Annual Report 2016 Contents 01 02 03 Directors’ Report Auditor’s Independence Declaration Corporate Governance Statement 04 Consolidated Statement of Profi t or Loss and Other Comprehensive Income 05 06 07 08 09 10 11 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 ASX Additional Information 10 21 22 23 24 25 26 27 49 50 53 Consolidated Financial Statements for the Year Ended 30 June 2016 4 Highlights for FY16 Progress on fi rst-in-human clinical trials Progenza STEP trial - allogeneic off-the-shelf stem cells for human osteoarthritis • Commenced and completed enrollment for STEP trial • Positive safety review for both dose cohorts RGSH4K ACTIVATE trial - autologous cancer vaccine • Established tumour bank • Patients safely dosed in all 3 dose cohorts Commencement of clinical trials for animal health CryoShot pre-pivotal trial - allogeneic stem cells for canine osteoarthritis • Commenced enrollment for trial at University of Pennsylvania - more than 30% recruited Kvax trials - autologous canine cancer vaccine • Completed osteosarcoma trial with VCA Hospitals Inc. in USA • Commenced enrollment of lymphoma trial at Small Animal Specialist Hospital in Sydney Growth in strategic partnerships • Entered into agreement with top animal health pharma to partner development and commercialisation of CryoShot for canine osteoarthritis • Advanced licensing discussions for manufacturing and clinical development of Progenza in Japan • Secured ARC linkage grant funding for collaborative research with Macquarie University and University of Adelaide into treating chronic pain with stem cells Technology development and manufacture scale-up • Exclusive licence for next generation cell identifi cation and selection technology for high potency secreting stem cells developed at Macquarie University node of Centre for Nanoscale Biophotonics • Collaboration with CSIRO on manufacture scale-up technologies for Progenza and Secretions • • Optimised Secretions formulation Improvements to cell growth media to enhance cell yield for Progenza and Secretions Key patents granted • Patent granted in Australia covering Progenza technology - allogeneic stem cells and secretions for the treatment of osteoarthritis and other inflammatory conditions in humans and animals • Patent granted in Australia covering cancer vaccine technology for the treatment of cancers in humans (RGSH4K) and animals (Kvax) Financial highlights • Licence fee revenues up 35% to $1.2m (FY15: $0.9m) • Loss from ordinary activities down 45% to $3.6m (FY15: $6.6m). These results included R&D tax incentive of $2.7m (FY15: $3.4m) • Quarterly cash burn down 37% to $1.48m per quarter (FY15: $2.35m per quarter) - better than stated target of $1.7m • Net cash used in operating activities of $2.25m (including R&D tax incentive) (FY15: $5.92m) Consolidated Financial Statements for the Year Ended 30 June 2016 5 Report from the Chairman and CEO Dear Shareholders, On behalf of the Board of Directors, we are pleased to report on the progress we have made during the fi nancial year ending 30 June 2016. During the period we achieved a number of signifi cant clinical, manufacturing and commercial milestones that position the company to unlock signifi cant value in the business over the next 12-18 months. Human Health Pipeline Product Therapeutic Area Technology Platform Manufacturing and process development Preclinical Phase 1 Phase 2 Phase 3 Market approval Progenza Osteoarthritis RGSH4K Oncology Secretions Dermatology Wound care Allogeneic adipose MSCs and secretions Autologous tumour vaccine Allogeneic adipose MSC secretions Allogeneic cells - cells from a donor Autologous cells - patient’s own cells Progenza – allogeneic stem cell therapy technology platform Progenza is the company’s lead cell therapy technology that is being developed for the treatment of osteoarthritis and other musculoskeletal disorders. It also has the potential to be used for other inflammatory conditions that have limited treatment options. Progenza is made from expanded allogeneic mesenchymal stem cells (MSCs) from human adipose (or fat) tissue and contains the bioactive secretions of the cells. Progenza works by reducing inflammation and promoting healing and repair in the damaged or diseased tissue. It is a scalable technology that has the demonstrated capability to produce millions of doses of cells from a single donor. Completion of patient recruitment to STEP trial In May this year, we completed the recruitment of the Phase 1 STEP trial of Progenza for the treatment of knee osteoarthritis without any unexpected safety concerns. The trial is being led by Dr. Donald Kuah who is a leading Sydney-based sports medicine specialist and one of the most experienced clinicians in the use of cell therapy for osteoarthritis. The trial includes 20 participants with knee osteoarthritis treated at two different doses of cells. Participants received ultrasound- guided injections of Progenza or placebo directly into their arthritic knee joint. One in fi ve patients received a placebo injection. The primary objective of the trial is to evaluate the safety and tolerability of Progenza. The secondary objectives are to investigate the effect of Progenza on knee pain and function, quality of life, knee joint structures using magnetic resonance imaging and osteoarthritis biomarkers. The trial will conclude once the last patient completes 12 month post-treatment follow-up. It is anticipated that we will report on the trial results in Q4 FY17. Partnering Progenza in Japan We have identifi ed Japan as a key target market for partnering clinical development, manufacturing and commercialisation of Progenza. Japan has positioned itself as a leader in regenerative medicine including establishing an accelerated approval process specifi cally designed for regenerative medicine products like Progenza. These new laws allow for the conditional marketing approval of regenerative medicine products that demonstrate safety and probable effi cacy without the need for expensive and long phase 3 trials. Over the last year, we have seen increasing R&D investment and partnering activity in Japan for cell-based regenerative medicine technologies. We are in advanced discussions with potential partners for the manufacture and commercialisation of Progenza in Japan and look forward to converting these discussions into binding arrangements by the end of Q1 FY17. Consolidated Financial Statements for the Year Ended 30 June 2016 6 Report from the Chairman and CEO Preparation for Phase 2 trial product We have commenced preparations for the development of Progenza for the planned Phase 2 trial of Progenza for osteoarthritis in Japan and its development for other major markets. Our adipose tissue donor procurement process is underway and ethics approval has been received to procure up to 20 donors to proceed into cell bank manufacture. In addition, further improvements were made on the cell growth media to improve on cell yield, to refi ne the formulation and to ensure the secured supply of the raw materials. We are developing potency and identity assays that we can use as part of the product release criteria for the Phase 2 manufacture. We are on target to have the assays ready for cGMP manufacture tech transfer. Manufacture scale-up We have made progress on the scale-up of the manufacture of Progenza. In preparation for the STEP trial, we demonstrated the capacity to produce millions of therapeutic doses from a single donor. As we use adipose tissue as the source of our MSCs, we have abundant starting material which assists in optimising the expansion of the MSCs. This year we collaborated with CSIRO on scale-up culturing techniques in bioreactors and have determined the best technology platforms and carriers for cell growth for further development of the scaled-up manufacturing process. Key Progenza patent granted In November 2015, the company was granted a key Australian patent covering the use of Progenza for the treatment of osteoarthritis and other inflammatory conditions for human and animal applications. The patent is also being pursued for grant in other key territories. RGSH4K - human cancer vaccine In October 2015, the fi rst patient was successfully dosed in our fi rst-in-human clinical trial for our cancer vaccine technology, RGSH4K. The ACTIVATE trial is a single centre, open label, Phase 1 dose escalating trial to evaluate the safety, tolerability and preliminary effi cacy of RGSH4K. This technology uses a patient’s tumour to harness the body’s own immune system to fi ght cancer cells. As part of the trial, the company has established a tumour bank to enable the banking of both previously collected and new tumours. These tumours are used as source material for the manufacture of the cancer vaccine. We have recruited patients for all 3 dose levels without any unexpected safety concerns. We have approved tissue collection and treatment sites. We anticipate the trial being fully recruited by the end of this year and reporting on the trial results in H2 FY17. Exploring combination therapy In FY17, we will explore the opportunity of combining RGSH4K with a promising group of immunotherapy products known as checkpoint inhibitors, some of which are approved for patient use. These inhibitors stop the cancer from blocking the action of the body’s immune cells. Key cancer vaccine patent granted In December 2015, an Australian patent was granted covering the use of the cancer vaccine technology for the treatment of a range of cancers in humans and animals. The patent is also being pursued for grant in other key territories. Cell secretions for infl ammatory skin conditions Cell secretions is the company’s technology platform that utilises the molecules including cytokines and growth factors that are secreted by MSCs and work in concert to reduce pain and inflammation and encourage accelerated healing and repair. These secretions are robust and stable and have been developed as a topical application for the treatment of inflammatory skin conditions such as acne and wound healing. Inflammatory skin conditions and wound healing are the most promising and near- term areas for regenerative medicine products. These secretions are included with MSCs in our Progenza product and have demonstrated no safety concerns in preclinical and clinical testing. We have also shown secretions to be safe and effective in a preclinical inflammatory disease model as a standalone preparation. During the year, we focused our efforts on developing and testing the optimal secretions-based formulation for topical applications and worked with CSIRO on technologies for scale-up manufacturing. In FY17, we will conduct further preclinical and clinical testing of the latest secretions for the treatment of acne and wound healing. We will continue our discussions with parties for development and commercialisation opportunities for topical applications of the secretions in both the therapeutic and cosmetic markets. Consolidated Financial Statements for the Year Ended 30 June 2016 7 Report from the Chairman and CEO Technology development and licensing In November 2015, we entered into a collaboration and licence agreement with Macquarie University to develop and commercialise a new cell identifi cation and selection technology for high secreting stem cells. Researchers at the Macquarie University node of the Centre for Nanoscale BioPhotonics developed the technology. The collaboration with researchers at Macquarie University and the University of Adelaide has led to the successful ARC linkage grant of $340k to fund research that seeks to better understand how stem cells and the new cell selection technology can be used in the treatment of chronic pain. Animal Health Pipeline Product Therapeutic Area Technology Platform Manufacturing and process development Safety and effi cacy studies Pivotal trial Market approval CryoShot Canine Osteoarthritis Allogeneic adipose MSCs CryoShot Equine Osteoarthritis Allogeneic adipose MSCs Kvax* Oncology Autologous tumour vaccine * Autologous animal cancer vaccines are subject to less regulatory requirements in Australia and the USA CryoShot - allogeneic stem cells for canine and equine osteoarthritis CryoShot is the company’s lead cell therapy technology for the treatment of canine and equine osteoarthritis and other musculoskeletal disorders. CryoShot is made from expanded allogeneic mesenchymal stem cells from canine or equine adipose (or fat) tissue. CryoShot cells work by reducing inflammation and promoting healing and repair in the damaged or diseased tissue. It is a scalable technology that has the demonstrated capability to produce commercial quantities of doses of cells from a single donor. Pre-pivotal canine OA trial In November 2015, recruitment commenced for a pre-pivotal trial assessing CryoShot as a treatment for canine osteoarthritis. This placebo-controlled trial of 80 dogs is being undertaken at the University of Pennsylvania School of Veterinary Medicine. The results of the trial will be used to fi nalise the design of a pivotal US Food and Drug Administration (FDA) trial with good manufacturing practice (GMP) grade product. Recruitment for the trial is scheduled for completion by the end of H1 FY17. All trial participants are followed for 90 days. Collaboration with animal pharma In November 2015, we entered into a collaboration and licence agreement with a major animal pharma company for the development and commercialisation of CryoShot. Upon completion of the pre-pivotal trial, our partner has an option to exclusively licence the CryoShot technology. Under the terms of the licence, we will receive an upfront licence fee and be entitled to other developmental milestone payments to be agreed at the time. The partner will be responsible for funding the pivotal trial and GMP manufacture of CryoShot and have exclusive global rights for sales and marketing for canine applications. We will receive a royalty on all CryoShot sales. Kvax - autologous canine cancer vaccine Osteosarcoma trial with VCA During the year the company completed a small osteosarcoma trial conducted by Dr. Phil Bergman at VCA in the USA. The purpose of the trial was to test the safety, tolerability and preliminary effi cacy of Kvax. We will report on the results of the trial in Q2 FY17. Lymphoma trial with SASH In November 2015, the company initiated a 45 dog trial of Kvax in combination with chemotherapy for the treatment of canine lymphoma. The trial is being conducted at Small Animal Specialist Hospital (SASH) in Sydney and is currently recruiting cases. Consolidated Financial Statements for the Year Ended 30 June 2016 8 Report from the Chairman and CEO Financial highlights for FY16 Our fi nancial results for FY16 were better than expectations and show continuing fi nancial discipline in the management of the business operations while making substantial progress on our R&D, clinical and commercial goals. Highlights for the period included: • Licence fee revenues up 35% to $1.2m (FY15: $0.9m) • Loss from ordinary activities down 45% to $3.6m (FY15: $6.6m). These results include the R&D tax incentive of $2.7m (FY15: $3.4m) • Quarterly cash burn down 37% to $1.48m per quarter (FY15: $2.35m per quarter) - better than stated target of $1.7m • Net cash used in operating activities of $2.25m (including R&D tax incentive) (FY15: $5.92m) A more detailed fi nancial review of operations is set out in the Directors’ Report. Looking forward FY17 will be an important year in the development of the company with a number of key commercial, clinical and R&D milestones in sight including: • Secure manufacturing and commercial partner for Progenza technology in Japan - Q1 FY17 • Advance clinical partnering discussions for Progenza in Japan and other territories • Commence donor procurement in preparation for Progenza manufacture for Phase 2 trial in Japan - Q1 FY17 • Commence ARC linkage project on stem cells for chronic pain - Q2 FY17 • Initiate preclinical and clinical trials for secretions technology - H1 FY17 • Complete recruitment and report on ACTIVATE cancer vaccine trial - H2 FY17 • Report on Progenza osteoarthritis STEP trial – H2 FY17 • Report on CryoShot canine pre-pivotal trial - H2 FY17 We look forward to capitalising on these milestones and other developments to unlock value in the company’s clinical assets. Thanks We’d like to thank our fellow directors and the team at Regeneus for their outstanding efforts and contribution to the business over the last fi nancial year. Finally, we would like to thank our shareholders for their support for what we do and showing patience as we develop and seek to partner our regenerative medicine products. Dr. Roger Aston Chairman John Martin Chief Executive Offi cer Consolidated Financial Statements for the Year Ended 30 June 2016 9 01 Directors’ Report Your Directors present their report for Regeneus Ltd and its controlled entities (the Group) for the fi nancial year ended 30 June 2016. 1. Directors The names of the Directors in offi ce at any time during or since the end of the year are: CEO - Executive Director John Martin has served on the Board since early 2009 and was appointed CEO in November 2014. John has over 20 years of experience as a business executive, director and corporate lawyer including roles as CEO and Director of ASX- listed and private emerging technology companies including BTF and Proteome Systems. John was a corporate and executive partner of Allens specialising in M&A, fundraising and life sciences. Dr. Roger Aston - Non-executive Chairman John Martin - CEO and Executive Director Professor Graham Vesey - CSO and Executive Director Barry Sechos - Non-executive Director Dr. Glen Richards - Non-executive Director Directors have been in offi ce since the start of the fi nancial year to the date of this report unless otherwise stated. Chairman Dr. Roger Aston has served on the Board since 2013 and was appointed Chairman in November 2014. He is one of the most experienced and commercially astute people in drug commercialisation in Australia. Roger brings more than 20 years experience in the pharmaceutical and healthcare industries in senior roles in the United Kingdom, Asia Pacifi c and Australia. Roger is also a director or chairman on a number of boards carrying out late-stage drug development. Other current directorships PharmAust Ltd Immuron Ltd Oncosil Medical Ltd ResApp Health Ltd Previous directorships of (last 3 years) IDT Ltd PolyNovo Ltd (Formerly Calzada Ltd) Interests in shares 51,179 Interests in options Nil Other current directorships None Previous directorships (last 3 years) None Interests in shares 7,253,908 Interests in options 2,680,355 CSO - Executive Director Professor Graham Vesey is a co-founder and founding CEO of the Company and has served on the Board since incorporation. He was appointed Chief Scientifi c Offi cer in November 2014. Graham is a successful biotechnology entrepreneur, technology innovator and inventor and a highly regarded scientist. Graham was a co-founder and Executive Director of the successful biotech company, BTF, which was sold to bioMerieux in 2007. Graham is an Adjunct Professor at Macquarie University. Other current directorships None Previous directorships of (last 3 years) None Interests in shares 15,879,968 Interests in options 2,142,855 Consolidated Financial Statements for the Year Ended 30 June 2016 10 01 Directors’ Report Non-executive Directors Barry Sechos has served on the Board since 2012 and has over 20 years experience as a director, business executive and corporate lawyer with particular experience in investment and asset management. Barry is Executive Director of the Sherman Group (an early-stage investor in the Company) and sits on the board of many Sherman Group companies and investee companies. Other current directorships Aberdeen Leaders Fund Ltd Previous directorships of (last 3 years) None Interests in shares Nil Interests in options Nil Dr. Glen Richards joined the Board on 1 April 2015. Glen practised companion animal medicine and surgery in Brisbane, Townsville and London before establishing Greencross Vets in 1994. As Managing Director of Greencross Ltd (ASX:GXL) he created Australia’s largest veterinary healthcare group with over 120 veterinary practices and 200 pet specialty stores. He resigned as MD in December 2014 and continues as a Non-executive Director. Other current directorships Greencross Ltd 1300Smiles Ltd Previous directorships (last 3 years) None Interests in shares 2,333,333 Interests in options Nil Company Secretary Sandra McIntosh is the Company Secretary and Investor Relations Manager. Sandra has been with the Company since 2009, and has 20 years management experience in HR, customer service and fi nance. 2. Principal activities Regeneus is an ASX-listed clinical-stage regenerative medicine company using stem cell and immuno-oncology technologies to develop a portfolio of cell-based therapies to address signifi cant unmet medical needs in the human and animal health markets with a focus on osteoarthritis and other musculoskeletal disorders, oncology and dermatology diseases. The company is focused on unlocking value in its clinical- stage human and animal pipeline products through generating positive clinical data, technology development and partnering. 3. Operating and fi nancial review Review of operations During the year, the company achieved signifi cant clinical development, R&D and commercial milestones that help position the company for future growth and development including: Progress on fi rst-in-human clinical trials • Progenza STEP trial – allogeneic stem cells for human osteoarthritis • Commenced and completed STEP trial enrollment • Positive safety review for both dose cohorts • RGSH4K ACTIVATE trial – autologous cancer vaccine • Established tumour bank • Patients safely dosed in all 3 dose cohorts Commencement of clinical trials for animal health • CryoShot pre-pivotal trial – allogeneic off-the-shelf stem cells for canine osteoarthritis • Commenced enrollment for trial at University of Pennsylvania - more than 30% recruited • Kvax trials – autologous canine cancer vaccine • Completed osteosarcoma trial with VCA Hospitals Inc. in USA • Commenced enrollment of lymphoma trial at Small Animal Specialist Hospital in Sydney Partnering and technology development • Entered into agreement with top animal health pharma to partner development and commercialisation of CryoShot for canine osteoarthritis • Advanced licensing discussions for manufacturing and clinical development of Progenza in Japan • Exclusive licence for next generation cell identifi cation and selection technology for high potency secreting stem cells developed at Macquarie University node of Centre for Nanoscale Biophotonics • Secured ARC linkage grant funding for collaborative research with Macquarie University and University of Adelaide into treating chronic pain with stem cells • Collaboration with CSIRO on manufacture scale-up • technologies for Progenza and Secretions Improvements to cell growth media to enhance cell yield for Progenza and Secretions • Optimised Secretions formulation Consolidated Financial Statements for the Year Ended 30 June 2016 11 01 Directors’ Report Key patents granted • Patent granted in Australia covering Progenza technology - allogeneic stem cells and secretions for the treatment of osteoarthritis and other inflammatory conditions in humans and animals • Patent granted in Australia covering cancer vaccine technology for the treatment of cancers in humans (RGSH4K) and animals (Kvax) A more detailed review of operational highlights is set out in the Report from the Chairman and CEO. Financial review Operating results The Group’s loss for the year, after income tax, at $3.6 million was signifi cantly better than the prior year of $6.6 million. The loss includes the R&D tax incentive of $2.7 million (FY15 $3.4 million). The improvement in the results reflects the shift in strategic focus to clinical development of the Group’s key programs rather than early commercialisation activities for HiQCell. The results were better than expectations with ‘cash burn’ being maintained below the $1.7 million quarterly target throughout the entire year. The tighter expenditure controls had minimal impact on the delivery of the clinical and research strategic imperatives. Revenue and margin Licence fee income Licence fee income increased by almost 35% to $1.2 million. The ongoing fees for the use of Regeneus technology in research and early commercialisation opportunities remain an important source of revenue and highlight the interest from key R&D partners and the depth of the relationships. Additionally, during the year, the group received a licence option fee for CryoShot from a top 5 animal pharmaceutical company. Income from sale of goods The revenue from the sale of goods declined by 44% to $0.52 million. This reflects the move away from early stage commercial activities for HiQCell and fi eld trial activities for CryoShot to a focus on targeted clinical research programs in Progenza, CryoShot, RGSH4K, Kvax and Secretions. Gross profi t increased in the year to $1.59 million up from $1.15 million, an increase of 38%. This increase is due to the higher margin licence arrangements and also driven by the reduction in HiQCell activities and CryoShot fi eld trial expenses. 2016 $‘000 1,219 517 142 2015 $’000 900 920 241 1,878 2,061 Operating activities Licence fee income Income from sale of goods Interest received Total revenue Expenditure Research and development expenses Research and development activities include staff and other costs associated with product research, preliminary manufacture and the conduct of clinical trials for the company’s products for humans and animals. Expenditure for the year was $4.3 million, a slight decline on FY15 $4.9 million and that was more reflective of the costs of the current clinical trials being lower than the prior year when the manufacture of Progenza for the Phase 1 trial was incurring signifi cant internal and external costs. In line with the Group’s policy and to comply with the accounting standards, all costs associated with research and development are fully expensed in the period in which they are incurred. The Directors do not consider the Group can demonstrate all the requirements of the accounting standards to capitalise development expenditure. Selling expenses In FY15, there was a planned reduction in commercialisation activities of HiQCell and the business focus was one of undertaking clinical trials. There were signifi cant marketing costs associated with the commercialisation activities of prior years and they have now declined materially. Selling and marketing expenses of $375k were 78% less than the prior year and this is expected to be consistent in FY17. Occupancy costs Occupancy costs at $473k were 38% below prior year expenditure due to the consolidation and reduction of leased premises associated with in-clinic manufacturing of HiQCell. The costs incurred are now predominantly associated with leasing the corporate head offi ce at Pymble and the utility costs of these premises. Corporate expenses The reduction of corporate expenses was in excess of 28% to $2.7 million from the previous year (FY15 $3.8 million) This is a key benefi t of the strategic changes taken throughout FY15. Consolidated Financial Statements for the Year Ended 30 June 2016 12 01 Directors’ Report Research and development Selling Occupancy Corporate Finance costs 2016 $’000 4,309 375 473 2,730 20 2015 $’000 4,945 1,678 757 3,814 56 Movement $’000 (636) (1,303) (284) (1,084) (36) Total expenses 7,907 11,250 (3,343) Cash fl ows The net cash inflows for the period were: Net cash (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) fi nancing activities Net change in cash and cash equivalents held 2016 $’000 2015 $’000 (2,253) (5,923) (231) 260 - 6,168 (2,484) 505 Operating activities – cash used in operating activities was signifi cantly reduced from the prior year and excluding the benefi t of the R&D incentive, the cash outflow from operations was $5.7 million compared to FY15 $9.7 million. While 2015 included one off costs as part of the implementation of the strategic review they were less than $1.3 million in cash. The cash benefi ts of the strategic review contributed the majority of the reduction in the cash outflow. Investing activities – the underlying cash used in investing activities is similar year on year with the difference represented by in excess of $0.4 million of deposits maturing that secured the premises lease fi tout payments. Financing activities – 2015 cash provided by investing activities was a capital raising. Overall the quarterly ‘operational cash burn’ in 2016 of $1.48 million per quarter is a signifi cant improvement over 2015 $2.35 million per quarter. Signifi cant changes in state of aff airs There were no signifi cant changes in the state of affairs of the Group during the reporting period. Changes in accounting policy There were no changes in accounting policy during the reporting period. Events subsequent to the reporting period In the period since 30 June 2016 to the signing of the fi nancial report, a material loan facility has been secured. The details of this arrangement are as follows: On July 1 2016, the company entered into an R&D funding arrangement with Sherman Group Pty Ltd, a related party. The facility forward funds, via a loan, the Federal Government’s research and development tax incentive for FY16. The loan is secured over the tax incentive receipt and as a fi rst ranking charge over the Group’s property. The facility allows the company to draw down the lower of $2.0 million or 80% of the anticipated claim. At the time of implementing the facility, the R&D incentive was estimated at $2.5 million. The claim has now been lodged at $2.73 million. At the date of this report, $750k of the facility has been drawn down and depending upon the timing of the tax incentive, another $750k is anticipated as being drawn down. Full repayment of the loan is anticipated to be completed by the end of September. Apart from the above, there are no other matters or circumstances that have arisen since the end of the year that have signifi cantly affected or may signifi cantly affect either the entity’s operations in future fi nancial years, the results of those operations in future fi nancial years or the entity’s state of affairs in future fi nancial years. Likely developments, business strategies and prospects FY17 and FY18 will provide critical foundations for the long term success of Regeneus. The following activities and business initiatives will be core elements of the strategic deliverables required for that success: • Secure manufacturing and commercial partner for Progenza technology in Japan - Q1 FY17 • Advance clinical partnering discussions for Progenza in Japan and other territories • Commence donor procurement in preparation for Progenza manufacture for Phase 2 trial in Japan - Q1 FY17 • Commence ARC linkage project on stem cells for • chronic pain - Q2 FY17 Initiate preclinical and clinical trials for secretions technology - H1 FY17 • Complete recruitment and report on ACTIVATE cancer vaccine trial - H2 FY17 • Report on Progenza osteoarthritis STEP trial - H2 FY17 • Report on CryoShot canine pre-pivotal trial - H2 FY17 Consolidated Financial Statements for the Year Ended 30 June 2016 13 01 Directors’ Report Directors’ meetings The number of meetings of Directors (including committees of Directors) held during the year and the number of meetings attended by each Director were as follows: Directors’ name Board meetings Audit and risk committee Remuneration and nominations charter Directors’ name Roger Aston John Martin Graham Vesey Barry Sechos Glen Richards A 9 9 9 9 9 B 7 9 9 9 6 A 2 2 - 2 - B - 2 - 2 11 A 1 1 - 1 - B 1 1 - 1 - Column A is the number of meetings the director was entitled to attend. Column B is the number of meetings the director did attend. 1 Glen Richards attended an Audit and Risk Committee meeting as an alternate for Roger Aston. Dividends paid or recommended No dividends have been paid or declared since the start of the fi nancial year (2015: Nil). 4. Unissued shares under option Unissued ordinary shares of Regeneus Ltd under option at the date of this report are: Date of granting Expiry date Exercise price of option $ Number under option 01/07/2010 01/01/2011 21/02/2011 01/07/2011 16/09/2013 04/12/2013 21/10/2014 28/06/2020 29/12/2020 18/02/2021 28/06/2021 15/09/2018 03/12/2018 20/10/2019 During 2016, no unlisted options were issued. 0.136 0.136 0.136 0.280 0.250 0.250 0.160 770,100 462,060 1,001,674 500,000 4,323,210 1,715,000 900,000 Consolidated Financial Statements for the Year Ended 30 June 2016 14 01 Directors’ Report All unexercised, vested options expire on the earlier of their expiry date or within a period set out in the plans. These options were issued under the Employee Share Option Plan and Option Trust Share plans, and have been allotted to individuals on condition that they meet the agreed milestones before the options vest. As part of the IPO, 12,740,252 employee options, that had an exercise price of less than 20 cents, were exercised prior to the listing on the 19 September 2013. These were fi nanced by a full recourse loan provided by the Company to the option holders. 5. Shares issued during or since the end of the year as a result of exercise of options During or since the end of the year, no shares were issued by the Company as a result of the exercise of options (2015: Nil). 6. Remuneration report (audited) The Directors of the Group present the Remuneration Report for Executive Directors, Non-executive Directors and other key management personnel prepared in accordance with the Corporations Act 2001 and the Corporations Regulations 2001. The Remuneration Report is set out under the following main headings: a. Principles used to determine the nature and amount of remuneration b. Details of remuneration c. Service agreements d. Share-based remuneration e. Bonuses and f. Other information a. Principles used to determine the nature and amount of remuneration The principles of the Group’s executive strategy and supporting incentive programs and frameworks are to: • Align rewards to business outcomes that deliver value to shareholders • Drive a high performance culture by setting challenging objectives and rewarding high performing individuals • Ensure remuneration is competitive in the relevant employment market place to support the attraction, motivation and retention of executive talent Regeneus has structured a remuneration framework that is market competitive and complementary to the reward strategy of the Group. The Board has established a Remuneration and Nominations Committee which operates in accordance with its charter as approved by the Board and is responsible for making recommendations to the Board for reviewing and approving compensation arrangements for the Directors and the Executive team. The remuneration structure that has been adopted by the Group consists of the following components: • Fixed remuneration being annual salary • Short and long term incentives, being employee bonuses and options The Remuneration and Nominations Committee assesses the appropriateness of the nature and amount of remuneration on a periodic basis by reference to recent employment market conditions with the overall objective of ensuring maximum stakeholder benefi t from the retention of a high quality Board and Executive team. All bonuses, options and incentives are linked to predetermined performance criteria. Short term incentive (STI) Regeneus performance measures involve the use of annual performance objectives, metrics, and performance appraisals. The performance measures are set annually after consultation with the Directors and Executives and are specifi cally tailored to the areas where each executive has a level of control. The measures target areas the Board believes hold the greatest potential for expansion and profi t and cover fi nancial and non-fi nancial measures. Consolidated Financial Statements for the Year Ended 30 June 2016 15 01 Directors’ Report The KPIs for the Executive team are summarised as follows: Performance area: • Financial - operating results • Non-fi nancial - strategic goals set for each individual The Board may, at its discretion, award bonuses for exceptional performance in relation to each person’s pre-agreed KPIs and extraordinary achievements. Voting and comments made at the Company’s last Annual General Meeting Regeneus received 12,140,896 ‘For’ votes on its Remuneration Report for the fi nancial year ending 30 June 2015 (2014: 32,601,677). The Company received no specifi c feedback on its Remuneration Report at the Annual General Meeting. Consequences of performance on shareholder wealth In considering the Group’s performance and benefi ts for shareholder wealth, the Board has regard to the following indices in respect of the current fi nancial year and the previous six (6) fi nancial years: Item EPS (cents) Dividends (cents per share) Net (loss) ($000) Share price ($) 2016 2015 (0.017) (0.032) $0 (3,574) $0.14 $0 (6,607) $0.15 2014 (0.05) $0 (7,523) $0.40 2013 (0.05) $0 (5,195) $0.25* 2012 (0.03) $0 2011 (0.01) $0 (3,261) (1,093) n/a n/a *$0.25 share price on listing 19 September 2014. Consolidated Financial Statements for the Year Ended 30 June 2016 16 01 Directors’ Report Details of remuneration b. Details of the nature and amount of each element of key management personnel (KMP) remuneration are shown in the table below: Short term employee benefi ts Executive Directors Cash salary and fees $ Cash bonus $ Back pay of Directors’ fees $ Non- monetary benefi ts $ Post employment benefi ts Superannuation $ Long term benefi ts Termination benefi ts Share-based payments Other long term benefi ts $ Termination payments $ Options $ Total $ % of remuneration that is performance based John Martin 2016 304,679 - 2015 304,679 150,000 2016 200,000 - 2015 261,063 140,000 Graham Vesey Non-executive Directors Roger Aston Barry Sechos Glen Richards Appointed 1/4/15 Ben Herbert Resigned 10/11/14 2016 71,204 2015 67,165 2016 45,000 2015 45,000 2016 45,000 2015 11,250 2016 - 2015 45,833 2016 Total 665,883 2015 Total 734,990 290,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 28,944 11,637 28,944 10,233 19,000 19,611 24,801 (7,514) 3,796 5,194 - - - - - - - - - - - - - - 51,740 31,248 58,939 2,719 - - - - - - - - - - - - - - - 345,260 62,324 556,180 - 238,611 62,324 480,674 - - - - - - - - - 75,000 72,359 45,000 45,000 45,000 11,250 - 45,833 748,871 0% 38% 0% 42% 0% 0% 0% 0% 0% 0% 0% 0% 0% 124,648 1,211,296 34% Other long term benefi ts include the movement in the annual leave provision and long service leave provision in accordance with AASB 119 Employee Benefi ts. Where the provision is reduced due to leave taken exceeding leave accrued the movement is negative. The relative proportions of remuneration that are linked to performance and those that are fi xed are as follows: Name Fixed remuneration At risk - STI At risk - options Service agreements c. Remuneration and other terms of employment for the Executive Directors and other key management personnel are formalised in a service agreement. The major provisions of the agreements relating to remuneration are set out below: John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Ben Herbert 100% 100% 100% 100% 100% 100% - - - - - - - - - - - - Name Base salary $ Term of agreement Notice period John Martin 304,679 Unspecifi ed Three months Graham Vesey 200,000 Unspecifi ed Three months Roger Aston 75,000 Unspecifi ed Barry Sechos 45,000 Unspecifi ed Glen Richards 45,000 Unspecifi ed Nil Nil Nil There are no termination payments provided for in these agreements, other than those required by statute. Consolidated Financial Statements for the Year Ended 30 June 2016 17 01 Directors’ Report Share-based remuneration d. Options granted over unissued shares. All options are for ordinary shares in the Company, and are exercisable on a one-for-one basis. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or within the time period set out in the plan, from termination of the individual’s employment. Details of options over ordinary shares in the Company that were granted as remuneration to each key management personnel are set out below. Number vested Number lapsed Exercise price $ First exercise date Last exercise date Name Number granted Grant date Graham Vesey 714,285 16/09/2013 Graham Vesey 714,285 16/09/2013 Graham Vesey 714,285 16/09/2013 John Martin 714,285 16/09/2013 John Martin 714,285 16/09/2013 John Martin 714,285 16/09/2013 Value per option at grant date $ 0.1561 0.1561 0.1561 0.1561 0.1561 0.1561 714,285 714,285 714,285 714,285 714,285 714,285 Wild Rose Pty Ltd - John Martin 37,500 16/09/2013 0.1561 37,500 John Martin 500,000 01/07/2011 0.1758 500,000 - - - - - - - - 0.25 01/07/2013 15/09/2018 0.25 30/06/2014 15/09/2018 0.25 30/06/2015 15/09/2018 0.25 30/06/2013 15/09/2018 0.25 30/06/2014 15/09/2018 0.25 30/06/2015 15/09/2018 0.25 11/09/2013 15/09/2018 0.28 31/12/2011 28/06/2021 The following options over ordinary shares in the Company were forfeited (lapsed) during the year: Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Ben Herbert Number of options forfeited (lapsed) during the year Nil Nil Nil Nil Nil Nil e. Bonuses included in remuneration Details of the short-term incentive cash bonuses awarded as remuneration to each key management personnel, the percentage of the available bonus that was paid in the fi nancial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. No part of the bonus is payable in future years. Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Ben Herbert Included in remuneration $ Percentage vested in year Percentage forfeited in year - - - - - - - - - - - - - - - - - - Consolidated Financial Statements for the Year Ended 30 June 2016 18 01 Directors’ Report Other information f. Options held by key management personnel The number of options to acquire shares in the Company held during the 2016 reporting period by each of the key management personnel of the Group, including their related parties are set out below. Name Balance at start of year Granted as remuneration Exercised Other changes Balance at end of year Year ended 30 June 2016 Vested and exercisable at the end of the reporting period Vested and un-exercisable at the end of the reporting period John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards 2,808,560 2,271,061 - - - Totals 5,079,621 - - - - - - - - - - - - (128,205) 2,680,355 2,680,355 (128,206) 2,142,855 2,142,855 - - - - - - - - - (256,411) 4,823,210 4,823,210 - - - - - - Other changes refers to unlisted options over ordinary shares issued in conjunction with the private placement of August 2014. These options were not exercised and expired on 15 August 2015. Shares held by key management personnel The number of ordinary shares in the Company during the 2016 reporting period held by each of the Group’s key management personnel, including their related parties, are set out below: Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Totals End of audited remuneration report. Year ended 30 June 2016 Balance at start of year Granted as remuneration Received on exercise Purchased 7,253,908 15,879,968 51,179 - 2,333,333 25,518,388 - - - - - - - - - - - - Held at the end of the reporting period 7,253,908 15,879,968 51,179 - 2,333,333 25,518,388 - - - - - - Consolidated Financial Statements for the Year Ended 30 June 2016 19 01 Directors’ Report 7. Environmental legislation Regeneus operations are not subject to any particular or signifi cant environmental regulation under a law of the Commonwealth or of a State or Territory in Australia. 8. Indemnities given to auditors and offi cers and insurance premiums paid During the year, Regeneus paid a premium to insure offi cers of the Group. The offi cers of the Group covered by the insurance policy include all Directors. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the offi cers in their capacity as offi cers of the Group, and any other payments arising from liabilities incurred by the offi cers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the offi cers or the improper use by the offi cers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of the insurance policies is not disclosed as such disclosure is prohibited under the terms of the contract. The Group has not otherwise, during or since the end of the fi nancial year, except to the extent permitted by law, indemnifi ed or agreed to indemnify any current or former offi cer or auditor of the Group against a liability incurred as such by an offi cer or auditor. 9. Non-audit services From time to time, Grant Thornton, the Group’s auditors, perform certain other services in addition to their statutory audit duties. The Board considers any non-audit services provided during the year by the auditor and satisfi es itself that the provision of these non-audit services during the year is compatible with, and does not compromise, the auditor independence requirements of the Corporations Act 2001. Details of the amounts paid to the auditors of the Group, Grant Thornton Audit Pty Ltd, and its related practices for audit and non- audit services provided during the year are set out in Note 23 to the Financial Statements. 10. Proceedings on behalf of the Group No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. Auditor’s independence declaration A copy of the Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 21 and forms part of this Directors’ report. Signed in accordance with a resolution of the Board of Directors: John Martin CEO and Executive Director Dated this day 24 August 2016 Consolidated Financial Statements for the Year Ended 30 June 2016 20 Auditor’s Independence Declaration02Consolidated Financial Statements for the Year Ended 30 June 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)(cid:87)(cid:17)(cid:3)(cid:3)(cid:3)(cid:3)(cid:42)(cid:53)(cid:36)(cid:49)(cid:55)(cid:3)(cid:55)(cid:43)(cid:50)(cid:53)(cid:49)(cid:55)(cid:50)(cid:49)(cid:3)(cid:36)(cid:56)(cid:39)(cid:44)(cid:55)(cid:3)(cid:51)(cid:55)(cid:60)(cid:3)(cid:47)(cid:55)(cid:39)(cid:3)(cid:38)(cid:75)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:47)(cid:3)(cid:48)(cid:3)(cid:58)(cid:82)(cid:85)(cid:86)(cid:79)(cid:72)(cid:92)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:3)(cid:16)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:9)(cid:3)(cid:36)(cid:86)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:3)(cid:54)(cid:92)(cid:71)(cid:81)(cid:72)(cid:92)(cid:15)(cid:3)(cid:21)(cid:23)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) 03 Corporate Governance Statement The Board is committed to achieving and demonstrating the highest standards of corporate governance. As such, Regeneus Ltd and its controlled entities (the Group) have adopted the third edition of the Corporate Governance Principles and Recommendations which was released by the ASX Corporate Governance Council on 27 March 2014 and became effective for fi nancial years beginning on or after 1 July 2014. The Group’s corporate governance statement for the fi nancial year ending 30 June 2016 is dated as at 30 June 2016 and was approved by the Board on 24 August 2016. The corporate governance statement is available on Regeneus’ website at: regeneus.com.au/investor-centre/corporate-governance Consolidated Financial Statements for the Year Ended 30 June 2016 22 04 Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated statement of profi t or loss and other comprehensive income for the year ended 30 June 2016 Note 2016 $ 2015 $ Revenue Cost of sales Gross profi t Other income Research and development expenses Selling expenses Occupancy expenses Corporate expenses Finance costs Loss before income tax Income tax benefi t Loss for the year Other comprehensive (expense) / income Total comprehensive loss for the year Earnings per share Basic earnings per share Earnings per share from continuing operations Diluted earnings per share Earnings per share from continuing operations 6 6 7 22 24 24 1,877,759 2,061,094 (291,743) (915,399) 1,586,016 1,145,695 2,746,943 3,498,045 (4,309,379) (4,945,183) (374,611) (1,677,794) (472,600) (757,306) (2,730,343) (3,814,532) (19,899) (55,446) (3,573,873) (6,606,521) - - (3,573,873) (6,606,521) - (1,154) (3,573,873) (6,607,675) (0.017) (0.032) (0.017) (0.032) Note: This statement should be read in conjunction with the notes to the fi nancial statements. Consolidated Financial Statements for the Year Ended 30 June 2016 23 05 Consolidated Statement of Financial Position Consolidated statement of fi nancial position as at 30 June 2016 Note 2016 $ 2015 $ Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Other non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Other current liabilities Total current liabilities Non-current liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital 8 9 10 11 12 13 14 15 16 17 18 17 528,670 3,012,812 21,774 30,076 66,571 98,975 2,732,110 3,417,566 190,054 532,458 3,502,684 7,128,382 801,562 11,254 891,883 26,110 1,619,307 1,532,886 2,432,123 2,450,879 5,934,807 9,579,261 906,312 99,273 - 781,101 109,868 368,570 1,005,585 1,259,539 144,482 144,482 47,588 47,588 1,150,067 1,307,127 4,784,740 8,272,134 19.1 31,076,819 31,076,819 Retained earnings / (accumulated losses) (27,916,645) (25,295,813) Reserves Total equity 19.2 1,624,566 2,491,128 4,784,740 8,272,134 Note: This statement should be read in conjunction with the notes to the fi nancial statements. Consolidated Financial Statements for the Year Ended 30 June 2016 24 06 Consolidated Statement of Changes in Equity For year ended 30 June 2016 Share capital $ Share option reserve $ Retained earnings $ Foreign currency translation reserve $ Total attributable to parent owners $ Total equity $ Balance at 1 July 2014 24,908,920 2,190,377 (18,792,423) 1,154 8,308,028 8,308,028 (6,606,521) - (6,606,521) (6,606,521) (1,154) (1,154) (1,154) Reported loss for the year Reported other comprehensive income (expense) Employee share-based payment option expense Shares issued on exercise of options Transfer to share capital for options exercised - - - - - Issue of share capital - net of transaction costs 6,167,899 - - 403,882 - - - - - - - - Transfer from reserves to retained earnings for options forfeited - (103,131) 103,131 Balance at 30 June 2015 31,076,819 2,491,128 (25,295,813) Balance at 1 July 2015 31,076,819 2,491,128 (25,295,813) Reported loss for the year Reported other comprehensive income (expense) Employee share-based payment option expense Shares issued on exercise of options Transfer to share capital for options exercised Issue of share capital - net of transaction costs Transfer from reserves to retained earnings for options forfeited - - - - - - - - - 86,479 - - - (3,573,873) - - - - - (953,041) 953,041 Balance at 30 June 2016 31,076,819 1,624,566 (27,916,645) Note: This statement should be read in conjunction with the notes to the fi nancial statements. - - - - - - - - - - - - - - - 403,882 403,882 - - - - 6,167,899 6,167,899 - - 8,272,134 8,272,134 8,272,134 8,272,134 (3,573,873) (3,573,873) - - 86,479 86,479 - - - - - - - - 4,784,740 4,784,740 Consolidated Financial Statements for the Year Ended 30 June 2016 25 07 Consolidated Statement of Cash Flows Operating activities Receipts from customers Payments to suppliers and employees Interest received Other income R&D tax refund Finance costs For year ended 30 June 2016 Note 2016 $ 2015 $ 1,931,268 2,070,083 (7,637,200) (11,902,514) 55,021 - 153,465 80,479 3,417,566 3,730,576 (19,899) (55,446) Net cash (used in) operating activities 25 (2,253,244) (5,923,357) Investing activities Investment in short term deposit Purchase of property, plant and equipment Receipts from sale of property, plant and equipment Purchase of intangibles Deposits Net cash (used in)/provided by investing activities Financing activities Proceeds from issue of shares Net cash provided by fi nancing activities Net change in cash and cash equivalents held Cash and cash equivalents at beginning of fi nancial year - 127,754 (249,670) (193,017) 18,772 - - (230,898) 8,237 (14,841) 332,640 260,773 - - 6,167,899 6,167,899 (2,484,142) 505,315 3,012,812 2,507,497 Cash and cash equivalents at end of fi nancial year 8 528,670 3,012,812 Note: This statement should be read in conjunction with the notes to the fi nancial statements. Consolidated Financial Statements for the Year Ended 30 June 2016 26 08 Notes to the Consolidated Financial Statements 1. Nature of operations Regeneus is a Sydney-based ASX listed clinical-stage regenerative medicine company that develops innovative cell- based therapies for human and animal health markets, with a focus on osteoarthritis and musculoskeletal disorders as well as oncology and dermatology diseases. The portfolio of therapeutic products is being developed using the Company’s proprietary stem cell and immuno-oncology technology platforms. Regenerative medicine is a rapidly growing multidisciplinary specialty that is focused on the repair or regeneration of cells, tissues and organs. The primary goal is to enhance the body’s natural ability to replace tissue damaged or destroyed by injury or disease. Where commercial opportunities are identifi ed, the Group seeks to license appropriate parties. 2. General information and statement of compliance The fi nancial report is a general purpose fi nancial report that has been prepared in accordance with Australian Accounting Standards (including Australian Accounting Interpretations), other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. Regeneus is a for-profi t entity for the purpose of preparing the fi nancial statements. The fi nancial statements cover Regeneus and its controlled entities as a consolidated entity (The Group). As at the 30 June 2016, Regeneus is a Public Group, incorporated and domiciled in Australia. The address of its registered offi ce and its principal place of business is 25 Bridge St., Pymble, NSW 2073, Australia. Statement of compliance Compliance with Australian Accounting Standards ensures that the fi nancial statements and notes of Regeneus comply with International Financial Reporting Standards (IFRS) as issued by the IASB. The consolidated fi nancial statements for the year ended 30 June 2016 were approved and authorised for issue by the Board of Directors on 24 August 2016. Basis of preparation The fi nancial statements have been prepared on an accruals basis and are based on historical costs modifi ed by the revaluation of selected non-current assets and fi nancial instruments for which the fair value basis of accounting has been applied. New and revised standards that are eff ective for these fi nancial statements A number of new and revised standards are effective for annual periods beginning on or after 1 July 2015. Information on these new standards is presented below. AASB 2015-4 Amendments to Australian Accounting Standards – Financial Reporting Requirements for Australian Groups with a Foreign Parent AASB 2015-4 amends AASB 128 Investments in Associates and Joint Ventures to ensure that its reporting requirements on Australian groups with a foreign parent align with those currently available in AASB 10 Consolidated Financial Statements for such groups. AASB 128 will now only require the ultimate Australian entity to apply the equity method in accounting for interests in associates and joint ventures, if either the entity or the group is a reporting entity, or both the entity and group are reporting entities. AASB 2015-4 is applicable to annual reporting periods beginning on or after 1 July 2015. The adoption of this amendment has not had a material impact on the Group. Accounting standards issued but not yet eff ective and not adopted early by the Group At the date of authorisation of these fi nancial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group’s accounting policies for the fi rst period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group’s fi nancial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group’s fi nancial statements. AASB 9 Financial Instruments (applicable for annual reporting periods beginning on or after 1 January 2018) The standard introduces new requirements for the classifi cation and measurement of fi nancial assets and liabilities. These requirements improve and simplify the approach for classifi cation and measurement of fi nancial assets compared with the requirements of AASB 139. Consolidated Financial Statements for the Year Ended 30 June 2016 27 08 Notes to the Consolidated Financial Statements The main changes are: a. Financial assets that are debt instruments will be classifi ed based on: i. The objective of the Group’s business model for managing the fi nancial assets ii. The characteristics of the contractual cash flows b. Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income (instead of in profi t or loss). Dividends in respect of these investments that are a return on investment can be recognised in profi t or loss and there is no impairment or recycling on disposal of the instrument. Introduces a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. c. d. Financial assets can be designated and measured at fair value through profi t or loss at initial recognition if doing so eliminates or signifi cantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. e. Where the fair value option is used for fi nancial liabilities, the change in fair value is to be accounted for as follows: • The change attributable to changes in credit risk are presented in Other Comprehensive Income (OCI) • The remaining change is presented in profi t or loss If this approach creates or enlarges an accounting mismatch in the profi t or loss, the effect of the changes in credit risk are also presented in profi t or loss. Otherwise, the following requirements have been carried forward unchanged from AASB 139 into AASB 9: • Classifi cation and measurement of fi nancial liabilities • De-recognition requirements for fi nancial assets and liabilities AASB 9 requirements regarding hedge accounting represent a substantial overhaul of hedge accounting that will enable entities to better reflect their risk management activities in the fi nancial statements. Furthermore, AASB 9 introduces a new impairment model based on expected credit losses. This model makes use of more forward-looking information and applies to all fi nancial instruments that are subject to impairment accounting. The Group is yet to undertake a detailed assessment of the impact of AASB 9. However, based on the Group’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the fi nancial statements when it is fi rst adopted for the year ending 30 June 2019. AASB 1057 Application of Australian Accounting Standards In May 2015, the AASB decided to revise Australian Accounting Standards that incorporate IFRSs to minimise Australian-specifi c wording even further. The AASB noted that IFRSs do not contain application paragraphs that identify the entities and fi nancial reports which the Standards (and Interpretations) apply. As a result, the AASB decided to move the application paragraphs previously contained in each Australian Accounting Standard (or Interpretation), unchanged, into a new Standard AASB 1057 Application of Australian Accounting Standards. When this Standard is fi rst adopted for the year ending 30 June 2017, there will be no impact on the fi nancial statements. AASB 15 Revenue from Contracts with Customers AASB 15: • Replaces AASB 118 Revenue, AASB 111 Construction Contracts and some revenue-related Interpretations • Establishes a new revenue recognition model • Changes the basis for deciding whether revenue is to be recognised over time or at a point in time • Provides new and more detailed guidance on specifi c topics (e.g., multiple element arrangements, variable pricing, rights of return, warranties and licensing) • Expands and improves disclosures about revenue In May 2015, the AASB issued ED 260 Income of Not-for- Profi t Entities, proposing to replace the income recognition requirements of AASB 1004 Contributions and provide guidance to assist not-for-profi t entities to apply the principles of AASB 15. The ED was open for comment until 14 August 2015 and the AASB is currently in the process of redeliberating its proposals with the aim of releasing the fi nal amendments in late 2016. The Group is yet to undertake a detailed assessment of the impact of AASB 15. However, based on the Group’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the fi nancial statements when it is fi rst adopted for the year ending 30 June 2019. AASB 16 Leases AASB 16: • Replaces AASB 117 Leases and some lease-related interpretations • Requires all leases to be accounted for ‘on-balance sheet’ be lessees, other than short-term and low value asset leases • Provides new guidance on the application of the defi nition of lease and on sale and lease back accounting • Largely retains the existing lessor accounting requirements in AASB 117 • Requires new and different disclosures about leases Consolidated Financial Statements for the Year Ended 30 June 2016 28 08 Notes to the Consolidated Financial Statements The Group is yet to undertake a detailed assessment of the impact of AASB 16. However, based on the Group’s preliminary assessment, the likely impact on the fi rst time adoption of the Standard for the 30 June 2020 includes: • There will be a signifi cant increase in lease assets and fi nancial liabilities recognised on the balance sheet • The reported equity will reduce as the carrying amount of lease assets will reduce more quickly than the carrying amount of lease liabilities • EBIT in the statement of profi t or loss and other comprehensive income will be higher as the implicit interest in lease payments for former off balance sheet leases will be presented as part of fi nance costs rather than being included in operating expenses • Operating cash outflows will be lower and fi nancing cash flows will be higher in the statement of cash flows as principal repayments on all lease liabilities will now be included in fi nancing activities rather than operating activities. Interest can also be included within fi nancing activities AASB 2014-4 Amendments to Australian Accounting Standards – Clarifi cation of Acceptable Methods of Depreciation and Amortisation The amendments to AASB 116 prohibit the use of a revenue- based depreciation method for property, plant and equipment. Additionally, the amendments provide guidance in the application of the diminishing balance method for property, plant and equipment. The amendments to AASB 138 present a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. This rebuttable presumption can be overcome (i.e., a revenue-based amortisation method might be appropriate) only in two (2) limited circumstances: • The intangible asset is expressed as a measure of revenue, for example when the predominant limiting factor inherent in an intangible asset is the achievement of a revenue threshold (for instance, the right to operate a toll road could be based on a fi xed total amount of revenue to be generated from cumulative tolls charged) • When it can be demonstrated that revenue and the consumption of the economic benefi ts of the intangible asset are highly correlated. When these amendments are fi rst adopted for the year ending 30 June 2017, there will be no material impact on the transactions and balances recognised in the fi nancial statements. AASB 2014-5 Amendments to Australian Accounting Standards arising from AASB 15 AASB 2014-5 incorporates the consequential amendments arising from the issuance of AASB 15. The Group is yet to undertake a detailed assessment of the impact of AASB 15. However, based on the Group’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the fi nancial statements when it is fi rst adopted for the year ending 30 June 2019. AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) AASB 2014-7 incorporates the consequential amendments arising from the issuance of AASB 9. The Group is yet to undertake a detailed assessment of the impact of AASB 9. However, based on the Group’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the fi nancial statements when it is fi rst adopted for the year ending 30 June 2019. AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. The amendments: • Clarify the materiality requirements in AASB 101, including an emphasis on the potentially detrimental effect of obscuring useful information with immaterial information • Clarify that AASB 101’s specifi ed line items in the statement(s) of profi t or loss and other comprehensive income and the statement of fi nancial position can be disaggregated • Add requirements for how an entity should present subtotals in the statement(s) of profi t and loss and other comprehensive income and the statement of fi nancial position • Clarify that entities have flexibility as to the order in which they present the notes, but also emphasise that understandability and comparability should be considered by an entity when deciding that order • Remove potentially unhelpful guidance in IAS 1 for identifying a signifi cant accounting policy When these amendments are fi rst adopted for the year ending 30 June 2017, there will be no material impact on the fi nancial statements. 3. Summary of accounting policies Overall considerations The signifi cant accounting policies that have been used in the preparation of these consolidated fi nancial statements are summarised below. The consolidated fi nancial statements have been prepared using the measurement bases specifi ed by the Australian Accounting Standards for each type of asset, liability, in- come and expense. The measurement bases are more fully described in the following accounting policies. Basis of consolidation a. A controlled entity is any entity that Regeneus has the power to control the fi nancial and operating policies of the entity so as to obtain benefi ts from its activities. In assessing the power to govern, the existence and effect of holdings of actual and potential voting rights are considered. Consolidated Financial Statements for the Year Ended 30 June 2016 29 08 Notes to the Consolidated Financial Statements A list of controlled entities is contained in Note 4 to the fi nancial statements. All controlled entities have a June fi nancial year end. As at reporting date, the assets and liabilities of all controlled entities have been incorporated into the consolidated fi nancial statements as well as their results for the year then ended. All inter-Group balances and transactions between entities in the Group have been eliminated on consolidation. Segment reporting b. Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers’ (CODM). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. The Group’s operating segment is based on the internal reports that are reviewed and used by the Board of Directors (being the CODM) in assessing performance and determining the allocation of resources. In previous periods the Group reported segments of Human Health and Veterinary Health. This segregation of information provided no benefi t to the CODM. Reports provided to the CODM reference the Group operating in one segment, being the development of innovative cell-based therapies to address signifi cant unmet medical needs in human and veterinary health. Initial focus is osteoarthritis and other musculoskeletal disease as well as oncology and dermatology. The information reported to the CODM, on a monthly basis, is profi t or loss before tax, assets and liabilities and cash flow. c. Going concern basis of accounting The Group incurred a loss after income tax of $3,573,873 (2015: $6,606,521), had net cash outflows from operating activities of $2,253,244 (2015: $5,923,357) for the year ended 30 June 2016 and has accumulated losses of $27,940,042 as at 30 June 2016 (2015: $25,295,813). Notwithstanding the losses incurred and negative operating cash flows, the Directors have prepared the fi nancial statements on a going concern basis which contemplates continuity of normal activities and realisation of assets and settlement of liabilities in the normal course of business. As at 30 June 2016 Regeneus had positive net assets. Subsequent to year-end the Directors have put in place a short term funding facility of up to $2.0 million (obtained from a related party, see note 33 Subsequent Events) secured over the Federal Government’s R&D tax incentive and as a fi rst ranking charge over the Group’s property. Additionally, the Directors are expecting, by the end of Q1 FY17, that the Group will be well placed to enter into its fi rst signifi cant partnering agreement in Japan that provides upfront funding and future payments contributing to the Group’s funding requirements for the next 18 months. The Directors continue to have a number of additional strategies available to maintain the Group in a positive cash flow position including further product licensing, funding of R&D or raising additional capital, including issuance of securities. Should the above transactions or assumptions not materialise, there is material uncertainty whether the consolidated entity will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in these fi nancial statements. Comparative fi gures d. When required by accounting standards, comparative fi gures have been adjusted to conform to changes in the presentation for the current fi nancial year. Cash and cash equivalents e. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignifi cant risk of changes in value. Income tax f. The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income). Current and deferred income tax expense (income) is charged or credited directly to other comprehensive income instead of the profi t or loss when the tax relates to items that are credited or charged directly to other comprehensive income. Tax expense recognised in profi t or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Current income tax assets and/or liabilities comprise those obligations to, or claims from, the Australian Taxation Offi ce (ATO) and other fi scal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profi t. Deferred tax on temporary differences associated with investments in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognised to the extent that it is probable that they will be able to be utilised against future taxable income, based on the Group’s forecast of future operating results which is adjusted for signifi cant non-taxable income and expenses and specifi c limits to the use of any unused tax loss or credit. Deferred tax liabilities are always provided for in full. Consolidated Financial Statements for the Year Ended 30 June 2016 30 08 Notes to the Consolidated Financial Statements Deferred tax assets and liabilities are offset only when the Group has a right and intention to set off current tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognised as a component of tax income or expense in profi t or loss, except where they relate to items that are recognised in other comprehensive income (such as the revaluation of land) or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively. Inventories g. Inventories are measured at the lower of cost and net realisable value. The average cost method has been used to value inventory. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Plant and equipment h. Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and impairment losses. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of profi t or loss and other comprehensive income during the fi nancial period in which they are incurred. Depreciation i. The depreciable amount of fi xed assets are depreciated on either a straight line or reducing balance basis over their useful lives to the Consolidated entity commencing from the time the asset is held ready for use. Leased assets are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the assets. The depreciation rates generally used for each class of depreciable assets are: Class of fi xed asset Offi ce equipment straight line Laboratory equipment straight line Offi ce fi t-out straight line Leasehold improvements straight line Depreciation rate (%) 25% - 50% 20% - 30% life of lease 20% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting period date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in the statement of profi t or loss and other comprehensive income. Intangibles j. Intangible assets include acquired software. Intangible assets are accounted for using the cost model whereby capitalised costs are amortised on a reducing balance basis over their estimated useful lives, as these assets are considered fi nite. Amortisation commences from the date the asset is brought into use. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and install the specifi c software. Subsequent expenditure is expensed as incurred. Costs associated with maintaining intangibles are expensed as incurred. The amortisation rate used for acquired software is 25% straight line. The Group has reviewed its policy not to capitalise development costs unless they meet the criteria as set in AASB 138. All development costs not meeting these criteria are expensed. Impairment of non-fi nancial assets k. At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that the assets may be impaired. If any such indication exists, or when annual impairment testing for an asset is required (i.e. intangible assets with indefi nite useful lives and intangible assets not yet available for use), the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the asset’s value in use cannot be estimated to be close to its fair value. In such cases the asset is tested for impairment as part of the cash generating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash- generating unit is considered impaired and is written down to its recoverable amount. To determine the value-in-use, management estimates expected future cash flows from each asset or cash- generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each asset or cash-generating unit and reflect management’s assessment of respective risk profi les, such as market and asset-specifi c risks factors. Impairment losses relating to continuing operations are recognised in those expense categories consistent with the function of the impaired asset unless the asset is carried at revalued amount (in which case the impairment loss is treated as a revaluation decrease). Consolidated Financial Statements for the Year Ended 30 June 2016 31 08 Notes to the Consolidated Financial Statements Loans and receivables Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of fi nancial instruments. Individually signifi cant receivables are considered for impairment when they are past due or when other objective evidence is received that a specifi c counter-party will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which are determined by reference to the industry and region of a counter-party and other shared credit risk characteristics. The impairment loss estimate is then based on recent historical counter-play default rates for each identifi ed group. Financial liabilities The Group’s fi nancial liabilities include trade and other payables, and fi nance lease obligations. Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for fi nancial liabilities held for trading or designated at fair value through profi t or loss, that are carried subsequently at fair value with gains or losses recognised in profi t or loss. Equity and reserves o. Share capital represents the fair value of shares that have been issued. Any transaction costs associated with the issuing of shares are deducted from share capital, net of any related income tax benefi ts. Other components of equity include the following: • Option reserve. Comprises equity settled share-based remuneration plans for the Group’s employees • Retained earnings/(Accumulated losses) include all current and prior period retained profi ts/(losses) Employee benefi ts p. Short-term employee benefi ts Short-term employee benefi ts are benefi ts, other than termination benefi ts, that are expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. Examples of such benefi ts include wages and salaries, non-monetary benefi ts and accumulating sick leave. Short-term employee benefi ts are measured at the undiscounted amounts expected to be paid when the liabilities are settled. Leases l. Leases of fi xed assets where substantially all the risks and benefi ts incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the Group are classifi ed as fi nance leases. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefi ts remain with the lessor, are charged as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight line basis over the life of the lease term. Foreign currency transactions and balances m. Functional and presentation currency The functional currency of each entity is measured using the currency of the primary economic environment in which that entity operates. The consolidated fi nancial statements are presented in Australian dollars which is the consolidated entity’s functional and presentation currency. Transaction and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in the statement of profi t or loss and other comprehensive income. Financial instruments n. Financial assets and fi nancial liabilities are recognised when the Group becomes a party to the contractual provisions of the fi nancial instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the fi nancial asset expire, or when the fi nancial asset and all substantial risks and rewards are transferred. A fi nancial liability is de-recognised when it is extinguished, discharged, cancelled or expires. Financial assets and fi nancial liabilities are measured initially at fair value adjusted by transactions costs, except for fi nancial assets and fi nancial liabilities carried at fair value through profi t or loss, which are measured initially at fair value. Financial assets and fi nancial liabilities are measured subsequently as described. Consolidated Financial Statements for the Year Ended 30 June 2016 32 08 Notes to the Consolidated Financial Statements Other long-term employee benefi ts The Group’s liabilities for annual leave and long service leave are included in other long term benefi ts as they are not expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. They are measured at the present value of the expected future payments to be made to employees. The expected future payments incorporate anticipated future wage and salary levels, experience of employee departures and periods of service, and are discounted at rates determined by reference to market yields at the end of the reporting period on high quality corporate bonds that have maturity dates that approximate the timing of the estimated future cash outflows. Any re-measurements arising from experience adjustments and changes in assumptions are recognised in profi t or loss in the periods in which the changes occur. The Group presents employee benefi t obligations as current liabilities in the statement of fi nancial position if the Group does not have an unconditional right to defer settlement for at least twelve (12) months after the reporting period, irrespective of when the actual settlement is expected to take place. Post-employment benefi t plans The Group provides post-employment benefi ts through various defi ned contribution and defi ned benefi t plans. Defi ned contribution plans The Group pays fi xed contributions into independent entities in relation to several state plans and insurance for individual employees. The Group has no legal or constructive obligations to pay contributions in addition to its fi xed contributions, which are recognised as an expense in the period that relevant employee services are received. q. Provisions, contingent liabilities and contingent assets Provisions for product warranties, legal disputes, make good obligations, onerous contracts or other claims are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material. Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision. No liability is recognised if an outflow of economic resources as a result of present obligation is not probable. Such situations are disclosed as contingent liabilities, unless the outflow of resources is remote in which case no liability is recognised. r. Share-based employee remuneration The Group operates equity settled share-based remuneration plans for its employees. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the equity instruments granted. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example profi tability and sales growth targets and performance conditions). All share-based remuneration is ultimately recognised as an expense in profi t or loss with a corresponding credit to share option reserve. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs are allocated to share capital. Revenue s. Revenue is recognised when it is probable that economic benefi ts associated with the transaction will flow to the Consolidated Group. Revenue is measured at the fair value of the consideration received or receivable. Licence fee revenue is recognised on a straight line basis over the period that the licence covers. Revenue from the sale of goods is recognised at the point of delivery as this corresponds to the transfer of signifi cant risks and rewards of ownership of the goods and the cessation of all involvement in those goods. Revenue relating to the provision of services is recognised when the services are provided. Interest revenue is recognised using the effective interest rate method. All revenue is stated net of the amount of goods and services tax (GST). Consolidated Financial Statements for the Year Ended 30 June 2016 33 08 Notes to the Consolidated Financial Statements Share options and performance rights Share options were valued using a variation of the binomial option pricing model. Historical volatility has been the basis for determining expected share price volatility as it is assumed that this is indicative of future movements. For purposes of the valuation the assumed life of the options was based on the historical exercise patterns, which may not eventuate in the future. No special features inherent to the options granted were incorporated into measurement of fair value. Research and development claim x. The Group’s research and development activities are eligible expenditure under the Australian Government tax incentive. Management has assessed these activities and expenditures to determine which are likely to be eligible under the incentive scheme. At each period end, management estimates the refundable tax offset available to the Group based on current information. This estimate is also reviewed by external tax advisors. For the years ended 30 June 2016 and 2015, the Group has recognised income of $2.7 million and $3.4 million respectively. Refer note 6. Goods and services tax (GST) t. Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Offi ce. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of fi nancial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and fi nancing activities, which are disclosed as operating cash flows. u. Research and development Expenditure during the research phase of a project is recognised as an expense when incurred. The research and development tax incentive is calculated and accrued at year end and is recognised in accordance with ‘AASB 120 Accounting for Government Grants’. The amount is credited to other income and the receivable is included in the Consolidated Statement of Financial Position as a current tax asset. Operating expenses v. Operating expenses are recognised in profi t or loss upon utilisation of the service or at the date of their origin. Expenditure for warranties is recognised and charged against the associated provision when the related revenue is recognised. w. Signifi cant management judgements and estimates in applying accounting policies The Directors evaluate estimates and judgements incorporated into the fi nancial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data. When preparing the fi nancial statements, management undertakes a number of judgements, estimates and assumptions about the recognition and measurement of assets, liabilities, income and expenses. Estimation uncertainty Information about estimates and assumptions that have the most signifi cant effect on recognition and measurement of assets, liabilities, income and expense is provided over the page. Actual results may be substantially different. Useful lives of depreciable assets Management reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utility of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utility of certain software and IT equipment. Inventories Management estimates the net realisable values of inventories, taking into account the most reliable evidence available at each reporting date. Consolidated Financial Statements for the Year Ended 30 June 2016 34 08 Notes to the Consolidated Financial Statements 4. Controlled entities Set out below are details of the subsidiaries held directly by the Group. Name of the subsidiary Country of incorporation & principal place of business Principal activity Group proportion of ownership interests Regeneus Animal Health Pty Ltd Cell Ideas Pty Ltd Australia - 25 Bridge Street, Pymble NSW 2073 Non trading Australia - 25 Bridge Street, Pymble NSW 2073 Non trading - owns various IP Regeneus South East Asia Pte Ltd - incorporated on 24th February 2014 Singapore - 4 Sussex Gardens, Singapore No longer trading 30 June 2016 30 June 2015 100% 100% 100% 100% 100% 100% Regeneus South East Asia Pte Ltd was dormant throughout FY16 and struck off 17 March 2016. 5. Segment reporting Identifi cation of reportable income segments The Group’s operating segment is based on the internal reports that are reviewed and used by the Board of Directors (being the Chief Operating Decision Makers (CODM)) in assessing performance and in determining the allocation of resources. Following a reassessment of the information provided to the CODM, it has been concluded that the Group operates in only one segment, being the development of innovative cell-based therapies to address signifi cant unmet medical needs in human and veterinary health. Comparative information has been restated in line with the current operating segment. The segment result is as shown in the statement of profi t or loss and other comprehensive income. Refer to statement of fi nancial position for assets and liabilities. 6. Revenue 2016 $ 2015 $ Operating activities Licence fee income 1,218,896 Income from sale of goods Interest received Total revenue Other income Grant income 516,566 142,297 900,000 920,353 240,741 1,877,759 2,061,094 - 80,479 R&D tax incentive 2,732,110 3,417,566 Other income: Gain on sale of property, plant and equipment 14,833 - Total other income 2,746,943 3,498,045 Consolidated Financial Statements for the Year Ended 30 June 2016 35 08 Notes to the Consolidated Financial Statements 7. Results for the year 9. Trade and other receivables The results for the year have been arrived at after charging the following items: Trade and other receivables consist of the following: a. Expenses Cost of sales Rental expense on operating leases - minimum lease payment 2016 $ 2015 $ 291,743 915,399 343,251 621,987 Amortisation of intangible assets 14,856 18,732 Depreciation 335,903 385,983 Loss on disposal of assets 148 270,468 Employment expenses (excludes share-based payment) 2,578,156 4,737,554 Superannuation expense 246,472 357,278 Share-based payments 86,479 403,882 b. Finance costs - Interest expense - Bank charges 14,597 5,302 22,397 33,049 Total fi nance costs 19,899 55,446 Trade receivables Total trade and other receivables 2016 $ 21,774 21,774 2014 $ 66,571 66,571 All amounts are short term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. All of the Group’s trade and other receivables have been reviewed for indicators of impairment of which none were noted. 10. Inventories Inventories consist of the following: Raw materials and consumables at cost Less: Provisions Total inventories 2016 $ 2015 $ 76,076 144,975 (46,000) (46,000) 30,076 98,975 2016 $ 2015 $ 8. Cash and cash equivalents 11. Current tax asset Cash and cash equivalents include the following components: 2016 $ 2015 $ Current Cash on hand 38 163 Cash at bank (AUD account) 459,141 3,011,862 Cash at bank (USD account) Cash at bank (SGD account) 69,391 - - 787 Total cash and cash equivalents 528,570 3,012,812 R&D tax refund receivable 2,732,110 3,417,566 Total current tax asset 2,732,110 3,417,566 12. Other current assets Other current assets Prepayments Security deposits GST receivable Other receivables 2016 $ 2015 $ 32,799 52,804 74,377 30,074 71,970 368,743 77,937 13,808 Total other current assets 190,054 532,458 Consolidated Financial Statements for the Year Ended 30 June 2016 36 08 Notes to the Consolidated Financial Statements 13. Plant and equipment Details of the Group’s property, plant and equipment and their carrying amounts are as follows: Gross carrying amount Balance 1 July 2015 Additions Disposals Balance 30 June 2016 Depreciation and impairment Balance 1 July 2015 Disposals Depreciation Offi ce equipment $ Lab equipment $ Equipment in clinics $ Offi ce fi tout $ Total $ 108,051 352,879 106,142 972,265 1,539,337 3,995 (982) 49,275 (2,958) - 196,400 249,670 (3,225) - (7,165) 111,064 399,196 102,917 1,168,665 1,781,842 (71,010) (239,658) (54,516) (282,270) (647,454) 102 1,700 1,275 - 3,077 (19,699) (58,435) (22,514) (235,255) (335,903) Balance 30 June 2016 (90,607) (296,393) (75,755) (517,525) (980,280) Carrying amount 30 June 2016 20,457 102,803 27,162 651,140 801,562 Gross carrying amount Balance 1 July 2014 Additions Disposals Balance 30 June 2015 Depreciation and impairment Balance 1 July 2014 Disposals Depreciation 204,176 415,509 317,852 972,265 1,909,802 17,477 36,326 13,825 125,389 193,017 (113,602) (98,956) (225,535) (125,389) (563,482) 108,051 352,879 106,142 972,265 1,539,337 (116,537) (228,344) (109,302) (94,090) (548,273) 83,121 67,397 136,284 - 286,802 (37,594) (78,711) (81,498) (188,180) (385,983) Balance 30 June 2015 (71,010) (239,658) (54,516) (282,270) (647,454) Carrying amount 30 June 2015 37,041 113,221 51,626 689,995 891,883 The Company exercised an option to acquire the fi t-out premises at the end of the fi nance lease in January 2016 for $150,000. Consolidated Financial Statements for the Year Ended 30 June 2016 37 08 Notes to the Consolidated Financial Statements 14. Intangible assets Included within the shareholder loan are balances owing by the Directors as follows: Details of the Group’s intangible assets and their carrying amounts are as follows: Acquired software licenses $ Total $ John Martin Graham Vesey 2016 $ 295,925 150,552 2015 $ 295,925 150,552 Gross carrying amount Balance at 1 July 2015 82,561 82,561 Addition, separately acquired - - 16. Trade and other payables Trade and other payables consists of the following: Current Trade payables Accruals PAYG payable 2016 $ 2015 $ 539,430 453,349 188,100 256,096 178,782 71,656 Total trade and other payables 906,312 781,101 All amounts are short term and the carrying values are considered to be a reasonable approximation of fair value. 16.1 Foreign currency risk The carrying amount of trade and other payables denominated in the foreign currencies is: US dollar GBP 2016 $ 59,875 - 2015 $ 67,878 13,412 Balance at 30 June 2016 Amortisation and impairment Balance at 1 July 2015 (56,451) (56,451) Amortisation (14,856) (14,856) Balance at 30 June 2016 Carrying amount 30 June 2016 71,307 11,254 71,307 11,254 Gross carrying amount Balance at 1 July 2014 Addition, separately acquired 67,720 14,841 67,720 14,841 Balance at 30 June 2015 82,561 82,561 Amortisation and impairment Balance at 1 July 2014 (37,719) (37,719) Amortisation (18,732) (18,732) Balance at 30 June 2015 (56,451) (56,451) Carrying amount 30 June 2015 26,110 26,110 15. Other non-current assets Non-current Shareholder loan Security deposits 2016 $ 2015 $ 1,409,307 1,322,031 210,000 210,000 Other non-current assets - 855 Total other non-current assets 1,619,307 1,532,886 The shareholder loan is a full recourse, interest free, loan for 4 years, maturing July 2017. Consolidated Financial Statements for the Year Ended 30 June 2016 38 08 Notes to the Consolidated Financial Statements 17. Provisions 18. Other liabilities 2016 $ 2015 $ 2016 $ 2015 $ Current: Annual leave Current Opening balance 1 July 109,868 167,751 Deferred income Benefi ts accrued (expensed) (10,595) (57,883) Lease liability Balance as at 30 June 99,273 109,868 Total other current liabilities - - - 115,200 253,370 368,570 Non-current: Long service leave Opening balance 1 July Benefi ts accrued Balance as at 30 June Non-current: Make good Opening balance 1 July Provision accrued Balance as at 30 June 47,588 46,594 94,182 - 50,300 50,300 - 47,588 47,588 - - - Total non-current provisions 144,482 47,588 During the current fi nancial year a provision for the estimated cost for the make good of the operating lease was recorded. The provision relates to the expected future cost and is based on management’s best estimate of the cost to restore the leased premises to their agreed pre-fi tout state at the expiration of the lease agreement. Consolidated Financial Statements for the Year Ended 30 June 2016 39 08 Notes to the Consolidated Financial Statements 19. Equity 19.1 Share capital The share capital of Regeneus Ltd consists only of fully paid ordinary shares; the shares do not have a par value. All shares are equally eligible to receive dividends and the repayment of capital, and represent one vote at the shareholders’ meeting of Regeneus Ltd. Shares issued and fully paid Beginning of the year Shares issued 2016 shares 2015 shares 2016 $ 2015 $ 208,885,143 184,393,077 31,076,819 24,908,920 - 24,492,066 - 6,167,899 Closing balance at the end of the year 208,885,143 208,885,143 31,076,819 31,076,819 During 2016, no shares or options were issued. The 3,846,154 unlisted options issued during 2015 expired on 15 August 2015. In 2015, 24,492,066 shares at $0.26 and 3,846,154 unlisted options at $0.40, were issued as part of a capital raising program. Issue costs (2015: $200,056) associated with the issue of shares have been directly paid from the proceeds of the issues. These costs have been deducted from the issued capital in the statement of fi nancial position, rather than charged as an expense of the Group, as they are considered to form part of the net equity raised. 19.2 Reserves The details of reserves are as follows: Share option reserve $ Foreign currency translation reserve $ Total reserves $ Balance at 30 June 2014 Share options expense Options exercised Transfer from reserves to retained earnings for options forfeited 2,190,377 403,882 - (103,131) - - - 1,154 2,191,531 Foreign currency translation Balance at 30 June 2015 Share options expense Options exercised Transfer from reserves to retained earnings for options forfeited Foreign currency translation Balance at 30 June 2016 - (1,154) 2,491,128 86,479 - (953,041) - 1,624,566 - - - - - - 403,882 - (103,131) (1,154) 2,491,128 86,479 - (953,041) - 1,624,566 Consolidated Financial Statements for the Year Ended 30 June 2016 40 08 Notes to the Consolidated Financial Statements 20. Employee remuneration 20.1 Share-based employee remuneration As at 30 June 2016 the Group maintained share-based option plans as part of employee remuneration. Share options and weighted average exercise prices are as follows for the reporting periods presented. Share options Employee share option plan Option share trust Total share options Number Weight avg exercise price $ Number Weighted avg exercise price $ Number Weight avg exercise price $ Outstanding at 1 July 2014 Granted Forfeited Exercised Outstanding at 30 June 2015 Granted Forfeited Exercised Outstanding at 30 June 2016 Exercisable at 30 June 2015 Exercisable at 30 June 2016 7,542,755 0.18 7,922,110 0.25 15,464,865 - - 900,000 (300,000) 0.28 (500,000) - - - 0.16 0.25 - 900,000 (800,000) - 7,242,755 0.17 8,322,110 0.24 15,564,865 - - - - - (4,508,921) 0.18 (1,383,900) 0.25 (5,892,821) - - - - - 2,733,834 0.16 6,938,210 0.24 9,672,044 7,242,755 0.17 7,087,110 0.25 14,329,865 2,733,834 0.16 6,138,210 0.25 8,872,044 0.21 0.16 0.26 - 0.21 - 0.20 - 0.22 0.21 0.22 The fair value of options granted under the Option share trust was determined using a variation of the binomial option pricing model. The weighted average share price at the date of exercise was $0.16 Other details of options currently outstanding: • The range of exercise prices is $0.136 to $0.28 • The weighted average remaining contractual life is 4 years Consolidated Financial Statements for the Year Ended 30 June 2016 41 08 Notes to the Consolidated Financial Statements The following principal assumptions were used in the valuation: Valuation assumptions Grant date Share price at date of grant Volatility Option life Dividend yield Risk free investment rate Fair value at grant date Exercise price at date of grant Grant date Share price at date of grant Volatility Option life Dividend yield Risk free investment rate Fair value at grant date Exercise price at date of grant 1 Jul. 2010 1 Jan. 2011 21 Feb. 2011 1 Jul. 2011 $0.136 45% $0.136 45% $0.136 45% $0.280 45% 10 years 10 years 10 years 10 years 0% 5.10% $0.085 $0.136 0% 5.60% $0.086 $0.136 0% 5.60% $0.085 $0.136 0% 5.30% $0.180 $0.280 16 Sept. 2013 4 Dec. 2013 21 Nov. 2014 $0.250 65% 5 years 0% 3.40% $0.156 $0.250 $0.470 65% 5 years 0% 3.50% $0.327 $0.250 $0.160 244% 5 years 0% 2.80% $0.179 $0.160 In total, $86,479 (2015:$403,882), of employee remuneration expense (all of which related to equity settled share-based payment transactions) has been included in profi t or loss and credited to share option reserve. Volatility has been determined based on the historic share price volatility as it is assumed that this is indicative of future movements. Option life is based on the nominated expiry date of the option and historical exercise patterns, which may not eventuate in the future. Consolidated Financial Statements for the Year Ended 30 June 2016 42 08 Notes to the Consolidated Financial Statements 21. Leasing 21.1 Operating leases as lessee In November 2013 the Group entered a 5 year 4 month operating lease for its offi ce and production facilities. The lease payments are secured by a cash deposit of $210,000. The future minimum lease payments are as follows: 30 June 2016 30 June 2015 21.2 Finance lease Minimum lease payments due Within 1 year $ 1-5 years $ After 5 years $ 263,596 249,940 502,963 766,559 - - Total $ 766,559 1,016,499 The Group entered into a 2 year fi nance lease for the fi t out of the new offi ces and laboratories. During December 2015 the lease was fi nalised with the payment of a $150,000 option fee. As of 30 June 2016, the net carrying amount of these assets is $651,140 (2015: $689,995). 30 June 2016 Lease payments Finance charges Total lease liabilities 30 June 2015 Lease payments Finance charges Total lease liabilities Minimum lease payments due Within 1 year $ 1-5 years $ After 5 years $ Total $ - - - 254,888 (1,517) 253,371 - - - - - - - - - - - - - - - 254,888 (1,517) 253,371 Consolidated Financial Statements for the Year Ended 30 June 2016 43 08 Notes to the Consolidated Financial Statements 22. Income tax expense The major components of tax expense and the reconciliation of the expected tax expense based on the domestic effective tax rate of Regeneus Ltd at 30% (2015: 30%) and the reported tax expense in profi t or loss are as follows: The prima facie tax on loss before income tax is reconciled to the income tax as follows Prima facie tax receivable on loss before income tax at 30% (2015: 30%) (1,072,161) (1,981,956) 2016 $ 2015 $ Add: Tax effect of: - Research and development incentive - Tax losses not brought to account - Non-deductible expenses - Other non-allowable items Less: Tax effect of: Other allowable items Income tax benefi t The applicable weighted average effective tax rates are as follows: Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefi t of 30% 23. Auditor’s remuneration Audit and review of fi nancial statements - Auditors of Regeneus Ltd - Auditors of Regeneus South East Asia Pte Ltd1 Remuneration for audit and review of fi nancial statements Other services Other services Other services - Regeneus South East Asia Pte Ltd1 Total other service remuneration Total auditor’s remuneration (819,633) (1,025,270) 1,795,806 3,013,653 180,672 18,149 198,787 (72,071) (102,833) (133,143) - 0% - 0% 2016 $ 2015 $ 8,603,798 8,409,456 2,581,139 2,522,837 2016 $ 2015 $ 87,750 - 87,750 - - - 89,025 5,326 94,351 1,600 5,457 7,057 87,750 101,408 1 These fees relate to the auditor services of Regeneus South East Asia Pte Ltd undertaken by Foo Kon Tan LLP (FKT). In respect of 2015 fees, FKT is not affi liated with Grant Thornton Audit Pty Ltd. Consolidated Financial Statements for the Year Ended 30 June 2016 44 08 Notes to the Consolidated Financial Statements 24. Earnings per share Both the basic and diluted earnings per share have been calculated using the loss attributable to shareholders of the Parent Company as the numerator (i.e. no adjustments to the loss were necessary in 2016 or 2015). The reconciliation of the weighted average number of shares for the purposes of diluted earnings per share to the weighted average number of ordinary shares used in the calculation of basic earnings per share is as follows: Earnings per share Basic earnings per share from continuing operations (0.017) (0.032) The weighted average number of ordinary shares used as the denominator on calculating the EPS 208,885,143 204,732,440 Diluted earnings per share Diluted earnings per share from continuing operations (0.017) (0.032) The weighted average number of ordinary shares used as the denominator on calculating the DEPS 208,885,143 204,732,440 2016 $ 2015 $ Share options have not been included in the diluted EPS calculation because they are anti-dilutive. 25. Reconciliation of cash fl ows from operating activities Reconciliation of cash flows from operating activities Cash flows from operating activities Loss for the period Non cash adjustments for: • Depreciation • Amortisation • Loss on disposal of plant and equipment • Profi t on disposal of plant and equipment • Equity settled share based transactions • Unwinding of shareholder loan • Unrealised foreign exchange movement Net changes in working capital: • Change in inventories • Change in trade and other receivables • Change in other assets • Change in trade and other payables • Change in other employee obligations • Change in tax assets • Change in other liabilities • Change in provisions Net cash outflow from operating activities 2016 $ 2015 $ (3,573,873) (6,606,521) 335,903 14,856 148 (14,833) 86,479 (87,276) - 68,899 44,798 343,259 18,085 107,126 685,456 385,983 18,732 270,468 (2,027) 403,884 (87,276) (1,154) 106,734 67,695 (148,986) (15,930) (123,973) 313,010 (368,570) (493,701) 86,299 (10,295) (2,253,244) (5,923,357) Consolidated Financial Statements for the Year Ended 30 June 2016 45 08 Notes to the Consolidated Financial Statements 26. Related party transactions and loans 29. Capital expenditure commitments During the period the Group used consulting services of companies in which a Director has a shareholding. There were no capital commitments as at the 30 June 2016 (30 June 2015: $Nil). Related party transactions 2016 $ 2015 $ Channel Group Pty Ltd Marketing and consulting services (John Martin) Total paid to related parties Related party loan receivable John Martin Graham Vesey - - 11,375 11,375 2016 $ 2015 $ 295,925 295,925 150,552 150,552 30. Financial instruments Capital risk management a. The Group’s fi nancial instruments consist mainly of deposits with banks, accounts receivable, deposits, shareholder loans, accounts payable and fi nancial liabilities. Categories of fi nancial instruments b. The total for each category of fi nancial instrument, measured in accordance with AASB 139 as detailed in the accounting policies to these fi nancial statement, are as follows: Total related parties loans 446,477 446,477 Financial assets 2016 $ 2015 $ These loans relate to the shareholder loan, the terms of which are disclosed in note 15. 27. Transactions with key management personnel Key management personnel remuneration includes the following expenses: Salaries Bonuses Total short term employee benefi ts Defi ned contribution pension plans Other long term benefi ts 2016 $ 2015 $ 665,883 734,990 - 290,000 665,883 1,024,990 51,740 31,248 58,939 2,719 Share based payments - 124,648 Total remuneration 748,871 1,211,296 During the year, no options were exercised. Disclosures relating to key management personnel are set out in this note and the remuneration report in the Directors’ report. 28. Contingent liabilities The Group had no contingent liabilities as at 30 June 2016 (30 June 2015: $nil). Trade and other receivables 21,774 66,571 Cash and cash equivalents 528,670 3,012,812 Total fi nancial assets 550,444 3,079,383 Financial liabilities 2016 $ 2015 $ Trade and other payables 906,312 781,101 Total fi nancial liabilities 906,312 781,101 Financial risk management objectives c. The Group is exposed to various risks in relation to fi nancial instruments. The main types of risks are foreign currency risk, credit risk and liquidity risk. The Group’s risk management is coordinated in close operation with the Board of Directors, and focuses on actively securing the Group’s short to medium term cash flows by minimising the exposure to fi nancial markets. The Group does not actively engage in the trading of fi nancial assets for speculative purposes. The most signifi cant fi nancial risks to which the Group is exposed are described below. Foreign exchange risk d. Foreign exchange risk is the risk of an adverse impact on the Group’s fi nancial performance as a result of exchange rate volatility. Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Consolidated Financial Statements for the Year Ended 30 June 2016 46 08 Notes to the Consolidated Financial Statements The Group is exposed to foreign exchange risk arising primarily from transactions with foreign suppliers and the effect of foreign exchange rate volatility on a US denominated bank account, balance at 30 June 2016 US$52,000 (30 June 2015: $Nil). Other exposure to currency risk arises from foreign currency transactions and is limited to trade payables. The Group does not frequently transact with foreign suppliers and the total balance of trade payables denominated in a foreign currency is not material, therefore the Group’s exposure is minimal. Management have assessed the risk of movement in interest rates, and foreign exchange, and do not believe the impact would be material to the accounts. Liquidity risk analysis e. Liquidity risk is risk that the Group might be unable to meet its obligations. The Group manages its liquidity needs by monitoring forecast cash inflows and outflows due in day-to- day business. The data used for analysing these cash flows is consistent with that used in the contractual maturity analysis below. Liquidity needs are monitored in a rolling 365 day projection. The Group’s objective is to maintain cash and deposits to meet its liquidity requirements for 180 day periods at a minimum. This objective was met for the reporting periods. The Group considers expected cash flows from fi nancial assets in assessing and managing liquidity risk in particular its cash resources and trade receivables. As at 30 June 2016 the Group’s non-derivative fi nancial liabilities have contractual maturities (including interest payments where applicable) as summarised below: g. Capital management policies and procedures The Group’s capital management objectives are: • To ensure the Group’s ability to continue as a going concern; and • To provide an adequate return to shareholders; The Group monitors capital on the basis of the carrying amount of equity less cash and cash equivalents as presented on the face of the statement of fi nancial position and cash flow. Management assesses the Group’s capital requirements in order to maintain an effi cient overall fi nancing structure while avoiding excessive leverage. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. 31. Fair value measurement Fair value hierarchy The Group’s assets and liabilities measured or disclosed at fair value are valued using a three level hierarchy, based on the lowest level of input that is signifi cant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability 2016 $ 2015 $ Current within 6 months Current within 6 months All assets and liabilities are considered to be Level 1 and their carrying values are considered to approximate fair value. There were no transfers between levels during the fi nancial year. Trade and other payables Total fi nancial liabilities 906,312 906,312 781,101 781,101 Credit risk f. Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in a fi nancial loss to the Group. Credit risk arises from cash and cash equivalents, deposits with banks and fi nancial institutions, as well as credit exposure to customers, including outstanding receivables and committed transactions. The Group has adopted a policy of only dealing with creditworthy counter parties as a means of mitigating the risk of fi nancial loss from defaults. There are no signifi cant concentrations of credit risk within the Group. Consolidated Financial Statements for the Year Ended 30 June 2016 47 08 Notes to the Consolidated Financial Statements 32. Parent entity information Set out below is the supplementary information about Regeneus Ltd, the parent entity. 2016 $ 2015 $ Statement of fi nancial position Current assets Total assets 3,502,584 7,127,495 5,934,707 9,579,341 Current liabilities 1,005,585 1,259,539 Total liabilities Net assets Issued capital 1,150,067 1,307,127 4,784,640 8,272,214 31,076,819 31,076,819 Retained earnings (27,916,747) (25,295,733) Option reserve Total equity 1,624,568 2,491,128 4,784,640 8,272,214 Statement of profi t or loss and other comprehensive income Loss for the year (3,573,873) (6,693,670) Other comprehensive income - - Total comprehensive loss (3,573,873) (6,693,670) 33. Subsequent events In the period since 30 June 2016 to the signing of the fi nancial report, a material loan facility has been secured. The details of this arrangement are as follows: On July 1 2016, the company entered into an R&D funding arrangement with Sherman Group Pty Ltd, a related party. The facility forward funds, via a loan, the Federal Government’s research and development tax incentive for FY16. The loan is secured over the tax incentive receipt and as a fi rst ranking charge over the Group’s property. The facility allows the company to draw down the lower of $2.0 million or 80% of the anticipated claim. At the time of implementing the facility, the R&D incentive was estimated at $2.5 million. The claim has now been lodged at $2.73 million. At the date of this report, $750k of the facility has been drawn down and depending upon the timing of the tax incentive, another $750k is anticipated as being drawn down. Full repayment of the loan is anticipated to be completed by the end of September. Apart from the above, there are no other matters or circumstances that have arisen since the end of the year that have signifi cantly affected or may signifi cantly affect either the entity’s operations in future fi nancial years, the results of those operations in future fi nancial years or the entity’s state of affairs in future fi nancial years. Consolidated Financial Statements for the Year Ended 30 June 2016 48 09 Directors’ Declaration Directors’ declaration 1. In the opinion of the Directors of the Group: a. The consolidated fi nancial statements and notes are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of its fi nancial position as at 30 June 2016 and of its performance for the fi nancial year ended on that date; and ii. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and b. There are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive offi cer and chief fi nancial offi cer for the fi nancial year ended 30 June 2016. 3. Note 2 confi rms that the consolidated fi nancial statements also comply with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: CEO and Executive Director John Martin Dated this day 24 August 2016 Consolidated Financial Statements for the Year Ended 30 June 2016 49 Independent Auditor’s Report10Consolidated Financial Statements for the Year Ended 30 June 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Independent Auditor’s Report10Consolidated Financial Statements for the Year Ended 30 June 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Independent Auditor’s Report10Consolidated Financial Statements for the Year Ended 30 June 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11 ASX Additional Information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information is effective 19 August 2016. Ordinary shares Twenty largest shareholders Number held % of issued shares Corporate governance statement In accordance with the ASX principles and recommendations, Regeneus Ltd’s corporate governance statements can be reviewed on the Company website, at: regeneus.com.au/investor-centre/corporate-governance HSBC Custody Nominees (Australia) Limited 16,603,742 Vesey Investments Pty Ltd 14,399,642 Dr. Marc Ronald Wilkins 8,659,769 Thomas Georg Mechtersheimer 7,909,687 7.95 6.89 4.15 3.79 3.38 1.84 1.80 1.39 1.30 1.08 1.08 1.06 0.96 0.95 0.93 0.89 0.85 0.75 0.74 0.72 Dr. Benjamin Ross Herbert Tony Batterham John Martin Pierre Frederic Malou SMC Capital Pty Ltd Parros Pty Ltd George Miklos J P Morgan Nominees Australia Limited MLB Holdings Pty Ltd 7,056,712 3,850,500 3,759,682 2,905,542 2,716,726 2,259,136 2,255,038 2,211,205 2,000,000 Sayers Investment (ACT) Pty Ltd 1,988,543 Bacau Pty Ltd Rose Martin Mrs. Ciara Yvonne Kelly and Mr. Paul Dominic Kelly Dr. Michael Muller Duncan Thomson & Donna Thomson Dr. Terence Cecil Vardy & Mrs. Belinda Jane Vardy Total Balance of register 1,940,732 1,863,642 1,774,512 1,571,896 1,534,183 1,507,692 88,768,581 120,116,562 42.50 57.50 Grand total 208,885,143 100.00 Substantial shareholders The number of substantial shareholders and their associates are set out below: Shareholder Vesey Investments Voting rights Number of shares 14,399,642 Ordinary shares On a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options No voting rights. Distribution of equity security holders Holding Shares Options 100,001 and over 173,969,245 9,622,044 10,001 to 100,000 31,739,572 50,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 2,257,765 902,553 16,008 - - - 208,885,143 9,672,044 Securities exchange Unmarketable parcels 331,159 Buy back of shares There is no buy back of shares on offer. The Company was listed on the Australian Securities Exchange on the 19 September 2013 Cash Usage Unissued equity securities Options issued under the options plans total 9,672,044. Since listing on the ASX on 19 September 2013, the Group has used its cash and assets in a form readily converted to cash that it had at the time of admission to the offi cial list of ASX in a manner consistent with its business objectives. Consolidated Financial Statements for the Year Ended 30 June 2016 53 Corporate Directory Registered Offi ce and Principal Place of Business 25 Bridge Street Pymble, NSW 2073, Australia Board of Directors Dr. Roger Aston (Non-executive Chairman) John Martin (Chief Executive Offi cer) Professor Graham Vesey (Executive Director) Barry Sechos (Non-executive Director) Dr. Glen Richards (Non-executive Director) Company Secretary Sandra McIntosh Website regeneus.com.au Lawyers Dibbs Barker Level 8, 123 Pitt Street Sydney NSW 2000 Auditors Grant Thornton Audit Pty Ltd Level 17, 383 Kent Street Sydney NSW 2000 Patent Attorneys Spruson & Ferguson Level 35, 31 Market Street Sydney, NSW 2000 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney, NSW 2000 Stock Exchange Listing Australian Stock Exchange ASX Code: RGS Consolidated Financial Statements for the Year Ended 30 June 2016 54 Regeneus Ltd ABN 13 127 035 358 25 Bridge Street Pymble, NSW 2073 Ph: Fax: +61 2 9499 8010 +61 2 9499 8020 Regeneus Ltd (ASX: RGS) is an Australian clinical-stage regenerative medicine company using stem cell and immuno-oncology technologies to develop a portfolio of cell-based therapies to address signifi cant unmet medical needs in the human and animal health markets with a focus on osteoarthritis and other musculoskeletal disorders, oncology and dermatology diseases. The company is focused on unlocking value in its clinical-stage human and animal pipeline products through generating positive clinical data, technology development and partnering.