New horizons Annual Report 2023 CONTENTS Our Vision Our Values Our Performance Chairman and CEO Report A Year in Review: Swami Raote Global Strategy Multiple Options For Global Growth Expanding Global Reach NovoSorb® MTX Clinical Trials 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 Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 1 1 2 4 6 8 9 10 12 13 14 25 28 38 39 40 41 42 43 74 75 79 81 NovoSorb MTX Received FDA 510(k) clearance on 19 September 2022. NovoSorb MTX represents a major product innovation for soft tissue regeneration. Read more on Page 12 B PolyNovo Limited Annual Report 2023 OUR VISION Healing. Redefined. Our mission is to innovate and bring disruptive technologies to market by partnering with the best minds to improve patient outcomes and reimagine the standard of care. We refreshed the company Vision, Mission, and Values in FY23 which will serve as guiding principles as the company continues to grow. A collaborative effort engaging staff, clinicians and leaders, our Vision, Mission and Values speak to our shared purpose to redefine healing to the benefit of patients across the world. We see an exciting future of continued expansion and innovation, fuelled by our people, a network of surgeon advocates and continued investment in the drivers of growth. OUR VALUES We put patients first. We earn trust. We believe in each other. We innovate boldly. We respect and nurture diversity. PolyNovo Limited Annual Report 2023 1 OUR PERFORMANCE In FY23 sales growth in our direct markets accelerated, particularly in 2H23 where in May, monthly sales exceeded $7 million and total revenue exceeded $8 million for the first time. Annual growth in NovoSorb sales of 58.3% reflects the strength of our commercial teams, surgeon-led innovation, and increasing demand for our products globally. 2 58.8% FY23 $66.5m | FY22 $41.9m TOTAL GROUP REVENUE 58.3% FY23 $59.6m | FY22 $37.6m NOVOSORB GROUP SALES TOTAL REVENUE GROWTH 58.8% $66.5m 42.8% 32.0% $41.9m 54.6% 110.5% $29.3m $22.2m $14.4m $6.8m FY18 FY19 FY20 FY21 FY22 FY23 PolyNovo Limited Annual Report 2023 44.6% 133.9% 49.2% FY23 $46.1m | FY22 $31.9m NOVOSORB U.S. SALES FY23 $13.5m | FY22 $5.8m NOVOSORB ROW SALES FY23 $5.7m | FY22 $3.8m BARDA REVENUE 667.7% 43.4% FY23 $46.8m | FY22 $6.1m CASH ON HAND FY23 218 | FY22 152 TOTAL EMPLOYEES 53.9% FY23 $38.3m | FY22 $24.9m EMPLOYEE RELATED EXPENDITURE (EXCL. SHARE BASED PAYMENTS) 210.7% FY23 $1.5m | FY22 $0.5m CAPITAL EXPENDITURE 29.3% FY23 $7.4m | FY22 $5.7m R&D EXPENDITURE 312.9% FY23 $4.9m | FY22 $1.2m NET LOSS AFTER TAX 16.0% FY23 $2.3m | FY22 $2.0m NET LOSS AFTER TAX (EXCL. NON-CASH ITEMS) PolyNovo Limited Annual Report 2023 3 CHAIRMAN AND CEO REPORT David Williams Chairman Swami Raote Chief Executive Officer Sales growth in our direct markets continued to accelerate throughout the year, particularly in 2H23 where in May, monthly sales exceeded $7 million and total revenue exceeded $8 million for the first time. Growth in sales has been driven by organic growth across established accounts and new account acquisition, facilitated by the continued expansion of our sales teams across direct markets, especially in the U.S., Australia and UK. We have entered new markets India, Hong Kong and Canada and launched a new product NovoSorb MTX, all of which will drive further sales growth. complex wound reconstructions. Our NovoSorb MTX product received 510(k) FDA approval during the year and already has good support from surgeons. The core NovoSorb technology can support other clinical needs and we are open to partners to help co-develop, commercialise or distribute new products. Building successful partnerships will help PolyNovo reach many more patients sooner than we could do alone. During the year, we launched our products in Hong Kong, Canada, India, Spain, and France. We are excited about each of these jurisdictions for different reasons. Hong Kong as a precursor to a China entry, India to prove we can satisfy the economics of developing markets and to contribute to the BARDA trial, etc. We have experienced early and impressive sales in new markets. Other markets like China and Japan are on our radar. Dear Shareholders, Sales growth and geographical market penetration reflect an acknowledgement that NovoSorb BTM and NovoSorb MTX are being accepted by surgeons as the next generation dermal substitute. Consequently, and more significantly the technology is changing the way in which many indications are treated by clinicians. The PolyNovo team is proud to receive surgeon acceptance and recognition that NovoSorb BTM is a robust, versatile medical device, delivering superior outcomes with lower operational complexity and cost. Unprompted, more surgeons are writing about the product in journals and presenting their experiences at conferences. Many of these clinicians have identified other patient needs that would benefit from NovoSorb BTM or NovoSorb MTX. Underneath this surgeon engagement is the knowledge that patient lives are being changed for good. In FY23 sales growth in our direct markets accelerated through the year and across all geographies. We had a stand-out result in May 2023, when our monthly sales exceeded A$7 million and total revenue exceeded A$8 million. Monthly sales will always be lumpy, but the sales graphs show exceptional growth over the medium term. Group Performance Global NovoSorb BTM sales of $59.6m were up 58.3% on the prior year. The U.S. market was up 44.6% in AUD and the Rest of World (ROW) was up 133.9% vs. prior year. Australia increased sales by 84.3%, UKI 168.8% and distributors in the EU particularly Germany grew by 192.8% vs. prior year. These results demonstrate the efforts of our commercial teams but also the ingenuity of clinicians who are driving innovation, new applications, and the education of their colleagues. Total revenue of $66.5m was up 58.8% on the prior year which includes revenue from the BARDA pivotal trial. With 64 enrolled patients, we have crossed an important mid-point in the trial. Net loss after tax excluding non-cash items was $2.3m, up 16.0% on the prior year $2.0m loss. Executing on Strategic Plan NovoSorb BTM has the ability to temporise and heal deep dermal burns and various other types of tissue loss comprehensively. PolyNovo is well known in burn procedures and has the proven ability to leverage that reputation into acute care. However, over time clinicians and their ingenuity has taken us to many new places – plastic and reconstruction surgeries associated with trauma, vascular, diabetic foot and pressure ulcers, oncological and other 4 PolyNovo Limited Annual Report 2023 the Mode of Action of SynPath is not compromised by the study design and the device is working effectively. 25 patients have been enrolled so far. Closing We would like to thank our shareholders for their continued support and confidence. We would also like to thank the clinicians for their input and support. Lastly, we would like to thank our team around the world for their hard work and enthusiasm. David Williams Chairman Swami Raote Chief Executive Officer Employees increased from 152 to 218. We have continued to increase the sales teams in established markets particularly the U.S. whilst onboarding sales professionals in the newly entered markets of Hong Kong and India. We have invested in building our clinical capabilities and R&D teams to gain insights, evidence and build new solutions for clinicians and patients. Our second manufacturing facility, adjacent to the current facility was commissioned and operational in May 2023. The capital raising of $53 million in November 2022 allows us to take this further, with a new co-located manufacturing facility currently being designed and estimated to be operational in Q1 FY26. The new facility will service an additional A$500 million in revenue, approximately 5 times current production volumes. Outlook We ended the year 30 June 2023 with $46.8 million cash, putting us in a strong position to fuel global expansion. In FY24 we expect to see strong revenue growth in direct markets particularly the U.S., UKI and ANZ, India, and Hong Kong. We also expect our key distributor markets of Germany and Canada will continue to perform well, and that of our recently appointed distributors in Spain and France will experience early sales. Further applications for FDA 510(k) clearances are expected in FY24 allowing expansion of our NovoSorb MTX and BTM product portfolio. Clinical trials are progressing well, and the BARDA pivotal burns trial recently passed the mid-way point of 60 patients. 64 patients have been enrolled and we expect recruitment to be completed in FY24. A chronic wound study comparing the use of NovoSorb BTM combined with negative pressure wound therapy to clinical standard of care has enrolled 35 out of 64 patients and recruitment is expected to be completed in late CY 2023. The NovoSorb SynPath randomised control trial of 138 patients is being reviewed to make sure We are excited about the year ahead but below we catalogue some of our achievements in FY23: • Annual NovoSorb BTM revenue growth of 58.3% • Annual U.S. revenue growth in $AUD of 44.6% • Annual ROW revenue growth in $AUD of 133.9% • First $7 million sales month in May 2023 (May 2022: $3.3 million) • Completion of $53,000,000 capital raising • Received for 510(k) clearance from the FDA for NovoSorb MTX • Successfully entered Hong Kong, India, and Canadian markets • Grew the U.S. team from 54 to 93 and increased the U.S. customer accounts from 189 to 299 hospitals • In our direct markets including the U.S., we increased our customer accounts from 470 to 638 hospitals • Increased staff from 152 to 218 • Enrolled 64 patients into the U.S. BARDA pivotal burns study (53%) • Enrolled 25 patients into the U.S. DFU Chronic Wound study for health insurance reimbursement (18%) • Enrolled 35 patients into the chronic wound study with Flinders University South Australia (55%) • Leased an adjacent property in Port Melbourne to significantly increase manufacturing capacity • Awarded Victorian Government grant for manufacturing Diabetic Foot Ulcer product (NovoSorb SynPath) PolyNovo Limited Annual Report 2023 5 A YEAR IN REVIEW: SWAMI RAOTE We are focused on expanding the possibilities for NovoSorb BTM and NovoSorb MTX in the soft tissue reconstruction space, while maintaining excellence in burns and developing smart partnerships to accelerate our growth. What are the highlights of the past 12 months? Can you provide an update on global growth? My highlights are: a) our acceptance by clinicians as being the next generation standard of care for burn care, b) outpacing the global dermal implant category by a factor of ten and winning market share in all geographies we are in, c) shareholders and new investors providing funding for accelerating our global growth, d) launching in India and ensuring that our simple, transformative, and cost-effective technology was available to patients who needed it but were constrained due to cost and lack of availability. We have expanded our presence in the U.S. and entered Canada, Hong Kong, India and very recently, Spain and France. We are investing to ensure the growth of NovoSorb BTM in soft tissue reconstruction due to trauma, oncological resection, hand surgery, limb salvage, vascular diseases, and many other disease etiologies. Surgeons are excited by the NovoSorb technology, and we are following them to provide solutions to their clinical needs. In terms of products, we are strengthening efforts behind NovoSorb MTX, working with clinicians to understand and support them. Our product portfolio continues to expand and evolve in response to their insights. We are exploring external alliances to partner and build on our procedural strength in burns, while leveraging other businesses and academia for their expertise. Our plans for capacity expansion are on track for a significant increase in production to satisfy demand. What is the biggest opportunity for PolyNovo in FY24? We are focused on expanding the use of NovoSorb BTM and NovoSorb MTX in the soft tissue reconstruction space, while maintaining our excellence in burn care. While we have an amazing technology, smart partnerships will help us amplify and accelerate our global reach and impact, in many types of tissue loss and reconstruction. We served over 13,000 patients in 2023, but have the technology and capacity to serve many times that number. 6 PolyNovo Limited Annual Report 2023 PolyNovo Limited Annual Report 2023 7 GLOBAL STRATEGY: GRAFTABLE AND IMPLANTABLE Lead Grow Develop Seed Deep Dermal Burns Trauma, Necrotizing Fasciitis, Hidradenitis, Paediatric Vascular, Pressure, Diabetic foot Ulcers Intensive Care Acute Care Acute Care, Outpatient Breast Reconstruction & Augmentation, Abdominal Wall, Pelvic Reconstruction, Hernia Acute Care, Ambulatory Care, Physicians Office BTM BTM / MTX SynPath SynTrel Burn Surgeons Plastic & Reconstruction, Trauma, Paediatric Plastic & Reconstruction, General, Trauma, Surgical Podiatry Aesthetic Surgeons USA / ANZ UK, Germany, Hong Kong, India, Canada Japan, China South Korea, Thailand, Italy, Spain, Brazil PolyNovo Focus Alliance Potential Burns & Trauma US, entering Japan, China Hernia, Abdominal Wall Reconstruction Breast Reconstruction, Augmentation, Aesthetics Orthobiologics Transformational M&A possibilities Plastic and Reconstructive Surgery oriented businesses Potential of NovoSorb technology Continuing to explore the enormous potential of our proprietary NovoSorb resorbable polymer platform. The flexibility of configuration (foams, filaments, films, non-woven and woven structures, thermoplastics), proven biocompatibility, and predictable and tailored resorption profile provides the opportunity to address unmet clinical needs in dermal repair, soft tissue replacement, and regeneration of missing or damaged structures in both soft and hard tissues. Our current focus has been development of graftable applications, best exemplified in our flagship product NovoSorb BTM that has broad application in burns, acute and chronic wounds, limb salvage, necrotising fasciitis, and other applications on the surface of the body. We recently launched NovoSorb MTX which further expands our reach into dermal repair and regeneration where temporising a wound with the removable sealing membrane is not required, such as in smaller acute wounds as well as deeper chronic wounds. Our NovoSorb platform technology also has unique attributes to address implantable applications, including development of surgical mesh products for hernia (both simple and ventral), abdominal wall reconstruction, post-mastectomy breast reconstruction, soft-tissue fillers, tendon repair (rotator cuff, achilles), and bone regeneration, among others. Our current focus on implantable applications is for hernia repair utilising both foam and monofilament forms of the NovoSorb polymer, and plastic and reconstructive applications following breast reconstruction. 8 PolyNovo Limited Annual Report 2023 MULTIPLE OPTIONS FOR GLOBAL GROWTH Progress in FY23 Growth Plans Geographic expansion • Entered Canada, Hong Kong and India markets • Strengthened the U.S. team from 54 to 93 (June 2023) people and increased the U.S. customer accounts by 110 • Core markets (Australia, U.S.) provide expertise, evidence, and business model to support international expansion. • Increased customer accounts globally from 470 to 638 • Surgeon led insights and innovation are driving new indications and applications • NovoSorb BTM is already a leader in third degree burns in Australia and New Zealand and is on a steep growth curve in US • Sales growth for indications other than burns is accelerating • Investing in R&D to support new product and faster commercialisation • Alliances with global category leaders and academia for Clinical & Health economics evidence • Up-stream application and marketing, insight generation, biologic sciences, expand pre-clinical, process and product engineering, and package engineering New indications for NovoSorb New products • Exploring entry into China and Japan — the global #2 and #3 medical device markets • Opportunity to increase TAM through access to new markets with existing products, e.g. - Complex Trauma reconstruction, including paediatric indications - Diabetic Foot Ulcers • Opportunity to enter breast reconstruction, soft tissue reinforcement, orthobiologics, delivery of therapeutics. Capacity expansion to satisfy growth • Delivery of new office space to support additional investment in enabling functions e.g., HR, IT and Legal. • Commenced design of new manufacturing facility • New co-located facility with production, R&D and office facilities, designed for scale with focus on flexibility, modularity and automation • Will service an additional A$500m in revenue (~5x current production volumes) PolyNovo Limited Annual Report 2023 9 EXPANDING GLOBAL REACH +44.6% U.S. FY23 sales growth in AUD +744.0% Canada FY23 sales growth in AUD North America Our U.S. business is profitable. Sales revenue and customer growth is strong and defined by our ability to acquire new accounts and expand the business within current accounts. Our focus remains on outstanding patient outcomes through clinical education. Growth in the business is fuelled by excellent clinical outcomes. Our product range is expanding with NovoSorb MTX 510(k) clearance and our Limited Market Release to capture necessary clinical data. NovoSorb SynPath will be launched in the U.S. after completion of a 138-patient Diabetic Foot Ulcer (DFU) trial which commenced in July 2022. The data from the study will be used to submit for insurance reimbursement in the USD $400 million outpatient market. Our BARDA funded pivotal trial is in progress with 64 patients enrolled out of a target 120 with recruitment occurring through 21 U.S. burn centres and one site in Canada. We are currently enrolling an additional 5 U.S. sites, 4 Canadian and 3 Indian based burns centres. In early October 2022, PolyNovo received regulatory approval to enter Canada with our full indications, including full thickness burns. We launched at the Canadian Burn Association meeting which included a symposium hosted by PolyNovo and our guest speaker Dr. Marcus Wagstaff. Over 200 healthcare professionals were in attendance. In January 2023 we added an experienced sales agent and team, onboarding burn centres and hospitals in several provinces. We plan to add additional sales agents in the first half of FY24. +58.3% Global FY23 NovoSorb sales growth Europe & UK In the UK, sales have grown significantly from facilitating NovoSorb BTM usage across a wide range of plastic specialities. This has instilled surgeon confidence and secured NovoSorb BTM use in all the major trauma and burn centres across the UK. The team has continued to focus on a wide range of wounds including, partial and full thickness wounds, pressure ulcers, venous and diabetic ulcers, surgical wounds, trauma wounds, cancer, and scar reconstruction. Importantly, as the year progressed and confidence grew, we have also achieved market leadership in the burns segment. This success has resulted in sales increasing by 160.3% over the prior year and the number of hospitals purchasing NovoSorb BTM has grown from 42 last year to 74. As experience has grown in the UK, we have seen the generation of high-quality clinical data published by UK surgeons and they have presented regularly at conferences across Europe, detailing their successful outcomes. In Europe, our sales effort is supported by exceptional distribution partners in defined geographies. Sales in Europe have increased this year by 182.4%, with the final quarter of this year being a record. Of particular success, was our DACH partner who increased sales by 192.8% this year. They also have hospitals across the country purchasing BTM and are present in 98% of the burn centres in Germany. We continue to seek complimentary partners throughout Europe and have recently filled stocking orders with distributors in France and Spain, which will significantly enhance our sales footprint and enable us to touch more patients. In addition, we also received first orders from the UAE. Finally, our 3PL, Movianto Belgium, provides a European warehouse, which went live in September 2021, an efficient logistics solution for the EU. 10 PolyNovo Limited Annual Report 2023 PolyNovo Limited Annual Report 2023 +160.3% UK FY23 sales growth in AUD +182.4% Europe FY23 sales growth in AUD Hong Kong Go Live October 2022 India Go Live April 2023 +84.3% Australia FY23 sales growth To educate surgeons about the life-saving benefits of NovoSorb BTM, a creative program called “VOW” (Victory Over Wounds) has been implemented, raising awareness of the potential impact of NovoSorb BTM. Recognising the immense potential in India, the inclusion of the country in the BARDA-run clinical trial is significant. Three trial sites have been identified and approved, with the trials scheduled to commence in September 2023. Singapore grew strongly in FY23, with sales increasing by 151.2%. Our success in Taiwan continues as our current distributor engagement enters its third year. An initial focus on small traumas has been leveraged to move into other indications, including larger burns. Revenue from this market has seen significant growth, more than doubling. Asia Hong Kong, India, Singapore, Taiwan PolyNovo officially entered Hong Kong in October 2022, appointing a highly experienced Business Development Manager in May 2023 to build on the initial success in the territory when it was managed remotely. PolyNovo will quickly accelerate our footprint in the market by implementing the model developed in Australia, leveraging leadership in the burns category to extend into trauma, plastic reconstruction, and other indications. To date, 5 hospitals have trialled NovoSorb BTM and 2 have purchased product. India experiences 7 million burn incidents and has over 100 million diabetes patients with 20% suffering from chronic ulcers. This underscores the urgent need for NovoSorb BTM. To address this significant opportunity, a strategic entry was made into the Indian market through a Mumbai-based subsidiary, PolyNovo Biomaterials India Private Limited, supported by a dedicated team of 16 direct sales professionals. Since the commencement of commercial operations in April 2023 over 50 patients have been treated. Australia and NZ Australia grew strongly, and all 14 burns units in Australia have used BTM. Revenue outside of burns continues to grow with our shift to trauma, plastic reconstruction, and other indications. The total number of patients touched has increased rapidly, growing by approximately 70%. The team also acquired an additional 26 hospital accounts. We have 7 dedicated professionals, with plans to hire one more. Our New Zealand business continues its success, and in FY23, our dedicated market resource onboarded in FY22 gained early traction with the newest product in our portfolio, NovoSorb MTX. The clinical data from use of NovoSorb MTX in New Zealand will be leveraged to support regulatory approvals across the globe. NovoSorb BTM continues to be widely used in burns, but plastic surgeons are using the product for numerous non-burn indications. 11 PolyNovo Limited Annual Report 2023 NOVOSORB® MTX Surgeon-led insights provide avenues for indication expansion. NovoSorb MTX leverages the technology platform underpinning the clinical success of NovoSorb BTM, without a sealing membrane. Development of NovoSorb MTX was informed by clinical experience with NovoSorb BTM, where early removal of the sealing membrane is followed by rapid formation of granulation tissue and wound closure. The product was developed to satisfy clinician demand for a product for use in indications where the sealing membrane is not required. With NovoSorb MTX, a wound can be closed with a skin graft or allowed to heal by contraction and formation of an epithelial layer. This can simplify wound management and presents wider applications for common wound healing problems. NovoSorb MTX is indicated for use in partial and full thickness wounds, pressure ulcers, venous ulcers, chronic and vascular ulcers, diabetic ulcers, and surgical and trauma wounds, offering clinicians greater versatility in wound management. NovoSorb BTM and NovoSorb MTX are complementary, and it is expected clinicians will use both products. The NovoSorb MTX product portfolio expands PolyNovo’s addressable market in the U.S. by an estimated $AU500M. 12 PolyNovo Limited Annual Report 2023 FDA 510(k) clearance for NovoSorb MTX received 19 September 2022 Major product innovation for soft tissue regeneration for the management of complex wounds The NovoSorb MTX product portfolio expands PolyNovo’s addressable market in the U.S. by an estimated $AU500M CLINICAL TRIALS U.S. Burns Pivotal Trial (BARDA) SynPath DFU Chronic Wound Trial Chronic Wound Study Description Randomised controlled pivotal sponsored clinical trial to assess the safety and effectiveness of NovoSorb BTM in subjects with severe burn skin injuries. A comparison will be made to the outcomes resulting from the use of NovoSorb BTM to FDA-cleared standard of care, (Integra and cadaveric Allograft). Indications Obtaining additional clinical evidence to support the use of NovoSorb BTM as a class III medical device for the management of deep dermal/ full thickness burn injury wounds in the U.S. Progress The first patient was enrolled into the trial in September 2021. A minimum of 120 subjects will be recruited in a 2:1 ratio of BTM to standard of care. To date, 64 subjects have been recruited. Expected completion Recruitment is expected to be completed in Q2 2024. Description Randomised controlled sponsored clinical trial comparing the use of NovoSorb SynPath to clinical standard of care in subjects with non-responsive, chronic diabetic foot ulcers. Indications Obtaining additional clinical evidence to support a reimbursement code for the use of NovoSorb SynPath for the management of chronic wounds in the U.S. Progress Trial commenced in July 2022. A total of 138 subjects will be recruited, with equal numbers in each trial group. To date, 25 patients have been enrolled into the study. Expected completion We are looking closely at the study design to make sure the Mode of Action of SynPath is not compromised in any way and the device is working effectively in the patient population. Description Randomised controlled investigator- initiated clinical study comparing the use of NovoSorb BTM combined with negative pressure wound therapy (NPWT) to clinical standard of care (NPWT alone) in subjects with neuroischemic diabetic foot wounds. Indications Obtaining additional clinical evidence to support the use of NovoSorb BTM for the management of chronic wounds, namely diabetic foot wounds complicated by vascular insufficiency, in global markets. Progress Study commenced in April 2022. A total of 64 subjects will be recruited, with equal numbers in each study group. To date, 35 subjects have been recruited. Expected completion Recruitment is expected to be completed in late 2023. PolyNovo Limited Annual Report 2023 13 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 2023 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 Dr Robyn Elliott B.Ec (Hons), M.Ec, FAICD BSc (Hons) Chemistry, PhD Inorganic Chemistry Non-executive Chairman 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 experience advising ASX-listed companies in the food, medical device, and pharmaceutical sectors. Mr Williams is currently Chairman of RMA Global Ltd (ASX: RMY) and is Managing Director of corporate advisory firm Kidder Williams. Mr Williams is the Chair of the PolyNovo Remuneration Committee. Dr Elliott was appointed a Director of PolyNovo on 28 October 2019. Dr Elliott is currently Global Head, Strategic Portfolio Management at CSL Behring, a role that is responsible for governance oversight and business value delivery from a multi-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. Dr Elliott is a member of the Audit and Risk Committee. 14 PolyNovo Limited Annual Report 2023 Ms Christine Emmanuel-Donnelly Mr Leon Hoare Mr Andrew Lumsden BSc (Hons) Chemistry, MSc Enterprise, FIPTA, MAICD GradDipBus, AssocDipAppSc (Orth), GAICD MA (Hons) in Accountancy & Finance, CA, AGIA ACG, MAICD Non-executive Director 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 (as one of three Regional Presidents). 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 the Board of Australia’s peak medical device industry body, Medical Technology Association of Australia. He is currently a Non-Executive Director of Medical Developments International Ltd (ASX: MVP). Mr Hoare is a member of the PolyNovo Remuneration Committee. 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 Chief Executive Officer of Wellcom Worldwide Australasia having previously held the roles of Group Chief Financial Officer and Group Chief Operating Officer. Prior to joining Wellcom, Mr Lumsden was a Senior Manager within the Audit and Assurance practice of PricewaterhouseCoopers. Mr Lumsden is the Chair of the Audit and Risk Committee. Ms Emmanuel-Donnelly was appointed a Director of PolyNovo on 13 May 2020. Ms Emmanuel is an accomplished IP and business development professional with more than 30 years’ local and international experience. Ms Emmanuel has a Bachelor of Science with a major in Economics (Hons: Chem) from Monash University, Certificate in Intellectual Property Law from Queen Mary College, University of London, Masters of Enterprise from Melbourne University. She is a member of the Chartered Institute of Patent Attorneys UK and has been on the Board of the Institute of Patent and Trade Mark Attorneys of Australia for over a decade. Ms Emmanuel is currently on the Board of Medical Developments International Ltd and was previously Executive Manager of Business Development and Commercial at the CSIRO, having founded and grown the central IP management team and led the management of CSIRO’s IP portfolio for over 10 years and managed the growth of the CSIRO equity portfolio for 5 years. Previously she was in-house IP Counsel for Unilever in the UK and practised as a patent and trademark attorney for Wilson Gunn (UK) and Davies Collison Cave and Griffith Hack in Melbourne. Ms Emmanuel- Donnelly is a member of the PolyNovo Remuneration Committee. 15 PolyNovo Limited Annual Report 2023 DIRECTORS’ REPORT CONTINUED Mr Bruce Rathie Mr Swami Raote Mr Jan Gielen B. Comm, LLB, MBA, FIML, FAICD, FGIA B. Pharmacy, MBA CA, Bachelor Bus (Acc) Non-executive Director Chief Executive Officer Chief Financial Officer and Company Secretary 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. During the period he was Chairman of Capricorn Mutual Limited, Chairman of ASX listed CleanSpace Holdings Limited (ASX:CSX) and a Non-executive Director of ASX listed Cettire Limited (ASX:CTT) and Capricorn Society 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 Rathie is a member of the Audit and Risk Committee. Mr Raote was appointed Chief Executive Officer of PolyNovo Limited on 29 July 2022. Mr Raote held the position of Worldwide President, Vision Care from 2017 to 2021, a division of Johnson & Johnson the world’s largest medical, pharmaceutical and consumer healthcare company, where Mr Raote had a 30-year career. From 2014 to 2016 Mr Raote served a dual role as the Area Vice President, Medical Devices for North Asia and Vice President for Ethicon, Asia Pacific. From 2009 to 2014 Mr Raote served in a variety of roles across India for Johnson & Johnson including Managing Director for Janssen India and Area Managing Director ASEAN and India. Mr Raote was also President Director in Indonesia from 2004 to 2008. Mr Raote’s early career included leadership roles across Johnson & Johnson Asia Pacific in sales, marketing, supply chain, finance, and IT. Mr Raote is currently a Non-executive Director of EOS Vision in China and holds several advisory roles to private and government institutions. 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, 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. 16 PolyNovo Limited Annual Report 2023 Dr David McQuillan Mr Philip Scorgie BSc (Hons) Biochemistry, PhD Biochemisty Master, Bus Inf Tech Chief Technical and Scientific Officer Chief Information Officer Dr McQuillan was appointed a Director of PolyNovo on 6 August 2012. He resigned as Non-Executive Director and was appointed as Chief Technical and Scientific Officer on 1 September 2022. He has extensive technical, medical, scientific, and regulatory knowledge. 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. Mr Scorgie joined PolyNovo Limited as Chief Information Officer on the 22 May 2023. Mr Scorgie holds a Master’s degree in Business Information Technology from Swinburne University and is a Non-executive Director of Wallara, a disability service provider that focusses on empowering individuals with different abilities. Mr Scorgie held the position of Global Chief Information Officer in Chicago at the top 20 global law firm, Mayer Brown from 2012 – 2016. Before working for PolyNovo Limited Mr Scorgie was an independent consultant involved in strategic technology consulting, providing valuable guidance to diverse businesses ranging from local manufacturing companies to international banking and commercial law firms. Mr Scorgie has extensive experience in a wide range of technology industries across the globe including Germany, South Africa and Hong Kong. Mr Scorgie was the Regional Chief Information Officer at Deacons in Hong Kong from 1997 to 2005. PolyNovo Limited Annual Report 2023 17 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 of 30 June 2023, PolyNovo Limited had ten 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, PolyNovo Ireland Ltd, PolyNovo Biomaterials India Private Ltd, and PolyNovo Hong Kong 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. Principal Activities and Operations PolyNovo’s principal activity is the development of innovative medical devices for 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 numerous patents all fully owned by PolyNovo. PolyNovo has no royalty or licence obligations to any other parties. Below is a summary of PolyNovo’s lead projects. 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 of BTM is delaminated and the wound closes through secondary intention (smaller wounds) or with the application of a split skin graft. NovoSorb BTM is sold directly by PolyNovo salesforce Australia, Hong Kong, India, Ireland, New Zealand, Singapore, United Kingdom, and the United States. PolyNovo utilises distributors for sales in Canada, the EU, Taiwan, and South Africa. The Company is working on obtaining regulatory approvals in other markets to quickly expand our geographical footprint. Key attributes of the NovoSorb technology include an unparalleled range of mechanical properties and bioabsorption times, excellent biocompatibility and safety profile and harmless degradants. 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. 18 PolyNovo Limited Annual Report 2023 Chart 1: NovoSorb BTM Publication Growth 250 200 150 100 50 0 214 172 108 64 42 26 2018 2019 2020 2021 2022 YTD 2023 Publications and videos relating to NovoSorb BTM applications can be found on our website: www.polynovo.com. The company is currently working on expanding the BTM product range of products. An additional 510(k) submission to further support the BTM range will be submitted to the FDA later in 2023. Additional 510(k) submissions are planned for 2024. NovoSorb BTM indication for full thickness burns NovoSorb BTM is indicated for full thickness/ third degree burns in markets outside of the U.S. Full thickness burns treatment for a U.S. FDA regulatory ‘indication’ requires additional clinical evidence (trials). A pivotal trial is in progress and funded by BARDA. Successful completion of this trial will enable PolyNovo to file a PMA application for full thickness burn use and may lead to BARDA stockpiling NovoSorb BTM for disaster management. USA Burns Pivotal Trial – BARDA PolyNovo’s 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 announced the result for this trial on 21 April 2020. PolyNovo completed a 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. The contract is a cost-plus monthly reimbursement arrangement. PolyNovo will also contribute to the trial through provision of product, employee resources and infrastructure support. The first patient was enrolled into the trial in September 2021, and we are currently recruiting patients through 21 U.S. burn centres and 1 site in Canada. We are in the process of enrolling an additional 5 U.S. sites, 4 Canadian sites and 3 Indian sites to participate in the trial. Currently, 64 patients have been enrolled into the study out of a target 120, and we expect the recruitment to be completed in FY24. Successful completion of the pivotal trial will lead to a PMA application with the U.S. FDA and the use of the BTM scaffold in full thickness acute burns. Dr Marcus Wagstaff is 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 Blome Eberwein, Lehigh Valley, are the co-principal investigators for the pivotal trial study. NovoSorb BTM already has the CE Mark, a requirement for the EU market, which includes an indication for use in full thickness burns as well as other surgical wounds and reconstructive procedures. Regulatory update for NovoSorb BTM Registrations & Certifications NovoSorb BTM Medical Device Licence was issued in October 2022 by Health Canada in Canada. NovoSorb MTX 510(k) clearance issued September 2022 by FDA in U.S. EU MDR and UK K-CA submissions for NovoSorb BTM are currently under full technical review. Registrations are under review for Bolivia and Ecuador for NovoSorb BTM and we are in the initial stages of exploring registration in UAE, China and Japan. NovoSorb SynPath Our NovoSorb SynPath product is being used in a randomised control trial (RCT) of 138 patients compared to the Standard of Care in the treatment of non-healing diabetic foot ulcers (DFU). The trial commenced on 21 June 2022 and 25 patients have been enrolled. We are looking closely at the study design to make sure the Mode of Action of SynPath is not compromised in any way and the device is working effectively in the patient population. The RCT follows the successful pilot study on 10 patients who presented with a Wagner Grade 1 or 2 DFU. The purpose of the study and RCT is to assess the safety and clinical efficacy of NovoSorb SynPath to promote wound closure in non-healing DFU. The data from this study will be used to submit for insurance reimbursement coverage for chronic wound applications in the U.S. outpatient setting. The market segment has a total addressable market of USD $400 million. Chronic Wound Study This is a randomised controlled study comparing the use of NovoSorb BTM combined with negative pressure wound therapy (NPWT) to the usual standard of care in neuroischemic diabetic foot wounds. The study will assess rates and time to complete wound healing and rates of post-surgical infection, perioperative complications, and proximal lower limb amputations. In addition, the impact of NovoSorb BTM will be explored on a range of factors including cellular proliferation and neo-angiogenesis that are known to affect wound healing, as well as quality of life and health economics. The focus of this study is patients with moderate to high risk of amputation. 35 out of a total 64 patients have been recruited and recruitment is expected to be complete late 2023. Data from the trial will provide additional clinical evidence for its broader use in patients with diabetic foot wounds complicated by vascular insufficiency. NovoSorb MTX MTX has broad applicability for single stage grafting in burns, chronic, surgical, and deep tunnelling wounds to provide increased treatment options and better outcomes. MTX and BTM are complementary, and it is expected clinicians will use both products for the treatment of soft tissue defects. MTX comprises BTM foam only without the temporising film. It is supplied in various sizes. PolyNovo announced on 19 September 2022 it had received FDA 510(k) clearance for NovoSorb® MTX with a 2mm thickness and a U.S. limited market release commenced in April 2023. The total addressable U.S. market comprising in and out-patient settings is estimated at AUD $500 million. An additional 510(k) submission to further support the MTX range will be submitted to the FDA later in 2023 with further product extensions scheduled in 2024. 19 PolyNovo Limited Annual Report 2023 DIRECTORS’ REPORT CONTINUED Hernia Repair PolyNovo has focused its approach to hernia repair and is developing a targeted solution for ventral hernia and complex abdominal wall reconstruction. This comprises a novel NovoSorb-based textile that will expand the clinical application of the NovoSorb polymer technology. Plastics and Reconstructive Device Products PolyNovo previously announced that it has taken the breast development program in-house. We envisage this program will leverage the experience and processes developed for the hernia devices. The hernia product development models serve as effective building blocks for other tissue reinforcement products in breast, orthopaedics, and other applications. We anticipate that manufacturing processes, technology and equipment will be shared across a range of new products. NovoSorb Dermal Beta-Cell Implant PolyNovo is supplying NovoSorb BTM in modified sizes to Beta-Cell Technologies, a third-party R&D group. Beta-Cell is collaborating with a global supplier of stem cell-derived Islet cells for use in this program. PolyNovo will be supplying NovoSorb BTM in unique shapes and sizes for the trial and Beta-Cell will explore the potential of integrated NovoSorb BTM to host pancreatic Islet cells in the skin. This treatment holds significant promise for treating Type 1 diabetes with reduced reliance on a donor pancreas. Capital Investment PolyNovo’s capital expenditure in FY23 was higher than FY22 due to investing in enhancing manufacturing capabilities and office expansion. This included cleanroom upgrades and new manufacturing and process equipment. This capital investment was partly funded by the Victorian State Governments Medtech Manufacturing Capability Program in the amount of $500k. PolyNovo leased a property in September 2022 located next door to the current facilities which will more than double the current office and manufacturing footprint. The design process has commenced for the new manufacturing facility which will service an additional A$500m in annual sales. Status of Markets 1H23 demonstrated the unshackling of Covid-19 impacts with sales up 67.5% on the prior period and strong customer account growth. Access to hospitals, surgeons and 20 logistics capacity is comparable to pre-Covid era albeit with some remnants remaining. PolyNovo achieved 58.3% in sales growth for FY23 including a $7.2m sales month in May 2023 and accelerated customer account growth with now over 600 accounts in direct markets. PolyNovo recorded strong NovoSorb BTM sales growth in all markets notably in the U.S. up 34.0% in local USD currency and ROW was up 133.9%. The ROW increase includes strong performances in Australia up 84.3%, UK/Ireland up 168.8%, Germany up 192.8% and also strong sales in Canada and Hong Kong and first sales in India. Following the completion of the $53m capital raising in November 2022 a recruitment drive for the U.S. sales and marketing teams commenced and 28 hires were completed by Q4 2023. The efficient onboarding and training of the new employees has had a positive impact on sales and account growth but importantly sets up the business for further growth in FY24. Inflation and rising interest rates have increased some costs in all markets including wages and salaries. PolyNovo debt level remains low with an equipment finance facility owing $2,802,941 as at 30 June 2023. PolyNovo maximises interest earned on cash deposits via high interest term deposits. To manage the impact of higher inflation and interest costs 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 in the impact of rising costs. 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 2023. Strategic Overview and Likely Developments PolyNovo’s focus over the next 12 months will be to: • Continue to accelerate revenue from NovoSorb BTM in existing markets and recently entered markets India, Canada and Hong Kong • Expand product range of NovoSorb BTM and NovoSorb MTX • Identify potential partners in China and Japan • Identify potential partners for indication expansion such as hernia and breast • Finalise device design options for hernia and breast • Complete recruitment of 120 patients in FY24 for the U.S. BARDA pivotal trial for full thickness burns • Near completion of the 138-patient randomised control trial for diabetic foot ulcers using NovoSorb SynPath • Sign additional GPO/IDN agreements in the U.S. to further accelerate sales • Support BetaCell with the supply of NovoSorb BTM for use as a dermal deposit for Type 1 diabetes • Finalise design and appoint construction contractor for new manufacturing facility at 326 Lorimer Street Port Melbourne Significant Events After the Balance Date The Directors are not aware of any other matters or circumstances since the end of the financial year other than those described above, nor otherwise dealt with in this report, which have significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Announcements released by the Company after 30 June 2023 include: • 11 August 2023 - Webcast Details FY23 Results Financial Results PolyNovo Limited reported revenue for the year ended 30 June 2023 of $66,535,017 an increase of $24,644,414 from the prior year’s $41,890,603. The net loss after tax (NLAT) of $4,924,539 for FY23 was an increase of $3,732,007 from the prior year’s net loss of $1,192,532. Excluding non-cash items of share-based payments $1,113,207, unrealised forex gain $787,301 and depreciation & amortisation $2,282,553, the underlying net loss after tax is $2,316,080 (2022: net loss $1,996,442). Several factors contributed to the result as follows: • Revenue from the sale of commercial products for FY23 increased by 58.3% to $59,578,531 from the prior year’s $37,643,160. PolyNovo Limited Annual Report 2023 • Revenue from BARDA for FY23 increased by 49.2% to $5,662,938 from the prior year’s $3,796,679. This increase is reflective of the patient enrolment in the pivotal trial which is currently at 64 patients out of a target 120 patients. • Other Income includes $408,000 from Victorian State Government supporting our manufacturing development and commercialisation of new products. • Employee related expenses increased by 84.1% to $39,438,210 but after excluding the reversal of share options and share awards forfeited by the previous CEO and COO on their resignations in the prior year of $4,708,151, the increase for FY23 is 50.9%. This increase is due to headcount increase to drive and support growth primarily within sales, marketing, production, research and development, and quality. • Research and development expenses increased by 29.3% to $7,428,821 due to increased activity in research and commercialisation of new products. • Depreciation and amortisation increased by $448,446 attributable to property, plant and equipment acquired for the manufacturing facility and research and development. • Corporate, administrative, and overhead expenses increased by 67.6% to $17,415,763 reflecting the increased growth and activity in the business. R&D Tax Incentives During the 2023 financial year, the Company received a 38.5% non-refundable tax offset of $887,721 (non-cash) in relation to the FY22 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 2018 30 June 2019 30 June 2020 30 June 2021 30 June 2022 30 June 2023 A high of $4.01 was reached on 29 December 2020. Loss Per Share In Australian dollars Cents Basic loss per share – cents Diluted loss per share $ $0.54 $1.54 $2.54 $2.82 $1.35 $1.55 $ (0.72) (0.72) As the Group made a loss for the year ended 30 June 2023, 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 2023, there are 8,450,000 unvested share options issued and nil performance rights. 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 2023, the Company indemnified its Directors, Company Secretary and Executive Officers in respect of any acts or omissions giving rise to a liability to another person (other than the Company or a related party) unless the liability arose out of conduct involving a lack of good faith. In addition, the Company indemnified the Directors and the Company Secretary against any liability incurred by them in their capacity as Directors or Company Secretary in successfully defending civil or criminal proceedings in relation to the Company. No monetary restriction was placed on this indemnity. The Company has insured its Directors, Company Secretary and Executive Officers for the period under review. Under the Company’s Directors’ and Officers’ Liability Insurance Policy, the Company shall not release to any third party or otherwise publish details of the nature of the liabilities insured by the policy or the amount of the premium. Accordingly, the Company relies on section 300(9) of the Corporations Act 2001 to exempt it from the requirement to disclose the nature of the liability insured against and the premium amount of the relevant policy. 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. 21 PolyNovo Limited Annual Report 2023 DIRECTORS’ REPORT CONTINUED 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. 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. The Company recognises it has an impact on the environment, directly through its operations, and indirectly through its value chain. PolyNovo is committed to minimising the environmental impact of its operations and its products. Forward-looking Statements Certain statements in this Annual Report contain forward-looking statements regarding the Company’s business and the therapeutic and commercial potential of its technologies and products in development. Any statement describing the Company’s goals, expectations, intentions, or beliefs is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly those risks or uncertainties inherent in the process of discovering, developing and commercialising drugs and medical devices that can be proven to be safe and effective for use in humans, and in the endeavour of building a business around such products and services. PolyNovo undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. Actual results could differ materially from those discussed in this Annual Report. As a result, readers of this report are cautioned not to rely on forward- looking statements. Directors’ Shareholdings and Declared Interests As at 30 June 2023, the Directors of PolyNovo collectively hold 26,315,183 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 Mr Leon Hoare Dr Robyn Elliott Ms Christine Emmanuel- Donnelly Mr Andrew Lumsden Shares held directly Shares held indirectly – – – 21,421,385 3,250,000 1,180,220 42,789 – – – 270,789 150,000 Total 42,789 26,272,394 As at 30 June 2023 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 Group’s 2023 Annual Report. Further details of the equity interests of Directors can be found in the Remuneration Report. Directors Total number of meetings held Mr David Williams* Dr Robyn Elliott Role Non-Executive Director Non-Executive Director Ms Christine Emmanuel-Donnelly Non-Executive Director Dr David McQuillan*** Non-Executive Director Mr Leon Hoare Mr Bruce Rathie Non-Executive Director Non-Executive Director Mr Andrew Lumsden** 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 12 3 5 12 12 12 1 12 12 11 12 12 12 2 12 12 12 – 3 – – – 3 3 – 3 – – – 3 3 5 – 5 – 5 – – 5 – 5 – 5 – – * Mr David Williams is Chair of the Remuneration Committee. ** Mr Andrew Lumsden is Chair of the Audit and Risk Committee. *** Dr David McQuillan resigned as a director on 1 September 2022. 22 PolyNovo Limited Annual Report 2023 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 2023, 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 149,933 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 38. PolyNovo Limited Annual Report 2023 2323 PolyNovo Limited Annual Report 2023 24 PolyNovo Limited Annual Report 2023 ESG STATEMENT AND CORPORATE GOVERNANCE PolyNovo brings disruptive, innovative, and regenerative medical devices to market that improve clinical, functional and cosmetic outcomes for patients. Our products offer significant health economic benefits to patients, surgeons, and health systems. Apart from saving lives, 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 live their best possible lives. We strive to improve on all aspects of our business year on year in line with our commercial development. Our Approach to ESG PolyNovo acknowledges the importance of an integrated and consistent approach to Environmental, Social and Governance (ESG) risk factors. 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 manufacturing process is already low emitting, with approximately 560 grams of carbon emitted per batch of NovoSorb BTM. PolyNovo is carbon neutral certified for its business operations for the reporting period FY2021-22 (projected); the FY2021-22 true-up report is submitted and is currently under assessment by Climate Active. PolyNovo only uses environmentally certified commercial waste disposal providers, with minimal waste produced in our manufacturing process. To further improve our waste management processes, we engaged a specialised third-party consultancy to develop a waste management and reduction plan. 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 Every employee plays a role in our success and by working together, we develop new opportunities for patients, customers, our community, and shareholders. The company has a strong focus on learning and development, and all employees have access to an online learning platform. Employees also have an appraisal and development program to ensure we continue to develop our skill base, improve productivity, and give employees and managers the opportunity for personal and professional growth. Training is achieved through targeted educational programs and mentorship. 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 monitored to ensure we are a leading example of a diverse organisation in our industry. We celebrate religious and cultural events with our teams with learnings from these informing our international operations. Embracing diversity makes PolyNovo an interesting, exciting, and dynamic workplace where alternative thinking provides us with an innovative edge. 25 PolyNovo Limited Annual Report 2023 ESG STATEMENT AND CORPORATE GOVERNANCE CONTINUED 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 organisation at 30 June 2023. Board of Directors Managers/ Supervisors All Employees 33% Women 67% Men 41% Women 59% Men 38% Women 62% Men Company Diversity Profile Global Company Sales Marketing Rest of company Total company Manager C Suite Staff # Female Middle East/ African Black/ African Hispanic Asian/ Indian Indigenous Female Middle East/ African Black/ African Hispanic Asian/ Indian Indigenous 105 14 99 218 73 5 37 8 37 82 30 0 0 0 11 11 4 0 4 0 2 6 2 0 2 1 3 6 2 0 7 3 51 61 23 2 0 0 0 0 0 0 35% 57% 0% 0% 37% 11% 38% 5% 41% 0% 5% 0% 4% 0% 2% 3% 3% 0% 2% 7% 7% 21% 3% 52% 3% 28% 3% 0% 32% 40% 0% 0% 0% 0% 0% 0% Health & Safety Safety is central to the responsible operation of our business, and the health and safety of our employees and contractors is a 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 FY23, there was zero (0) lost time injury and zero (0) medical treatment injuries to our employee and contractor workforce. The company Total Recordable Injury Frequency Rate (TRIFR) is zero for the year, unchanged from FY22. PolyNovo’s Health & Safety Policy can be found on its website: https://polynovo.com/ about-us/. 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. It is an honour and obligation of our organisation to participate and support programs for rehabilitation of both the body and mind of patients who have had their lives impacted by tragedy. We are committed to engaging with research and clinical activities that advance the quality of life for those impacted by burn, trauma, and tissue loss and are proud to have provided NovoSorb BTM at no-cost for surgical applications when surgeons are participating in charitable or out-reach programs. At the request of surgeons and medical organisations, we supplied products for humanitarian needs during FY23. Partnership with Interplast For 40 years, Interplast has worked in 25 countries, providing free reconstructive surgery for patients who may otherwise not be able to afford access to such services. Interplast also empowers local medical personnel by building their capacity to independently provide clinical services without Interplast support. PolyNovo worked closely with the Interplast team to assist with life-changing work in Fiji, where burns continue to present a significant public health burden. In April 2023, a trial of NovoSorb BTM commenced, with PolyNovo providing education to nursing and medical staff at the Colonial War Memorial Hospital in Fiji. 26 PolyNovo Limited Annual Report 2023 As an example, NovoSorb BTM was used on 5-year-old Joseph, who in 2021, was playing at his cousin’s house, when an accident led to his pants catching fire, resulting in severe burns to his legs. He was rushed to a local clinic, and then onto the ICU department at Labasa Hospital in Fiji, several hours from Joseph’s village. Joseph’s mother Divui initially donated skin from her own legs to be used to graft his wounds. Despite the initial care provided by local surgeons, the scars on Joseph’s legs contracted and he was unable to straighten them fully. This meant he had trouble walking and was at risk of infection. The surgery using NovoSorb BTM was successful, and the team have continued to follow Joseph closely, providing ongoing education and support to the local team in Fiji (Scott Buadromo – surgeon, Mereia Seru – burns nurse and Akisi Dovibua – physio). All were thrilled to receive the incredible news in June that Joseph had returned to his home village outside of Labasa, where he is now walking and running around like any little boy his age, for the first time in many years. 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 U.S. 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 will 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 Modern Slavery Statement can be found on its website: https://polynovo.com/ about-us/. Governance PolyNovo recognises the importance of good corporate governance and the role it plays in 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 balanced 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. Principle 1 Lay solid foundations for management and oversight 2 Structure the board to be effective and add value PolyNovo Policy PolyNovo Board Charter PolyNovo Board Charter 3 Instill a culture of acting lawfully, Commercial Code of Conduct ethically, and responsibly 4 Safeguard the integrity of corporate reports Whistle-blower Policy Gender Diversity Policy Share Trading Policy Environment Policy Modern Slavery Statement Audit and Risk Committee Charter 5 Make timely and balanced disclosure Market Disclosure Protocol 6 Respect the rights of security holders Communications Policy 7 Recognise and manage risk PolyNovo Risk Management Policy 8 Remunerate fairly and responsibly 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/. Joseph, who was treated using NovoSorb BTM at the Colonial War Memorial Hospital in Fiji PolyNovo Limited Annual Report 2023 27 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 2023. 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 year ended 30 June 2023. This report outlines the compensation arrangements for the key management personnel of PolyNovo and explains how these arrangements are linked to Company performance. 1. 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. 1.1 Non‑executive Directors • Mr David Williams – Non‑executive Chairman • Dr Robyn Elliott – Non‑executive Director • Ms Christine Emmanuel‑Donnelly – Non‑executive Director • Mr Leon Hoare – Non‑executive Director • Dr David McQuillan – Non‑executive Director (resigned as Non‑executive Director and was appointed as Chief Technical and Scientific Officer on 1 September 2022) • Mr Bruce Rathie – Non‑executive Director • Mr Andrew Lumsden – Non‑executive Director 1.2 Senior Management • Mr Swami Raote – Chief Executive Officer (appointed on 29 July 2022) • Mr Jan Gielen – Chief Financial Officer/Company Secretary • Dr David McQuillan – Chief Technical and Scientific Officer (appointed on 1 September 2022) • Mr Philip Scorgie – Chief Information Officer (appointed on 22 May 2023) • Mr Max Johnston – Interim Chief Executive Officer (appointed on 8 November 2021 and employment ended on 31 August 2022) 2. 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 difficult to apply. 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, clinical trials, expansion in direct markets and entering new markets. 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 commercialisation, additional milestones in relation to the achievement of product sales and production targets will be added to 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 against increases in shareholder value. 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. The Company has a compensation policy for Non‑executive Directors and a separate policy for the CEO and Senior Managers. 28 PolyNovo Limited Annual Report 2023 2.1 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 (2022: $850,000). Total Non‑executive Directors’ fees (including superannuation but excluding share‑based payments) for the year ended 30 June 2023 were $635,190 (2022: $569,858). The Directors’ fees are considered within the average range for similar sized companies in the biotechnology industry and are reviewed periodically. 2.2 Senior Management 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 and its shareholders; • 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. Short‑term incentives, through a bonus scheme dependent upon performance against objectives and targets which are linked to PolyNovo’s overall corporate strategy. 3. Long‑term incentives, through participation in the PolyNovo Employee Share Option Plan (the Plan) with share price thresholds to be achieved. 2.2.1 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. 2.2.2 Short Term Incentives PolyNovo’s short‑term incentive policy for Senior Managers encourages high‑quality performance in achieving key performance indicators during the current financial year. Bonus schemes are widely recognised as an effective way of providing performance incentives. Short‑term incentives are based on the Company exceeding budgeted total group revenue and EBITDA by at least ten percent (10%). The maximum incentive is twenty percent (20%) of salary, except for CEO Mr Swami Raote’s incentive which is up to 50% of salary and also includes ESG and diversity hurdles. CEO Mr Swami Raote’s incentive shall be paid in two halves, being 50% as taxable salary and 50% as free shares calculated at the 30‑day Volume Weighted Average Price (VWAP) as at the date the annual bonus was awarded. Free shares awarded will be held in escrow for 12 months. For bonus entitlement details please refer to Table A. 2.2.3 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 to 5 years. 29 PolyNovo Limited Annual Report 2023 REMUNERATION REPORT – AUDITED CONTINUED 3. Service Contracts 3.1 Chief Executive Officer (CEO) Mr Swami Raote was appointed as CEO of PolyNovo Limited on 29 July 2022. During the year ended 30 June 2023, 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 key terms of his contract are as follows: • a salary of USD $450,000 per annum; • USA pension plan 401(k) of 4% matching employee contributions based on salary; • a short‑term annual performance bonus of up to 50% of gross base salary, 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 ‘CEO Performance Incentives’ section of the Remuneration Report and in Tables A, B, C and D below; and • no fixed employment term. 3.2 Company Secretary and Chief Financial Officer (CFO) Mr Jan Gielen was appointed as CFO and Company Secretary on 12 December 2018. During the year ended 30 June 2023, 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 $247,519 per annum; • superannuation of 10.5%; • 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; and • no fixed employment term. 3.3 Chief Technical and Scientific Officer (CTSO) Dr David McQuillan resigned as Non‑Executive Officer and was appointed as Chief Technical and Scientific Officer on 1 September 2022. During the year ended 30 June 2023, 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 USD $215,000 per annum; • a short‑term annual performance bonus of up to 20% of gross base salary, 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 ‘CTSO Performance Incentives’ section of the Remuneration Report and in Tables A, B, C and D below; and • no fixed employment term. 3.4 Chief Information Officer (CIO) Mr Philip Scorgie was appointed as CIO on 22 May 2023. During the year ended 30 June 2023, 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 $226,224 per annum; • superannuation of 10.5%; • a short‑term annual performance bonus of up to 15% 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 ‘CIO Performance Incentives’ section of the Remuneration Report and in Tables A, B, C and D below; and • no fixed employment term. 30 PolyNovo Limited Annual Report 2023 4. Long Term Incentives 4.1 CEO Incentives On 29 July 2022, PolyNovo granted 5 million shares options in five equal tranches to CEO. Details of the five tranches are set out below. The vesting hurdle for the options is linked to CEO’s length of employment and the PolyNovo volume weighted average market price. The vesting hurdles applied to all 5 tranches are as follows and options only vest when both exercise conditions have been satisfied: • First hurdle –each tranche of 1,000,000 options cannot vest or be exercised until after the anniversary of the commencement of employment each year, details refer to below table; and • Second hurdle – shares have been trading 30 continuous days at premium to the exercise price. Details of the vesting hurdle for the five tranches are as follows: • Tranche 1: One Million (1,000,000) Options cannot vest or be exercised until after the one (1) year anniversary of the commencement of employment and until such time as shares in PolyNovo have been trading 30 continuous days at 50% greater than the exercise price or above; • Tranche 2: One Million (1,000,000) Options cannot vest or be exercised until after the two (2) year anniversary of the commencement of employment and until such time as shares in PolyNovo have been trading 30 continuous days at 75% greater than the exercise price or above; • Tranche 3: One Million (1,000,000) Options cannot vest or be exercised until after the three (3) year anniversary of the commencement of employment and until such time as shares in PolyNovo have been trading 30 continuous days at 100% greater than the exercise price or above; • Tranche 4: One Million (1,000,000) Options cannot vest or be exercised until after the four (4) year anniversary of the commencement of employment and until such time as shares in PolyNovo have been trading 30 continuous days at 150% greater than the exercise price or above; and • Tranche 5: One Million (1,000,000) Options cannot vest or be exercised until after the five (5) year anniversary of the commencement of employment and until such time as shares in PolyNovo have been trading 30 continuous days at 200% greater than the exercise price or above. The exercise price is $1.64 per option tranche. Sixty percent (60%) of the shares issued on the exercise of options will be restricted shares subject to rule 9 of the Employee Option Plan until the first anniversary of the date of issue of the shares. Shares issued will be in escrow for twelve months and until that time will be unable to be dealt with. Whether they have vested or not, the options will be cancelled on the date of termination or cessation of employment. Accumulated share options expense recognised during the year ended 30 June 2023 was $716,338. Details of the options package are included in the Tables A, B, C and D below. 4.2 CFO Incentives 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 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. Whether they have vested or not, the options will be cancelled on the date of termination or cessation of employment. Tranche 1 was exercised on 26 February 2021. Tranche 2 was exercised on 21 January 2022. Tranche 3 was exercised on 16 February 2023. 31 PolyNovo Limited Annual Report 2023 REMUNERATION REPORT – AUDITED CONTINUED 4.3 CTSO Incentives On 2 September 2022, PolyNovo issued an options package comprising three tranches totalling 1,200,000 options to the CTSO. Details of the three tranches are set out below. The vesting hurdle for the options is linked to CTSO’s length of employment and the PolyNovo volume weighted average market price. The vesting hurdles are as follows: • First hurdle – 6 months of employment with the Company; and • Second hurdle – shares in PolyNovo have been trading at all times at or above 150% of the exercise price for a continuous three months period. Once vested, the options can be exercised in three tranches as follows: • Tranche 1: 400,000 options – not to be exercised until 6 months of employment and not later than 30 May 2025; • Tranche 2: 400,000 options – not to be exercised until 18 months of employment and not later than 30 May 2025; and • Tranche 3: 400,000 options – not to be exercised until 24 months of employment and not later than 30 May 2026. The exercise price is $1.81 per option tranche. Sixty percent (60%) of the shares issued on the exercise of options will be restricted shares subject to rule 9 of the Employee Option Plan until the first anniversary of the date of issue of the shares. Shares issued will be in escrow for twelve months and until that time will be unable to be dealt with. Whether they have vested or not, the options will be cancelled on the date of termination or cessation of employment. Accumulated share rewards expense recognised during the year ended 30 June 2023 was $180,411. Details of the options package are included in the Tables A, B, C and D below. 4.4 CIO Incentives On 22 May 2023, PolyNovo issued an options package comprising three tranches totalling 500,000 options to the CIO. Details of the three tranches are set out below. The vesting hurdle for the options is linked to CIO’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 – shares in PolyNovo have been trading at all times at or above 150% of the exercise price for a continuous three months period. Once vested, the options can be exercised in three tranches as follows: • Tranche 1: 150,000 options – not to be exercised until 12 months of employment and not later than 31 May 2028; • Tranche 2: 150,000 options – not to be exercised until 24 months of employment and not later than 31 May 2028; and • Tranche 3: 200,000 options – not to be exercised until 36 months of employment and not later than 31 May 2028. The exercise price is $1.37 per option tranche. Sixty percent (60%) of the shares issued on the exercise of options will be restricted shares subject to rule 9 of the Employee Option Plan until the first anniversary of the date of issue of the shares. Shares issued will be in escrow for twelve months and until that time will be unable to be dealt with. Whether they have vested or not, the options will be cancelled on the date of termination or cessation of employment. Accumulated share rewards expense recognised during the year ended 30 June 2023 was $10,075. 32 PolyNovo Limited Annual Report 2023 5. Key Management Personnel Statutory Remuneration Tables Details of the remuneration for key management personnel for the years ended 30 June 2023 and 30 June 2022 are set out in Table A, B, C and D below. 5.1 Key Management Personnel Remuneration 2023 and 2022 Short‑term Long‑term Cash Salary & Fees $ Cash Bonus $ Share Options $ Super‑ annuation $ Leave Allow‑ ances $ Share Options & Share Awards $ Termi‑ nation Benefits $ Perfor‑ mance Based % Total $ Table A Directors Mr David Williams (Chairman/Non‑Executive Director) 2023 126,697 2022 107,161 Mr Bruce Rathie (Non‑Executive Director) Dr David McQuillan (Non‑Executive Director)1 Mr Leon Hoare (Non‑Executive Director) Dr Robyn Elliott (Non‑Executive Director) Ms Christine Emmanuel‑Donnelly (Non‑Executive Director) Mr Andrew Lumsden (Non‑executive Director) Sub total compensation for Directors 2023 86,364 2022 69,536 2023 18,028 2022 69,536 2023 95,432 2022 73,293 2023 86,364 2022 69,536 2023 86,364 2022 69,536 2023 93,165 2022 69,536 2023 592,415 2022 528,132 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 13,303 10,716 9,068 6,954 – – – 3,196 9,068 6,954 9,068 6,954 2,267 6,954 42,775 41,727 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 140,000 – – – – – – – – – – – – – – – 117,877 95,432 76,489 18,028 69,536 95,432 76,489 95,432 76,489 95,432 76,489 95,432 76,489 635,190 569,858 – – – – – – – – – – – – – – – – 33 PolyNovo Limited Annual Report 2023 REMUNERATION REPORT – AUDITED CONTINUED Short‑term Long‑term Cash Salary & Fees $ Cash Bonus7 $ Share Options $ Super‑ annuation/ USA Pension Plan 401(k) $ Leave Allow‑ ances $ Share Options & Share Awards $ Termin‑ ation Benefits $ Perform‑ ance Based % Total $ 2023 616,680 153,732 153,732 5,374 41,706 716,338 – 1,687,562 52% Table A Senior Management Mr Swami Raote2 Mr Jan Gielen 2022 – 2023 243,202 2022 217,687 – – – Dr David McQuillan1 2023 297,540 53,418 Mr Philip Scorgie3 Mr Paul Brennan4 Mr Max Johnson5 Dr Anthony Kaye6 2022 – 2023 25,813 2022 2023 – – 2022 254,114 2023 62,525 2022 176,923 2023 – 2022 80,023 – – – – – – – – – – – – – – – – – – – – – – – – 25,536 22,896 21,769 5,292 – – – 2,323 13,390 180,411 – – – 2,710 2,339 10,075 – – – – – – – – – – – – – – – 291,634 244,748 547,082 – 40,936 – – 0% 0% 0% 43% 0% 25% 0% 0% 25,411 (76,542) (3,817,982) 73,348 (3,541,650) 108% 4,773 (14,340) 17,692 14,340 – – – – – 17,071 70,029 – – 208,955 – 0% 0% 0% 8,002 (6,688) (211,660) 9,828 (120,494) 176% Sub total compensation for Other Key Management Personnel Total compensation for all Key Management Personnel 2023 1,245,759 207,150 153,732 40,716 65,991 906,824 17,071 2,637,243 42% 2022 728,748 – – 72,875 (63,599) (4,029,641) 83,175 (3,208,442) 126% 2023 1,838,174 207,150 153,732 83,491 65,991 906,824 17,071 3,272,432 34% 2022 1,256,880 – – 114,601 (63,599) (4,029,641) 83,175 (2,638,584) 153% Notes 1. Dr David McQuillan resigned as Non‑executive Director and was appointed as Chief Technical and Scientific officer on 1 September 2022. 2. Mr Swami Raote was appointed as Chief Executive Officer on 29 July 2022. 3. Mr Philip Scorgie was appointed as Chief Information Officer on 22 May 2023. 4. Mr Paul Brennan resigned as Managing Director on 5 November 2021. 5. Mr Max Johnston was appointed as interim CEO on 8 November 2021 and his employment ended on 31 August 2022. 6. Dr Anthony Kaye resigned as Chief Operating Officer on 6 October 2021. 7. The annual bonus is determined after the annual audited financial report has been signed of and is subject to change following Board approval. 34 PolyNovo Limited Annual Report 2023 5.2 Share options and awards granted or exercised in FY2023 During the year ended 30 June 2023, 6,700,000 share options (2022: nil) were granted to key management personnel. 400,000 share options were exercised by CFO in FY2023. The options exercised 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. Average Fair Value per Option at Grant Date1 $ Fair Value of Options Granted During the Year $ Number of Options Exercised During the Year Value of Options Exercised During the Year2 $ Value of Options Received Upon Exercise3 $ – – – – – – – – – – 400,000 476,000 716,000 400,000 476,000 716,000 Table B KMP Mr Jan Gielen Options Options Options Total Mr Swami Raote Options Options Options Options Options Total Dr David McQuillan Options Options Options Total Mr. Philip Scorgie Options Options Options Total Mr Max Johnston Total Grant Date Grant Number 06/03/2019 300,000 06/03/2019 300,000 06/03/2019 400,000 1,000,000 29/07/2022 1,000,000 29/07/2022 1,000,000 29/07/2022 1,000,000 22/07/2022 1,000,000 29/07/2022 1,000,000 5,000,000 02/09/2022 400,000 02/09/2022 400,000 02/09/2022 400,000 1,200,000 15/05/2023 15/05/2023 150,000 150,000 15/05/2023 200,000 500,000 – – 0.236 0.311 0.394 0.702 0.778 0.889 0.940 1.062 0.408 0.423 0.502 0.682 0.621 0.541 – – 702,000 778,000 889,000 940,000 1,062,000 4,371,000 163,200 169,200 200,800 533,200 102,300 93,150 108,200 303,650 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Notes 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 note 35. 2. Determined at the time of exercise at the intrinsic value. Exercise price was $0.60, market price was $1.79, intrinsic value was $1.19 per share. 3. Determined at the time of exercise at the market value. – – – – – – – – – – – – – – – – 35 PolyNovo Limited Annual Report 2023 REMUNERATION REPORT – AUDITED CONTINUED 5.3 Share options and awards vested or forfeited in 2023 The share options and awards of key management personnel for the year ended 30 June 2023 are set out in the following table: Table C KMP Mr Swami Raote Mr Jan Gielen Dr David McQuillan Mr Philip Scorgie Mr Max Johnston Balance at 1 July 2022 Options Granted During Year Options Exercised During Year Options Forfeited During Year Total Vested at End of Year Total Exercisable at End of Year Total Not Exercisable at End of Year Balance at 30 June 2023 – 5,000,000 – 400,000 – (400,000) – – – 1,200,000 500,000 – – – – – – – – – – – – – – – – – – – – – 5,000,000 5,000,000 – – 1,200,000 1,200,000 500,000 500,000 – – – 6,700,000 6,700,000 Total 400,000 6,700,000 (400,000) 5.4 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: Table D Directors Mr David Williams Mr Bruce Rathie Mr Leon Hoare Dr Robyn Elliott Ms Christine Emmanuel‑Donnelly Mr Andrew Lumsden Dr David McQuillan1 Other key Management personnel Mr Jan Gielen Dr David McQuillan1 Mr Swami Raote Mr Philip Scorgie Mr Max Johnston Balance at 1 July 2022 Granted as Compen‑ sation On Exercise of Options Net Change Other Balance at 30 June 2023 Balance at End of Year – Directly Held Balance at End of Year – Indirectly Held 24,592,087 3,050,000 1,180,220 – 115,000 100,000 608,313 600,000 608,313 – – – – – – – – – – – – – – – – – – – – – – (3,170,702) 21,421,385 200,000 3,250,000 – 1,180,220 – 21,421,385 – – 3,250,000 1,180,220 42,789 42,789 42,789 155,789 270,789 50,000 150,000 – – – 608,313 608,313 – 270,789 150,000 – 400,000 (90,000) 910,000 610,000 300,000 – – – – 59,880 668,193 668,193 – – – – – – – – – – – – – Notes 1. Dr David McQuillan resigned as Non‑executive Director and appointed as Chief Technical and Scientific Officer on 1 September 2022. His ending balance date in Directors table and beginning balance date in KMP table is 1 September 2022. 2. Opening balance excludes shares held by closely related parties where there is no control or significant influence by the KMP. 3. ‘Net Change Other’ reflects shares privately acquired or disposed during the year and shares held by resigned KMP on the date of their cessation of employment. 36 PolyNovo Limited Annual Report 2023 6. 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. 7. Other Key Management Personnel Transactions Kidder Williams Ltd, an entity associated with David Williams, received payment in the amount of $110,000, GST inclusive. The payment was in respect to consulting services provided to PolyNovo Limited at standard commercial terms and conditions in relation to the capital raising. Other than as noted above, there were no transactions with key management personnel during the year ended 30 June 2023. End of Remuneration Report – Audited. This Directors’ Report, incorporating the Corporate Governance Statement and Remuneration Report, has been signed in accordance with a Resolution of the Directors made on 23 August 2023. 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 23 August 2023 37 PolyNovo Limited Annual Report 2023 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 2023, 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; b. No contraventions of any applicable code of professional conduct in relation to the audit; and c. No non-audit services provided that contravene 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 23 August 2023 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 38 PolyNovo Limited Annual Report 2023 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2023 Revenue Revenue from contracts with customers 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 expenses Finance costs Impairment loss Loss before income tax (expense)/benefit Income tax (expense)/benefit Loss after income tax (expense)/benefit for the year attributable to the owners of PolyNovo Limited Other comprehensive income/ (loss) Items that may be reclassified subsequently to profit or loss Loss on translation of foreign operation Other comprehensive income/ (loss) for the year, net of tax Total comprehensive income/ (loss) for the year attributable to the owners of PolyNovo Limited Loss per share for loss attributable to the owners of PolyNovo Limited Basic loss per share Diluted loss per share Consolidated 30 June 2023 $ 30 June 2022 $ Note 4 5 6 7 8 9 10 11 12 65,241,469 41,439,839 869,625 423,923 671 450,093 66,535,017 41,890,603 (4,433,696) (2,202,686) (39,438,210) (21,419,312) (7,428,821) (5,747,156) (2,037,462) (1,589,016) (17,415,763) (10,392,159) (528,044) (95,216) (186,119) (220,150) – (1,375,832) (4,933,098) (1,150,924) 8,559 (41,608) (4,924,539) (1,192,532) (681,421) (681,421) (144,458) (144,458) (5,605,960) (1,336,990) Cents Cents 34 34 (0.72) (0.72) (0.18) (0.18) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 39 PolyNovo Limited Annual Report 2023 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2023 Assets Current assets Cash and cash equivalents Trade and other receivables Contract cost assets Inventories Other financial assets Prepayments Income tax receivables Total current assets Non‑current assets Contract cost assets Property, plant and equipment Right‑of‑use assets Intangibles Prepayments Total non‑current assets Total assets Liabilities Current liabilities Trade and other payables Interest‑bearing loans and borrowings Lease liabilities Provisions Total current liabilities Non‑current liabilities Interest‑bearing loans and borrowings Lease liabilities Provisions Total non‑current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Consolidated 30 June 2023 $ 30 June 2022 $ Note 13 14 15 16 26 18 12 15 19 17 20 18 21 22 23 24 22 23 24 25 25 25 46,846,946 6,102,192 13,692,791 6,089,442 306,834 146,315 4,530,285 2,535,293 50,000 50,000 1,903,339 1,261,988 24,030 4,279 67,354,225 16,189,509 182,893 329,208 11,115,326 9,946,085 12,252,318 6,805,460 1,156,624 1,404,472 559,263 296,796 25,266,424 18,782,021 92,620,649 34,971,530 9,134,930 4,967,879 1,398,158 1,330,058 491,979 457,750 1,642,287 1,000,606 12,667,354 7,756,293 1,788,769 2,802,940 12,364,776 6,403,721 416,608 293,490 14,570,153 9,500,151 27,237,507 17,256,444 65,383,142 17,715,086 191,591,311 139,430,502 (4,829,857) (5,261,643) (121,378,312) (116,453,773) 65,383,142 17,715,086 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 40 PolyNovo Limited Annual Report 2023 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2023 Consolidated Balance at 1 July 2021 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Exercise of options Share‑based payments (note 35) Balance at 30 June 2022 Consolidated Balance at 1 July 2022 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Issue of share capital Capital raising costs Exercise of options Share‑based payments (note 35) Balance at 30 June 2023 Contributed Equity $ Other Reserves $ Acquisition of Non‑ Controlling Interest Reserves $ Accumulated Losses $ Total Equity $ 139,250,502 7,656,740 (9,293,956) (115,261,241) 22,352,045 – – – – (144,458) (144,458) 180,000 – – (3,479,969) – – – – – (1,192,532) (1,192,532) – (144,458) (1,192,532) (1,336,990) – – 180,000 (3,479,969) 139,430,502 4,032,313 (9,293,956) (116,453,773) 17,715,086 Contributed Equity $ Other Reserves $ Acquisition of Non‑ Controlling Interest Reserves $ Accumulated Losses $ Total equity $ 139,430,502 4,032,313 (9,293,956) (116,453,773) 17,715,086 – – – – (681,421) (681,421) 53,000,835 (1,467,526) 627,500 – – – – 1,113,207 – – – – – – – (4,924,539) (4,924,539) – (681,421) (4,924,539) (5,605,960) – – – – 53,000,835 (1,467,526) 627,500 1,113,207 191,591,311 4,464,099 (9,293,956) (121,378,312) 65,383,142 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 41 PolyNovo Limited Annual Report 2023 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2023 Cash flows from operating activities Receipts from customers Receipt from BARDA reimbursements and advances Receipt from grant income Receipt from other revenue Payment of interest on borrowings Payment of interest on lease liabilities Payments to suppliers and employees Net cash used in operating activities Cash flows from investing activities Payments for property, plant and equipment Interest received Receipts from sale and leaseback of property Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from borrowings Proceeds from the issue of share capital (net of equity raising costs) Proceeds from the exercise of options Repayment of principal on borrowings Repayment of principal on lease liabilities Net cash from/(used in) financing activities Net increase/(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 Consolidated 30 June 2023 $ 30 June 2022 $ Note 55,333,642 36,884,778 3,676,431 4,220,005 404,800 72,290 247,720 – (186,119) (220,150) (528,044) (95,216) (65,385,528) (43,094,171) (6,612,528) (2,057,034) (1,528,229) (491,929) 679,461 400 11 – 6,350,000 (848,768) 5,858,471 – 1,860,780 51,423,489 – 627,500 180,000 (3,159,849) (7,095,469) (826,759) (333,625) 48,064,381 (5,388,314) 40,603,085 (1,586,877) 6,102,192 7,688,554 141,669 515 Cash and cash equivalents at the end of the financial year 13 46,846,946 6,102,192 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 42 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 June 2023 Note 1. Corporate information The Financial Report of PolyNovo Limited (the Company) and its controlled entities (the Group) for the year ended 30 June 2023 was authorised for issue in accordance with a resolution of the Directors on 23 August 2023. 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. During the year ended 30 June 2023, the Group has incorporated two additional 100% owned subsidiaries in India and Hong Kong, China, as well as a branch in Canada. Note 2. Summary of significant accounting policies (a) Basis of preparation The general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, International Financial Reporting Standards (IFRS) and the Corporations Act 2001. 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. 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 its ability to meet its debts and obligations taking into account all available information about the future. The Group has a level of discretion in managing cash outflows in a response to any changes or unexpected demands on working capital or operating conditions. (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 2022. 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 are 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 2023. 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. 43 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (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 Biodegradable Temporising Matrix (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. The group also sells its NovoSorb 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 NovoSorb 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. Biomedical Advanced Research and Development Authority (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 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. (g) Costs to fulfill contracts Costs to fulfil a contract include set‑up costs and prepaid costs of a service provider related to goods and services which will be transferred in the future reporting periods. The Group capitalise costs to fulfil a contract if: • the costs relate directly to a contract or a specifically identified anticipated contract; • the cost generate or enhance resources that we control and will use when transferring further goods and services; and • the Group expect to recover the costs. The Group amortise contract cost assets over the term that reflects the expected period of benefit of the expense. (h) Trade and other receivables and contract cost assets Trade and other receivables and contract assets are initially recorded at fair value and subsequently measured at amortised cost. Trade and other receivables and contract cost assets are written off against their carrying amounts and expensed in the income statement when all collection efforts have been exhausted and the asset is considered uncollectable. Factors indicating there is no reasonable expectation of recovery include insolvency and significant time period since the last invoice was issued. (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 a definite useful life on acquisition. Internally generated intangible assets are capitalised if the product is at development phase. Costs that are directly attributable to a product’s development phase are recognised as intangible assets, provided all of the following recognition requirements are met: • the product is technically and commercially feasible; • the Group intends to and has sufficient resources to execute a commercial outcome from the product; • the Group has the ability to derive income from the product and will generate probable future economic benefits from the product; and • the development costs can be measured reliably. 44 PolyNovo Limited Annual Report 2023 Development costs not meeting these criteria for capitalisation are expensed as incurred. Directly attributable costs include employee costs incurred on development along with an appropriate portion of relevant overheads. Expenditure on the research phase of projects is recognised as an expense as incurred and 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 2023. Information relating to this Plan is set out in note 35 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 35. 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 cost comprises the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date and any initial direct costs. Right of use assets are subsequently measured at cost less accumulated depreciation and impairment losses. Right of use assets are reviewed for impairment under the same policy as our property, plant and equipment assets. 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 20 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. 45 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (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 to 40 years 3 to 10 years 3 to 13.33 years 3 to 20 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, freight expenses to third party logistics and manufacturing overheads. The value of finished goods and semi‑finished goods may include an allocation of manufacturing variances incurred during the period if it is determined that the relevant production remains in inventory at balance date. (s) Government grants Government grants are recognised at their fair value when the grant is received and all attaching conditions have been complied with. Research and development income tax revenue is recognised when there is reasonable assurance of receipt. 46 PolyNovo Limited Annual Report 2023 (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 the amount of deferred tax assets that can be recognised on unused tax losses based on expectation of profit generated in the future. 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 35 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 BARDA study, 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. For the intangible assets that have finite economic lives, PolyNovo considers indicators of impairment and if an indicator exists, will determine the recoverable amount of the intangible asset. For the indefinite life intangibles and goodwill, the recoverable amount is determined every year. 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 20. Expected Credit Loss Estimating the expected credit loss (ECL) for trade receivables and contract assets requires selection of an appropriate method and significant judgement to determine the amount. The method applied categorises trade receivables and 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. Lease term PolyNovo applies judgement to determine a lease term for leases with extension, termination or purchase options. PolyNovo also considers lease modifications where we continue to use the same underlying asset for an extended term. Our lease terms are negotiated on an individual basis and contain a range of different terms and conditions, with fixed term period between 3 to 20 years. The lease term assessment is reviewed if a significant event or change in circumstances occurs which affects this assessment and that is within our control as a lessee. Incremental borrowing rate for property lease PolyNovo applies judgement to determine incremental borrowing rate for property lease because the interest rate implicit in lease is not readily determinable for the arrangement. The incremental borrowing rate is determined based on the interest that the lessee would have to pay to borrow over a similar term, the funds necessary to obtain an asset of a similar value to the right‑of‑use asset in a similar economic environment, and observable inputs such as market interest rates are used as applicable. In the lease transaction of 322‑326 Lorimer Street, Port Melbourne, the incremental borrowing rate is determined to be 5.62% per annum. Further details on incremental borrowing rate are disclosed in note 23. 47 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (w) Goods and services tax (GST) Revenues, expenses and assets are recognised net of GST except: • where the GST incurred on purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables, which are stated with the amount of GST (if any) included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Cash Flow Statement on a gross basis (that is, including GST) and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed exclusive of the amount of GST recoverable from, or payable to, the taxation authority. (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, US dollars for the US entity, Canadian dollars for Canada entity, Singapore dollars for Singapore entity, New Zealand dollars for New Zealand entity, Rupees for India entity, Hong Kong dollars for Hong Kong entity, British pound sterling for UK 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 standards 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. 48 PolyNovo Limited Annual Report 2023 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 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 Operating Segment PolyNovo has only one reporting segment being the development of the NovoSorb technology for use in a range of biodegradable medical devices. The chief operating decision‑maker is the Chief Executive Officer of PolyNovo Limited. The chief operating decision‑maker reviews the results of the business on a single entity basis and assesses business performance in order to make decisions about resource allocation. Performance assessment is based on EBITDA (earnings before interest, tax, depreciation and amortisation). These measures are different from the profit or loss reported in the consolidated financial statements which is shown after net interest and tax expense. Net Loss After Tax Interest income Interest expense Depreciation and amortisation Tax EBITDA Consolidated 30 June 2023 $ 30 June 2022 $ (4,924,539) (1,192,532) (869,625) (671) 714,163 315,366 2,282,553 1,797,488 (8,559) (2,806,007) 41,608 961,259 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 year ended 30 June 2023, sales to BARDA in the United States of America, represented 9% (2022: 9%) 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 Consolidated 30 June 2023 $ 30 June 2022 $ 51,763,960 35,857,273 4,769,010 3,206,724 8,708,499 2,375,842 65,241,469 41,439,839 49 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Non‑current assets Geographical areas United States of America Australia and New Zealand Other countries Note 4. Revenue from contracts with customers BARDA revenue Commercial product sales Note 5. Other income Other income Majority of the other income is generated from government grants. Consolidated 30 June 2023 $ 30 June 2022 $ 343,947 519,061 24,787,524 19,210,150 134,953 13,778 25,266,424 19,742,989 Consolidated 30 June 2023 $ 30 June 2022 $ 5,662,938 3,796,679 59,578,531 37,643,160 65,241,469 41,439,839 Consolidated 30 June 2023 $ 30 June 2022 $ 423,923 450,093 Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions. During the year ended 30 June 2023, the Group continued to receive two government grants from the Victorian Government: • The Victorian Government’s Medtech Manufacturing Capacity Program is to help expand manufacturing for the production of new devices. In this year, PolyNovo has completed this grant program and received grant income of $300,000; • Another Victorian Government grant is up to $252,000, which is to support the purchase of equipment and the development of the new cleanroom at PolyNovo’s Port Melbourne facility. In this year, PolyNovo received grant income of $108,000. The remainder is generated from the sale of raw materials to customers in U.S. Note 6. Employee‑related expenses Wages and salaries (including sales commission) Superannuation Share‑based payments expense Other Consolidated 30 June 2023 $ 30 June 2022 $ 31,804,940 20,699,554 1,345,041 978,683 1,113,207 (3,479,582) 5,175,022 3,220,657 39,438,210 21,419,312 A net share‑based income of $3,479,582 was recognised during the year ended 30 June 2022, as the share option expenses of $4,708,151 recognised for the Managing Director and Chief Operating Officer were reversed at the time of their resignation. 50 PolyNovo Limited Annual Report 2023 Note 7. Depreciation and amortisation expenses Depreciation – property Depreciation – laboratory equipment Depreciation – office equipment Depreciation – leasehold improvements Subtotal Depreciation – Right of use assets Amortisation – intangible assets Subtotal Total Consolidated 30 June 2023 $ 30 June 2022 $ – 415,992 320,571 194,582 330,636 410,094 247,018 14,206 931,145 1,001,954 858,469 247,848 1,106,317 339,214 247,848 587,062 2,037,462 1,589,016 In addition to the depreciation and amortisation expenses listed above, depreciation relating to manufacturing of $245,091 ($169,566 for depreciation of fixed assets and $75,525 for depreciation of lease assets) is included in the cost of inventory. Total depreciation and amortisation expenses amount in 2023 is $2,282,553 (2022: $1,797,488). Refer to note 19 for property, plant and equipment reconciliation and note 17 for right‑of‑use assets reconciliation. Note 8. Corporate, administrative and overhead expenses Insurances Professional fees Investor relations and share registry expenses Consultants and contractors Communication expenses Travel Marketing costs Realised foreign exchange loss Unrealised foreign exchange (gain)/ loss Other* Consolidated 30 June 2023 $ 30 June 2022 $ 2,517,447 2,011,584 770,119 360,529 562,007 445,167 3,553,876 1,759,264 784,680 521,295 4,332,769 1,519,925 2,357,593 1,260,822 114,762 151,483 (787,301) (497,648) 3,411,289 2,658,260 17,415,763 10,392,159 * Included in other administrative expenses are mainly third‑party logistic fees of $631,574 (2022: $407,090), dues and subscriptions of $481,509 (2022: $332,946) and IT software licences of $441,174 (2022: $289,013). Note 9. Interest expenses Lease liability interest expenses Consolidated 30 June 2023 $ 30 June 2022 $ 528,044 95,216 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 17. The Group has secured equipment finance facilities and short term loan, further details on loan facility are disclosed in note 22. 51 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 10. Finance costs Interest expense Interest expense – equipment finance loan Interest expense – short term loan Consolidated 30 June 2023 $ 30 June 2022 $ 16,480 110,504 59,135 186,119 – 190,721 29,429 220,150 Note 11. Impairment loss In June 2022, the Group sold the property located at Unit 1/316‑320 Lorimer Street, Port Melbourne, as a funding option, which was owned by PolyNovo and includes part of PolyNovo’s corporate head office and manufacturing facility. The adjacent Unit 2 is currently leased by PolyNovo through to April 2029 with no options to extend. A non‑binding purchase proposal for $6,350,000 was signed on 21 Feb 2022. The property met assets held for sale criteria when the purchase proposal was signed, therefore the value of the property was written down to the fair value ($6,350,000) and an impairment loss of $1,375,832 was recognised. On 14 June 2022, the sale was settled. Following the sale, the Group leased back the building with a lease term of 10 years, plus two 5‑year renewal options. The $6,350,000 sales proceeds were received in instalments, with 10% deposit received in May 2022 and the remainder in June 2022. $3,052,890 of the sale proceeds was used to repay in full two outstanding equipment finance leases. The net cash received from the sale and leaseback of property was $3,050,092, after deducting the two equipment finance leases paid out and real estate commission fee. Note 12. Income tax expense/(benefit) (a) Income tax expense Current income tax charge/ (benefit) Deferred income tax Relating to origination and reversal of temporary differences Aggregate income tax expense/(benefit) Reconciliation of income tax expense to prima facie tax payable Loss before income tax (expense)/benefit Tax at the statutory tax rate of 30% (2022: 25%) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non‑assessable R&D income tax credit Share‑based payments Meals and entertainment Current year tax losses not recognised Current year temporary differences not recognised Income tax expense/(benefit) Consolidated 30 June 2023 $ 30 June 2022 $ (8,559) 41,608 – – – – (8,559) 41,608 (4,933,098) (1,150,924) (1,479,929) (287,731) 691,509 249,128 333,962 614,325 (869,896) 89,415 (205,330) (453,887) (1,295,857) 1,492,628 (8,559) 128,515 366,980 41,608 52 PolyNovo Limited Annual Report 2023 (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 (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 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 30% (2022: 25%) Consolidated 30 June 2023 $ 30 June 2022 $ 766,242 (766,242) – 488,561 (488,561) – (766,242) (488,561) Consolidated 30 June 2023 $ 30 June 2022 $ 93,493,336 95,205,088 2,258,869 – 855,541 146,288 95,752,205 96,206,917 Consolidated 30 June 2023 $ 30 June 2022 $ 23,938,051 24,161,445 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 2023 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; and • 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 Income tax receivable Consolidated 30 June 2023 $ 30 June 2022 $ 24,030 4,279 PolyNovo New Zealand overpaid income tax provision instalments in 2022 and 2023, which led to a tax receivable position as at 30 June 2023 and 30 June 2022. 53 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 13. Cash and cash equivalents Cash and cash equivalents are denominated in: AUD USD NZD GBP EUR CAD INR SGD Total Consolidated 30 June 2023 $ 30 June 2022 $ 37,379,970 1,849,255 7,115,544 3,176,383 414,091 751,267 299,715 411,223 475,136 – 71,440 789,280 215,834 – – – 46,846,946 6,102,192 Cash at bank earns interest at floating rates based on daily bank deposit rates, except for the term deposit of $35,000,000. As at 30 June 2023, PolyNovo Limited holds a 90‑day term deposit of $35,000,000, at the weighted average interest rate of 4.28%. Reconciliation of net loss before income tax to net cash flow from operating activities Consolidated 30 June 2023 $ 30 June 2022 $ (4,933,098) (1,150,924) 2,282,553 1,797,488 1,113,207 (3,479,582) 10,431 105,039 34,170 12,985 31,671 – (74,034) (303,264) – 1,375,832 (7,412,949) (422,387) (378,283) (14,204) (1,994,992) (262,467) 4,167,051 764,799 (19,751) 565,691 146,314 (575,458) (152,659) (142,328) 264,127 (24,540) (6,612,528) (2,057,034) Net loss before income tax Adjustments for non‑cash items: Depreciation and amortisation Share‑based payment expense Interest Loss on inventory write‑off Doubtful debts expense Unrealised foreign exchange rate differences Impairment loss Change in assets and liabilities during the financial year: (Increase) in trade receivables (Increase)/decrease in prepayments (Increase)/decrease in contract assets (Increase) in inventory (Increase) in other assets Increase/(decrease) in payables Increase in provisions (Increase)/ decrease in other receivables Net cash outflows from operating activities 54 PolyNovo Limited Annual Report 2023 Note 14. Trade and other receivables Current assets Trade receivables BARDA income receivables Sundry receivables Interest receivable Total trade and other receivables Financial assets and non‑financial assets Trade receivables BARDA Income Receivables Sundry receivables Interest receivable Total financial assets Sundry receivables Total non‑financial assets Total trade and other receivables Consolidated 30 June 2023 $ 30 June 2022 $ 12,366,229 5,527,852 683,373 452,789 190,400 248,174 313,093 323 13,692,791 6,089,442 Consolidated 30 June 2023 $ 30 June 2022 $ 12,366,229 5,527,852 683,373 93,940 190,400 248,174 52,925 323 13,333,942 5,829,274 358,849 358,849 260,168 260,168 13,692,791 6,089,442 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. The changes in the balance of trade receivables and the information about the credit exposure are disclosed in note 26. 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 2023, the Group has BARDA income receivables of $683,373 (2022: $248,174). 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, as the credit risk of US Federal Government Agency is low. The Group has an agreement with BARDA to provide research and development services which was extended during the year ended 30 June 2023 until August 2025 for the Pivotal Trial. BARDA has committed funding of USD $15 million for the Pivotal Trial. Expected credit loss Based on the business failure rates by class of customers and Dun & Bradstreet credit score the Expected Credit Losses relating to trade receivables and contract assets the Group has recognised $44,127 as at 30 June 2023 (2022: $9,957). $Nil trade and other receivables were written off during the year. The Group uses a provision matrix to measure its expected credit loss. Set out below is information about the credit risk exposure on the Group’s trade receivables and BARDA income receivables using a provision matrix as at 30 June 2023: Trade and other receivables Not due 0 Days June 1‑30 Days May 30‑60 Days April 60‑90 Days March+ 90+ Days Total Gross carrying amount ($) 8,003,882 1,695,213 1,398,098 644,030 669,133 12,410,356 Expected credit loss ($) – (4,615) (2,691) (3,957) (32,864) (44,127) Net balance 8,003,882 1,690,598 1,395,407 640,073 636,269 12,366,229 Trade and other receivables which are not due as at 30 June 2023 was $8,003,882, 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. 55 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 15. Contract cost assets Contract cost assets (Current) Contract cost assets (Non‑current) Consolidated 30 June 2023 $ 30 June 2022 $ 306,834 182,893 489,727 146,315 329,208 475,523 The Group engaged subcontractors to fulfil specific performance obligations with regards to the Group’s BARDA arrangement since the year ended 30 June 2021. The Group was required to prepay specific amount to the subcontractor upfront to support the delivery of the BARDA contract. Amortisation is calculated on a straight‑line basis over the life of the BARDA contract from the FY2021 to FY2025. Note 16. Inventories Current assets Raw materials Work in progress Finished goods Provision for finished goods Consolidated 30 June 2023 $ 30 June 2022 $ 222,036 1,617,299 106,218 854,189 2,721,987 1,605,737 (31,037) (30,851) 2,690,950 1,574,886 4,530,285 2,535,293 The total of inventory is held at lower of cost or net realisable value (NRV). During the year ended 30 June 2023, the loss on inventory write off was $105,039. Note 17. Right‑of‑use assets Non‑current assets Right‑of‑use assets Accum Depn – Right of use assets Consolidated 30 June 2023 $ 30 June 2022 $ 14,380,539 8,002,374 (2,128,221) (1,196,914) 12,252,318 6,805,460 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. On 1 September 2022, the Group leased the building located at 322‑326 Lorimer Street, Port Melbourne with a lease term of 9.5 years, plus four 5‑year renewal options. It is expected that the Group will renew the lease in line with the Group strategy, thus lease term is expected to be 20 years. A right‑of‑use asset of $6,279,494 was recognised on 1 September 2022 and it will be amortised on straight line basis over the next 20 years. In addition, PolyNovo India leased the office building on 3 January 2023 and PolyNovo UK terminated the car lease for a sales representative who resigned in March 2023. 56 PolyNovo Limited Annual Report 2023 Set out below are the carrying amounts of right‑of‑use assets recognised and the movements during the period. Carrying amount as at 1 July 2022 Additions Depreciation expense Termination Foreign currency exchange differences Property $ 6,785,301 6,387,166 (929,799) – 8,521 Carrying amount as at 30 June 2023 12,251,189 Office Equipment $ Manufacturing Equipment $ Motor Vehicle $ Total $ – – – – – – 6,382 – (5,253) – – 13,776 6,805,459 – 6,387,166 (7,928) (6,167) 319 (942,980) (6,167) 8,840 1,129 – 12,252,318 Carrying amount as at 1 July 2021 Additions Depreciation expense Foreign currency exchange differences Carrying amount as at 30 June 2022 Property $ 2,193,284 4,957,639 Office Equipment $ Manufacturing Equipment $ Motor Vehicle $ Total $ 1,265 – 19,093 25,117 2,238,759 – – 4,957,639 (388,303) (1,265) (12,711) (10,560) (412,839) 22,684 6,785,304 – – – 6,382 (780) 21,904 13,777 6,805,463 The following are the amounts recognised in profit or loss in addition to low value and short term leases of $9,366 recognised during the year. 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 $835,614 in 2023 ($461,590 in 2022). Group as lessor The Group has not entered into any leases as lessor. Note 18. Prepayments Current assets Prepayments Non‑current assets Security deposits Consolidated 30 June 2023 $ 30 June 2022 $ 933,994 528,044 1,462,038 412,984 95,216 508,200 Consolidated 30 June 2023 $ 30 June 2022 $ 1,903,339 1,261,988 559,263 296,796 The non‑current security deposit relates predominantly to PolyNovo’s long‑term lease of office premises in Port Melbourne and San Diego, USA, including the security deposit of $151,500 due to the leaseback of office premises at Unit 1/316‑320 Lorimer Street, Port Melbourne. Included in current prepayment are prepaid insurance of $862,893 (2022: $715,025) and other prepaid expenses. 57 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 19. 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 Improvements $ Construction in Progress $ Total $ As at 30 June 2022 Cost Accumulated depreciation Impairment Carrying amount at 30 June 2022 – – – – Carrying amount at 1 July 2021 5,125,786 Additions – – 2,580,008 537,021 141,831 Transfer to/ (from) CIP to FA (at cost) 6,725,630 2,404,036 Transfer (at cost) Impairment Disposals (3,834,887) (1,372,153) (6,332,467) – – – 4,530,253 1,807,126 5,884,094 2,294,406 14,515,879 (1,950,245) (927,800) (1,691,749) – 879,326 737,472 369,648 – – – – – – – (4,569,794) – 4,192,345 2,294,406 9,946,085 438,781 10,745,338 17,584,398 14,826 678,733 1,205,038 – (9,129,666) 3,834,887 (3,679) (17,533) (74,938) – – – – – – – – (1,375,832) (6,350,000) (1,135,633) 18,114 Depreciation expense (311,909) (502,880) (245,906) Foreign exchange difference Carrying amount at 30 June 2022 – – – 18,114 2,580,008 879,328 4,192,344 2,294,405 9,946,085 As at 30 June 2023 Cost Accumulated depreciation Carrying amount at 30 June 2023 Carrying amount at 1 July 2022 Additions (at cost) Transfer from CIP to FA (at cost) Depreciation expense Foreign exchange difference Carrying amount at 30 June 2023 Land and Buildings $ Laboratory Plant & Equipment $ Office Equipment $ Leasehold Improvements $ Construction in Progress $ Total $ – – – – – – – – – 5,658,377 2,399,681 6,637,991 2,096,381 16,792,430 (2,488,203) (1,254,970) (1,933,931) – (5,677,104) 3,170,174 1,144,711 4,704,060 2,096,381 11,115,326 2,580,008 879,328 4,192,343 2,294,405 9,946,084 276,621 851,503 563,446 753,897 664,916 2,258,880 11,437 – (862,940) – (537,958) (320,524) (242,180) – 11,024 – – – (1,100,662) 11,024 3,170,174 1,144,711 4,704,060 2,096,381 11,115,326 In June 2022, the Group sold the property located at Unit 1/316‑320 Lorimer Street, Port Melbourne. Following the sale, the Group leased back the building sold with a lease term of 10 years, plus two 5‑year renewal options. Details refer to note 11. The Group derecognised the land and building assets and two leasehold improvement assets on the settlement date and reversed the accumulated depreciation expenses. According to the contract of sale, the Group would retain a portion of the building assets ($3,834,887), thus the Group transferred the assets to leasehold improvements. The Group sold and derecognised the remaining portion of building assets and land ($8,229,065). 58 PolyNovo Limited Annual Report 2023 Note 20. 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 2023. Non‑current assets Intangibles (i) Cost Opening balance Additions Closing balance (ii) Accumulated amortisation Opening balance Amortisation for the year Closing balance Net book value Note 21. Trade and other payables Current liabilities Trade payables Other payables Total trade and other payables Financial liabilities and non‑financial liabilities Trade payables Other payables Total financial liabilities Other payables Total non‑financial liabilities Total trade and other payables Consolidated 30 June 2023 $ 30 June 2022 $ 2,519,788 2,519,788 – – 2,519,788 2,519,788 (1,115,316) (247,848) (867,468) (247,848) (1,363,164) (1,115,316) 1,156,624 1,404,472 Consolidated 30 June 2023 $ 30 June 2022 $ 2,737,976 1,870,809 6,396,954 3,097,070 9,134,930 4,967,879 Consolidated 30 June 2023 $ 30 June 2022 $ 2,737,976 1,824,432 5,386,296 2,168,810 8,124,272 3,993,242 1,010,658 1,010,658 974,637 974,637 9,134,930 4,967,879 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 $523,710 (2022: $668,213), accrued commission of $2,095,315 (2022: $906,320), accrued other liabilities of $1,019,851 (2022: $276,801). BARDA contract liability will be recognised over the period of the contract. 59 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 22. Interest‑bearing loans and borrowings Current liabilities Equipment Finance – current Short term loan – current Non‑current liabilities Equipment Finance – non current Consolidated 30 June 2023 $ 30 June 2022 $ 1,014,172 383,986 981,573 348,485 1,398,158 1,330,058 1,788,769 2,802,940 Refer to note 26 for further information on financial risk management objectives and policies. (a) Interest bearing facility details Financing Facilities Equipment finance Short term loan Facility Amount $ Maturity Date 3,800,000 June 2025 – May 2027 2,346,650 Jul – Oct 2023 Interest Rate % FY23 Interest Expense $ 3.24% 2.89% 126,966 59,135 Equipment finance facility The purpose of this facility is to fund the purchase of capital expenditure items such as manufacturing equipment and construction of the cleanroom. As a requirement from NAB, due to the sale and leaseback of Unit 1/320 Lorimer Street, Port Melbourne, which was previously used as a security for the debt facilities, NAB required $3,052,890 in the sale proceeds to be applied against the outstanding equipment finance facility. The new arrangement was effective when the settlement of the sale transaction took place on 14 June 2022. The new facility is a $5.2 million revolving equipment finance facility with repayments over 5 years on each financial lease drawn at an interest rate between 2.5% to 6.0% (average rate of 3.24%). A total of $5,038,093 was drawn down in June 2022. Interest is calculated daily and payable on the last business day of each month. The current limit as at 30 June 2023 is $3.8 million. The security over Unit 1/320 Lorimer Street, Port Melbourne was released on settlement of the sale transaction in return for General Security Agreement over PolyNovo Ltd, PolyNovo Biomaterials Pty Ltd, NovoSkin Pty Ltd and NovoWound Pty Ltd. No additional covenant requirements, except that PolyNovo needs to maintain a minimum cash balance of $1,285,000 at all times, reflective of 12 months interest payable and principal repayments of the facility. 60 PolyNovo Limited Annual Report 2023 Note 23. Lease liabilities Current liabilities Lease liability – current Non‑current liabilities Lease liability – non current Consolidated 30 June 2023 $ 30 June 2022 $ 491,979 457,750 12,364,776 6,403,721 Accounting policy for 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 the incremental borrowing rate of the lessee at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The Group exercises judgement when determining the incremental borrowing rate based on the interest that the lessee would have to pay to borrow over a similar term, the funds necessary to obtain an asset of a similar value to the right‑of‑use asset in a similar economic environment, and observable inputs such as market interest rates are used as applicable. 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. Subsequent to initial recognition, lease liabilities are measured at amortised cost. Lease liabilities are remeasured if there is a modification, such as a change in the lease term, a change in the in‑substance fixed lease payments or a change in the assessment to purchase the underlying asset. The Group’s lease liabilities are inclusive of extension options the Group is reasonably certain to exercise based upon our judgement as of the reporting date. Lease extension options that the Group is not reasonably certain to exercise as of the reporting date are appropriately excluded from the lease liabilities. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). The Group leased the building located at 322‑326 Lorimer Street, Port Melbourne on 1 September 2022. Further details please refer to note 17. Note 24. 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 2023 $ 30 June 2022 $ 1,474,769 167,518 906,780 93,826 1,642,287 1,000,606 184,306 232,302 416,608 143,490 150,000 293,490 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; and • 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. 61 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 25. Reserves (a) Movement in contributed equity Contributed equity at beginning of year Issue of share capital Capital raising costs Exercise of options Contributed equity at end of year Number of shares authorised and fully paid On issue at start of year Exercise of options Issue of share capital – Institutional placement Issue of share capital – Share purchase plan Issue of share capital – Director placement On issue at end of year (b) Reserves Share‑based payments reserve (i) Foreign currency translation reserve (ii) Acquisition of non‑controlling interest reserve (iii) Balance at end of period (i) Share‑based payments reserve Balance at beginning of period Share‑based payments movement* Balance at end of period * Details of share‑based payment movement refer to note 6 Employee‑related expenses. (ii) Foreign currency translation reserve Opening balance Translation of foreign operations Balance at end of period Consolidated 30 June 2023 $ 30 June 2022 $ 139,430,502 139,250,502 53,000,835 (1,467,526) – – 627,500 180,000 191,591,311 139,430,502 661,688,044 661,388,044 650,000 300,000 15,789,474 10,526,285 1,578,948 – – – 690,232,751 661,688,044 Consolidated 30 June 2023 $ 30 June 2022 $ 5,479,893 4,366,686 (1,015,794) (334,373) (9,293,956) (9,293,956) (4,829,857) (5,261,643) Consolidated 30 June 2023 $ 30 June 2022 $ 4,366,686 7,846,655 1,113,207 (3,479,969) 5,479,893 4,366,686 Consolidated 30 June 2023 $ 30 June 2022 $ (334,373) (681,421) (1,015,794) (189,915) (144,458) (334,373) 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. 62 PolyNovo Limited Annual Report 2023 (iii) Acquisition of non‑controlling interest reserve Opening balance Balance at end of year Consolidated 30 June 2023 $ 30 June 2022 $ (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 2023 $ 30 June 2022 $ (116,453,773) (115,261,241) (4,924,539) (1,192,532) (121,378,312) (116,453,773) Note 26. 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 assets** Trade and other payables Lease liabilities Equipment finance facility Short term loan Consolidated 30 June 2023 $ 30 June 2022 $ 46,846,946 6,102,192 13,333,942 5,829,275 50,000 50,000 8,124,272 3,993,242 12,856,755 6,861,471 2,802,941 3,784,513 383,986 348,485 * As at 30 June 2023, PolyNovo Limited holds a 90‑day term deposit of $35,000,000, at the weighted average interest rate of 4.28%. ** As at 30 June 2023, $50,000 is held in a term deposit maturing on 16 March 2024 at an interest rate of 4.5%. (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. 63 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (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 25. 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 equipment finance facilities. The objective of managing interest rate risk is to minimise the Group’s exposure to fluctuations in interest rates. To manage this risk, the Group locks a portion of the Group’s cash and cash equivalents into term deposits. The required maturity period of term deposits is determined based on the Group’s cash flow forecast with particular focus on the timing of cash requirements. In addition, the Group considers the lower interest rate received on cash held in the Group’s operating account compared to placing funds on term deposit. Account is also taken of the costs associated with early withdrawal of a term deposit should access to cash and cash equivalents be required. The Group’s exposure to interest rate risk and the interest rates (current at the end of each year) on the Group’s financial assets and financial liabilities as at 30 June 2023, along with prior year comparatives, was as follows: Fixed interest rate Interest Rate % Floating Interest Rate $ 0 to 90 Days $ 91 to 365 Days $ 1 to 5 Years $ Over 5 Years $ Non‑ interest Bearing $ Total $ 2023 Financial assets Cash and cash equivalents (Note) Other financial assets 4.50% Trade and other receivables Total financial assets Financial liabilities Trade and other payables – – 3.25% 11,846,946 35,000,000 – – – – – 50,000 – 11,846,946 35,000,000 50,000 Short term loan 2.89% 383,986 Equipment Finance Facility 3.24% 2,802,941 – – – – – – – – – – – – – – – – – 46,846,946 – 50,000 – 13,333,942 13,333,942 – 13,333,942 60,230,888 – – – 8,124,272 8,124,272 – – 383,986 2,802,941 Lease liabilities 4.51% – 110,665 388,521 2,867,075 9,490,494 – 12,856,755 Total financial liabilities 3,186,927 110,665 388,521 2,867,075 9,490,494 8,124,272 24,167,954 Note: As at 30 June 2023, PolyNovo Limited holds a 90‑day term deposit of $35,000,000, at the weighted average interest rate of 4.28%. 64 PolyNovo Limited Annual Report 2023 Fixed interest rate Interest Rate % Floating Interest Rate $ 0 to 90 Days $ 91 to 365 Days $ 1 to 5 Years $ Over 5 Years $ Non‑ interest Bearing $ Total $ 2022 Financial assets Cash and cash equivalents 0.16% 6,102,192 Other financial assets 1.09% Trade and other receivables Total financial assets Financial liabilities Trade and other payables – – 6,102,192 – Short term loan 2.51% 348,485 Equipment Finance Facility 3.24% 3,784,513 Leases liabilities 3.90% 6,861,471 Total financial liabilities 10,994,469 – – – – – – – – – – 50,000 – 50,000 – – – – – – – – – – – – – – – – – – – – – – – – – 6,102,192 50,000 5,829,275 5,829,275 5,829,275 11,981,467 3,993,242 3,993,242 – – – 348,485 3,784,513 6,861,471 3,993,242 14,987,711 As noted above, cash is invested in term deposits of varying maturity terms to maximise interest income as well as to meet the timing of operational cash flow requirements. All term deposits are with the NAB, to ensure market interest rates are achieved without compromising the security of funds on deposit. The analysis below details the impact on the Group’s loss after tax and equity if the interest rate associated with the closing balance of financial assets was to fluctuate by the margins below, assuming all other variables had remained constant: + 1% (100 basis points) ‑ 1% (100 basis points) Loss (higher)/ lower Equity higher/(lower) 2023 $ Loss (higher)/ lower Equity higher/(lower) 2022 $ 118,969 (118,969) 61,552 (61,552) The range of +1%/‑1% 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 2023, 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 $ 2023 Trade and other receivables 10,629,148 1,428,366 640,159 636,269 13,333,942 2022 – – – – – Trade and other receivables 5,336,119 379,296 10,871 102,989 5,829,275 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. 65 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 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: 30 June 2023 Trade and other Payables Interest‑bearing loans and borrowings* Lease Liabilities Total 30 June 2022 Trade and other payables Interest‑bearing loans and borrowings* Lease Liabilities Total Less than 3 months $ 3 to 12 months $ 7,992,433 121,910 1 to 5 years $ 9,929 763,897 1,778,212 644,818 110,665 Over 5 years $ Total $ – – 8,124,272 3,186,927 388,521 2,867,075 9,490,494 12,856,755 8,747,916 1,274,328 4,655,216 9,490,494 24,167,954 Less than 3 months $ 3,626,811 590,836 111,924 3 to 12 months $ 246,801 1 to 5 years $ 18,157 Over 5 years $ Total $ 101,473 3,993,242 739,222 2,802,940 – 4,132,998 345,826 1,575,784 4,827,937 6,861,471 4,329,571 1,331,849 4,396,881 4,929,410 14,987,711 * Interest‑bearing loans and borrowings include short term loan and equipment finance loan facility. 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, EUR, CAD and INR. To reduce foreign currency risk exposure, the Group maintains an amount of cash and cash equivalents in USD, NZD, GBP, EUR, CAD and INR. The Group receives payment from its overseas customers in USD, NZD, GBP, EUR, INR and pays USA, NZD, GBP, EURO and INR 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 CAD and INR bank account given the new incorporation of India subsidiary and Canada branch and will open an HKD bank account in near future. The holdings of cash and cash equivalents, trade receivables and trade payables analysed by nominated currency at 30 June 2023, along with prior year comparatives, were as follows. These are amounts in foreign sub with same functional currency as foreign currency stated. Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated in GBP $ Denominated in EURO $ Denominated in SGD $ Denominated in CAD $ Denominated in INR $ Total $ 30 June 2023 Financial assets Cash and cash equivalents 37,379,970 7,115,546 414,091 751,267 299,715 – 411,223 475,134 46,846,946 Trade and other receivables 4,763,235 7,252,592 4,405 1,116,675 146,967 49,635 Other financial assets 50,000 – – – – – – – 433 13,333,942 – 50,000 Total financial assets 42,193,205 14,368,138 418,496 1,867,942 446,682 49,635 411,223 475,568 60,230,888 Financial liabilities Trade and other payables ‑3,370,741 ‑4,252,973 ‑19,818 ‑228,369 ‑43,972 ‑37,733 Total financial liabilities ‑3,370,741 ‑4,252,973 ‑19,818 ‑228,369 ‑43,972 ‑37,733 – – ‑170,666 ‑8,124,272 ‑170,666 ‑8,124,272 Total 38,822,464 10,115,165 398,678 1,639,573 402,710 11,902 411,223 304,902 52,106,617 66 PolyNovo Limited Annual Report 2023 30 June 2022 Financial assets Denominated in AUD $ Denominated in USD $ Denominated in NZD $ Denominated in GBP $ Denominated in EURO $ Denominated in SGD $ Total $ Cash and cash equivalents 2,615,989 2,548,706 70,217 789,280 78,000 – 6,102,192 Receivables Other financial assets Total financial assets Financial liabilities Trade and other payables 924,280 3,888,211 288,857 591,661 108,552 27,714 5,829,275 50,000 – – – – – 50,000 3,590,269 6,436,917 359,074 1,380,941 186,552 27,714 11,981,467 (2,056,858) (1,612,329) (42,025) (214,598) (34,104) (33,328) (3,993,242) Total headroom/ (shortfall) 1,533,411 4,824,588 317,049 1,166,343 152,448 (5,614) 7,988,225 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 2023) with all other variables held constant would have the following effect on the loss and equity for the year ended 30 June 2023 for the Group: Country United States of America United Kingdom New Zealand Singapore Ireland India Total 2023 $ (56,543) Unfavourable (22,718) Unfavourable (2,502) Unfavourable (7,114) Unfavourable (1,905) Unfavourable (1,177) Unfavourable (91,959) A 10% strengthening in the exchange rate has been applied based on current market economic conditions. Note 27. Key management personnel disclosures The key management personnel compensation disclosures required by the Corporations Act 2001 are provided in the Remuneration Report in the Directors’ Report. (a) Details of key management personnel The key management personnel of the Group are those persons having the authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the 2022 and 2023 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 Consolidated 30 June 2023 $ 30 June 2022 $ 1,838,174 1,256,880 83,491 65,991 114,601 (63,599) 906,824 (4,029,641) 2,894,480 (2,721,759) 67 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED (c) Interests held by key management personnel Share options held by key management personnel to purchase ordinary shares have the following expiry dates and exercise prices: Issue Date Expiry date Exercise price 2023 number outstanding 2022 number outstanding Jan Gielen 6/03/2019 6/03/2019 6/03/2019 Subtotal Swami Raote 29/07/2022 29/07/2022 29/07/2022 29/07/2022 29/07/2022 Subtotal David McQuillan 2/09/2022 2/09/2022 2/09/2022 Subtotal Philip Scorgie 22/05/2023 22/05/2023 22/05/2023 Subtotal 30/06/2021 30/06/2022 30/06/2023 29/07/2025 29/07/2026 29/07/2027 29/07/2028 29/07/2029 30/05/2025 30/05/2025 30/05/2026 31/05/2028 31/05/2028 31/05/2028 $0.60 $0.60 $0.60 $1.64 $1.64 $1.64 $1.64 $1.64 $1.81 $1.81 $1.81 $1.37 $1.37 $1.37 – – – – – – 400,000 400,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000 400,000 400,000 400,000 1,200,000 150,000 150,000 200,000 500,000 – – – – – – – – – – – – – – (d) Loans to key management personnel No loans have been made to Directors of PolyNovo or to any other key management personnel, including their personally related entities. (e) Other transactions with Directors Kidder Williams Ltd, an entity associated with David Williams, received payment in the amount of $110,000, GST inclusive. The payment was at standard commercial terms and conditions in respect to consulting services provided to PolyNovo Limited in relation to the capital raising. Other than as noted above, there were no transactions with related parties during the year ended 30 June 2023. 68 PolyNovo Limited Annual Report 2023 Note 28. 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 year end 30 June 2023, the following fees were paid or payable for services provided by Ernst & Young, the auditor of the company, and its network firms: Consolidated 30 June 2023 $ 30 June 2022 $ Audit Services – Ernst & Young (Australia) Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities 386,520 295,285 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 – Agreed‑upon procedures and other audit engagements Fees for other services Total fees to Ernst & Young (Australia) Audit Services – Ernst & Young Overseas Member Firms – – – – 386,520 295,285 Fees for assurance services that are required by legislation to be provided by the auditor 27,821 26,057 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 – Agreed‑upon procedures and other audit engagements Fees for other services Total fees to overseas member firms of Ernst & Young (Australia) Total audit and other assurance services Total non‑audit services* Total auditor’s remuneration * Non‑audit services include taxation services and company secretary services. – – 27,821 414,341 149,933 564,274 – – 26,057 321,342 177,358 498,700 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 29. Commitments and contingencies The Directors are not aware of any contingent liabilities or contingent assets at 30 June 2023. There has been no change in this assessment up to the date of this report. Note 30. Related party transactions Related party transactions are disclosed under note 27 Key management personnel. 69 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 31. Parent entity information Profit/(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 2023 $ 30 June 2022 $ (2,364,644) 1,511,500 (2,364,644) 1,511,500 Parent 30 June 2023 $ 30 June 2022 $ 101,115,691 49,344,921 107,147,252 55,376,482 8,759,078 7,897,680 8,759,078 7,897,680 191,591,311 139,430,502 (484,326) (1,597,533) (92,718,811) (90,354,167) 98,388,174 47,478,802 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 32. 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: Principal place of business/ Country of incorporation Ownership interest 30 June 2023 % 30 June 2022 % 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 Australia United States Australia Australia Australia New Zealand Singapore United Kingdom Ireland PolyNovo Hong Kong Limited Hong Kong special administrative Region, China PolyNovo Biomaterials India Private Limited India 70 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – PolyNovo Limited Annual Report 2023 Note 33. Events after the reporting period No matter or circumstance has arisen since 30 June 2023 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. Note 34. Loss per share Loss after income tax attributable to the owners of PolyNovo Limited Weighted average number of ordinary shares used in calculating loss per share Basic loss per share Diluted loss per share Consolidated 30 June 2023 $ 30 June 2022 $ (4,924,539) (1,192,532) Number Number 684,454,164 660,874,406 684,454,164 660,874,406 Cents (0.72) (0.72) Cents (0.18) (0.18) Basic loss per share Basic loss 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 loss per share Diluted loss 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 2023 there existed share options that if vested, would result in the issue of additional ordinary shares over the period to FY2028. 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 loss 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 23 August 2023 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. 71 PolyNovo Limited Annual Report 2023 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 35. Share‑based payments (a) Employee share‑based payment plans The Group 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 2022 and 30 June 2023 are ($3,479,969) and $1,113,207 respectively. During the year ended 30 June 2022, previous CEO and COO resigned thus their share options and awards were forfeited. (b) Employee share‑based payment details Employee share‑based payment details are summarised in below table. 2023 Key management personnel Mr Jan Gielen Mr Swami Raote Dr David McQuillan Mr Philip Scorgie Subtotal Other employees Mr Ed Graubart Mr Joshua Cheetham Mr Ahmed Hassan Subtotal Total Balance at 1 July 2022 Options granted Options exercised Options forfeited Balance at 30 June 2023 Total vested at end of year Share‑based payments expense ($) 400,000 – 400,000 – – – 5,000,000 1,200,000 500,000 – – – 400,000 6,700,000 400,000 – – – – – – 5,000,000 1,200,000 500,000 6,700,000 1,000,000 250,000 250,000 250,000 750,000 – – – – – – – – 716,338 180,411 10,075 906,824 (58,261) 134,561 500,000 500,000 – – – – – – 500,000 500,000 150,000 130,083 2,000,000 250,000 250,000 250,000 1,750,000 150,000 206,383 2,400,000 6,950,000 650,000 250,000 8,450,000 150,000 1,113,207 (c) Share options granted in FY2023 During the year ended 30 June 2023, share options were issued to below 3 key management personnel and 1 employee. Details of 3 key management personnel are summarised in below table. Exercise price, vesting hurdle and expiry dates please refer to Remuneration Report. Tranche Swami Raote Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Subtotal David McQuillan Tranche 1 Tranche 2 Tranche 3 Subtotal Philip Scorgie Tranche 1 Tranche 2 Tranche 3 Subtotal 72 Grant date Number of Options 29/07/2022 1,000,000 29/07/2022 1,000,000 29/07/2022 1,000,000 29/07/2022 1,000,000 29/07/2022 1,000,000 02/09/2022 02/09/2022 02/09/2022 22/05/2023 22/05/2023 22/05/2023 5,000,000 400,000 400,000 400,000 1,200,000 150,000 150,000 200,000 500,000 Risk‑free rate % Volatility % Average fair value per option $ 2.83% 2.88% 2.93% 2.98% 3.03% 3.25% 3.25% 3.33% 3.15% 3.15% 3.15% 59.15% 57.96% 62.82% 64.11% 65.80% 69.58% 69.58% 65.31% 62.47% 62.47% 62.47% 0.702 0.778 0.889 0.940 1.062 0.408 0.423 0.502 0.682 0.621 0.541 PolyNovo Limited Annual Report 2023 Details of the employee that was granted share options during the year ended 30 June 2023 are summarised in below table. Number of options Exercise price $ Vesting hurdle Tranche Grant date Ed Graubart Risk‑free interest rate % Volatility % Expiry Average fair value per option $ Tranche 5 01/07/2022 250,000 $1.21 The options cannot vest or be 3.17% 60.46% 13/08/2026 $0.597 exercised until after the two‑year anniversary of employment and until such time as shares in PolyNovo have been trading at all times above $1.21 per option for a continuous 3‑month period. Key valuation assumptions for the Employee Share Options: The fair value of options granted during the year ended 30 June 2023 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. 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 average exercise date which is the average midpoint between vesting date and option expiry date. 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. 73 PolyNovo Limited Annual Report 2023 DIRECTORS’ DECLARATION 30 June 2023 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 2023 and of their performance for the year ended on that date; • complying with Australian Accounting Standards and Corporations Regulations 2001; and 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 2023. On behalf of the directors Mr David Williams Chairman 23 August 2023 74 PolyNovo Limited Annual Report 2023 INDEPENDENT AUDITOR’S REPORT 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 2023, 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. Giving a true and fair view of the consolidated financial position of the Group as at 30 June 2023 and of its consolidated financial performance for the year ended on that date; and b. Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matter 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. The matter was 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 the matter. For the 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 the matter. 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 matter 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 75 PolyNovo Limited Annual Report 2023 INDEPENDENT AUDITOR’S REPORT CONTINUED 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. Revenue from contracts with customers for the year ended 30 June 2023 was $65.2 million. For sales of commercial products, revenue is recognised upon delivery of the product to the customer. The Group sells to customers in various geographical territories. Commercial product sales have significantly increased this financial year. Services revenue is recognised as the services are delivered. Notes 2, 3 and 4 of the financial statements outline the Company’s accounting policies with respect to revenue recognition and revenue disclosures. Revenue recognition was considered a key audit matter due to the sales volumes and diversity of customer arrangements entered into by the Group. 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. ► Assessed on a sample basis, whether revenue was correctly recognised based on the products delivered as at 30 June 2023 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 the appropriateness the disclosures in relation to the Group’s revenue recognition and disaggregation of revenue in accordance with AASB 15 Revenues from Contracts with Customers as outlined in Notes 2, 3 and 4 of the financial statements. 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 2023 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 we do not and will 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 76 PolyNovo Limited Annual Report 2023 Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. ► Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ► 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 77 PolyNovo Limited Annual Report 2023 INDEPENDENT AUDITOR’S REPORT CONTINUED 78 PolyNovo Limited Annual Report 2023A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 28 to 37 of the directors’ report for the year ended 30 June 2023. In our opinion, the Remuneration Report of PolyNovo Limited for the year ended 30 June 2023, 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 23 August 2023 SHAREHOLDER INFORMATION 30 June 2023 Additional Information Required by ASX For the year ended 30 June 2023. Ordinary Shares As at 7 August 2023 there were 690,232,751 ordinary shares on issue held by 19,999 shareholders. Each ordinary share carries one vote per share. Top 20 Shareholders as at 7 August 2023 Shareholder HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED MOGGS CREEK PTY LTD (MOGGS CREEK SUPER A/C) BNP PARIBAS NOMS PTY LTD (DRP) LATERAL INNOVATIONS PTY LTD (TRUST A/C) NATIONAL NOMINEES LIMITED MR ANTHONY SHANE KITTEL + MRS MICHELE THERESE KITTEL (KITTEL FAMILY SUPER A/C) BNP PARIBAS NOMINEES PTY LTD (IB AU NOMS RETAILCLIENT DRP) SANDHURST TRUSTEES LTD (ENDEAVOR ASSET MGMT MDA A/C) NETWEALTH INVESTMENTS LIMITED (WRAP SERVICES A/C) MS SIMONE MAREE BEKS MR PAUL GERARD BRENNAN COMMONWEALTH SCIENTIFIC AND INDUSTRIAL RESEARCH ORGANISATION MR MATTHEW JAMES AVERY MRS LI‑HSIEN TSAI MR DAVID KENLEY DR MARCUS JAMES DERMOT WAGSTAFF + MRS LARA KATE WAGSTAFF MR LAURENT FOSSAERT MR CHRIS DAWBORN (HASKALI SUPER FUND A/C) Total Number of shares 94,468,202 58,519,477 26,811,635 19,010,112 12,383,050 10,924,103 8,413,960 8,055,789 5,909,896 5,739,049 4,276,587 4,185,095 4,185,095 4,081,250 3,631,338 3,292,698 3,139,855 3,072,166 2,929,961 2,870,271 % Units 13.69 8.48 3.88 2.75 1.79 1.58 1.22 1.17 0.86 0.83 0.62 0.61 0.61 0.59 0.53 0.48 0.45 0.45 0.42 0.42 285,899,589 41.43 79 PolyNovo Limited Annual Report 2023 SHAREHOLDER INFORMATION CONTINUED Unquoted Securities Share options over unissued shares As at 30 June 2023, a total of 8,450,000 share options over ordinary shares are on issue held by 6 employees. Share options do not carry a right to vote. PolyNovo issued 6,700,000 share options during the year ended 30 June 2023. Details of the share options issued are included in note 35. Share awards over unissued shares As at 30 June 2023, nil share awards over ordinary shares are on issue. Share awards do not carry a right to vote. The range of shareholders based on number of shares held as at 7 August 2023 is as follows: Range of Units As at 7 August 2023 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 5,784 6,727 2,636 Number of shares 3,132,030 18,475,646 20,461,479 4,153 128,533,048 699 519,630,548 19,999 690,232,751 1,668 311,562 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. Shareholder HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Pty Ltd Number of shares 94,468,202 58,519,477 152,987,679 % 13.69 8.48 22.17 Quotation of the Company’s Shares PolyNovo has been granted official quotation for its shares on the Australian Securities Exchange (ASX Code: PNV). 80 PolyNovo Limited Annual Report 2023 CORPORATE DIRECTORY Non‑executive Chairman Mr David Williams Non‑executive Directors Dr Robyn Elliott Ms Christine Emmanuel‑Donnelly Mr Leon Hoare Mr Bruce Rathie Mr Andrew Lumsden Chief Executive Officer Mr Swami Raote 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 Street Melbourne, Victoria 3000 Stock exchange listing PolyNovo Limited shares are listed on the Australian Securities Exchange (ASX code: PNV) Website www.polynovo.com PolyNovo Limited Annual Report 2023 81 2/320 Lorimer Street Port Melbourne Victoria Australia 3207 T +61 3 8681 4050 F +61 3 8681 4099 polynovo.com