During the 2020 financial year, 4,300,330 share options and awards 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 share awards at $3.03. The share awards 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 share awards package will expire on 30 June 2023. The expense in relation to the share awards 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. 7070 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 2020 Key management personnel Mr Paul Brennan Balance at 1 July 2019 Granted as compen‑ sation Options exercised Balance at 30 June 2020 Total vested at end of year Total not exercis‑ able at end of year Total vested during year Share‑ based payments expense – 3,300,330 – 3,300,330 – 3,300,330 – 1,633,713 Mr Jan Gielen 1,000,000 – – 1,000,000 1,000,000 1,000,000 1,000,000 264,787 Other employees – 1,000,000 – 1,000,000 – 1,000,000 – 163,272 1,000,000 4,300,330 – 5,300,330 1,000,000 5,300,330 1,000,000 2,061,772 Options issued during financial year 2020 Grant date Number of options Exercise price Vesting hurdle Risk‑free interest rate Volatility Expiry Dividend yield Average fair value per option 13/08/2019 1,000,000 $1.55 12 months T1 0.66% 47.04% 13‑Aug‑22 service period and 3 months share price exceeds $1.55 T2 0.67% 57.03% 13‑Aug‑23 T3 0.68% 59.30% 13‑Aug‑24 T4 0.73% 61.59% 13‑Aug‑25 – – – – $0.423 $0.588 $0.704 $0.720 7171 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 DIRECTORS’ DECLARATION 30 June 2021 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 2021 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 2021. On behalf of the directors Mr David Williams Chairman 26 August 2021 72 PolyNovo Limited | Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF POLYNOVO LIMITED Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor's Report to the Members of PolyNovo Limited Report on the Audit of the 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 2021, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 73 PolyNovo Limited | Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF POLYNOVO LIMITED CONTINUED Going concern basis of preparation of financial statements Why significant How our audit addressed the key audit matter As described in Note 2 of the financial report, the financial statements have been prepared on a going concern basis. Our audit considered the requirements of Australian Auditing Standard ASA 570 Going Concern. Our audit procedures included but were not limited to: The Group incurred a loss of $4.3 million during the year and had net operating cash outflows of $0.3 million. It is anticipated that further investment will be incurred by the Group in its planned growth and ongoing product commercialisation over the next 12 months. The Group’s forecast growth in revenues and cash inflows may be impacted by COVID-19 differently in each of the geographies it operates within, which could impact on the Group’s ability to pay its debts and obligations as they fall due. The Directors have considered existing cash and working capital balances, available current financing facilities, and forecasts of future cash flows for a period of at least 12 months from the date of the financial report. The Cash flow forecasts involve judgements and estimations based on management’s view of business operations, expected growth and market conditions. Assessing the appropriateness of the Group’s basis of preparation of the financial statements on a going concern basis required judgement in assessing the Group’s forecast cashflows for a period of at least 12 months from the date of the audit report. The availability of sufficient cash flows and/or funding is critical to the ongoing viability of the business and, as such, was a significant aspect of our audit. ► Obtained and evaluated management’s assessment of the Group’s ability to continue as a going concern, including the related forecast cash flows for the 12 month period ending 31 August 2022 including all relevant information based on our knowledge of the Group as a result of our audit. ► Reviewed the financial condition of the Group taking into consideration the debts on the statement of financial position at year end and the Group’s ability to settle its debts as and when they become due. ► Assessed the forecast cash flow assumptions based on historical results, current economic and industry indicators, publicly available information and the Group’s strategic plans. This included assumptions in relation to customer sales values and retention rates, cashflow saving initiatives including deferral of identified projects and growth rates. ► Reviewed relevant external information to assess a range of possible scenarios, including those associated with the impact of COVID-19 in the different geographies the Group operates within. ► Obtained evidence with respect to the Group’s forecast modelling including support for customer growth, sales ordering, current and recent sales run rates and identified cash savings. ► Inquired of management as to whether they are aware of any events or conditions through to the date of our audit report that may cast significant doubt on the entity’s ability to continue as a going concern. ► Assessed the appropriateness of the Groups’ going concern basis of preparation disclosures for financial statements for consistency with Australian Accounting Standards. Recognition of revenue Why significant How our audit addressed the key audit matter The Group has recognised revenue from the sale of commercial products and revenue from services performed in respect of research and development activities. For sales of commercial products, revenue is recognised upon delivery of the product to the customer. The Group sells to customers in various geographic territories. Commercial product sales have significantly increased this financial year. Services revenue is recognised as the services are delivered. Our audit procedures with respect to the Group’s revenue recognition included: ► Assessed new contracts with customers for terms and conditions that could impact the timing of recognition and measurement of revenue. ► Assessed the operating effectiveness of the Group’s revenue controls by testing a sample of controls with respect to the initiation and recording of commercial sales transactions. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 7474 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 Recognition of revenue (continued) Why significant How our audit addressed the key audit matter 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 volumes and customer arrangements entered into by the Group. ► Assessed on a sample basis, whether revenue was correctly recognised based on the products delivered as at 30 June 2021 with reference to supporting documentation including contracts, purchase orders proof of delivery, cash receipts and credit notes. ► Assessed the Group’s performance obligations under the services contracts to check that revenue is recognised only for services provided during the year and at the contracted rate. ► Assessed whether the Company’s revenue disclosures as outlined in Notes 2, 3 and 4 are complete and meet the requirements of Australian Accounting Standards. Existence and valuation of inventory Why significant How our audit addressed the key audit matter At 30 June 2021, the Group held inventory of $1.98 million which comprised raw materials, work in progress and finished goods. The disclosure in respect of inventory is included in note 16 of the financial statements. 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 including overheads and, where applicable, capitalisable manufacturing variances. The net realisable value of the inventory is assessed at year end considering sale price of product, 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: ► Attended inventory counts that occurred at the year end, reperforming a sample of the inventory counts and agreeing count results into the year-end inventory listing. Due to travel and social distancing restrictions resulting from the COVID-19 pandemic, we could not physically attend the US third-party logistics provider inventory count. However, we observed the inventory counts using video streaming and other technologies. ► Assessed that the nature of costs included in inventory, including allocations of labour and manufacturing overheads, were consistent with the requirements of Australian Accounting Standards. ► Agreed, on a sample basis, the amount of costs capitalised into inventory to supporting documentation. ► Assessed and recalculated the Group’s manufacturing variances. ► Assessed inventory net realisable values with reference to the ageing of inventory, expiry dates, gross margins achieved, sales forecasts and outcomes of quality assessments. ► Assessed whether the Group’s disclosures in respect of inventory in the financial statements 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 7575 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF POLYNOVO LIMITED CONTINUED Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2021 annual report other than the financial report and our auditor’s report thereon. We obtained the directors’ report that is to be included in the annual report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the annual report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, 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. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 7676 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 • • • • • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 7777 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF POLYNOVO LIMITED CONTINUED Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 26 to 36 of the directors' report for the year ended 30 June 2021. In our opinion, the Remuneration Report of PolyNovo Limited for the year ended 30 June 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Ashley Butler Partner Melbourne 26 August 2021 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 7878 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 SHAREHOLDER INFORMATION 30 June 2021 Additional Information Required by ASX For the year ended 30 June 2021. Ordinary Shares As at 13 August 2021 there were 661,388,044 ordinary shares on issue held by 21,588 shareholders. Each ordinary share carries one vote per share. Top 20 Shareholders as at 13 August 2021 Shareholder HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED MOGGS CREEK PTY LTDNATIONAL NOMINEES LIMITED LATERAL INNOVATIONS PTY LTD MR ANTHONY SHANE KITTEL + MRS MICHELE THERESE KITTEL BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMINEES PTY LTD MS SIMONE MAREE BEKS MR PAUL GERARD BRENNAN COMMONWEALTH SCIENTIFIC AND INDUSTRIAL RESEARCH ORGANISATION NETWEALTH INVESTMENTS LIMITED BNP PARIBAS NOMINEES PTY LTD SIX SIS LTD SANDHURST TRUSTEES LTD MR PAUL LAPPIN + MRS SIOBHAN LYONS MR DAVID KENLEY DR MARCUS JAMES DERMOT WAGSTAFF + MRS LARA KATE WAGSTAFF MR LAURENT FOSSAERT Total Number of shares 86,192,215 41,780,382 27,212,802 17,800,000 16,084,276 10,924,103 7,960,000 7,944,172 6,340,183 5,300,974 4,185,095 4,185,095 4,081,250 4,019,409 3,397,939 3,374,840 3,154,631 3,139,855 3,056,377 3,014,172 % Units 13.03 6.32 4.11 2.69 2.43 1.65 1.20 1.20 0.96 0.80 0.63 0.63 0.62 0.61 0.51 0.51 0.48 0.47 0.46 0.46 263,147,770 39.77 Unquoted Securities Share options over unissued shares As at 30 June 2021, a total of 2,700,000 share options over ordinary shares are on issue held by four employees. Share options do not carry a right to vote. PolyNovo issued 1,000,000 share options during the year ended 30 June 2021. Details of the share options issued are included in note 34. Share awards over unissued shares As at 30 June 2021, a total of 3,300,330 share awards over ordinary shares are on issue held by Managing Director. Share awards do not carry a right to vote. PolyNovo issued nil share awards during the year ended 30 June 2021. Details of the share awards issued are included in note 34. 79 PolyNovo Limited | Annual Report 2021 SHAREHOLDER INFORMATION CONTINUED The range of shareholders based on number of shares held as at 13 August 2021 is as follows: Range of Units As at 13 August 2021 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Number of holders 6,561 7,628 2,849 3,873 Number of shares 3,564,131 20,981,275 22,488,472 119,542,035 677 494,812,131 21,588 661,388,044 1,113 152,765 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 Shareholder HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Pty Ltd Number of shares 86,192,215 41,780,382 127,972,597 % 13.03 6.32 19.35 Quotation of the Company’s Shares PolyNovo has been granted official quotation for its shares on the Australian Securities Exchange (ASX Code: PNV). 8080 PolyNovo Limited | Annual Report 2021PolyNovo Limited | Annual Report 2021 CORPORATE DIRECTORY 30 June 2021 Non‑executive Chairman Mr David Williams Non‑executive Directors Dr Robyn Elliott Ms Christine Emmanuel Mr Leon Hoare Dr David McQuillan Mr Bruce Rathie Mr Andrew Lumsden Managing Director Mr Paul Brennan Company secretary Mr Jan Gielen Registered office Share register Auditor Unit 2/ 320 Lorimer Street Port Melbourne Victoria 3207 T (03) 8681 4050 F (03) 8681 4099 Computershare Investor Services Pty Ltd Yarra Falls 452 Johnson Street Abbotsford, Victoria 3067 T 1300 850 505 Ernst & Young 8 Exhibition St Melbourne Victoria 3000 Stock exchange listing PolyNovo Limited shares are listed on the Australian Securities Exchange (ASX code: PNV) Website www.polynovo.com 81 PolyNovo Limited | Annual Report 2021 2/320 Lorimer Street Port Melbourne Victoria Australia 3207 T +613 8681 4050 F +613 8681 4099 polynovo.com