Annual Report 2020 Regeneus Ltd ABN 13 127 035 358 Contents Letter from the Chairman and CEO 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 i 3 14 15 16 17 18 19 45 46 WHO WE ARE Regeneus Ltd (ASX: RGS) is an ASX listed clinical stage regenerative medicine company using stem cell technologies to develop a portfolio of novel cell-based therapies focussed on neuropathic pain, including osteoarthritis and various skin conditions. The Company has two platform technologies, Progenza and Sygenus. The Company’s strategy focuses on bringing Progenza to commercialisation in Japan, targeting osteoarthritis (OA). Letter from the Chairman and CEO Dear fellow shareholders On behalf of the Board of Directors we are pleased to present Regeneus’ annual report for the 2020 financial year. A number of important milestones were achieved in 2020, including our revised strategy to focus on the global neuropathic pain market which anchored many of our activities during the year and beyond. We are pleased to note that by focusing on the neuropathic pain market, we were able to successfully secure a transformative licensing deal with Kyocera Corporation of Japan: to collaborate, license and commercialise our lead stem cell technology platform, Progenza, for knee osteoarthritis in Japan. While this announcement was made outside the 2020 financial year, our activities during the year paved the way for securing this significant transaction. Operational changes and focus on global pain market 2020 was a productive year as Regeneus implemented a number of operational changes to realign its focus on the global pain market. In particular, the Company underwent a major restructure in order to streamline operations and reduce costs to ensure the preservation and enhancement of shareholder value. This restructure included a reduction in operational expenditure by up to 50 per cent and ensuring the Company’s priority remained focused on the commercialisation of Progenza. Of course, during the financial year the COVID-19 pandemic affected many businesses across industries and sectors. For Regeneus, disruptions were minimal given our research and development activities were able to continue largely unaffected. We are also pleased to report that the management team was able to navigate the challenges of international border closures and successfully consummate the transformative deal with Kyocera in August 2020. Our recent licensing and collaboration agreement with Kyocera was an important milestone as it provides a clear pathway for the commercialisation of Regeneus’ lead platform technology, Progenza, in Japan. As noted above, while the transaction with Kyocera was concluded just outside the 2020 financial year, it was an important milestone for the Company. Not only does it illustrate a clear commercialisation pathway for Progenza in Japan, but it also provides Regeneus with sufficient cash runway through to a commercial launch of its Progenza OA product in Japan. The terms of the transaction with Kyocera are also highly attractive, with upfront and milestone payments amounting to US$19 million to be received by the Company, in addition to the receipt of single to high double-digit royalties for future Progenza OA product sales in Japan. Importantly, the licensing deal also provides Regeneus with flexibility as it allows the Company to negotiate the licensing of its Progenza OA technology in other regions and for other indications outside of Japan with other partners. Given the global market for osteoarthritis treatments is estimated to be worth $3.5 billion by 2026, we believe this provides Regeneus with an untapped market opportunity. Clinical and regulatory progress During the 2020 financial year, Regeneus was able to secure a number of important clinical and regulatory milestones for its platform technologies. For example, in the first quarter of the financial year, we announced that Progenza was able to demonstrate a reversal of disease in a neuropathic pain model; a single injection of Progenza resulted in the complete reversal of symptoms of allodynia, a condition in which pain occurs from what is normally non-painful stimulation of the skin, such as light touch. These positive preclinical results support our move to target the global pain market and underscore the versatility of our platform technology to potentially address additional indications and diseases. We also continued our existing research partnership with Monash University to explore the mode of action of Mesenchymal Stem Cells (MSCs) in pain management. This research was further bolstered as Regeneus received a funding grant as part of the Innovation Connections Grant from the Australian Government’s Department of Industry, Innovation and Science. Another important achievement was our new key patent to be granted from the United State Patent and Trademark Office for Progenza. The patent covers a broad range of inflammatory conditions such as Acute Respiratory Distress Syndrome (ARDS), arthritis, heart diseases and auto-immune diseases, and means the Company now has strong IP coverage in all its key markets, including the US, Japan, Europe and Australia. While the Company remains focused on addressing the opportunities in pain and osteoarthritis, this achievement opens doors to partnerships for our lead platform technology for other diseases and indications. Financial Highlights Our financial results during the financial year underscore our commitment to our strategy as we reduced operational expenditure and focused on moving our commercialisation discussions for Progenza. i As part of this, we were able to reduce corporate costs primarily due to the one-off costs of implementing the outcomes of the strategic review, including redundancies and consulting costs associated with securing the Kyocera agreement. Further to this, Regeneus completed a $5.5 million share placement which was supported by institutional and private investors, including a Japanese biotech institutional investor who took up the shortfall. To help support the Company in its commercialisation discussions, in February 2020, the Directors provided loan facilities totaling $4 million. Of this amount, $1.1 million has been drawn and in the new financial year, Regeneus will focus on reducing its current liabilities and strengthen its cash position, including intentions to cancel the loan facilities once the additional upfront Kyocera funds have been received In the third quarter of the financial year we were pleased to report that Regeneus received $1.6 million from Kyocera as part of the licensing transaction subsequently entered into between the parties and referred to above. This initial upfront payment will be followed by further upfront payments in the 2021 financial year and we look forward to sharing these details with our shareholders. Outlook Looking ahead into the 2021 financial year, the Company has secured a transformative deal with Kyocera for its lead platform technology Progenza. This deal is significant as it provides a clear commercialisation pathway for Progenza in Japan, where the osteoarthritis market is expected to be worth $350 million by 2026. In the new financial year, our focus will be on the completion of manufacturing set up and working towards the start of a Phase 2 clinical study in Japan. We look forward to entering into more partnerships with leading universities and research groups to explore potential commercial opportunities for our technologies in order to continue to build long term shareholder value. This includes taking Sygenus into new indications given the recent grant of our additional US patent which covers a broad range of non-inflammatory skin conditions such as aged spots, wrinkles and other aged-related skin concerns. The market for aesthetic therapeutics is significant, estimated to be worth US$53 billion, and we believe Sygenus can potentially address a part of this market. We also look forward to updating the market on our progress in the year ahead and achieving more clinical and regulatory milestones to pave the way for Progenza’s commercialisation in Japan. We thank our fellow directors, our small and dedicated team and our various clinical and research partners for their ongoing support and tireless work to the business despite the disruptions the COVID-19 pandemic has brought about. Finally, we thank our shareholders for their ongoing support for Regeneus. The Kyocera agreement we have recently secured is a major milestone for the Company and we are pleased to share this with our shareholders. We look forward to progressing our collaboration with Kyocera, building our pipeline of stem cell technologies and updating you on this front. Barry Sechos Chairman Leo Lee Chief Executive Officer ii Directors’ report Your Directors present their report for Regeneus Ltd and its controlled entities (the Group) for the financial year ended 30 June 2020. Directors The names of the Directors in office at any time during or since the end of the year are: Barry Sechos Non-executive Chairman Leo Lee CEO and Executive Director Professor Graham Vesey CSO and Executive Director Dr Alan Dunton Non-executive Director Dr John Chiplin Non-executive Director Dr. Glen Richards Non-executive Director Resigned 4 June 2020 Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Chairman Barry Sechos has served on the Board since 2012 and has over 35 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 Concentrated Leaders Fund Ltd (formerly Aberdeen Leaders Fund Ltd) Previous directorships (last 3 years) None Interests in shares 7,700,000 Interests in options Nil Interests in options Nil CEO - Executive Director Leo Lee joined the Board in December 2017 and was appointed CEO in January 2019. Leo brings more than 20 years experience in pharmaceutical innovation, commercialisation, regulation and policy development and has worked extensively in North America and Asia. Most recently, Mr. Lee served as President, Japan, for Merck KGaA. Prior to this role, he served as President, Japan, for Allergan plc, a global pharmaceutical company. Leo has held sales and commercial roles in Merck & Co., IQVIA and Accelrys, Inc Leo received a Bachelor of Science in Molecular Genetics and Microbiology from the University of California. Other current directorships None Previous directorships (last 3 years) None Interests in shares 13,511,000 Interests in options 15,000,000 Consolidated Financial Statements for the Year Ended 30 June 2020 3 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 (last 3 years) None Interests in shares 15,879,968 Interests in options Nil Non-executive Directors Dr. Alan Dunton joined the Board in April 2019. Dr Dunton is a senior pharmaceutical and biotechnology industry leader with over 35 years experience in senior company leadership roles. Dr Dunton has served as a director of 18 companies and is based in Florida, USA. He is the founder and principal of Danerius, LLC a consultancy that provides specialised advisory services to pharmaceutical and biotechnology organisations both in the private and public sectors. Over the last few years, Dr Dunton has also served as an independent board director for a variety of publicly-listed biopharmaceutical and drug development companies such as Palatin Technologies, Oragenics and CorMedix and the private company Cytogel Pharma. Other current directorships None Previous directorships (last 3 years) None Interests in shares Nil Interests in options Nil Dr. John Chiplin joined the Board in April 2019. Dr. Chiplin is Managing Director of Newstar Ventures Ltd and has significant operational, investment and transactions experience in the international life science and technology industries. Between 1995 and 2014, Dr Chiplin served as CEO at three leading publicly-listed software, biotechnology and cancer immunotherapy companies. Based in London, UK, Dr. Chiplin currently serves on the boards of Adalta (ASX: 1AD), Batu Biologics, Scancell Holdings plc (LSE: SCLP, Chairman) and ScienceMedia. Other current directorships Adalta Ltd Previous directorships (last 3 years) Cynata Therapeutics Ltd Interests in shares Nil Interests in options Nil Dr. Glen Richards resigned from the Board in June 2020 having served on the Board since 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 People Infrastructure Ltd Previous directorships (last 3 years) None Interests in shares 4,208,333 Interests in options Nil Company Secretary Sandra McIntosh is the Company Secretary and Head of Corporate Operations. Sandra has been with the Company since 2009, and has more than 20 years management experience in HR, customer service and finance. Consolidated Financial Statements for the Year Ended 30 June 2020 4 • Memorandum of understanding (MOU) signed with Kyocera Corporation of Japan Total revenue Principal activities Regeneus Ltd (ASX: RGS) is a Sydney-based clinical-stage regenerative medicine company using stem cell technologies to develop a portfolio of novel cell-based therapies to address significant unmet medical needs in the human health markets with a focus on osteoarthritis and other musculoskeletal disorders, neuropathic pain and dermatology. Operating and financial review Review of operations During Q1 FY2020 a strategic review led to the Group’s activities being streamlined as it focused on its licence arrangements for Progenza in Japan. R&D continued on Progenza and Sygenus. Highlights of the year in review include: • • • • • • • (Kyocera), a diversified multinational listed on the Tokyo stock exchange (TYO:6971) for exclusive negotiation rights for Progenza OA in Japan Receipt of $1.64 million from Kyocera for the successful completion of the due diligence process with a further $1.3 million payable upon signing of a commercial licence arrangement The Group completed a successful $5.5 million private placement and rights issue which included a Japan-based institutional investor with significant experience in the life sciences and regenerative sector taking up the shortfall Directors converted loans of $1.4 million into shares as part of the capital raising Received $1.5m by way of R&D Tax Incentive Repayment of Paddington St Finance Pty Ltd R&D loan and the securing of new loan facilities of $4 million from CEO Leo Lee and Paddington St Finance. Finalised the arrangements with AGC Inc (AGC). which includes the pending share issuance of 22.8 million shares to AGC. Shares to be issued at AGC’s request. Upon issue AGC will become the single largest shareholder in the Group Cash utilised in supplier and employee payments was $4.76 million down from: $5.9 million in FY19. Excluding current year redundancy costs of $784k the average monthly cash utilised on these payments was $331k (FY19: $489k) While outside FY20, in August 2020 the Group signed a collaboration and licence agreement with Kyocera which includes US$19 million in upfront and milestone payments and high single to double-digit royalties on future Progenza sales. This agreement provides a clear commercial pathway for the lead platform technology, Progenza, in Japan. Financial review Operating results The Groups operating results for the year was a loss of $1.1 million (FY19: $6.0 million). The improved result is reflective of the $1.64m from Kyocera for the successful completion of the due diligence process, significantly lower expenditure and includes the $1.9m gain from finalising the AGC arrangement. Revenue from operating activities Operating activities Licence & other fee revenue Expenses Research and development Occupancy Corporate Finance costs Expenses from operations Other expenses 2020 $’000 1,663 1,663 2020 $’000 1,238 263 3,439 271 5,211 18 2019 $’000 Movement $’000 - - 1,663 1,663 2019 $’000 2,433 512 3,922 403 7,270 - - - 180 41 Movement $’000 (1,195) (249) (483) (132) (2,059) 18 (1,855) 88 (180) (48) Gain on settlement of AGC contract liability (1,855) Realised foreign exchange loss on contract liability Unrealised foreign exchange loss on contract liability Share of (gain) / loss on investment 88 - (7) Total expenses 3,455 7,491 (4,036) Consolidated Financial Statements for the Year Ended 30 June 2020 5 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. R&D expenditure for the year was $1.2m (FY19 $2.4m). The continuing reduction in R&D expenditure is a reflection of the cost containment program undertaken in Q1 and R&D being focused on finalising testing and related activities that enhance licensing opportunities for Progenza and Sygenus. 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. The significant improvement over the 12 month period is predominantly reflective of the reduction in current liabilities to $3.6m (FY19: $8.8M). This improvement was driven by a number of significant activities. The capital raising brought into Regeneus net $3.9 million of new cash and also saw $1.4 million of the Directors Loans converted to Regeneus shares. Additionally, the R&D incentive loan from Paddington St Finance was repaid with the R&D incentive receipt and the agreement on the reduction of shares and associated liability to satisfy AGC’s entitlement of $3.5m contributed to a stronger balance sheet. Current Liabilities at $3.6 million includes the Directors loan of $1.1m and the contract liability of $1.4m representing the second invoice to Kyocera which requires signing of the Kyocera licence and collaboration agreement to be recognised as income. The current loan facilities available to the Company of $4 million are drawn to $1.1 million. Occupancy costs Occupancy costs of $263k were significantly down on the prior year due to the conclusion of the Corporate office lease. Occupancy costs are now only the use of laboratory facilities on an ad-hoc basis. Corporate expenses Corporate expenses at $3,439k are 12% lower than prior year ($3,922k) but remain higher than targeted predominantly due to the one-off costs of implementing the outcomes of the strategic review including redundancies of $784k for the Group and increased consulting costs associated with securing the Kyocera arrangements. This category of expenditure includes: corporate employees, Directors, IP, compliance, depreciation and business development costs. Cash flows The net cash inflows for the period were: Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Net change in cash and cash equivalents held Finance costs Operating activities 2020 $’000 (1,918) 16 2,628 726 2019 $’000 (3,608) (8) 2,780 (836) These are predominantly interest on the Directors and the Paddington St Finance loans. Gain on settlement This gain is the result of finalising the AGC Inc share issuance. Previously a financial liability was recognised in respect of AGC’s entitlement to receive US$2.5 million (A$3.6 million) payable in Regeneus shares. In December 2019 AGC agreed to receive a fixed number of Regeneus shares (22.46 million) at a value of $0.16 per share. At the time Regeneus shares were trading at $0.08 giving rise to a benefit of $1.855 million. This arrangement is more fully detailed in the notes to the Financial Statements. Financial Position The Consolidated Statement of Financial Position continues to be a deficit with assets exceeded by liabilities by $0.1m (FY19:$6.4m). The strategic initiatives implemented in FY20 facilitated a reduced cash usage in operating activities. The underlying cash payments to suppliers and employees of $4.8m (excluding the receipt of Kyocera’s first payment received of $1.6m and the R&D incentive received of $1.5m) compared favourably to the prior year of $6.0 million. This comparison is further enhanced when the one-off termination payments including employee provisions of almost $0.8m is considered. Investing activities This amount reflects the net impact of cash on the acquisition and subsequent termination of the AGC Japan Joint Venture. Financing activities The cash provided by financing activities in the September capital raising of $3.9m were in part offset by the Paddington St Finance loan repayment of $1.3m, which was repaid using the R&D incentive received by the Company. Consolidated Financial Statements for the Year Ended 30 June 2020 6 Significant changes in state of affairs There were no other 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 other than the adoption of AASB 16 Leases. Events subsequent to the reporting period In the period from 30 June 2020 through to the signing of the financial report the following important events have occurred: On 11 August 2020, Regeneus announced that it had signed with Kyocera a licence and collaboration agreement. The agreement is for Kyocera to exclusively develop and commercialise Regeneus’ lead stem cell platform technology Progenza for the treatment of knee osteoarthritis in Japan. Regeneus will receive approximately $27 million (US$19m) in upfront, development and regulatory milestone payments consisting of: - - $13 million (US$9m) in upfront and execution payments, data package delivery and establishing Standard Operating Procedures, of which $1.6 million was received in March 2020, $1.3 million is due in the current quarter and the balance in the current financial year. $14 million (US$10m) in regulatory and development milestone payments. Additionally, Regeneus will receive high single to double-digit royalties on all future Progenza OA product sales in Japan. On 19 August 2020, Regeneus announced that the US Patent and Trademark office has issued a notice of allowance for a new patent for Sygenus. The patent covers treatment of a broad range of non-inflammatory skin conditions with adipose-derived cell secretion, including age spots, wrinkles, and other age-related conditions. On 27 August 2020, Regeneus received from Kyocera the second payment under the February 2020 MOU of JPY100m. The net amount after withholding tax was A$1.23m. 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. COVID-19 impact Regeneus has considered the impact of COVID-19 on its business and believes that there is no material impact on its operations, asset values and impairment considerations. As the potential impacts of COVID-19 continue to evolve management will continue to monitor the situation and the effect on the business. Likely developments, business strategies and prospects The finalisation of the licence and collaboration agreement in FY21 Q1 lays a strong foundation for the commercialisation of Regeneus’ lead stem cell platform technology Progenza in Japan as well as in additional jurisdictions. FY21 will focus on the manufacture of Progenza and preparation for a successful Phase 2 clinical trial in Japan. Ongoing clinical trials of Sygenus and the further development of ‘pain’ applications will also continue throughout FY21. 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 in 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 2020 is dated as at 30 June 2020 and was approved by the Board on 27 August 2020. The corporate governance statement is available on Regeneus’ website at: regeneus.com.au/investors/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’ name Board meetings Audit and risk committee Remunerations and nominations charter Barry Sechos Leo Lee Graham Vesey John Chiplin1 Alan Dunton Glen Richards2 A 6 6 6 6 6 6 B 5 6 5 6 6 4 A 2 - - - - 2 B 2 - - - - 1 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. Where a Director joined the Board during the year or resigned their position during the year then the number of meetings entitled to attend is for the relevant period. 1. John Chiplin was appointed Chair of the Rem & Nom committee and appointed as a member of the Audit & Risk committee on 5 June 2020 2. Glen Richards resigned from the Board 4 June 2020 Consolidated Financial Statements for the Year Ended 30 June 2020 7 Dividends paid or recommended No dividends have been paid or declared since the start of the financial year (FY19: Nil). Unissued shares under option 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. Unissued ordinary shares of Regeneus Ltd under option at the date of this report are: The Remuneration Report is set out under the following main headings: Date of granting Expiry date 21/02/2011 31/01/2019 31/01/2019 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/04/2020 01/04/2020 20/02/2021 30/01/2024 30/01/2024 30/09/2024 30/09/2024 30/09/2024 30/09/2024 30/09/2024 30/09/2024 31/03/2025 31/03/2025 Exercise price of option $ 0.136 0.200 0.250 0.100 0.150 0.200 0.250 0.300 0.350 0.100 0.200 Number under option 1,001,674 1,250,000 2,500,000 1,000,000 3,500,000 750,000 750,000 750,000 750,000 3,500,000 1,250,000 During FY20, 15.75 million options over ordinary shares were issued of which 3.5 million were forfeited. Of the balance of 12.25m options, 6.5m were approved at the FY19 AGM and 4.25m were issued subject to shareholder approval (FY19: 5.0m).1.0 million options were issued to staff as part of the Option Share Trust plan (FY19: nil). 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 19 September 2013. These were financed by a full recourse loan provided by the Company to the option holders. Loans associated with almost 8 million of these shares remain outstanding. 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 (FY19: nil). a. b. c. d. e. f. Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based remuneration Bonuses and Other information a. Principles used to determine the nature and amount of remuneration The principles of the Group’s executive strategy and supporting incentive programs and frameworks are to: • Align rewards to business outcomes that deliver value to shareholders, • Drive a high-performance culture by setting challenging objectives and rewarding high performing individuals, • Ensure remuneration is competitive in the relevant employment market place to support the attraction, motivation and retention of executive talent. Regeneus has structured a remuneration framework that is market competitive and complementary to the reward strategy of the Group. The Board has established a Remuneration and Nominations Committee which operates in accordance with its charter as approved by the Board and is responsible for making recommendations to the Board for reviewing and approving compensation arrangements for the Directors and the Executive team. The remuneration structure that has been adopted by the Group consists of the following components: • • Short and long-term incentives, being employee bonuses and options. Fixed remuneration being annual salary, 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. Consolidated Financial Statements for the Year Ended 30 June 2020 8 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: Financial - operating results Performance area: • • 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 65,315,998 – 99.3% ‘For’ votes on its Remuneration Report for the financial year ending 30 June 2019 (FY18: 40,474,751 – 93.6%). 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: Item EPS (cents) Dividends (per share) Net profit (loss) ($000) Share price ($) 2020 2019 2018 2017 2016 (0.004) (0.029) (0.025) 0.016 (0.017) $0 (1,069) $0.070 $0 (6,025) $0.085 $0 (5,185) $0.12 $0 3,271 $0.12 $0 (3,574) $0.14 b. Details of remuneration Details of the nature and amount of each element of key management personnel (KMP) remuneration are shown in the following table: Executive Directors Short term Incentive $ Other benefits $ Cash salary & fees $ Post employ Super- annuation $ Share based payments Total $ Perform- ance related Leo Lee 1 Graham Vesey John Martin 4 2020 298,750 2019 174,000 2020 152,000 2019 212,000 2020 - 2019 345,011 Non-executive Directors Barry Sechos Glen Richards3 John Chiplin 2 Alan Dunton 2 Roger Aston 4 Total Total 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 85,000 60,000 41,250 55,000 55,000 9,166 55,000 9,166 - 70,833 2020 687,000 2019 935,176 - - - - - - - - - - - - - - - - - - - - - - 212,714 511,464 100,490 274,490 42% 44% 4,985 14,440 10,396 20,140 - - (45,275) 20,583 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 171,425 242,536 - 320,319 85,000 60,000 41,250 55,000 55,000 9,166 55,000 9,166 - 70,833 0% 0% - 0% 0% 0% 0% 0% 0% 0% 0% 0% - 0% 4,985 14,440 212,714 919,139 (34,879) 40,723 100,490 1,041,510 1. 2. 3. 4. Leo Lee joined the Board as a non-executive Director in December 2017 and appointed CEO and executive Director 23 January 2019 John Chiplin and Alan Dunton were appointed as non-executive Directors 29 April 2019 Glen Richards resigned as a Director 4 June 2020 John Martin resigned from the role of CEO 23 January 2019 providing 3 months’ notice and both he and Roger Aston resigned from the Board 29 April 2019 Other 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 The share based payment of $212,714 (2019: $100,490) is share based remuneration in the form of options (refer following notes). Consolidated Financial Statements for the Year Ended 30 June 2020 9 The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration At risk – STI At risk – options 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: Name Leo Lee Graham Vesey Barry Sechos Glen Richards John Chiplin Alan Dunton 58% 100% 100% 100% 100% 100% - - - - - - 42% - - - - - Name Leo Lee Graham Vesey Barry Sechos John Chiplin Alan Dunton Base salary $ 325,000 140,000 85,000 55,000 55,000 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. 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 below. Name Leo Lee Leo Lee Leo Lee Leo Lee Leo Lee Leo Lee Leo Lee Leo Lee Number granted Grant date 3,500,000 3,500,000 750,000 750,000 750,000 750,000 3,500,000 1,250,000 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/10/2019 01/04/2020 01/04/2020 Value per option at grant date $ 0.0440 0.0392 0.0357 0.0329 0.0307 0.0288 0.0313 0.0248 Number vested - - - - - - - - Exercise price $ 0.10 0.15 0.20 0.25 0.30 0.35 0.10 0.20 First exercise date Last exercise date 30/09/2020 30/09/2021 31/12/2020 31/12/2021 31/12/2022 31/12/2023 31/03/2021 31/03/2021 30/09/2024 30/09/2024 30/09/2024 30/09/2024 30/09/2024 30/09/2024 31/03/2025 31/03/2025 Options granted in April 2020 tor Leo Lee require shareholder approval at the AGM. During FY20 4,750,000 (average exercise price $0.126) management personnel options were forfeited (FY19: 4,823,210 options forfeited (average exercise price $0.25)) Consolidated Financial Statements for the Year Ended 30 June 2020 10 Shares held by key management personnel The number of ordinary shares in the Company during the FY20 reporting period held by each of the Group’s key management personnel, including their related parties, are set out below: Name Held at 1 July 2019 Granted as remuneration Purchased Other movement Held at 30 June 2020 Leo Lee 1,011,000 Graham Vesey 15,879,968 Barry Sechos 200,000 Glen Richards 2,333,333 John Chiplin Alan Dunton Totals - - 19,424,301 - - - - - - - 12,500,000 - 7,500,000 1,875,000 - - 21,875,000 - - - - - - - 13,511,000 15,879,968 7,700,000 4,208,333 - - 41,299,301 Glen Richards resigned as a Director 4 June 2020. Loans to key management personnel These loans relate to the shareholder loan, the terms of which are disclosed in Note 13. Name Graham Vesey Totals Loan at 1 July 2019 150,552 150,552 Loans repaid Loans Advanced - - - - Other movement Loan at 30 June 2019 150,552 150,552 - - e. Short term incentives included in remuneration Details of the short-term incentive awarded as remuneration to each key management personnel, the percentage of the available incentive 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 incentive is payable in future years. Name Leo Lee Graham Vesey Barry Sechos Glen Richards John Chiplin Alan Dunton Included in remuneration $ Percentage vested in year Percentage forfeited in year - - - - - - - - - - - - - - - - - - f. Other information Options held by key management personnel The number of options to acquire shares in the Company held during the FY19 reporting period by each of the key management personnel of the Group, including their related parties are set out below. Name Balance at 1 July 2019 Granted Forfeited Balance at end of year Vested and exercisable at 30 June 2020 Vested, and un- exercisable at 30 June 2020 Leo Lee Graham Vesey Barry Sechos Glen Richards John Chiplin Alan Dunton 5,000,000 14,750,000 4,750,000 15,000,000 1,250,000 - - - - - - - - - - - - - - - - - - - - - - - Totals 5,000,000 14,750,000 4,750,000 15,000,000 1,250,000 - - - - - - - Of the options granted 10,000,000 were approved by shareholders at the FY19 AGM and the remainder of 4,750,000 options issued to Leo Lee require shareholder approval at the FY20 AGM (FY19: 5,000,000). Consolidated Financial Statements for the Year Ended 30 June 2020 11 Loans by key management personnel These loans are either the R&D loan facility provided by Paddington St Finance Pty Ltd or the loans provided by the Directors in February 2019. These loans are further detailed in note 2’9. Name Barry Sechos (Paddington St Finance) Barry Sechos (Other) Leo Lee Glen Richards John Martin Totals Loan at 1 July 2019 Loans Advanced Loans Repaid Converted to Equity 1,280,000 20,000 1,300,000 - Loan at 30 June 2020 - - 250,000 2,100,000 100,000 50,000 - - - - 250,000 1,000,000 1,100,000 100,000 50,000 - - 3,780,000 20,000 1,300,000 1,400,000 1,100,000 John Martin resigned as a Director 29 April 2019. The loan from John Martin of $50,000 was converted to equity along with the Directors loans. End of audited remuneration report. Consolidated Financial Statements for the Year Ended 30 June 2020 12 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. Details of the amount of the premium paid in respect of the insurance policies is not disclosed as such disclosure is prohibited under the terms of the contract. The Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify any current or former officer or auditor of the Group against a liability incurred as such by an officer or auditor. 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 26 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 14 and forms part of this Directors’ report. Signed in accordance with a resolution of the Board of Directors: Leo Lee CEO and Executive Director Dated this day 27 August 2020 Consolidated Financial Statements for the Year Ended 30 June 2020 13 Auditor’s independence declaration Consolidated Financial Statements for the Year Ended 30 June 2020 14 Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June Revenue Other income Research and development expenses Occupancy expenses Corporate expenses Finance costs Share of (loss) on investment accounted for using equity method Gain on Disposal of Regeneus Japan Inc Loss on disposal of fixed assets Gain on settlement of AGC Inc contract liability Realised foreign exchange loss on contract liability Unrealised foreign exchange loss on contract liability Profit/(loss) before income tax Income tax (expense) / benefit Profit/(loss) for the year Other comprehensive (expense) / income Total comprehensive (loss) for the year Earnings per share Basic earnings per share Earnings per share from continuing operations Diluted earnings per share Earnings per share from continuing operations Note 6 6 7b 17 17 21 21 25 27 27 2020 $ 1,663,345 2019 $ - 722,232 1,466,859 (1,237,657) (2,432,564) (262,972) (512,311) (3,439,261) (3,922,731) (271,471) (402,800) - (40,903) 7,077 (17,622) 1,854,783 (87,500) - - - - - (180,150) (1,069,046) (6,024,600) - - (1,069,046) (6,024,600) - - (1,069,046) (6,024,600) (0.004) (0.029) (0.004) (0.029) Note: This statement should be read in conjunction with the notes to the financial statements. Consolidated Financial Statements for the Year Ended 30 June 2020 15 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 Financial assets at amortised cost Total current assets Non-current assets Property, plant and equipment Right of use assets under lease Intangible assets Investments accounted for using the equity method Total non-current assets Total assets Current liabilities Trade and other payables Provisions Borrowings Lease liabilities Financial liabilities Total current liabilities Non-current liabilities Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Issued capital Other contributed equity Accumulated losses Reserves Total equity Note 8 9 10 11 12 13 14 15 16 17 18 19 20 22 21 22 19 2020 $ 981,845 1,466,400 - 429,394 36,421 570,227 3,484,287 61,805 18,367 - - 80,172 3,564,459 946,268 141,122 1,100,000 5,117 1,440,000 3,632,507 13,843 49,071 62,914 3,695,421 (130,962) 23.1 23.2 23.2 36,358,675 1,797,017 (38,718,175) 431,521 (130,962) 2019 $ 255,463 - 8,615 1,249,440 275,016 596,157 2,384,691 153,448 - - 3,675 157,123 2,541,814 1,055,946 352,677 3,780,000 - 3,564,300 8,752,923 - 175,386 175,386 8,928,309 (6,386,495) 31,076,819 - (37,875,379) 412,065 (6,386,495) Note: This statement should be read in conjunction with the notes to the financial statements. Consolidated Financial Statements for the Year Ended 30 June 2020 16 Consolidated statement of changes in equity For the year ended 30 June Balance at 1 July 2018 Restatement for adoption of accounting standard AASB 15 Share capital $ Other contributed equity $ Share option reserve $ Retained earnings $ Total attributable to parent owners $ Total equity $ - - - - - - - - - - - - - - - 1,652,773 (29,774,504) 2,921,765 2,921,765 - (3,384,150) (3,384,150) (3,384,150) 1,619,450 (33,158,654) (462,385) (462,385) - - - (6,024,600) (6,024,600) (6,024,600) - - - (6,024,600) (6,024,600) (6,024,600) 100,490 - 100,490 100,490 (1,307,875) 1,307,875 - - 412,065 (37,875,379) (6,386,495) (6,386,495) 412,065 (37,875,379) (6,386,495) (6,386,495) - - - (1,069,046) (1,069,046) (1,069,046) - - - (1,069,046) (1,069,046) (1,069,046) 245,706 - 245,706 245,706 (226,250) 226,250 - - 31,076,819 - Restated balance at 1 July 2018 31,076,819 Reported loss for the year Reported other comprehensive income (expense) Total comprehensive income (loss) for the year Employee share-based payment option expense Transfer from reserves to retained earnings for options lapsed Balance at 30 June 2019 Balance at 1 July 2019 Reported loss for the year Reported other comprehensive income (expense) Total comprehensive income (loss) for the year Employee share-based payment option expense Transfer from reserves to retained earnings for options lapsed Equity confirmed pending issuance to AGC Inc - - - - - 31,076,819 31,076,819 - - - - - - Issue of share capital net of transaction costs 5,281,856 - 1,797,017 - - - - 1,797,017 1,797,017 5,281,856 5,281,856 Balance at 30 June 2020 36,358,675 1,797,017 431,521 (38,718,175) (130,962) (130,962) Note: This statement should be read in conjunction with the notes to the financial statements. Consolidated Financial Statements for the Year Ended 30 June 2020 17 Consolidated statement of cash flows For the year ended 30 June Operating activities Receipts from customers Payments to suppliers and employees Interest received Other income and grant received R&D incentive refund Finance costs Note 2020 $ 2019 $ 1,639,344 - (4,760,104) (5,866,152) 780 50,000 19,077 6,000 1,491,498 2,356,937 (339,104) (124,358) Net cash (used in) operating activities 28 (1,917,586) (3,608,496) Investing activities Purchase of property, plant and equipment - (7,620) Receipts from sale of property, plant and equipment Payment for outstanding 50% equity interest in Regeneus Japan Sale of Subsidiary Net cash provided by / (used in) investing activities Financing activities Proceeds from related party loan Repayment of related party loan Proceeds from issue of shares Receipts from shareholder loan Net cash provided by financing activities Net change in cash and cash equivalents held 5,430 (25,494) 36,246 16,182 - - - (7,620) 20,000 4,660,000 (1,300,000) (1,880,000) 3,881,856 25,930 - - 2,627,786 2,780,000 726,382 (836,116) Cash and cash equivalents at beginning of financial year 255,463 1,091,579 Cash and cash equivalents at end of financial year 8 981,845 255,463 Note: This statement should be read in conjunction with the notes to the financial statements. Consolidated Financial Statements for the Year Ended 30 June 2020 18 Notes to the consolidated financial statements 1. Nature of operations Regeneus Ltd is a Sydney based ASX listed clinical stage regenerative medicine company using stem cell technologies to develop a portfolio of novel cell-based therapies focused on neuropathic pain, including osteoarthritis and various skin conditions. The Company has two platform technologies, Progenza and Sygenus. 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 30 June 2020, Regeneus is a Public Group, incorporated and domiciled in Australia. The address of its registered office and its principal place of business is 2 Paddington Street, Paddington, NSW 2021, 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 2020 were approved and authorised for issue by the Board of Directors on 27 August 2020. 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 became effective for the first time to annual periods beginning on or after 1 July 2019. Information on the more significant standard(s) is presented below: AASB 16: Leases This standard AASB 16 ‘Leases’ replaces AASB 117 ‘Leases’ along with three Interpretations (Interpretation 4 ‘Determining whether an Arrangement contains a Lease’, Interpretation 15 ‘Operating Leases-Incentives’ and Interpretation 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’). For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from AASB 117 and Interpretation 4 and has not applied AASB 16 to arrangements that were previously not identified as a lease under AASB 117 and Interpretation 4. The new standard has been applied using the modified retrospective approach. Prior periods have not been restated. Consolidated Financial Statements for the Year Ended 30 June 2020 19 The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of AASB 16, being 1 July 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition. Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of AASB 16. On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight line basis over the remaining lease term. For those leases previously classified as finance leases, the right-of-use asset and lease liability are measured at the date of initial application at the same amounts as under AASB 117 immediately before the date of initial application. On transition to AASB 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under AASB 16 was 7.0%. The Group has benefited from the use of hindsight for determining lease term when considering options to extend and terminate leases. On the date of initial application of AASB 16, the impact to retained earnings was $nil. The table below highlights the impact of AASB 16 on the Group’s statement of financial position for the year ending 30 June 2020. The adoption of AASB 16 did not have a material impact on the Group’s Consolidated Statement of Profit or Loss and Other Comprehensive Income or Loss, and Consolidated Statement of Cash Flows The following is a reconciliation of total operating lease commitments at 30 June 2019 as disclosed in the financial statements at 30 June 2019 to the lease liabilities recognised at 1 July 2019. $ Operating lease commitments disclosed as at 30 June 2019 - Adjustments relating to commitments disclosures Total lease liability for discounting Discounted using the incremental borrowing rate Total lease liabilities recognised at 1 July 2019 28,998 28,998 (5,256) 23,742 AASB Interpretation 23 Uncertainty over Income tax Treatments This interpretation clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes when there is uncertainty over income tax treatments. The interpretation addresses (a) whether and entity considers uncertain tax treatments separately; (b) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (c) how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and (d) how an entity considers changes in facts and circumstances The adoption of this interpretation has had no impact on the current or previous reporting period and as such there have been no adjustments to the opening balance of retained earnings. Consolidated Financial Statements for the Year Ended 30 June 2020 20 Accounting standards issued but not yet effective and not adopted early by the Group At the date of authorisation of these financial statements, there were no new standards, amendments and interpretations to existing standards published but not yet effective, that are relevant to the Group, that have not been adopted by the Group. 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 2020. 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 unrealised 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. Investments in all joint ventures are accounted for using the equity method. 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 receivable 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. Consolidated Financial Statements for the Year Ended 30 June 2020 21 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 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. In arriving at this position, the Directors considered the loss after tax $1,069,046 (2019: $6,024,600), the cash balance $981,845 (2019: $255,463), the deficit of net current assets $148,220 (2019: $6,368,232 and the undrawn loan facilities $2,900,000 (2019: nil) During August 2020, as referred to in the subsequent event note (Note 36) an agreement was signed with Kyocera which includes an imminent payment of $1.3 million (Yen 100,000,000). This agreement gives rise to Regeneus receiving $27 million in upfront, development and regulatory milestones. The Directors have considered the cashflow needs of the Group and believe that the Group has sufficient cash flows to maintain the Group on a going concern basis. 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. Income tax f. The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income). Current and deferred income tax expense (income) is charged or credited directly to other comprehensive income instead of the 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. 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. Inventories g. Inventories are measured at the lower of cost and net realisable value. The average cost method has been used to value inventory. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Consolidated Financial Statements for the Year Ended 30 June 2020 22 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. i. Depreciation The depreciable amount of fixed assets are depreciated on a straight line 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 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. Intangibles j. Intangible assets include acquired software. Intangible assets are accounted for using the cost model whereby capitalised costs are amortised on a reducing balance basis over their estimated useful lives, as these assets are considered 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. The depreciation rates generally used for each class of depreciable assets are: Costs associated with maintaining intangibles are expensed as incurred. Class of fixed asset Office equipment straight line Laboratory equipment straight line Office fit-out straight line Leasehold improvements straight line Depreciation rate (%) 25%-50% 20%-30% Life of lease 20% The amortisation rate used for acquired software is 25% straight line. The Group has reviewed its policy not to capitalise development costs unless they meet the criteria as set in AASB 138. All development costs not meeting the recognition criteria of AASB 138 are expensed. Impairment of non-financial assets k. At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that the assets may be impaired. If any such indication exists, or when annual impairment testing for an asset is required (i.e. intangible assets with 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 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 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. Where practical exemptions for short term and low value leases are applied, expenses are recognised as incurred. Accounting policies applicable to comparative period (30 June 2019) Finance 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 Consolidated Financial Statements for the Year Ended 30 June 2020 23 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, and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss, which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. 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. Classification and subsequent measurement of financial assets Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable). For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into the following categories upon initial recognition: • • • • amortised cost fair value through profit or loss (FVPL) equity instruments at fair value through other comprehensive income (FVOCI) debt instruments at fair value through other comprehensive income (FVOCI) All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. Classifications are determined by both: • The entities business model for managing the financial asset • The contractual cash flow characteristics of the financial assets All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables, which is presented within other expenses. Subsequent measurement financial assets Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVPL): • • they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments as well as government bonds. Financial assets at fair value through profit or loss (FVPL) Financial assets that are held within a different business model other than ‘hold to collect’ or ‘hold to collect and sell’ are categorised at fair value through profit and loss. Further, irrespective of business model financial assets whose contractual cash flows are not solely payments of principal and interest are accounted for at FVPL. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply (see below). Equity instruments at fair value through other comprehensive income (Equity FVOCI) Investments in equity instruments that are not held for trading are eligible for an irrevocable election at inception to be measured at FVOCI. Under Equity FVOCI, subsequent movements in fair value are recognised in other comprehensive income and are never reclassified to profit or loss. Dividend from these investments continue to be recorded as other income within the profit or loss unless the dividend clearly represents return of capital. Consolidated Financial Statements for the Year Ended 30 June 2020 24 Debt instruments at fair value through other comprehensive income (Debt FVOCI) Financial assets with contractual cash flows representing solely payments of principal and interest and held within a business model of collecting the contractual cash flows and selling the assets are accounted for at debt FVOCI. Any gains or losses recognised in OCI will be reclassified to profit or loss upon derecognition of the asset. Impairment of Financial assets AASB 9’s impairment requirements use more forward looking information to recognize expected credit losses – the ‘expected credit losses (ECL) model’. Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost and FVOCI, trade receivables, contract assets recognised and measured under AASB 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss. The Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: • financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’) and • financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’). ‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date. ‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category. Measurement of the expected credit losses is determined by a probability- weighted estimate of credit losses over the expected life of the financial instrument. Trade and other receivables and contract assets The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance at the amount equal to the expected lifetime credit losses. In using this practical expedient, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix. The Group assess impairment of trade receivables on a collective basis as they possess credit risk characteristics based on the days past due. The Group makes no allowance for amounts less than 90 days past due and writes off fully any amounts that are more than 90 days past due. Classification and measurement of financial liabilities The Group’s financial liabilities include borrowings, and trade and other payables. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments). All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income. 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) • Other contributed equity represents the shares to be issued to AGC as part of the termination of agreements with them and to be issued upon their AGC notification to Regeneus. 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 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 Consolidated Financial Statements for the Year Ended 30 June 2020 25 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 For licence revenue, and in order to determine whether to recognise revenue, the Group follows a 5-step process: 1. 2. Identifying the contract with a customer, Identifying the performance obligations, 3. Determining the transaction price, 4. Allocating the transaction price to the performance obligations, 5. Recognising revenue when/as performance obligation(s) are satisfied. The Group will enter into licence transactions and receive upfront and milestone payments as part of research and development collaborations or out- licensing agreements. The total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices using the residual method and cost method. Revenue is recognised either at a point in time or over time, when (or as) the Group satisfies performance obligations by transferring the promised goods or services to its customers. The Group recognises contract liabilities for consideration received in respect of unsatisfied performance obligations or where revenue is constrained and reports these amounts as contract liabilities in the statement of financial position. Similarly, if the Group satisfies a performance obligation before it receives the consideration, the Group recognises either a contract asset or a receivable in its statement of financial position, depending on whether something other than the passage of time is required before the consideration is due. Licence revenue is determined with reference to performance obligations to provide either patents or IP. Licence revenues are considered a right to use and recognised at a point in time, net of any revenue constraints. Revenue relating to the provision of services is recognised when the services are provided. The assessment of the criteria for income recognition and the determination of the appropriate period during which income is recognised are subject to judgement where variable consideration that is constrained and revenue is recognised only when it is highly probable that there will not be a significant reversal of revenue. Consolidated Financial Statements for the Year Ended 30 June 2020 26 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 statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and 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. The R&D Incentive becomes receivable once the tax return is lodged which generally occurs during the first quarter after year end. 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 the recognition and measurement of assets, liabilities, income and expenses. 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 below. Actual results may be substantially different. 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. Where approval is required at the AGM and the service period has commenced the expense is measured from the service period start date and is re-measured at grant date (being AGM). Any true up/adjustment is reflected in future periods. Research and development claim In calculating the R&D incentive, the Group has treated certain research and development activities as eligible expenditure under the Australian Government tax incentive. Management has assessed these activities and expenditures undertaken in Australia and overseas 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 2020 and 2019, the Group has recognised income of $0.67 million and $1.44 million respectively. Refer note 6. 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. Additionally, uncertainty exists from a legislative perspective with the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 Initially due for review on the Economic Legislation Committee by 30 April, now due for report late August 2020. This bill may reduce the incentive from 43.5% to 41.0%. Retrospectivity to the current year is possible. Licence revenue In February 2020 Regeneus signed an MOU with Kyocera as a precursor to a definitive licence arrangement to be agreed. The MOU included 2 payments of JPY 100,000,000 each, represented by: - - Financial consideration for access to and adequate provision of ‘data’ culminating in Kyocera issuing a ‘Review notice’ attesting the adequacy of the data. Such a notice was received on 15 May 2020. Payment for definitive agreement, that while receivable prior to finalisation of a definitive agreement was refundable if such an agreement could not be reached. As at 30 June 2020, Kyocera had issued their ‘Review notice; and Regeneus was entitled to retain the payment received of $1.64 million and recognise this amount as income. Consolidated Financial Statements for the Year Ended 30 June 2020 27 Upon the receipt of the ‘Review notice’ Regeneus was entitled to invoice the second payment, included as at 30 June 2020 in trade and other receivables as $1.44 million. At the time of issuing the invoice both parties agreed that as it was refundable if agreement could not be reached it was more practical to simply delay payment until agreement was reached. Regeneus deferred the recognition of the revenue in accordance with the accounting standards, specifically AASB 15 Revenue from contracts with customers, including an offset amount in contract liability. Subsequent to 30 June 2020 agreement between the two parties was reached and payment became due (refer subsequent events). Loans to Shareholder’s The Group holds full recourse loans to shareholders totalling $870,227 (FY19: $896,157) that were provided at the time of the 2013 IPO. As outlined in ‘impairment of financial assets’ above, the Group has made an adjustment for expected credit losses. The Group assesses expected credit losses with reference to the history of losses and considering the value of shares held by the shareholders to determine future expected credit losses. The provision for expected credit losses has been raised against the loans to shareholders, reflecting the reduction in the share price to $0.07 at balance date and the expected credit loss on realising these loans. Consolidated Financial Statements for the Year Ended 30 June 2020 28 4. Controlled entities Set out below are details of the subsidiaries held directly by the Group. 6. Revenue and other income Name of the subsidiary Regeneus Animal Health Pty Ltd Cell Ideas Pty Ltd Country of incorporation & principal place of business Australia 2 Paddington Street, Paddington NSW 2021 Australia 2 Paddington Street, Paddington NSW 2021 5. Segment reporting Principal activity Group proportion of ownership interests 30 June 2020 30 June 2019 Non-trading 100% 100% Operating activities Licence fee income Other fee income Total revenue Other income Non-trading owns various IP 100% 100% Federal Government initiatives and grants Interest income R&D incentive Total other income Identification of reportable income segments The Group’s operating segment is based on the internal reports that are reviewed and used by the Board of Directors (being the Chief Operating Decision Makers (CODM)) in assessing performance and in determining the allocation of resources. Following 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. 2020 $ 2019 $ 1,639,345 24,000 1,663,345 50,000 780 671,452 722,232 - - - 6,000 19,077 1,441,782 1,466,859 Consolidated Financial Statements for the Year Ended 30 June 2020 29 7. Results for the year The results for the year have been arrived at after charging the following items: 9. Trade and other receivables Trade and other receivables include the following: a. Expense Premises rental expense on operating leases minimum lease payment Amortisation of intangible assets Depreciation Right of use assets amortisation Loss on disposal of assets 2020 $ - - 68,591 5,375 17,621 2019 $ 436,562 1,644 269,136 - 2,284 Trade Receivables Total trade and other receivables 2020 $ 1,466,400 1,466,400 2019 $ - - These 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 was noted. Included with trade receivables is $1,440,000 (JPY 100,000,000) which is the second payment under the February 2020 MOU signed with Kyocera. This amount was included in the licence agreement referred to in Subsequent Events. Employment expenses (excludes share-based payment) 1,367,775 2,743,048 Superannuation expense Share-based payments b. Finance costs - Interest expense - Bank and finance charges Total finance costs 8. 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 111,972 245,706 248,676 22,795 271,471 2020 $ - 981,700 145 981,845 247,302 100,490 320,926 81,874 402,800 2019 $ 11 255,310 142 255,463 10. Inventories Inventories consist of the following: Raw materials and consumables at cost Less: Provisions Total inventories 2020 $ - - - 2019 $ 13,014 (4,399) 8,615 In September 2019 the laboratory was closed as the Group prepared for a major licensing opportunity and the resultant commencement of a Phase 2 Trial in Progenza. Previously inventories were utilised in R&D projects and other operational activities. 11. R&D incentive receivable Current R&D incentive receivable Total R&D incentive receivable Consolidated Financial Statements for the Year Ended 30 June 2020 2020 $ 429,394 429,394 2019 $ 1,249,440 1,249,440 30 12. Other current assets Prepayments GST receivable Security deposit on leased premises Other current assets 2020 $ 12,431 23,990 - 36,421 2019 $ 14,609 50,407 210,000 275,016 In September 2019 the Group exited from its leased premises and the security deposit was utilised to pay for the make good of the premises. 13. Financial assets at amortised cost Shareholder loan Expected credit loss allowance Shareholder loan 2020 $ 870,227 (300,000) 570,227 2019 $ 896,157 (300,000) 596,157 The shareholder loan is a full recourse, interest-free loan initially for 4 years maturing September 2017. The Directors have extended the maturity of the loans to the 15 June 2019 and while the loans are technically in default the Directors consider the agreement with Kyocera will ensure the collectability in the first half FY21. While the loan is full recourse, in accordance with AASB 9 the ECL (expected credit loss) model credit risk has increased as the amounts are in default and the share price has reduced. Accordingly, an expected credit loss allowance has been made. At the date of this report the share price was $0.15, if this was the share price at reporting date the expected credit loss of nil and would have been recorded in respect of the shareholder loans receivable. Included within the shareholder loan are balances owing by the Directors of the financial year as follows: Graham Vesey 2020 $ 2019 $ 150,552 150,552 Consolidated Financial Statements for the Year Ended 30 June 2020 31 14. Plant and equipment 15. Right of use assets under lease Details of the Group’s property, plant and equipment and their carrying amounts are as follows: Office equipment $ Lab equipment $ Equipment in clinics $ Office fit-out $ Total $ Gross carrying amount Balance 1 July 2019 139,891 613,316 52,116 1,168,665 1,973,988 Additions Disposals - - - - - 112,188 269,153 52,116 1,168,665 1,602,122 Balance 30 June 2020 27,703 344,163 - - 371,866 Depreciation and impairment Balance 1 July 2019 (105,231) (494,528) (52,116) (1,168,665) (1,820,540) The Group’s right of use assets under lease and their carrying amounts are as follows: Gross carrying amount Balance at 1 July 2019 1 Balance at 30 June 2020 Amortisation and impairment Balance at 1 July 2019 Amortisation Balance at 30 June 2020 Carrying amount 30 June 2020 Right of use assets $ 23,742 23,742 - (5,375) (5.375) 18,367 Total $ 23,742 23,742 - (5,375) (5,375) 18,367 92,267 266,022 52,116 1,168,665 1,579,070 Disposals Depreciation (10,605) (57,986) Balance 30 June 2020 (23,569) (286,492) Carrying amount 30 June 2020 4,134 57,671 Gross carrying amount - - - - - (68,591) (310,061) 61,805 1) Initial balance is the value of Right of use assets at adoption of AASB 16 1 July 2019 In the previous year, the group only recognised lease assets and lease liabilities in relation to leases that were finance leases. The assets were presented in property, plant and equipment and the liabilities as part of the group’s borrowings. The adjustments recognised on adoption of AASB 16 on 1 July 2019 is further detailed in note 2. Balance 1 July 2018 146,810 611,362 52,116 1,168,665 1,978,953 Additions Disposals 5,666 1,954 7,620 12,585 - - - 12,585 Balance 30 June 2019 139,891 613,316 52,116 1,168,665 1,973,988 Depreciation and impairment Balance 1 July 2018 (85,900) (412,304) (52,116) (1,011,385) (1,561,705) Disposals Depreciation 10,301 - (29,632) (82,224) - - - 10,301 (157,280) (269,136) Balance 30 June 2019 (105,231) (494,528) (52,116) (1,168,665) (1,820,540) Carrying amount 30 June 2019 34,660 118,788 - - 153,448 Consolidated Financial Statements for the Year Ended 30 June 2020 32 16. Intangible assets Details of the Group’s intangible assets and their carrying amounts are as follows: Gross carrying amount Balance at 1 July 2019 Balance at 30 June 2020 Amortisation and impairment Balance at 1 July 2019 Amortisation Balance at 30 June 2020 Acquired software licenses $ 82,561 82,561 Total $ 82,561 82,561 (82,561) (82,561) - - (82,561) (82,561) 17. Investments accounted for using the equity method During the period the Group had one material joint venture Regeneus Japan Inc. This joint venture was discontinued in the current financial period. On February 25 2020 as part of the agreement with AGC inc, the other joint venture party, the outstanding 50% equity interest in the joint venture was purchased for $25,494. At the time of the purchase Regeneus had an agreement with a third party that they would purchase the entity for the cash held in the company. On the March 3 2020 the sale of the entity was finalised and it was sold for $36,246 represented by cash. The Group has no further commitments or contingent liabilities with respect to Regeneus Japan Inc. The transactions associated with the acquisition and disposal of the entity are noted in the table below: $ Carrying amount 30 June 2020 - - Investments accounted for using the equity method at 30 June 2019 (50% of entity) 3,675 Gross carrying amount Balance at 1 July 2018 Balance at 30 June 2019 Amortisation and impairment Balance at 1 July 2018 Amortisation Balance at 30 June 2019 Carrying amount 30 June 2019 82,561 82,561 (80,917) (1,644) (82,561) - 82,561 82,561 (80,917) (1,644) (82,561) - Payment to AGC outstanding 50% (25 Feb 2020) Receipt for sale of entity (2 March 2020) Gain on disposal of Regeneus Japan Inc Investment at 30 June 2020 25,494 (36,246) 7,077 - Consolidated Financial Statements for the Year Ended 30 June 2020 33 In the prior period the investment was accounted for using the equity method in accordance with AASB 128. Summarised financial information for Regeneus Japan Inc. is set out below: 18. Trade and other payables Trade and other payables consists of the following: Total assets (a) Total liabilities Net assets (a) Includes cash and cash equivalents Expenses Total comprehensive profit (loss) for the year Share of comprehensive loss for the year Exchange gain / (loss) on investment Loss on investment accounted for using equity method 2020 $ - - - - - - - - - 2019 $ 7,350 - 7,350 7,350 (81,806) (81,806) (40,903) 3,315 (37,588) Current Trade payables Accruals PAYG Payable Total trade and other payables 2020 $ 555,759 357,528 32,981 946,268 2019 $ 391,306 607,982 56,658 1,055,946 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 foreign currencies is: 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 Japan Inc. - 0% - 7,350 50% 3,675 US dollar Japanese Yen 2020 $/ ¥ 10,394 1,000,000 2019 $/ ¥ 12,078 350,000 Consolidated Financial Statements for the Year Ended 30 June 2020 34 19. Provisions 20. Other current liabilities Current: Annual leave Opening balance 1 July Benefits accrued / (expensed) Balance as at 30 June Current: Long service leave Opening balance 1 July Benefits accrued Benefits paid Benefits transferred from non-current Balance as at 30 June Current: Make good Opening balance 1 July Provision accrued Expense incurred Balance as at 30 June Total current provisions Non-current: Long service leave Opening balance 1 July Benefits accrued Benefits paid Benefits transferred to current Balance as at 30 June Total non-current provisions 2020 $ 102,481 (40,829) 61,652 40,196 2,881 (11,944) 48,337 79,470 210,000 - (210,000) - 141,122 175,386 3,663 (81,641) (48,337) 49,071 49,071 2019 $ 111,398 (8,917) 102,481 - - - 40,196 40,196 53,700 156,300 - 210,000 352,677 189,057 26,525 - (40,196) 175,386 175,386 Current Related party loan Directors loan Total other current liabilities 2020 $ - 1,100,000 1,100,000 2019 $ 1,280,000 2,500,000 3,780,000 The Related party loan is the R&D loan facility provided by Paddington St Finance Pty Ltd. This loan was repaid in full with the proceeds of the R&D tax incentive received by the Company. The Directors Loan relates to commercial loans provided by a number of Directors in February 2019, refer to note 29 for additional disclosure in relation to these balances. 21. Financial liabilities Current Contract Liability Financial liabilities Total financial liabilities 2020 $ 1,440,000 - 1,440,000 2019 $ - 3,564,300 3,564,300 The contract liability refers to the second payment as part of the February 2020 Kyocera MOU -Payment for definitive agreement. This amount, while receivable prior to finalisation of a definitive agreement was refundable if such an agreement could not be reached. Regeneus was entitled to invoice the second payment in May 2020 and it is included as at 30 June 2020 in Trade and other receivables at $1.44m million. At the time of issuing the invoice both parties agreed that, as it was refundable if agreement could not be reached, it was more practical to simply delay payment until agreement was reached. Regeneus deferred the recognition of the revenue in accordance with the accounting standards, specifically AASB 15 Revenue from contracts with customers, including an offset amount in contract liability. Subsequent to 30 June 2020 agreement between the two parties was reached and payment became due (refer subsequent events Note 36). Consolidated Financial Statements for the Year Ended 30 June 2020 35 The prior period financial liability of $3.56 million relates to the termination of the Manufacturing Licence Agreement and Shareholders Agreement with AGC. As part of the termination of these arrangements US$2.5 million of the upfront payment and milestone payments received by Regeneus from AGC became available to AGC to subscribe for shares in Regeneus. In December 2019, agreement between AGC and Regeneus was reached under which AGC agrees to subscribe, at some time in the future, for US$2.5 million worth of Regeneus shares at an issue price of AUD$0.16 per share. This gave rise to an entitlement of AGC to receive 22,462,712 ordinary shares in Regeneus. The prevailing price of Regeneus shares at the time of the agreement with AGC was $0.08 giving rise to Other contributed equity of $1,797,017 and a gain on the settlement with AGC of the contract liability of $1,854,783. Additionally, an exchange rate gain of $87,500 was recognised due to the change in the USD over the period. Financial liability at beginning of year Movements in period Exchange loss at date of settlement Transferred to other contributed equity Gain on settlement of AGC contract liability Contract termination US$2.5 m at $0.70 Financial liabilities 22. Lease liabilities Lease liability at adoption of standard Lease payments in period Interest expense (included in finance expenses) Total lease liabilities Comprising: Current lease liability Non-current lease liability Total lease liabilities 2020 $ 3,564,300 87,500 (1,797,017) (1,854,783) 2019 $ - - - - - - 3,564,300 3,564,300 2020 $ 23,742 (6,444) 1,662 18,960 5,117 13,843 18,960 2019 $ - - - - - - - Consolidated Financial Statements for the Year Ended 30 June 2020 36 23. Equity 23.1 Share capital The share capital of Regeneus Ltd consists only of fully paid ordinary shares which 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. 2020 shares 2019 shares 2020 $ 2019 $ Shares issued and fully paid 23.2 Other contributed equity In December 2019 the agreements with AGC were terminated. The termination of the agreements gave rise to AGC being entitled to be issued shares in Regeneus to the value of up to $US$2.5 million. AGC confirmed that they would be prepared to be issued with shares in Regeneus based on a valuation of AUD$0.16 per share. This gave rise to an entitlement of AGC to receive 22,462,712 ordinary shares in Regeneus. The prevailing price of Regeneus shares at the time of the agreement was $0.08 giving rise to Other contributed equity of $1,797,017. 2020 shares 2019 shares Beginning of the year 208,885,143 208,885,143 31,076,819 31,076,819 Shares issued 68,939,845 - 5,281,856 - Closing balance at the end of the year 277,824,988 208,885,143 36,358,675 31,076,819 Beginning of the year - Shares to be issued 22,462,712 Closing balance at the end of the year 22,462,712 During 2020, the following shares were issued as part of the capital raisings, no options were exercised. (2019: nil). As at 30 June 2020 these shares had not been issued. Private placement Directors loan conversion Directors subscription Non-renounceable rights issue Shortfall fully placed Total issued during period 29,250,000 17,500,000 5,000,000 7,751,973 9,437,872 68,939,845 The costs associated with these capital raisings were $233,332. 23.3 Reserves The details of reserves are as follows: Balance at 30 June 2018 Share options expense Options exercised 2020 $ - 1,797,017 1,797,017 - - - 2019 $ - - - Share option reserve $ Total reserves $ 1,619,450 1,619,450 100,490 100,490 - - Transfer from reserves to retained earnings for options lapsed (1,307,875) (1,307,875) Balance at 30 June 2019 Share options expense Options exercised 412,065 412,065 245,706 245,706 - - Transfer from reserves to retained earnings for options lapsed (226,250) (226,250) Balance at 30 June 2020 431,521 431,521 Consolidated Financial Statements for the Year Ended 30 June 2020 37 24. Employee remuneration 24.1 Share-based employee remuneration As at 30 June 2020 the Group maintained share-based option plans as part of employee remuneration. 15.75 million options were awarded during the year (FY19: 5.0m). Share options and weighted average exercise prices for the reporting periods presented are as follows. 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 $ 2,271,774 0.17 6,888,210 0.24 9,159,984 - - 5,000,000 0.23 5,000,000 (500,000) 0.28 (5,988,210) 0.25 (6,488,210) - - - - - 1,771,774 0.14 5,900,000 0.22 7,671,774 - - 15,750,000 0.15 15,750,000 (770,100) 0.14 (5,650,000) 0.13 (6,420,100) - - - - - 0.22 0.25 0.25 - 0.20 0.15 0.13 - 1,001,674 0.14 16,000,000 0.18 17,001,674 0.18 1,001,674 0.14 1,250,000 0.20 2,251,674 0.17 1,001,674 0.14 10,250,000 0.17 11,251,674 0.17 Outstanding at 1 July 2018 Granted Forfeited Exercised Outstanding at 30 June 2019 Granted Forfeited Exercised Outstanding at 30 June 2020 Exercisable at 30 June 2020 Exercisable at 30 June 2021 Other details of options currently outstanding: • • • The range of exercise prices is $0.100 to $0.350 The weighted average remaining contractual life is approximately 3 years The 4.75 million options awarded in January 2020 are subject to approval at the AGM The share options were valued using a variation of the binomial option pricing model. The following principal assumptions were used in the valuation: Valuation assumptions Grant date Share price at date of grant Volatility 21 Feb 2011 31 Jan 2019 31 Jan 2019 1 Oct 2019 1 Oct 2019 1 Oct 2019 $0.136 $0.155 $0.155 $0.069 $0.069 $0.069 45% 57% 57% 91% 91% 91% Option life 10 years 5 years 5 years 5 years 5 years 5 years Dividend yield 0% 0% 0% 0% 0% 0% Risk free investment rate Fair value at grant date Exercise price at date of grant Grant date Share price at date of grant Volatility 5.60% 1.9% 1.9% 0.75% 0.75% 0.75% $0.085 $0.067 $0.058 $0.044 $0.039 $0.036 $0.136 1 Oct 2019 $0.20 31 Jan 2019 1 Oct 2019 $0.25 31 Jan 2019 1 Oct 2019 $0.10 31 Jan 2019 1 Apr 2020 $0.15 1 Apr 2020 $0.069 $0.069 $0.069 $0.053 $0.053 $0.20 31 Jan 2019 91% 91% 91% 91% 91% Option life 5 years 5 years 5 years 5 years 5 years Dividend yield 0% 0% 0% 0% 0% Risk free investment rate Fair value at grant date Exercise price at date of grant 0.75% 0.75% 0.75% 0.54% 0.54% $0.033 $0.031 $0.029 $0.031 $0.025 $0.25 $0.30 $0.35 $0.10 $0.20 In total, $245,706 (2019: $100,490), 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. Consolidated Financial Statements for the Year Ended 30 June 2020 38 25. Income tax expense 26. Auditor’s remuneration 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 27.5% (2019: 27.5%) and the reported tax expense in profit or loss are as follows: 2020 $ 2019 $ Audit and review of financial statements 2020 $ 2019 $ - Auditors of Regeneus Ltd – Grant Thornton 108,595 115,000 Remuneration for audit and review of financial statements 108,595 115,000 (293,988) (1,656,765) Other services Other services Total other services remuneration Total auditor’s remuneration 27. Earnings per share - - - - 108,595 115,000 The prima facie tax on (loss) / profit before income tax is reconciled to the income tax as follows Prima facie tax receivable on (loss) / profit before income tax at 27.5% Less: Tax effect of: - Research and development incentive - Timing differences Add: Tax effect of: - Non-deductible expenses - Timing differences - Tax losses not brought to account 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 (184,649) (396,490) (327,212) - 468,974 1,008,459 - 227,328 336,875 817,468 - 0% 2020 $ - 0% 2019 $ 10,226,082 9,001,083 833,534 833,534 2,440,615 3,425,339 13,500,231 12,259,956 3,712,564 3,646,488 2019 tax losses not recognised have been restated to reflect amended tax returns. Both the basic and diluted earnings per share have been calculated using the loss attributable to shareholders of the Parent Company as the numerator (i.e. no adjustments to the loss were necessary in FY20 or FY19). 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: 2020 $ 2019 $ Earnings per share Basic earnings per share from continuing operations (0.004) (0.029) The weighted average number of ordinary shares used as the denominator on calculating the EPS 265,883,744 208,885,143 Diluted earnings per share Diluted earnings per share from continuing operations (0.004) (0.029) The weighted average number of ordinary shares used as the denominator on calculating the DEPS 265,883,744 208,885,143 Share options have not been included in the diluted EPS calculation because they are anti-dilutive. Consolidated Financial Statements for the Year Ended 30 June 2020 39 28. Reconciliation of cash flows from operating activities 29. Related party transactions and loans On 29 June 2018 the Group entered into an R&D loan facility agreement with Paddington St Finance Pty Ltd, a related party. The facility forward funded, via a loan, the lesser of 80% of the expected R&D tax incentive claim or $2m. In the reporting period a final drawdown of $20k was undertaken. The R&D tax incentive was received in October 2019 and the loan and all outstanding interest were repaid. On the 28 February 2019, the Company received loans from the Directors totalling $2,500,000 in an arms-length arrangement. The loans were unsecured and repayable on the earlier of 2 March 2020 or 10 days after a capital raise sufficient to fund repayment of the loans of the Company and support the working capital requirements of the Company for the following 12 months, as reasonably determined by the Board of Directors. During September 2019 a successful capital raising was undertaken and $1.4 million of the Directors Loans were converted to shares. The interest associated with these loans was paid out in March 2020 in accordance with the original loan arrangements. The remaining $1.1 million loan was renegotiated as part of a new $4 million loan facility, $2 million provided by Leo Lee and a further $2 million provided by Paddington St Finance Pty Ltd. At the end of the current financial year only $1.1 million has been drawn. The remaining loans terms include a market interest rate reflective of prior loans and current market conditions. Cash flows from operating activities (Loss) / Profit for the period Non cash adjustments for: • Depreciation • Amortisation • Loss on disposal of plant and equipment • Gain on settlement of equity instrument 2020 $ 2019 $ (1,069,046) (6,024,600) 73,966 269,136 - 17,622 (1,854,783) 1,644 2,284 - • Equity settled share-based transactions 245,706 100,490 • Provision for shareholder loan • Realised foreign exchange (gain) / loss • Unrealised foreign exchange gain • Gain on disposal of Regeneus Japan Inc • Share of loss on investment accounted for using the equity method Net changes in working capital: • Change in inventories • Change in trade and other receivables • Change in right of us assets • 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 - 300,000 87,500 (3,315) 180,150 (7,077) - - 40,903 8,615 6,721 (1,466,400) (4,782) - - 238,595 80,291 (86,001) 361,053 (23,677) (12,316) 820,046 915,155 1,440,000 - (337,870) 173,908 Net cash inflow / (outflow) from operating activities (1,917,586) (3,608,496) Consolidated Financial Statements for the Year Ended 30 June 2020 40 Related party transactions Paddington St Finance Pty Ltd Balance at beginning of the year Loan received Loan repaid Balance at year end Interest charged Interest paid 2020 $ 2019 $ 1,280,000 20,000 1,000,000 2,160,000 (1,300,000) (1,880,000) During the year Regeneus provided technical support to BioPoint Pty Ltd a company of which Graham Vesey is a director and significant shareholder. These services are valued at $48,000 over a 4 month period to August 2020. Of this amount $24,000 was incurred in the reported financial year. This revenue is in part offset by an agreement where BioPoint Pty Ltd provided laboratory space and facilities over a similar period valued at $50,000. Of this amount, $25,000, was incurred by Regeneus in the reported financial year. 30. Transactions with key management personnel - 1,280,000 Key management personnel remuneration includes the following expenses: 54,664 (206,807) 195,277 (43,134) 152,143 Unpaid interest on loan from Paddington St Finance Pty Ltd - Directors Loans Received Leo Lee Barry Sechos Glen Richards John Martin Balance at year end Interest charged Interest paid Unpaid interest on loan from Directors Total received from related parties 1,100,000 2,100,000 - - - 1,100,000 192,340 (107,840) 209,500 1,309.500 250,000 100,000 50,000 2,500,000 125,000 - 125,000 4,057,143 Salaries & Fees Short term incentive Total short-term employee benefits Defined contribution pension plans Other long-term benefits Share-based payments Total remuneration 2020 $ 2019 $ 687,000 886,512 - 687,000 14,440 4,985 212,714 919,139 - 886,512 40,723 (34,879) 100,490 992,846 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. In addition, interest of $152,143 (2018: $nil) due to Paddington St Finance and interest accrued of $125,000 due on the Directors’ loans is included in trade payables. 31. Contingent liabilities Loans receivable relate to the shareholder loan, terms of which are disclosed in Note 13 Related party loan receivable Graham Vesey Total related party loans 2020 $ 150,552 150,552 2019 $ 150,552 150,552 Recently a claim has been received for reimbursement of additional expenditure from a group that undertook an animal trial for the Group in 2015 through to 2018. Management believe it is an ambit claim with little merit and will pursue avenues to minimise this claim and may potentially seek reimbursement of the costs of the failed trial paid to date. It is anticipated the net claim including costs would not exceed $50,000. Other than the claim noted above, the Group has no other contingent liabilities as at 30 June 2020 (FY19: $nil). Consolidated Financial Statements for the Year Ended 30 June 2020 41 32. Capital expenditure commitments There were no capital commitments as at the 30 June 2020 (FY19: $nil). 33. 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 9 as detailed in the accounting policies to these financial statements, are as follows: Financial assets at amortised cost Cash and cash equivalents Trade and other receivables Shareholder loan Total financial assets at amortised cost Financial liabilities at amortised cost Trade and other payables Related party loan Directors’ loans Financial liabilities Total financial liabilities at amortised cost 2020 $ 981,845 1,466,400 570,227 3,018,472 2020 $ 913,287 - 1,100,000 1,440,000 3,453,287 2019 $ 255,463 - 596,157 851,620 2019 $ 999,288 1,280,000 2,500,000 3,564,300 8,343,588 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. 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. The Group is exposed to foreign exchange risk arising primarily from transactions with foreign suppliers and revenue from licence arrangements. Material exposure to currency risk arises from foreign currency transactions and is limited to trade receivables and trade payables and financial liabilities. The total AUD balance of trade receivables denominated in a foreign currency (JPY) at 30 June 2020 is $1,440,000 (FY19: nil) and trade payables denominated in a foreign currency (USD & JPY) at 30 June 2020 is $29,510 (FY19: $24,300) and contract liability at 30 June 2020 of $1,440,000 (FY19 Financial liability $3,564,000) Management have assessed the risk of movement in interest rates, and foreign exchange and with due consideration of the nature of the material debtor, which as at 30 June 2020 was offset by a contract liability of the same amount to Kyocera, and believe the nature of the net risk is minimal 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 and JPY / AUD exchange rate ‘all other things equal’. It assumes a +/- 10% change of the AUD / USD and the AUD / JPY exchange rate for the year ended at 30 June 2020 (FY19: 5%). 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 and the AUD / JPY would have the following impact: Profit / (loss) impact of exchange rate sensitivity 2020 $ 2019 $ If AUD had strengthened against USD & JPY by 10% (2019: 5%) (2,950) (177,188) If AUD had weakened against USD & JPY by 10% (2019: 5%) 2,950 177,694 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. Consolidated Financial Statements for the Year Ended 30 June 2020 42 The Group’s objective is to maintain cash and deposits to meet its liquidity requirements for 180 day periods at a minimum. This objective relies on the Groups Capital Management Policies and in conjunction with these 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. As at 30 June 2020 the Group’s non-derivative financial liabilities have contractual maturities as summarised below: 2020 Current within 6 months $ 2020 Current within 6 to12 months $ 2019 Current within 6 months $ 2019 Current within 6 to 12 months $ Trade and other payables 913,287 Related party loan Directors’ loans - - - - 874,288 1,280,000 - - 1,100,000 - 2,500,000 Financial Liabilities 1,440,000 - 3,564,300 - Total financial liabilities 2,353,287 1,100,000 5,718,588 2,500,000 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, 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. There are no significant concentrations of credit risk within the Group. Other financial assets at amortised cost include loans to shareholders. The Group applies the AASB 9 simplified model of recognising lifetime expected credit losses for loans to shareholders as these items do not have a significant financing component. In measuring the expected credit losses, loans to shareholders have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due and also according to the geographical location of customers. The expected loss rates are based on the repayment profile over the past 48 months before 30 June 2020 as well as the corresponding historical credit losses during that period. The historical rates are adjusted to reflect current and forwarding looking factors affecting the customer’s ability to settle the amount outstanding. The group has identified liquidity in the Company’s shares to be the most relevant factor and adjusts loss rates for expected changes in these factors. However, given the short period exposed to credit risk, the impact of these factors has not been considered significant within the reporting period. Loans to shareholders are written off (ie derecognised) when there is significant change in the share price of the Company and a likely change in the expectation of recovery. The Company share price at 30 June 2020 and the failure to make payments at the loan due date and to engage with the Group on alternative payment arrangement amongst other is considered indicative of a reduced expectation of recovery. On the above basis the expected credit loss for the shareholder loan as at 30 June 2020 was determined as follows: Expected credit loss rate 0% 33% 100% Stage 1 $ Stage 2 $ Stage 3 $ Total $ - Gross carrying amount Lifetime expected credit loss - - 870,227 (300,000) - - 870,227 (300,000) 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. Consolidated Financial Statements for the Year Ended 30 June 2020 43 34. Fair value measurement 36. Subsequent events 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 In the period from 30 June 2020 through to the signing of the financial report the following important events have occurred: On 11 August 2020, Regeneus announced that it had signed with Kyocera a licence and collaboration agreement. The agreement is for Kyocera to exclusively develop and commercialise Regeneus’ lead stem cell platform technology Progenza for the treatment of knee osteoarthritis in Japan. 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 There were no assets or liabilities held at fair value and no transfers between levels during the financial year. 35. Parent entity information Set out below is the supplementary information about Regeneus Ltd, the parent entity. Regeneus will receive $27 million (US$19m) in upfront, development and regulatory milestone payments consisting of: - - $13 million (US$9m) in upfront and execution payments, data package delivery and establishing Standard Operating Procedures, of which $1.6 million was received in March 2020, $1.3 million is due in the current quarter and the balance in the current financial year. $14 million (US$10m) in regulatory and development milestone payments. Additionally, Regeneus will receive high single to double-digit royalties on all future Progenza OA product sales in Japan. On 19 August 2020, Regeneus announced that the US Patent and Trademark office has issued a notice of allowance for a new patent for Sygenus. The patent covers treatment of a broad range of non-inflammatory skin conditions with adipose-derived cell secretion, including age spots, wrinkles, and other age-related conditions. On 27 August 2020, Regeneus received from Kyocera the second payment under the February 2020 MOU of JPY100m. The net amount after withholding tax was A$1.23m. 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. COVID-19 impact 2020 $ 2019 $ 3,484,187 3,564,359 3,632,507 3,695,421 (131,062) 38,155,692 2,384,591 2,541,714 8,752,923 8,928,309 (6,386,595) 31,076,819 (38,718,275) (37,875,479) 431,521 (131,062) 412,065 (6,386,595) Regeneus has considered the impact of COVID-19 on its business and believes that there is no material impact on its operations, asset values and impairment considerations. As the potential impacts of COVID-19 continue to evolve management will continue to monitor the situation and the effect on the business. Statement of profit or loss and other comprehensive income Profit / (Loss) for the year Other comprehensive income (1,069,046) (6,024,600) - - Total comprehensive profit or (loss) (1,069,046) (6,024,600) Consolidated Financial Statements for the Year Ended 30 June 2020 44 Statement of financial position Current assets Total assets Current liabilities Total liabilities Net assets Issued capital Retained earnings Option reserve Total equity 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 2020 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 2020. 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 Leo Lee Dated the 27th day of August 2020. Consolidated Financial Statements for the Year Ended 30 June 2020 45 Auditor’s Report Consolidated Financial Statements for the Year Ended 30 June 2020 46 Consolidated Financial Statements for the Year Ended 30 June 2020 47 Consolidated Financial Statements for the Year Ended 30 June 2020 48 Registered Office and Principal Place of Business 2 Paddington Street Paddington, NSW 2021 Board of Directors Barry Sechos (Non-executive Chairman) Leo Lee (Executive Director) Professor Graham Vesey (Executive Director) Dr John Chiplin (Non-executive Director) Dr Alan Dunton (Non-executive Director) Company Secretary Sandra McIntosh Website regeneus.com.au Lawyers Dentons Australia Pty Ltd 77 Castlereagh Street Sydney NSW 2000 Auditors Grant Thornton Audit Pty Ltd Level 17, 383 Kent St Sydney NSW 2000 Patent Attorneys Spruson & Ferguson Level 35, 31 Market Street Sydney, NSW 2000 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney, NSW 2000 Stock Exchange Listing Australian Stock Exchange ASX Code: RGS Consolidated Financial Statements for the Year Ended 30 June 2020 49