Regis
Annual Report 2017

Plain-text annual report

Annual Report 2017 The Annual General Meeting of Regeneus Ltd will be held in the offices of Grant Thornton, Level 17, 383 Kent Street Sydney on Thursday 2 November 2017 at 1.00 pm. Who we are Regeneus Ltd (ASX: RGS) is an ASX-listed clinical-stage regenerative medicine company developing a portfolio of cell-based therapies to address significant unmet medical needs in the human and animal health markets. Our initial focus is on osteoarthritis (OA) and other musculoskeletal disorders, cancer and dermatology. Our product pipeline is underpinned by proprietary stem cell and immuno-oncology technologies that seek to take advantage of the body’s capability for healing and repair and address the underlying causes of disease. More information about Regeneus Ltd can be found at regeneus.com.au 2 • Contents Directors’ report Auditor’s independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report ASX additional information 3 • 11 21 23 24 25 26 27 47 48 50 Highlights for FY17 Successful Progenza STEP trial results for osteoarthritis • Primary endpoint of safety and tolerability met • Significant, rapid and sustained reduction in knee pain in both Progenza cohorts • Significant improvement in cartilage volume compared to placebo • Positive signs of disease modification consistent with preclinical results • Positive clinical data and AGC collaboration supports Progenza licensing opportunities for OA and other indications in Japan and ROW Progress on ACTIVATE cancer vaccine trial • Recruitment across all 3 dose cohorts • Positive safety profile across all dose cohorts • Ongoing banking of tumours • Commenced preclinical study for RGSH4K in combination with PD-1 4 • Collaboration with Asahi Glass Co., Ltd. (AGC) on Progenza for Japan • Collaboration with AGC of Japan, a leading manufacturer of biopharmaceuticals, for exclusive manufacture of Progenza stem cell technology for Japan • RGS to receive US$16.5m in payments – US$5.5m paid upfront; US$1m paid on successful completion of STEP trial for OA; and 2 further payments of US$5m each payable on development milestones • AGC acquires 50% of RGS Japan Inc., which has exclusive rights for the clinical development and commercialisation of Progenza for all indications in Japan Key patents granted • Patent allowed in Japan covering Progenza technology – allogeneic stem cells and secretions for the treatment of osteoarthritis and other inflammatory conditions in humans and animals • Patent allowed in EU, USA and China covering Sygenus stem cell secretions technology for the topical treatment of acne • 56 patents or patent applications across 14 patent families Progress on animal health trials • Ongoing recruitment for CryoShot pre-pivotal trial for OA at University of Pennsylvania • Completed a successful Kvax study for treatment of canine osteosarcoma with VCA in USA showing Kvax is well tolerated and confers increased progression free interval and survival • Ongoing recruitment for Kvax cancer vaccine trial for B cell lymphoma at Sydney Small Animal Specialist Hospital Financial highlights • Licence fee revenues up 715% to $9.9m (FY16: $1.2m) driven by A$8.9m (US$6.5m) received from AGC • Profit of $3.3m up from prior year (FY16: $3.6m loss) • R&D tax incentive of $2.6m in line with prior year (FY16: $2.7m) • Quarterly cash used in operations (excluding R&D incentive) maintained at $1.7m (FY16: $1.5m per quarter) • 30 June cash available $4.1m (FY16: $0.5m) Letter from the Chairman and the CEO Strategic collaboration with AGC in Japan On 29 December 2016, we were delighted to announce a strategic collaboration and licensing agreement with AGC of Japan, a leading global manufacturer of biopharmaceuticals. Under the collaboration, AGC has exclusive rights to manufacture Progenza for all clinical applications in Japan and is responsible for the GMP manufacture of Progenza for a planned phase 2 trial in Japan. AGC has acquired a 50% interest in Regeneus Japan Inc., a vehicle that has the exclusive rights for the clinical development and commercialisation of Progenza in Japan. AGC will work closely with Regeneus to help secure the best clinical and commercialisation partners. Under the agreement, Regeneus is entitled to receive US$16.5m from AGC. US$5.5m was paid upfront in January this year and a further US$1m was paid in June for the successful completion of the STEP trial. There are 2 further development milestones totalling US$10m. We look forward to meeting the next milestone in this financial year. About AGC Group (TYO: 5201) ASAHI GLASS CO., LTD. (AGC), Headquarters: Tokyo, President & CEO: Takuya Shimamura AGC is a world-leading glass solution provider and supplier of flat, automotive and display glass, chemicals, biopharmaceuticals, ceramics and other high-tech materials and components. With more than a century of technical innovation, and cutting-edge products AGC Group employs over 50,000 people worldwide and generates annual sales of approximately 1.3 trillion Japanese Yen through businesses in about 30 countries. Dear Shareholders, On behalf of the Board of Directors, we are pleased to report on the progress we have made during the financial year ending 30 June 2017. During the period, we achieved significant licensing, clinical, intellectual property and commercial milestones that position the company to unlock significant value in the business over the next 12 months. Progenza – unlocking significant value in our stem cell technology platform About Progenza PROGENZA is the company’s lead cell therapy technology platform 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 (fat) tissue and contains the bioactive secretions of the cells. Progenza cells work by secreting cytokines, growth factors and exosomes to reduce inflammation and pain and promote 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. 5 • Consolidated Financial Statements for the Year Ended 30 June 2017 About Osteoarthritis OSTEOARTHRITIS continues to be an unmet medical need and is a significant global concern due to wear and tear on joints for ageing populations. Worldwide, osteoarthritis is estimated to be the fourth leading cause of disability. There is no cure for the debilitating disease and non-steroidal anti-inflammatory medication is the most common treatment for the pain symptoms although they can have adverse effects with over use. Stem cell products, such as Progenza, may address the treatment gap for patients who have persistent joint pain and are seeking to delay or avoid total knee replacement. Positive results from Phase 1 STEP trial for Progenza for osteoarthritis We were pleased to announce on 22 May positive results from the Phase 1 safety trial of Progenza in patients with knee osteoarthritis (OA), meeting the primary endpoint of safety and tolerability. The study showed that a single injection into the knee of either dose of Progenza (3.9 million cells or 6.7 million cells) in patients appeared safe and was well tolerated. We were also pleased to confirm that Progenza showed durable and clinically meaningful pain relief in patients with knee OA. No serious adverse events occurred and a single injection of Progenza was well tolerated. No trends or findings of concern were identified from the data collected from patients’ blood tests, physical examinations, ECG’s, or other safety measurements, indicating Progenza is safe and well tolerated. Secondary endpoints were assessed to explore the efficacy of Progenza. We were pleased to find that patients treated with either dose of Progenza showed a statistically significant within group reduction in pain. On the contrary, the placebo group showed no statistically significant reduction in pain during the study. Examination of knee joint structure by MRI showed a statistically significant improvement in lateral tibial cartilage volume for patients treated with 3.9 million cells compared to a worsening in placebo patients. This builds on previously reported Regeneus preclinical findings in an OA model in rabbits which showed that Progenza treated joints showed no deterioration from the time of Leading Sydney-based sports medicine specialist, Dr Donald Kuah, the Principal Investigator on the trial said “This study confirms a benign safety profile for Progenza when given as an intra-articular injection. Progenza significantly reduced pain, and in the majority of patients, Progenza alleviated pain to clinically meaningful levels, defined as 30% or more reduction from baseline. The same pain reduction was not seen in the placebo group. The beneficial effect of Progenza on the knee structure reinforces Progenza preclinical findings and may offer the potential for disease modification.” Progenza-treated patients showed rapid and sustained pain reduction Progenza 3.9m treated patients showed significant stabilisation in cartilage loss vs. placebo 0 -0.5 -1 -1.5 -2 -2.5 -3 Baseline Day 28 Month 3 Month 6 Month 9 Month 12 * * * * * Significant p values (<0.03) * Placebo Progenza combined i e r o c s n a p C A M O W n i e g n a h C 6 • l e m u o v e g a l i t r a c l a i l i b i t l a r e t a l n i e g n a h c % n a e M 1 0 -1 -2 -3 -4 -5 -6 Placebo Progenza 3.9m p = 0.022 Average annual cartilage degradation in untreated OA patients Consolidated Financial Statements for the Year Ended 30 June 2017 Letter from the Chairman and the CEO Letter from the Chairman and the CEO Sygenus – cell secretions technology Sygenus is the new name for the Group’s cell secretions technology platform that utilises the molecules (including cytokines, growth factors and exosomes) that are secreted by MSCs and work to reduce pain and inflammation and encourage accelerated healing and repair. These allogeneic MSC secretions are being further developed to be used topically for the application to treat inflammatory skin conditions such as acne and the reduction of pain and accelerated healing for wounds. Inflammatory skin conditions and wound healing are promising and near-term areas for topical regenerative medicine products. injection, in contrast to the vehicle control group, which continued to deteriorate. Japanese patent to grant for Progenza On 24 May, the Japanese Patent Office issued a decision to grant a key patent for the composition, manufacture and use of Progenza for the treatment of a wide range of inflammatory conditions including osteoarthritis. The Japanese Patent, Application Number 201-531048 entitled “Therapeutics using cells and cell secretions” provides commercial rights in Japan through to 2032. Corresponding grants have been granted in Australia and New Zealand and are being pursued for grant in other key territories including the USA and Europe. We now have 56 patents or patent applications across 14 patent families which provides a substantial competitive advantage for the company’s product pipeline. Advancing clinical partnering of Progenza The combination of positive STEP trial results, our new manufacturing and development collaboration with AGC in Japan and the Progenza patent in Japan, puts us in a strong position to advance our clinical licensing discussions for Progenza in Japan and other key markets. Japan continues to be one of the best markets for licensing and development of regenerative medicines. These market conditions have been driven by Japan’s accelerated regulatory approval process specifically designed for regenerative medicine products like Progenza. These laws allow for the conditional marketing approval of regenerative medicine products that demonstrate safety and probable efficacy without the pre-requirement of an expensive phase 3 trial. We are in continuing discussions with potential partners for the clinical development and commercialisation of Progenza in Japan and we also continue to engage with parties interested in licensing Progenza for territories other than Japan. RGSH4K - human cancer vaccine The ACTIVATE trial is a single centre, open label, Phase 1 dose escalating trial to evaluate the safety, tolerability and preliminary efficacy of RGSH4K. We have recruited patients into all 3 dose levels without any unexpected safety concerns. We anticipate the trial being fully recruited by the end of this financial year. This technology uses a patient’s tumour to harness the body’s own immune system to fight 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. In another positive regulatory development, in December 2016, the US President signed into law the 21st Century Cures Act. This Act includes specific provisions intended to accelerate the US Food and Drug Administration’s approval pathway for regenerative medicines. This means that the US joins Europe and Japan with specific regulatory frameworks to address and accelerate the development and access for regenerative medicines for serious unmet medical needs. Progenza – chronic pain research Chronic pain is a symptom of osteoarthritis and Progenza has shown promising results in the STEP trial for the significant and rapid reduction of knee pain for osteoarthritis sufferers. To achieve further insight into Progenza and its potential to reduce chronic pain unrelated to osteoarthritis, Regeneus, through a research consortium with Macquarie University and the University of Adelaide has received an Australian Research Council Linkage Grant to undertake pre-clinical research into the use of Progenza to relieve chronic pain. The 3 year research project commenced in March this year and will seek to develop a better understanding of chronic pain. 7 • Consolidated Financial Statements for the Year Ended 30 June 2017 Human health development pipeline Program Progenza RGSH4K Sygenus Technology platform Pre-clinical Phase 1 Phase 2 Phase 3 Filing Approval Allogeneic adipose MSCs & secretions Osteoarthritis Immunotherapy for oncology Solid Tumours Allogeneic adipose MSC secretions Derm / Wound These secretions are included with MSCs in our Progenza product and have demonstrated no safety concerns in our Progenza preclinical and clinical testing.   We are now conducting preclinical studies of the secretions to test for its pain modulation and wound healing effects. We are also conducting studies on the effects of secretions in a gel format on acne. We continue our discussions with parties for the development and commercialisation opportunities for topical applications, in both the therapeutic and cosmetic markets. Patents granted for acne During the year, patents were allowed in US, Europe and China covering the use of the company’s stem cell secretions technology Sygenus for the topical treatment of acne. The patent granted in China provides commercial rights in China through to 2032. This was the first Regeneus patent to be granted in China. The granted patent is specific for the topical treatment of acne, however, Regeneus has additional patent applications that cover the use of Sygenus for other skin conditions. CryoShot - allogeneic stem cells for canine osteoarthritis CryoShot is the company’s cell therapy technology for the treatment of canine and equine OA and other musculoskeletal disorders. CryoShot is made from expanded allogeneic MSCs from canine or equine adipose tissue. CryoShot 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 commercial quantities of doses of cells from a single donor. Pre-pivotal canine OA trial We continue to recruit for our pre-pivotal trial assessing CryoShot as a treatment for canine OA. This placebo-controlled trial of 80 dogs is being undertaken at the University of Pennsylvania School of Veterinary Medicine. All trial participants are followed for 90 days. The results of the trial will be used to finalise 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 FY18. Letter from the Chairman and the CEO The results showed that Kvax administered after limb amputation is well tolerated and appears to confer increased progression free interval and survival compared to historically reported dogs with osteosarcoma treated with limb amputation only. Lymphoma trial with SASH A 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. There have been no significant safety concerns to date. Financial highlights for FY17 Our financial results for FY17 reflect the strength of our strategic initiatives. The significant licensing activities with AGC and the ongoing financial discipline in managing the expenses enabled a positive financial result. Highlights for the period include: • Licence fee revenues up 715% to $9.9m (FY16: $1.2m) driven by AGC licence fees of US$6.5m (A$8.9m) Collaboration with animal pharmaceutical company In November 2015, we entered into a collaboration and licence agreement with a major animal pharmaceutical 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 - 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 efficacy of Kvax with an aggressive cancer like osteosarcoma. Animal health development pipeline Program CryoShot Canine CryoShot Equine Kvax Technology platform Manufacturing & process development Safety & efficacy studies Pivotal trial Market approval Allogeneic adipose MSCs Allogeneic adipose MSCs Immunotherapy for oncology Osteoarthritis Osteoarthritis Naturally occurring advanced cancers (conditional approval) 8 • Consolidated Financial Statements for the Year Ended 30 June 2017 Letter from the Chairman and the CEO Thanks We would like to thank our fellow directors and the team at Regeneus for their outstanding efforts and contribution to the business over the last financial year. Finally, we would like to thank our shareholders for your continued support and patience as we develop the business and add value through the development and partnering of our regenerative medicine products. Dr. Roger Aston Chairman John Martin Chief Executive Officer • Full year profit of $3.3m up significantly from prior year loss (FY16 $3.6m loss) • R&D tax incentive of $2.6m (FY16: $2.7m) • Quarterly cash used in operations (excluding R&D incentive and AGC net receipt) maintained at $1.7m (FY16: $1.5m per quarter) • Cash at year end $4.1m (FY16: $0.5m) A more detailed financial review of operations is set out in the Directors’ Report. Looking forward FY18 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: • Advance discussions to secure clinical and commercialisation partners for Progenza in Japan and other jurisdictions • Complete and report on ACTIVATE Phase 1 cancer vaccine trial • Complete and report on activities undertaken with Sygenus topical secretions technology • Complete and report on CryoShot canine pre-pivotal trial We look forward to meeting and capitalising on these milestones and other developments to continue to unlock value in the company’s assets. 9 • Consolidated Financial Statements for the Year Ended 30 June 2017 Directors’ report Your Directors present their report for Regeneus Ltd and its controlled entities (the Group) for the financial year ended 30 June 2017. Directors The names of the Directors in office at any time during or since the end of the year are: 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 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 Pacific 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) PolyNovo Ltd (Formerly Calzada Ltd) Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Interests in shares 51,179 Interests in options Nil 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. Other current directorships None Previous directorships (last 3 years) None Interests in shares 7,253,908 Interests in options 2,680,355 11 • Consolidated Financial Statements for the Year Ended 30 June 2017 Directors’ report 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 finance. 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 Scientific Officer 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 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 200,000 Interests in options Nil Dr. Glen Richards joined the Board in 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 12 • Consolidated Financial Statements for the Year Ended 30 June 2017 Directors’ report Financial review Operating results The Group produced a profit after income tax for the year of $3.27 million, a significant improvement from prior year loss of $3.57 million. The improvement was primarily driven by the licence fee received from AGC and it highlights the financial benefit that the licensing strategy delivers. Licence fee income Licence fee income exceeded $9.9 million including the AGC Japanese manufacturing licence fees of $8.9 million (US$6.5 million). An increase of 715%. Other licence fee income for the use of the Group’s technology locally declined slightly. The revenue from other operational activities declined as the move to a licensing business from marginally profitable early stage commercial activities was completed. Revenue from operating activities Operating activities Licence fee income Income from sale of goods Interest received Total revenue 2017 $‘000 9,940 54 75 10,069 2016 $‘000 1,219 517 142 1,878 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 significant 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, partnering and licensing. Operating and financial review Review of operations During the year, Regeneus achieved significant milestones positioning the Group for future growth including: AGC licensing of Progenza • AGC licence – exclusive rights to manufacture Progenza for all clinical applications in Japan and is responsible for the manufacture of GMP Progenza for the phase 2 trial in Japan Progenza human clinical STEP trial success • Progenza STEP trial – allogeneic stem cells for human osteoarthritis met both primary clinical endpoints of safety and tolerability with positive signs of disease modification and achieving other secondary endpoints Ongoing clinical trials • RGSH4K ACTIVATE trial – autologous cancer vaccine progresses well with patients safely dosed in all 3 dose cohorts and the tumour bank holding a significant number of tumours • CryoShot pre-pivotal trial – allogeneic off-the-shelf stem cells for canine osteoarthritis at University of Pennsylvania is ongoing • Kvax trials – autologous canine cancer vaccine trial of lymphoma trial at Small Animal Specialist Hospital in Sydney is ongoing Partnering and technology development • Continuing discussions with potential partners for the clinical development and commercialisation of Progenza in Japan • Patent for Progenza in Japan • Patent of Sygenus for acne in China A more detailed review of operational highlights is set out in the Letter from the Chairman and the CEO. 13 • Consolidated Financial Statements for the Year Ended 30 June 2017 Directors’ report 2017 $‘000 3,587 (227) 246 3,606 2016 $‘000 (2,253) (231) - (2,484) 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 $4.4 million, similar to FY16 $4.3 million. Cash flows The net cash inflows for the period were: 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. Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Selling expenses The selling and marketing expenses reflect the costs incurred in supporting general marketing activities of the corporation. Occupancy costs Occupancy costs of $420k are the direct lease costs of the Pymble corporate office and the associated utility costs. Corporate expenses The corporate expense increase of 6.7% was due primarily to increased activities associated with protection of the Group’s intellectual property portfolio including patent. Other expenses The expenses identified as other expenses are individually significant items of expenditure associated with the Japanese licence arrangements. These costs include withholding tax, legal fees and other professional fees. Expenses Research and development Selling Occupancy Corporate Finance costs Expenses from operations Other expenses Share of loss on investment Total expenses 14 • 2017 $‘000 4,456 238 420 2,912 16 8,042 1,300 9 9,351 2016 $‘000 4,309 375 473 2,730 20 7,907 - - 7,907 Movement $‘000 (147) 137 53 (182) 4 (135) (1,300) (9) (1,444) Net change in cash and cash equivalents held Operating activities Cash provided by operating activities of $3.6 million was a material improvement of $5.8 million from the prior year. This improvement was a direct reflection of the significant licence fees received from AGC of $8.9 million (US$6.5 million) offset partially by the cash impact of withholding tax expense and fees associated with the licence arrangements. Excluding the benefit of the R&D incentive and the net Japanese licence fees, the cash outflow from operations was $6.8 million compared to FY16 $5.7 million. There were minor increases across most expense categories and a decline in other revenue that contributed to this increase in cash used. This outcome was in line with the strategic focus on research and development and licensing activities in Japan. Investing activities This is predominantly investment in capital equipment supporting the business. Financing activities The cash provided by financing activities is the early repayment of 16% of the shareholder loan. Significant changes in state of affairs During the year the Group entered a strategic collaboration with AGC licencing exclusive rights to manufacture Progenza for all clinical applications in Japan. As disclosed in the Operating and financial review this arrangement provided a significant benefit to the Group’s financial position. There were no other significant 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. Consolidated Financial Statements for the Year Ended 30 June 2017 Events subsequent to the reporting period In the period since 30 June 2017 to the signing of the financial report, the Board of Directors reviewed the maturity of the shareholder loan facility, relating to the funding of employee options exercised as part of the IPO in 2013. The Directors considered that it was in all shareholders’ interest if the loan was extended 9 months to 15 June, 2018. The Directors will seek approval of this decision at the Annual General Meeting. Apart from the above, there are no other matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either the entity’s operations in future financial years, the results of those operations in future financial years or the entity’s state of affairs in future financial years. Likely developments, business strategies and prospects 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: • Advance discussions to secure clinical and commercialisation partners for Progenza in Japan and other jurisdictions • Complete and report on ACTIVATE Phase 1 cancer vaccine trial • Complete and report on activities undertaken with Sygenus topical secretions technology • Complete and report on CryoShot canine pre-pivotal trial 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 financial years beginning on or after 1 July 2014. The Group’s corporate governance statement for the financial year ending 30 June 2017 is dated as at 30 June 2017 and was approved by the Board on 17 August 2017. The corporate governance statement is available on Regeneus’ website at: regeneus.com.au/about/corporate-governance 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’ report Directors’ meetings 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 6 6 6 6 6 B 6 6 6 6 6 A 2 2 - 2 - B - 2 - 2 - 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. Dividends paid or recommended No dividends have been paid or declared since the start of the financial year (2016: nil). Unissued shares under option Unissued ordinary shares of Regeneus Ltd under option at the date of this report are: Unissued shares under option Date of granting Expiry date 01/07/2010 01/01/2011 21/02/2011 01/07/2011 16/09/2013 04/12/2013 21/10/2014 26/08/2020 29/12/2020 18/02/2021 28/06/2021 15/09/2018 03/12/2018 20/10/2019 During 2017, no unlisted options were issued, (2016: nil). Exercise price of option $ 0.136 0.136 0.136 0.280 0.250 0.250 0.160 Number under option 770,100 462,060 1,001,674 500,000 4,323,210 1,665,000 900,000 15 • Consolidated Financial Statements for the Year Ended 30 June 2017 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 financed by a full recourse loan provided by the Company to the option holders. 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 (2016: nil). 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 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 Directors’ report 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 benefit 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 specifically 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 profit and cover financial and non-financial measures. The KPIs for the Executive team are summarised as follows: Performance area: • Financial - operating results • Non-financial - 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 76% ‘For’ votes on its Remuneration Report for the financial year ending 30 June 2016 (2015: 86%). The Company received no specific feedback on its Remuneration Report at the Annual General Meeting. Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the Board has regard to the following indices in respect of the current financial year and the previous four (4) financial years: 16 • Consolidated Financial Statements for the Year Ended 30 June 2017 Consequences of performance on shareholder wealth Item EPS (cents) Dividends (per share) Net profit (loss) ($000) Share price ($) 2017 0.016 $0 3,271 $0.12 * $0.25 share price on listing 19 September 2014 2016 2015 (0.017) (0.032) $0 $0 (3,574) $0.14 Directors’ report 2014 (0.05) $0 2013 (0.05) $0 b. Details of remuneration Details of the nature and amount of each element of key management personnel remuneration are shown in the following table: Details of remuneration (6,607) (7,523) (5,195) $0.15 $0.40 $0.25 * Short term Post employment Long term Executive Directors John Martin Graham Vesey Non-executive Directors Roger Aston Barry Sechos Glen Richards Total Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Cash salary and fees $ 304,679 304,679 200,000 200,000 75,000 71,204 45,000 45,000 45,000 45,000 669,679 665,883 Super- annuation $ Other benefits $ Total $ Performance related 28,944 28,944 19,000 19,000 8,131 11,637 11,200 19,611 341,754 345,260 230,200 238,611 - 3,796 - - - - - - - - - - 75,000 75,000 45,000 45,000 45,000 45,000 47,944 51,740 19,331 31,248 736,954 748,871 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Other long term benefits include the movement in the annual leave provision and long service leave provision in accordance with AASB 119 Employee Benefits. Where the provision is reduced due to leave taken exceeding leave accrued the movement is negative. 17 • Consolidated Financial Statements for the Year Ended 30 June 2017 Directors’ report The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: c. Service agreements 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: Details of remuneration Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Fixed remuneration At risk – STI At risk – options Service agreements 100% 100% 100% 100% 100% - - - - - - - - - - Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Base salary $ 304,679 200,000 75,000 45,000 45,000 Term of agreement Notice period Unspecified Unspecified Unspecified Unspecified Unspecified 3 months 3 months Nil Nil Nil There are no termination payments provided for in these agreements, other than those required by statute. Share-based remuneration Name Number granted Grant date Value per option at grant date $ Number vested Exercise price $ First exercise date Last exercise date Graham Vesey Graham Vesey Graham Vesey John Martin John Martin John Martin Wild Rose Pty Ltd - John Martin John Martin 714,285 714,285 714,285 714,285 714,285 714,285 37,500 500,000 16/09/2013 16/09/2013 16/09/2013 16/09/2013 16/09/2013 16/09/2013 16/09/2013 01/07/2011 0.1561 0.1561 0.1561 0.1561 0.1561 0.1561 0.1561 0.1758 714,285 714,285 714,285 714,285 714,285 714,285 37,500 500,000 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.28 01/07/2013 30/06/2014 30/06/2015 30/06/2013 30/06/2014 30/06/2015 11/09/2013 31/12/2011 15/09/2018 15/09/2018 15/09/2018 15/09/2018 15/09/2018 15/09/2018 15/09/2018 28/06/2021 18 • Consolidated Financial Statements for the Year Ended 30 June 2017 d. Share-based remuneration 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 above. 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 financial 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. Bonuses included in remuneration Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Included in remuneration $ - - - - - Directors’ report f. Other information Options held by key management personnel The number of options to acquire shares in the Company held during the 2017 reporting period by each of the key management personnel of the Group, including their related parties are set out below. No options were forfeited during the year (2016: nil). Options held by key management personnel Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Balance at 1 July 2016 2,680,355 2,142,855 - - - Other changes Balance at end of year Vested and exercisable at 30 June 2017 Vested, un-exercisable at 30 June 2017 - - - - - - 2,680,355 2,142,855 2,680,355 2,142,855 - - - - - - 4,823,210 4,823,210 - - - - - - Percentage vested in year Percentage forfeited in year Totals 4,823,210 - - - - - - - - - - Shares held by key management personnel The number of ordinary shares in the Company during the 2017 reporting period held by each of the Group’s key management personnel, including their related parties, are set out below: Shares held by key management personnel Name John Martin Graham Vesey Roger Aston Barry Sechos Glen Richards Totals Held at 1 July 2016 Granted as remuneration Purchased Held at 30 June 2017 7,253,908 15,879,968 51,179 - 2,333,333 25,518,388 - - - - - - - - - 200,000 7,253,908 15,879,968 51,179 200,000 - 2,333,333 200,000 25,718,388 End of audited remuneration report. 19 • Consolidated Financial Statements for the Year Ended 30 June 2017 Signed in accordance with a resolution of the Board of Directors: Directors’ report John Martin CEO and Executive Director Dated this day 22 August 2017 Environmental legislation Regeneus operations are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory in Australia. Indemnities given to auditors and officers and insurance premiums paid During the year, Regeneus paid a premium to insure officers of the Group. The officers 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 officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. 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 satisfies 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 25 to the Financial Statements. 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. 20 • Consolidated Financial Statements for the Year Ended 30 June 2017 Auditor’s independence declaration Level 17, 383 Kent Street Sydney NSW 2000 Correspondence to: Locked Bag Q800 QVB Post Office Sydney NSW 1230 T +61 2 8297 2400 F +61 2 9299 4445 E info.nsw@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of Regeneus Ltd In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Regeneus Ltd for the year ended 30 June 2017, I declare that, to the best of my knowledge and belief, there have been: a no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD Chartered Accountants Louise M Worsley Partner - Audit & Assurance Sydney, 22 August 2017 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 21 • Consolidated Financial Statements for the Year Ended 30 June 2017 Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June Revenue Cost of sales Gross profit Other income Research and development expenses Selling expenses Occupancy expenses Corporate expenses Finance costs Other expenses Share of loss on investments accounted for using equity method Profit/(loss) before income tax Income tax (expense) / benefit Profit/(loss) for the year attributable to owners of the parent Other comprehensive (expense) /income Note 6 6 7 8 16 24 2017 $ 10,068,580 (55,062) 10,013,518 2,608,222 (4,456,201) (238,184) (420,296) (2,911,525) (16,220) (1,299,615) (9,107) 3,270,592 - 2016 $ 1,877,759 (291,743) 1,586,016 2,746,943 (4,309,379) (374,611) (472,600) (2,730,343) (19,899) - - (3,573,873) - 3,270,592 (3,573,873) - - Total comprehensive profit/(loss) for the year attributable to owners of the parent 3,270,592 (3,573,873) Earnings per share Basic earnings per share Earnings per share from continuing operations Diluted earnings per share Earnings per share from continuing operations 26 26 0.016 0.016 (0.017) (0.0.17) 23 • Consolidated Financial Statements for the Year Ended 30 June 2017 Consolidated statement of financial position As at 30 June Current Assets Cash and cash equivalents Trade and other receivables Inventories R&D incentive receivable Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Investments accounted for using the equity method 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 Accumulated losses Reserves Total equity Note 2017 $ 2016 $ 9 10 11 12 13 14 15 16 17 18 19 20 19 21.1 21.2 4,135,136 87,877 21,948 2,608,222 1,407,741 8,260,924 610,127 5,759 78,000 210,000 903,886 9,164,810 743,209 115,484 17,502 876,195 188,707 188,707 1,064,902 8,099,908 31,076,819 (24,629,684) 1,652,773 8,099,908 528,670 21,774 30,076 2,732,110 190,054 3,502,684 801,562 11,254 - 1,619,307 2,432,123 5,934,807 906,312 99,273 - 1,005,585 144,482 144,482 1,150,067 4,784,740 31,076,819 (27,916,645) 1,624,566 4,784,740 24 • Consolidated Financial Statements for the Year Ended 30 June 2017 Consolidated statement of changes in equity For the year ended 30 June Balance at 1 July 2015 Reported loss for the year Reported other comprehensive income/(expense) Employee share-based payment option expense Transfer from reserves to retained earnings for options forfeited Balance at 30 June 2016 Balance at 1 July 2016 Reported profit for the year Reported other comprehensive income (expense) Employee share-based payment option expense Transfer from reserves to retained earnings for options forfeited Share capital $ Share option reserve $ Accumulated loses $ Total attributable to parent owners $ Total equity $ 31,076,819 2,491,128 (25,295,813) 8,272,134 8,272,134 - - - - - - 86,479 (3,573,873) (3,573,873) (3,573,873) - - - - 86,479 86,479 (953,041) 953,041 - - 31,076,819 1,624,566 (27,916,645) 4,784,740 4,784,740 31,076,819 1,624,566 (27,916,645) 4,784,740 4,784,740 - - - - - - 44,576 (16,369) 3,270,592 3,270,592 3,270,592 - - - - 44,576 44,576 16,369 - - Balance at 30 June 2017 31,076,819 1,652,773 (24,629,684) 8,099,908 8,099,908 25 • Consolidated Financial Statements for the Year Ended 30 June 2017 Consolidated statement of cash flows For the year ended 30 June Note 2017 $ 2016 $ 8 27 Operating activities Receipts from customers Payments to suppliers and employees Interest received Other material expenses R&D incentive refund Finance costs Net cash provided by / (used in) operating activities Investing activities Payments for investments Purchase of property, plant and equipment Receipts from sale of property, plant and equipment Net cash (used in) by investing activities Financing activities Proceeds from related party loan Repayment of related party loan Receipts from shareholder loan Net cash provided by financing activities Net change in cash and cash equivalents held Cash and cash equivalents at beginning of financial year Cash and cash equivalents at end of financial year 9 10,140,776 (7,978,201) 8,340 (1,299,615) 2,732,110 (16,220) 3,587,190 (87,107) (149,949) 9,600 (227,456) 1,250,000 (1,250,000) 246,732 246,732 3,606,466 528,670 4,135,136 1,931,268 (7,637,200) 55,021 - 3,417,566 (19,899) (2,253,244) - (249,670) 18,772 (230,898) - - - - (2,484,142) 3,012,812 528,670 Note: This statement should be read in conjunction with the notes to the financial statements. 26 • Consolidated Financial Statements for the Year Ended 30 June 2017 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 identified, the Group seeks to license appropriate parties. 2. General information and statement of compliance The financial report is a general purpose financial 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-profit entity for the purpose of preparing the financial statements. The financial statements cover Regeneus and its controlled entities as a consolidated entity (The Group). As at the 30 June 2017, Regeneus is a Public Group, incorporated and domiciled in Australia. The address of its registered office 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 financial statements and notes of Regeneus comply with International Financial Reporting Standards (IFRS) as issued by the IASB. The consolidated financial statements for the year ended 30 June 2017 were approved and authorised for issue by the Board of Directors on 22 August 2017. Basis of preparation The financial statements have been prepared on an accruals basis and are based on historical costs modified by the revaluation of selected non-current assets and financial instruments for which the fair value basis of accounting has been applied. New and revised standards that are effective for these financial statements A number of new and revised standards are effective for annual periods beginning on or after 1 July 2016. Information on these new standards is presented below: AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations The amendments to AASB 11 Joint Arrangements state that an acquirer of an interest in a joint operation in which the activity of the joint operation constitutes a ‘business’, as defined in AASB 3 Business Combinations, should: • apply all of the principles on business combinations accounting in AASB 3 and other Australian Accounting Standards except principles that conflict with the guidance of AASB 11. This requirement also applies to the acquisition of additional interests in an existing joint operation that results in the acquirer retaining joint control of the joint operation (note that this requirement applies to the additional interest only, i.e. the existing interest is not re-measured) and to the formation of a joint operation when an existing business is contributed to the joint operation by one of the parties that participate in the joint operation; and • provide disclosures for business combinations as required by AASB 3 and other Australian Accounting Standards. AASB 2014-3 is applicable to annual reporting periods beginning on or after 1 January 2016. The adoption of these amendments has not had a material impact on the Group. AASB 2014--9 Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements The amendments introduce the equity method of accounting as one of the options to account for an entity’s investments in subsidiaries, joint ventures and associates in the entity’s separate financial statements. AASB 2014-9 is applicable to annual reporting periods beginning on or after 1 January 2016. The adoption of these amendments has not had a material impact on the Group. 27 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments 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 specified line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position can be disaggregated • add requirements for how an entity should present subtotals in the statement(s) of profit and loss and other comprehensive income and the statement of financial 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 AASB 101 for identifying a significant accounting policy AASB 2015-2 is applicable to annual reporting periods beginning on or after 1 January 2016. The adoption of these amendments has not had a material impact on the Group. Accounting standards issued but not yet effective and not adopted early by the Group At the date of authorisation of these financial 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 first 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 financial 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 financial statements. AASB 9 Financial Instruments (December 2014) The standard introduces new requirements for the classification and measurement of financial assets and liabilities and includes a forward-looking expected loss’ impairment model and a substantially changed approach to hedge accounting. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are: a) Financial assets that are debt instruments will be classified based on: a. The objective of the Group’s business model for managing the financial assets b. 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 profit or loss). Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. c) Introduces a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. d) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly 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 financial 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 profit or loss If this approach creates or enlarges an accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss. Otherwise, the following requirements have been carried forward unchanged from AASB 139 into AASB 9: • Classification and measurement of financial liabilities • De-recognition requirements for financial 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 financial 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 financial 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 financial statements when it is first adopted for the year ending 30 June 2019. 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 specific topics (e.g., multiple element arrangements, variable pricing, rights of return, warranties and licensing) • Expands and improves disclosures about revenue 28 • Consolidated Financial Statements for the Year Ended 30 June 2017 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 financial statements when it is first 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 definition 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. 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 first time adoption of the Standard for the 30 June 2020 includes: • There will be a significant increase in lease assets and financial 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 profit 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 finance costs rather than being included in operating expenses • Operating cash outflows will be lower and financing cash flows will be higher in the statement of cash flows as principal repayments on all lease liabilities will now be included in financing activities rather than operating activities. Interest can also be included within financing activities. 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 financial statements when it is first 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 financial statements when it is first adopted for the year ending 30 June 2019. Notes to the consolidated financial statements AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between and Investor and its Associate or Joint Venture The amendments address a current inconsistency between AASB10 Consolidated Financial Statements and AASB 128 Investments in Associates and Joint Ventures. The amendments clarify that, on a sale or contribution of assets to a joint venture or associate or on a loss of control when joint control or significant influence is retained in a transaction involving an associate or a joint venture, any gain or loss recognised will depend on whether the assets or subsidiary constitute a business, as defined in AASB 3 Business Combinations. Full gain or loss is recognised when the assets or subsidiary constitute a business, whereas gain or loss attributable to other investors’ interests is recognised when the assets or subsidiary do not constitute a business. This amendment effectively introduces an exception to the general requirement in AASB 10 to recognise full gain or loss on the loss of control over a subsidiary. The exception only applies to the loss of control over a subsidiary that does not contain a business, if the loss of control is the result of a transaction involving an associate or a joint venture that is accounted for using the equity method. Corresponding amendments have also been made to AASB 128. AASB 2015-8 Amendments to Australian Accounting Standards – Effective Date of AASB 15 AASB AASB 2015-8 amends the mandatory application date of AASB 15 Revenue from Contracts with Customers so that AASB 15 is required to be applied for annual reporting periods beginning on or after 1 January 2018 instead of 1 January 2017. It also defers the consequential amendments that were originally set out in AASB 2014- 5 Amendments to Australian Accounting Standards arising from 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 financial statements when it is first adopted for the year ending 30 June 2019. AASB 2016-2 Amendments to Australian Accounting Standards - Disclosure Initiative: Amendments to AASB 107 AASB 2016-2 amends AASB 107 Statement of Cash Flows to require entities preparing financial statements in accordance with Tier 1 reporting requirements to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. When these amendments are first adopted for the year ending 30 June 2019, there will be no material impact on the financial statements When these amendments are first adopted for the year ending 30 June 2018, there will be no material impact on the financial statements. 29 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15 The amendments clarify the application of AASB 15 in three specific areas to reduce the extent of diversity in practice that might otherwise result from differing views on how to implement the requirements of the new standard. They will help companies: 1. Identify performance obligations (by clarifying how to apply the concept of ‘distinct’); 2. Determine whether a company is a principal or an agent in a transaction (by clarifying how to apply the control principle); 3. Determine whether a licence transfers to a customer at a point in time or over time (by clarifying when a company’s activities significantly affect the intellectual property to which the customer has rights). The amendments also create two additional practical expedients available for use when implementing AASB 15: 1. For contracts that have been modified before the beginning of the earliest period presented, the amendments allow companies to use hindsight when identifying the performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations. 2. Companies applying the full retrospective method are permitted to ignore contracts already complete at the beginning of the earliest period presented. 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 financial statements when it is first adopted for the year ending 30 June 2019. Interpretation 22 Foreign Currency Transactions and Advance Consideration Interpretation 22 looks at what exchange rate to use for translation when payments are made or received in advance of the related asset, expense or income. Although AASB 121 The Effects of Changes in Foreign Exchange Rates sets out requirements about which exchange rate to use when recording a foreign currency transaction on initial recognition in an entity’s functional currency, the IFRS Interpretations Committee had observed diversity in practice in circumstances in which an entity recognises a non-monetary liability arising from advance consideration. The diversity resulted from the fact that some entities were recognising revenue using the spot exchange rate at the date of the receipt of the advance consideration while others were using the spot exchange rate at the date that revenue was recognised. Interpretation 22 addresses this issue by clarifying that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the nonmonetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration. When this interpretation is adopted for the year ending 30 June 2019, there will be no material impact on the financial statements. 3. Summary of accounting policies Overall considerations The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarised below. The consolidated financial statements have been prepared using the measurement bases specified by the Australian Accounting Standards for each type of asset, liability, income and expense. The measurement bases are more fully described in the following accounting policies. a. Basis of consolidation Controlled entities The Group financial statements consolidate those of the Parent Company and all of its subsidiaries as of 30 June 2017. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 30 June. All transactions and balances between Group companies are eliminated on consolidation, including unrealized gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. Investments in associates and joint arrangements Associates are those entities over which the Group is able to exert significant influence but which are not subsidiaries. A joint venture is an arrangement that the Group controls jointly with one or more other investors, and over which the Group has rights to a share of the arrangement’s net assets rather than direct rights to underlying assets and obligations for underlying liabilities. A joint arrangement in which the Group has direct rights to underlying assets and obligations for underlying liabilities is classified as a joint operation. Investments in all joint ventures are accounted for using the equity method. Interests in joint operations are accounted for by recognising the Group’s assets (including its share of any assets held jointly), its 30 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of the revenue from the sale of the output by the joint operation), and its expenses (including its share of any expenses incurred jointly). These are incorporated in the financial statements under the appropriate headings. Any goodwill or fair value adjustment attributable to the Group’s share in the associate or joint venture is not recognised separately and is included in the amount recognised as investment. The carrying amount of the investment in associates and joint ventures is increased or decreased to recognize the Group’s share of the profit or loss and other comprehensive income of the associate and joint venture, adjusted where necessary to ensure consistency with the accounting policies of the Group. Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in those entities. Where unrealised losses are eliminated, the underlying asset is also tested for impairment. If an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses. The interest in an associate or a joint venture is the carrying amount of the investment in the associate or joint venture determined using the equity method together with any long-term interests that, in substance, form part of the entity’s net investment in the associate or joint venture. For example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that associate or joint venture. Such items may include preference shares and long-term receivables or loans, but do not include trade receivables, trade payables or any long-term receivables for which adequate collateral exists, such as secured loans. Losses recognised using the equity method in excess of the entity’s investment in ordinary shares are applied to the other components of the entity’s interest in an associate or a joint venture in the reverse order of their seniority (ie priority in liquidation). After the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. b. Segment reporting 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. Reports provided to the CODM reference the Group operating in one segment, being the development of innovative cell-based therapies to address significant 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 profit or loss before tax, assets and liabilities and cash flow. c. Going concern basis of accounting The Group achieved, for the year ended 30 June 2017, a profit after income tax of $3,270,592 (2016: $3,573,873 loss), had net cash inflows from operating activities of $3,587,190 (2016: $2,253,244 outflow) and as at 30 June 2017 has accumulated losses of $24,629,684 (2016: $27,916,645). Having granted to AGC an initial manufacturing licence in 2017 and after due consideration of additional commercial licensing opportunities the Directors have prepared the financial 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 2017 Regeneus had positive net assets of $8,099,908 (2016: $4,784,740). The Directors are expecting, by the end of FY18, that the Group will enter into a clinical development and commercialisation licence with a Japanese partner. This arrangement is expected to provide upfront funding and future payments contributing to the Group’s funding requirements for the next 18 months. The Directors continue to review other available strategies 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 financial statements. d. Comparative figures When required by accounting standards, comparative figures have been adjusted to conform to changes in the presentation for the current financial year. e. Cash and cash equivalents 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 insignificant risk of changes in value. f. Income tax 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 profit or loss when the tax relates to items that are credited or charged directly to other comprehensive income. Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. 31 • Consolidated Financial Statements for the Year Ended 30 June 2017 Current income tax assets and/or liabilities comprise those obligations to, or claims from, the Australian Taxation Office (ATO) and other fiscal 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 profit. 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 significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. Deferred tax liabilities are always provided for in full. 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 profit 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. g. Inventories 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. h. Plant and equipment 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 benefits 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 profit or loss and other comprehensive income during the financial period in which they are incurred. Notes to the consolidated financial statements i. Depreciation The depreciable amount of fixed 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: the cost model whereby capitalised costs are amortised on a reducing balance basis over their estimated useful lives, as these assets are considered finite. 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 specific software. Subsequent expenditure is expensed as incurred. Costs associated with maintaining intangibles are expensed as incurred. Depreciation rate (%) The amortisation rate used for acquired software is 25% straight line. Class of fixed asset Office equipment straight line Laboratory equipment straight line Office fit-out straight line Leasehold improvements straight line 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 profit or loss and other comprehensive income. j. Intangibles Intangible assets include acquired software. Intangible assets are accounted for using 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 the recognition criteria of AASB 138 are expensed. k. Impairment of non-financial assets 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 indefinite 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 32 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 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 profiles, such as market and asset-specific 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). l. Leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the Group are classified as finance 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 benefits 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. m. Foreign currency transactions and balances 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 financial 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 profit or loss and other comprehensive income. n. Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is de-recognised when it is extinguished, discharged, cancelled or expires. Financial assets and financial liabilities are measured initially at fair value adjusted by transactions costs, except for financial assets and financial liabilities carried at fair value through profit or loss, which are measured initially at fair value. Financial assets and financial liabilities are measured subsequently as described. Loans and receivables Loans and receivables are non-derivative financial assets with fixed 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 financial instruments. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific 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 counterparty default rates for each identified group. Financial liabilities The Group’s financial liabilities include trade and other payables. Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at fair value through profit or loss, that are carried subsequently at fair value with gains or losses recognised in profit or loss. o. Equity and reserves 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 benefits. 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 profits/(losses) 33 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements p. Employee benefits Short-term employee benefits Short-term employee benefits are benefits, other than termination benefits, 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 benefits include wages and salaries, non-monetary benefits and accumulating sick leave. Short-term employee benefits are measured at the undiscounted amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The Group’s liabilities for annual leave and long service leave are included in other long term benefits 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 profit or loss in the periods in which the changes occur. The Group presents employee benefit obligations as current liabilities in the statement of financial 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. Defined contribution plans The Group pays fixed 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 fixed 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. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example profitability and sales growth targets and performance conditions). All share-based remuneration is ultimately recognised as an expense in profit 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. s. Revenue Revenue is recognised when it is probable that economic benefits 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 income is recognised on a straight-line basis over the period that the licence covers. Licence fee income – Japan is recognised based on the achievement of contracted milestones. Revenue from the sale of goods is recognised at the point of delivery as this corresponds to the transfer of significant 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). t. Goods and services tax (GST) 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 Office. 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 34 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements probability that any of the payments received to date may be subject to repayment or claw back provisions. statement of financial position are shown inclusive of GST. the recognition and measurement of assets, liabilities, income and expenses. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing 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 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 R&D incentive receivable. v. Operating expenses Operating expenses are recognised in profit 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. Significant management judgments and estimates in applying accounting policies The Directors evaluate estimates and judgments incorporated into the financial 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 financial statements, management undertakes a number of judgments, estimates and assumptions about Estimation uncertainty Information about estimates and assumptions that have the most significant 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. 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 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 R&D incentive available to the Group based on current information. This estimate is also reviewed by external tax advisors. For the years ended 30 June 2017 and 2016, the Group has recognised income of $2.6 million and $2.7 million respectively. Refer notes 6 and 12. Uncertainties in the estimate relate to expenditure that can be claimed under the scheme including in some cases the claimable percentages applied to certain expenditure. Joint venture assessment In respect of Regeneus Japan Inc. management has determined that the Group does not have control in accordance with the criteria outlined in AASB 10. Management has made an assessment that the joint arrangement represents a joint venture rather than a joint operation in accordance with the requirements of AASB 11 and has therefore accounted for the investment using the equity method. Revenue recognition Management has determined that the Group has met the revenue criteria outline in AASB 118 in respect of the milestone payments received during the year under the AGC Manufacturing Licence Agreement. As part of this assessment management has made judgements relating to the probability of obtaining future milestone payments and the 35 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 4. Controlled entities Set out below are details of the subsidiaries held directly by the Group. 6. Revenue Name of the subsidiary Regeneus Animal Health Pty Ltd Cell Ideas Pty Ltd Country of incorporation & principal place of business Australia – 25 Bridge Street, Pymble NSW 2073 Australia – 25 Bridge Street, Pymble NSW 2073 Principal activity Group proportion of ownership interests 30 June 2017 30 June 2016 Operating activities Licence fee income Licence fee income - Japan Income from sale of goods Non-trading 100% 100% Interest received Non-trading – owns various IP 100% 100% Total revenue Other income R&D incentive Gain on sale of property, plant and equipment Total other income 2017 $ 2016 $ 1,028,514 8,912,000 53,550 74,516 1,218,896 - 516,566 142,297 10,068,580 1,877,759 2,608,222 2,732,110 - 14,833 2,608,222 2,746,943 5. Segment reporting Identification of reportable income segments 7. Results for the year The results for the year have been arrived at after charging the following items: 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 an assessment 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 significant unmet medical needs in human and veterinary health. The segment result is as shown in the statement of profit or loss and other comprehensive income. Refer to statement of financial position for assets and liabilities. Revenue of $8,912,000 (2016: nil) is derived from a single external customer. This revenue is attributable to the current operating segment. a. Expense Cost of sales Rental expense on operating leases – minimum lease payment Amortisation of intangible assets Depreciation Loss on disposal of assets 2017 $ 55,062 329,301 5,495 320,693 11,091 2016 $ 291,743 343,251 14,856 335,903 148 Employment expenses (excludes share-based payment) 2,605,482 2,578,156 Superannuation expense Share-based payments b. Finance costs Interest expense Bank charges Total finance costs 240,772 44,576 320,693 12,802 3,418 16,220 246,472 86,479 335,903 14,597 5,302 19,899 36 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 12. R&D incentive receivable The results for the year have been arrived at after charging the following items: 2017 $ 2016 $ 8. Other expenses Individually significant items of expenditure Withholding tax on Licence Fees Legal, consulting and other professional fees Exchange loss on US$ account Total other expenses 9. Cash and cash equivalents Cash and cash equivalents include the following components: Cash on hand Cash at bank (AUD account) Cash at bank (USD account) Total cash and cash equivalents 10. Trade and other receivables Trade and other receivables consists of the following: Trade receivables Other receivables Total trade and other receivables - - - - Current R&D incentive receivable Total R&D incentive receivable 13. Other current assets Other current assets Prepayments Security deposits GST receivable Other assets Shareholder loan Total other current assets 445,640 502,664 351,311 1,299,615 2017 $ 38 35,817 4,099,281 4,135,136 2017 $ 770 87,107 87,877 2016 $ 38 459,141 69,391 528,570 2016 $ 21,774 - 21,774 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. 11. Inventories Inventories consist of the following: Raw materials and consumables at cost Less: Provisions Total inventories 37 • 2017 $ 46,132 (24,184) 21,948 2016 $ 76,076 (46,000) 30,076 The shareholder loan is a full recourse, interest-free loan for 4 years, maturing September 2017 (refer note 35 - Subsequent events for further details on the Shareholder loan). The Group’s management consider that the shareholder loans are not impaired or past due for each of the 30 June reporting dates under review and are of good credit quality. Included within the shareholder loan are balances owing by the Directors as follows: John Martin Graham Vesey 2017 $ 295,925 150,552 2016 $ 295.925 150,552 Consolidated Financial Statements for the Year Ended 30 June 2017 2017 $ 2016 $ 2,608,222 2,732,110 2,608,222 2,732,110 2017 $ 70,330 38,743 69,217 700 1,228,751 1,407,741 2016 $ 32,799 52,804 74,377 30,074 - 190,054 Notes to the consolidated financial statements 14. Plant and equipment Details of the Group’s property, plant and equipment and their carrying amounts are as follows: 15. Intangible assets Details of the Group’s intangible assets and their carrying amounts are as follows: Office equipment $ Lab equipment $ Clinical equipment $ Office fit-out $ Total $ Acquired software licenses $ Gross carrying amount Gross carrying amount Balance 1 July 2016 111,064 399,196 102,917 1,168,665 1,781,842 Balance at 1 July 2016 Additions Disposals Balance 30 June 2017 Depreciation and impairment (53,003) 119,613 61,552 88,397 - - (50,801) - - 149,949 (103,804) Balance at 30 June 2017 Amortisation and impairment 487,593 52,116 1,168,665 1,827,987 Balance at 1 July 2016 Balance 1 July 2016 (90,607) (296,393) (75,755) (517,525) (980,280) Disposals Depreciation 50,192 - 32,921 - 83,113 (16,229) (50,548) (6,986) (246,930) (320,693) Balance 30 June 2017 (56,644) (346,941) (49,820) (764,455) (1,217,860) Carrying amount 30 June 2017 62,969 140,652 2,296 404,210 610,127 Gross carrying amount Balance 1 July 2015 108,051 352,879 106,142 972,265 1,539,337 Additions Disposals 3,995 (982) 49,275 (2,958) - 196,400 249,670 Amortisation (3,225) - (7,165) Amortisation Balance at 30 June 2017 Carrying amount 30 June 2017 Gross carrying amount Balance at 1 July 2015 Balance at 30 June 2016 Amortisation and impairment Balance at 1 July 2015 Balance at 30 June 2016 Carrying amount 30 June 2016 Balance 30 June 2016 111,064 399,196 102,917 1,168,665 1,781,842 Depreciation and impairment Balance 1 July 2015 (71,010) (239,658) (54,658) (282,270) (647,454) Disposals Depreciation 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 The Company exercised an option to acquire the fit-out premises at the end of the finance lease in January 2016 for $150,000. 82,561 82,561 (71,307) (5,495) (76,802) 5,759 82,561 82,561 (56,451) (14,856) (71,307) 11,254 Total $ 82,561 82,561 (71,307) (5,495) (76,802) 5,759 82,561 82,561 (56,451) (14,856) (71,307) 11,254 38 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 16. Investments accounted for using the equity method The Group has one material joint venture – Regeneus Japan Inc. The investment is accounted for using the equity method in accordance with AASB 128. Summarised financial information for Regeneus Japan Inc. is set out below: 17. Other non-current assets Total assets (a) Total liabilities Net assets (a) Includes cash and cash equivalents Revenue Expenses Total comprehensive loss for the year Share of comprehensive loss for the year 2017 $ 156,000 - 156,000 156,000 - (18,214) (18,214) (9,107) A reconciliation of the above summarised financial information to the carrying amount of the investment in Regeneus Japan Inc. is set out below: Total net assets of Regeneus Japan Inc Proportion of ownership interests held by the Group Carrying amount of the investment in Regeneus Inc. 156,000 50% 78,000 2016 $ - - - - - - - - - - - The joint venture has no commitments or contingent liabilities as at 30 June 2017 (2016: nil) Non-current Shareholder loan Security deposits Total other non-current assets 18. Trade and other payables Trade and other payables consists of the following: Current Trade payables Accruals PAYG Payable Total trade and other payables 2017 $ 2016 $ - - 1,409,307 210,000 210,000 210,000 1,619,307 2017 $ 350,317 331,184 61,708 743,209 2016 $ - 539,430 188,100 178,782 906,312 All amounts are short term and the carrying values are considered to be a reasonable approximation of fair value. 18.1 Foreign currency risk The carrying amount of trade and other payables denominated in the foreign currencies is: US dollar 2017 $ 17,436 2016 $ 59,875 39 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 19. Provisions 21. Equity Current: Annual leave Opening balance 1 July Benefits accrued /(expensed) Balance as at 30 June Total current provisions Non-current: Long service leave Opening balance 1 July Benefits accrued Balance as at 30 June Non-current: Make good Opening balance 1 July Provision accrued Balance as at 30 June 2017 $ 99,273 16,211 115,484 115,484 94,182 42,525 136,707 50,300 1,700 52,000 2016 $ 109,868 (10,595) 99,273 99,273 47,588 46,594 94,182 50,300 50,300 Total non-current provisions 188,707 144,482 The provision for the estimated cost for the make good of the operating lease and 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-fitout state at the expiration of the lease agreement. 20. Other liabilities Current Deferred income Total other current liabilities 2017 $ 17,502 17,502 2016 $ - - 21.1 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. 2017 shares 2016 shares 2017 $ 2016 $ Shares issued and fully paid Beginning of the year 208,885,143 208,885,143 31,076,819 31,076,819 Shares issued Closing balance at the end of the year - - - - 208,885,143 208,885,143 31,076,819 31,076,819 During 2017, no shares or options were issued. (2016: nil). 21.2 Reserves The details of reserves are as follows: Balance at 30 June 2015 Share options expense Options exercised Transfer from reserves to retained earnings for options forfeited Balance at 30 June 2016 Share options expense Options exercised Transfer from reserves to retained earnings for options forfeited Balance at 30 June 2017 Share option reserve $ Total reserves $ 2,491,128 2,491,128 86,479 86,479 - - (953,041) (953,041) 1,624,566 1,624,566 44,576 44,576 - - (16,369) (16,369) 1,652,773 1,652,773 40 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 22. Employee remuneration 22.1 Share-based employee remuneration As at 30 June 2017 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 Weight avg exercise price $ Number Weight avg exercise price $ Outstanding at 1 July 2015 7,242,755 0.17 8,322,110 0.24 15,564,865 0.21 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 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 Granted Forfeited Exercised - - - - - - (4,508,921) 0.18 (1,383,900) 0.25 (5,892,821) 0.20 Grant date 16 Sep 2013 4 Dec 2013 21 Nov 2014 - - - - - - Share price at date of grant Outstanding at 30 June 2016 2,733,834 0.16 6,938,210 0.24 9,672,044 0.22 Granted Forfeited Exercised - - - - - - - - - - (50,000) 0.25 (50,000) 0.25 - - - - Outstanding at 30 June 2017 2,733,834 0.16 6,888,210 0.24 9,622,044 0.22 Exercisable at 30 June 2016 2,733,834 Exercisable at 30 June 2017 2,733,834 0.16 0.16 6,138,210 6,538,210 0.25 0.24 8,872,044 9,272,044 0.22 0.22 Other details of options currently outstanding: • The range of exercise prices is $0.136 to $0.28 • The weighted average remaining contractual life is 3 years Volatility Option life Dividend yield Risk free investment rate Fair value at grant date Exercise price at date of grant $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, $44,576 (2016: $86,479), of employee remuneration expense (all of which related to equity settled share-based payment transactions) has been included in profit 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. 41 • Consolidated Financial Statements for the Year Ended 30 June 2017 23. Leasing 23.1 Operating leases as lessee In November 2013 the Group entered a 5 year 4 month operating lease for its office and production facilities. The lease payments are secured by a cash deposit of $210,000. The future minimum lease payments are as follows: Minimum lease payments due Within 1 year $ 1-5 years $ After 5 years $ 277,798 263,596 225,165 502,963 - - Total $ 502,963 766,559 30 June 2017 30 June 2016 Notes to the consolidated financial statements 24. 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% (2016: 30%) and the reported tax expense in profit or loss are as follows: The prima facie tax on profit / (loss) before income tax is reconciled to the income tax as follows: Prima facie tax receivable on profit / (loss) before income tax at 30% (2016: 30%) 981,178 (1,072,161) 2017 $ 2016 $ Less: Tax effect of: - Research and development incentive - Tax losses applied / (not brought to account) (782,467) (819,633) (1,736,323) 15,201 Add: Tax effect of: - Non-deductible expenses - Timing differences Income tax benefit The applicable weighted average effective tax rates are as follows Deferred Tax Losses not recognised Tax losses not recognised Capital losses not recognised Other deferred tax assets not recognised Total Potential tax benefit of 30% 1,438,929 1,834,006 98,683 42,587 - 0% 2017 $ - 0% 2016 $ 876,033 833,534 1,433,723 3,143,290 942,987 6,663,778 833,529 1,104,779 8,602,086 2,580,626 42 • Consolidated Financial Statements for the Year Ended 30 June 2017 25. Auditor’s remuneration 27. Reconciliation of cash flows from operating activities Notes to the consolidated financial statements Audit and review of financial statements - Auditors of Regeneus Ltd Remuneration for audit and review of financial statements Other services Other services Total other services remuneration Total auditor’s remuneration 2017 $ 91,500 91,500 - - 2016 $ 87,750 87,750 - - 91,500 87,750 26. 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 profit or loss were necessary in 2017 or 2016). 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 0.016 (0.017) 2017 $ 2016 $ The weighted average number of ordinary shares used as the denominator on calculating the EPS Diluted earnings per share Cash flows from operating activities Profit / (Loss) for the period Non cash adjustments for: • Depreciation • Amortisation • Loss on disposal of plant and equipment • Profit on disposal of plant and equipment • Equity settled share-based transactions • Interest - unwinding of shareholder loan • Share of loss of on investments accounted for using the equity method 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 2017 $ 2016 $ 3,270,592 (3,573,873) 320,693 5,495 11,091 - 44,576 (66,176) 9,107 8,128 21,004 (76,043) (46,029) (117,074) 123,888 17,502 60,436 335,903 14,856 148 (14,833) 86,479 (87,276) - 68,899 44,798 343,259 18,085 107,126 685,456 (368,570) 86,299 208,885,143 208,885,143 Net cash inflow / (outflow) from operating activities 3,587,190 (2,253,244) Diluted earnings per share from continuing operations 0.016 (0.017) The weighted average number of ordinary shares used as the denominator on calculating the DEPS 208,885,143 208,885,143 Share options have not been included in the diluted EPS calculation because they are anti-dilutive. 43 • Consolidated Financial Statements for the Year Ended 30 June 2017 28. Related party transactions and loans During the period the Group entered into an R&D funding arrangement with Sherman Group Pty Ltd, a related party. The facility forward funded, via a loan, up to 80% of the Federal Government’s R&D tax incentive claim. Sherman Group charged interest at the market rate for this type of funding. The loan was fully repaid in September 2016. Related party transactions Sherman Group Pty Ltd Loan received Loan repaid Interest charged Net paid to related parties Related party loan receivable John Martin Graham Vesey Total related party loans 2017 $ 2016 $ 1,250,000 (1,250,000) (10,575) (10,575) 2017 $ 295,925 150,552 446,477 - - - - 2016 $ 295,925 150,552 446,477 These loans relate to the shareholder loan, the terms of which are disclosed in Notes 13 and 17. Notes to the consolidated financial statements 29. Transactions with key management personnel Key management personnel remuneration includes the following expenses: Related party loan receivable Salaries Bonuses Total short-term employee benefits Defined contribution pension plans Other long-term benefits Share-based payments Total remuneration 2017 $ 2016 $ 669,679 665,883 - - 669,679 665,883 47,944 19,331 - 51,740 31,248 - 736,954 748,871 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. 30. Contingent liabilities The Group had no contingent liabilities as at 30 June 2017 (30 June 2016: $nil). 31. Capital expenditure commitments There were no capital commitments as at the 30 June 2017 (30 June 2016: $nil). 44 • Consolidated Financial Statements for the Year Ended 30 June 2017 32. Financial instruments a. Capital risk management The Group’s financial instruments consist mainly of deposits with banks, accounts receivable, deposits, shareholder loans, accounts payable and financial liabilities. b. Categories of financial instruments The total for each category of financial instrument, measured in accordance with AASB 139 as detailed in the accounting policies to these financial statement, are as follows: Financial assets Trade and other receivables Cash and cash equivalents Shareholder loan Total financial assets Financial liabilities Trade and other payables Total financial liabilities 2017 $ 770 4,135,136 1,228,751 5,364,657 2017 $ 681,501 681,501 2016 $ 21,774 528,670 1,409,307 1,959,751 2016 $ 727,530 727,530 c. Financial risk management objective The Group is exposed to various risks in relation to financial 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 financial markets. The Group does not actively engage in the trading of financial assets for speculative purposes. The most significant financial risks to which the Group is exposed are described below. d. Foreign exchange risk Foreign exchange risk is the risk of an adverse impact on the Group’s financial performance as a result of exchange rate volatility. 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 2017 US$3,141,693 (30 June 2016: $52,000). 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. The following table illustrates the sensitivity of profit in regards to the Group’s financial assets and financial liabilities and the $USD / $AUD exchange rate ’all other things being equal’. It assumes a +/- 10% change of the $AUD / $USD exchange rate for the year ended at 30 June 2017 (2016: 10%) This percentage has been determined based on the average market volatility in exchange rates in the previous twelve (12) months. The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each reporting date. Movements in the $AUD / $USD would have had the following impact: Profit / (loss) Impact of exchange rate sensitivity 2017 $ 2016 $ If the $AUD had strengthened against the $USD by 10% (2016: 10%) (372,662) (6,308) If the $AUD had weakened against the $USD by 10% (2016: 10%) 455,476 7,710 Exposure to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless the analysis above is considered to be representative of the Group’s exposure to currency risk. e. Liquidity risk analysis 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 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 financial assets in assessing and managing liquidity risk in particular its cash resources and trade receivables. 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. As at 30 June 2017 the Group’s non-derivative financial liabilities have contractual maturities (including interest payments where applicable) as summarised below: 45 • Consolidated Financial Statements for the Year Ended 30 June 2017 Financial liabilities 2017 $ 2016 $ Current within 6 months Current within 6 months Trade and other payables Total financial liabilities 681,501 681,501 727,530 727,530 f. Credit risk Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in a financial loss to the Group. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, shareholder loans, 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 financial loss from defaults. The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the reporting date. Notes to the consolidated financial statements 33. 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 significant 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 measurements 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 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 financial year. 34. Parent entity information Set out below is the supplementary information about Regeneus Ltd, the parent entity. There are no significant concentrations of credit risk within the Group. Statement of financial position 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 • 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 financial position and cash flow. Management assesses the Group’s capital requirements in order to maintain an efficient overall financing structure while avoiding excessive leakage. 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. Current assets Total assets Current liabilities Total liabilities Net assets Issued capital Retained earnings Option reserve Total equity Statement of profit or loss and other comprehensive income Profit / (Loss) for the year Other comprehensive income Total comprehensive profit or (loss) 2017 $ 2016 $ 8,260,824 9,164,710 876,195 1,064,902 8,099,808 3,502,584 5,934,707 1,005,585 1,150,067 4,784,640 31,076,819 31,076,819 (24,629,784) (27,916,745) 1,652,773 1,624,566 8,099,808 4,784,640 3,270,592 (3,573,873) - - 3,270,592 (3,573,873) 46 • Consolidated Financial Statements for the Year Ended 30 June 2017 Notes to the consolidated financial statements 35. Subsequent events In the period since 30 June 2017 to the signing of the financial report, the Board of Directors reviewed the maturity of the shareholder loan facility, relating to the funding of employee options exercised as part of the IPO in 2013. The Directors considered that it was in all shareholders interest if the loan repayment was extended 9 months to 15 June 2018. The Directors will seek approval of this decision at the Annual General Meeting. Apart from the above, there are no other matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either the entity’s operations in future financial years, the results of those operations in future financial years or the entity’s state of affairs in future financial years. Directors’ declaration 1. In the opinion of the Directors of the Group: a. The consolidated financial statements and notes are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of its financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and ii. complying with 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 officer and the chief financial officer for the financial year ended 30 June 2017. 3. Note 2 confirms that the consolidated financial statements also comply with International Financial Reporting Standards. Signed in accordance with a resolution of the Board of Directors: CEO and Executive Director John Martin Dated the 22nd day of August 2017. 47 • Consolidated Financial Statements for the Year Ended 30 June 2017 Auditor's report We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material Uncertainty Related to Going Concern We draw attention to Note 3(c) in the financial statements, which indicates that the Group reported a net profit of $3,270,592 during the year ended 30 June 2017, and as of that date, the Group has accumulated losses of $24,629,684. As stated in Note 3(c), these events or conditions, along with other matters as set forth in Note 3(c), indicate that a material uncertainty exists that may cast doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Key audit matter How our audit addressed the key audit matter Accounting for the Asahi Glass contract (note 6 and note 16) On 28 December 2016 the Group entered into an agreement with Asahi Glass Co (AGC), a Japanese entity, for the exclusive manufacture of the Progenza stem cell technology for the Japanese market. The agreement entered into with Asahi Glass resulted in revenue of $8.9 million being recognised by the Group during the year. A vehicle (JV) was also created upon entering into the agreement with AGC in order to conduct the clinical development and licensing of Progenza in Japan. A significant contract requires consideration of the key elements in order to determine appropriate accounting treatment. The key elements of focus arising from this contract include revenue recognition, accounting treatment of the JV and consideration of any other elements within the contract that may have an impact on the Group. Our procedures included, amongst others:  reading and understanding the contracts entered into with AGC including the JV Agreement;  verifying cash received to bank statements and contracts;  verifying that milestones in the AGC agreement had been achieved and evaluating the appropriateness of the revenue recognition against requirements of AASB 118 Revenues.  reviewing and comparing to contracts management's key judgements related to the treatment of the Japanese entity as a joint venture;  verifying the initial investment in the joint venture to bank statements; and  reviewing the appropriateness of the related disclosures within the financial statements. Level 17, 383 Kent Street Sydney NSW 2000 Correspondence to: Locked Bag Q800 QVB Post Office Sydney NSW 1230 T +61 2 8297 2400 F +61 2 9299 4445 E info.nsw@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report to the Members of Regeneus Ltd Report on the audit of the financial report Opinion We have audited the financial report of Regeneus Ltd (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: a Giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its performance for the year ended on that date; and b Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 48 • Consolidated Financial Statements for the Year Ended 30 June 2017 Auditor's report Key audit matter Recognition of R&D incentive (note 6) The Group receives a 43.5% refundable tax offset (2016: 45%) of eligible expenditure under the research and development (“R&D”) incentive scheme if turnover is less than $20 million per annum. An R&D plan is filed with AusIndustry in the following financial year and, based on this filing, the Group receives the incentive in cash. Management, with the assistance of a management expert, performed a detailed review of the Group’s total R&D expenditure to estimate the refundable tax offset receivable under the R&D incentive legislation. The receivable recorded at year-end represents an estimated claim for the period 1 July 2016 to 30 June 2017. This area is a key audit matter due to the inherent subjectivity that is involved in the Group making judgements in relation to the estimation and recognition of the R&D incentive income and receivable. How our audit addressed the key audit matter Our procedures included, amongst others:  comparing the methodology and nature of the expenditure included in the current year estimate of the R&D incentive calculation to the prior period claim;  utilising an internal R&D expert to assess the methodology used, consistency with ATO guidance of amounts and review the work performed by management’s expert;  evaluating the qualification and expertise of management’s expert in order to assess their professional competence and capabilities as they relate to the work undertaken;  comparing the eligible expenditure used in the estimate to the expenditure recorded in the general ledger;  assessing management’s prior year estimates to actual results to support the reliability of the R&D incentive receivable;  inspecting copies of relevant correspondence with AusIndustry and the ATO related to the claims history; and  reviewing relevant disclosures in the financial statements. Information Other than the Financial Report and Auditor’s Report Thereon The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2017, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors’ for the Financial Report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. Further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 16 to 19 of the directors’ report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Regeneus Ltd, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. GRANT THORNTON AUDIT PTY LTD Chartered Accountants L M Worsley Partner - Audit & Assurance the going concern basis of accounting unless the Directors either intend to liquidate the Group or Sydney, 22 August2017 to cease operations, or have no realistic alternative but to do so. 49 • Consolidated Financial Statements for the Year Ended 30 June 2017 Additional shareholder 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 2017. Corporate governance statement In accordance with the ASX principles and recommendations, Regeneus Ltd’s corporate governance statement can be reviewed on the Company website at: regeneus.com.au/about/corporate-governance Buy back of shares There is no buy back of shares on offer. Substantial shareholders The number of substantial shareholders and their associates are set out below: Shareholder Number of shares Vesey Investments 14,399,642 Voting rights Ordinary shares Buy back of shares There is no buy back of shares on offer. 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. Unissued equity securities Options issued under the options plans total 9,622,044. Options No voting rights. Distribution of equity security holders Holding 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Unmarketable parcels Shares 172,274,950 33,302,121 2,383,642 909,841 14,589 208,885,143 616,971 Options 9,622,044 - - - - 9,622,044 50 • Consolidated Financial Statements for the Year Ended 30 June 2017 Ordinary shares Twenty largest shareholders HSBC Custody Nominees Vesey Investments Pty Ltd Dr Marc Ronald Wilkins Thomas Georg Mechtersheimer Dr Benjamin Ross Herbert BNP Paribas Nominees Pty Ltd John Martin Pierre Frederic Malou SMC Capital Pty Ltd Parros Pty Ltd MLB Holdings Pty Ltd Sayers Investment (ACT) Pty Ltd George Miklos KBRoss Pty Ltd Bacau Pty Ltd Rose Martin Mrs Ciara Yvonne Kelly and Mr Paul Dominic Kelly J P Morgan Nominees Australia Limited Dr Michael Muller Duncan Thomson & Donna Thomson Total Balance of register Grand total Number held 14,852,446 14,399,642 7,985,161 6,540,623 5,687,897 4,370,615 3,759,682 2,820,542 2,716,726 2,222,623 2,200,000 2,100,000 2,086,096 2,000,000 1,940,732 1,863,642 1,774,512 1,714,705 1,571,896 1,534,183 % of issued shares 7.11 6.89 3.82 3.13 2.72 2.09 1.80 1.35 1.30 1.06 1.05 1.01 1.00 0.96 0.93 0.89 0.85 0.82 0.75 0.73 84,141,723 124,743,420 208,885,143 40.28 59.72 100.00 Additional shareholder information Securities exchange The Company was listed on the Australian Securities Exchange on 19 September 2013. Electronic communications Regeneus encourages shareholders to receive information electronically. Shareholders who currently receive information by post can log in at www.linkmarketservices.com.au to provide their email address and elect to receive electronic communications. Electronic communications allows Regeneus to communicate with shareholders faster and reduce its use of paper. Cash usage 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 official list of ASX in a manner consistent with its business objectives. Annual General Meeting 2017 The Regeneus AGM will be held at the premises of: Grant Thornton Audit Pty Ltd Level 17, 383 Kent Street Sydney NSW 2000 At 1.00pm on Thursday 2 November 2017 The external auditors will be present at the AGM to answer questions relevant to the external audit. 51 • Consolidated Financial Statements for the Year Ended 30 June 2017 Registered Office and Principal Place of Business 25 Bridge Street Pymble, NSW 2073 Board of Directors Dr. Roger Aston (Non-executive Chairman) John Martin (Executive Director) 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 

Continue reading text version or see original annual report in PDF format above