ORTHOCELL LIMITED — Annual Report 2016

Sep 11, 2016

Orthocell Limited

ABN 57 118 897 135

Annual Financial Statements – 30 June 2016

Orthocell Limited Contents 30 June 2016

Corporate directory	1
Directors’ report	2
Auditor’s independence declaration	15
Consolidated statement of profit or loss and other comprehensive income	16
Consolidated statement of financial position	17
Consolidated statement of changes in equity	18
Consolidated statement of cash flows	19
Notes to the financial statements	20
Directors’ declaration	44
Independent auditor’s report to the members of Orthocell Limited	45

Orthocell Limited Corporate directory 30 June 2016

Directors	Dr Stewart Washer	Executive Chairman
	Mr Paul Anderson	Managing Director
	Mr Matthew Callahan	Non-Executive Director
	Professor Lars Lidgren	Independent Non-Executive Director
	Mr Qi Xiao Zhou	Non-Executive Director
Company Secretary	Mr Simon Robertson
Registered office	Building 191
	Murdoch University
	South Street
	Murdoch WA 6150
Share register	Automic Registry Services
	Suite 1a, Level 1
	7 Ventnor Avenue
	West Perth WA 6005
Auditor	PKF Mack
	4thFloor
	35 Havelock Street
	West Perth WA 6005
Solicitors	Gilbert + Tobin
	1202 Hay Street
	West Perth WA 6005
Bankers	Westpac Banking Corporation
Securities exchange listing	Australian Securities Exchange (ASX code: OCC)
Website	www.orthocell.com.au

1

Orthocell Limited Directors’ report 30 June 2016

The directors present their report, together with the consolidated financial statements, on the consolidated entity (referred to hereafter as the 'consolidated entity') consisting of Orthocell Limited (referred to hereafter as the 'Company' or 'parent entity') and the entity it controlled at the end of, or during, the year ended 30 June 2016.

Directors

The following persons were directors of Orthocell Limited during the financial year and up to the date of this report, unless otherwise stated:

Dr Stewart Washer Executive Chairman appointed 7 April 2014 Mr Paul Anderson Managing Director appointed 21 March 2006 Mr Matthew Callahan Non-Executive Director appointed 30 May 2006 Professor Lars Lidgren Independent Non-Executive Director appointed 17 December 2007 Mr Qi Xiao Zhou Non-Executive Director appointed 2 November 2012

Principal activities

During the financial year the principal continuing activities of the consolidated entity consisted of the development and commercialisation of cell therapies and related technologies.

Review and results of operations

The loss for the consolidated entity after income tax amounted to $3,784,864 (30 June 2015: $3,742,715).

Overview

Orthocell Ltd is a regenerative medicine company dedicated to the development of an important new class of tissue regeneration medical devices, cellular therapies and growth factors for the repair and regeneration of human tendons, ligaments, cartilage and soft tissue defects. Development to date has focused on two main products:

• ‘CelGro[®] ’ a naturally derived collagen medical device for soft tissue repair currently in use as an augment to rotator cuff repair, guided bone regeneration and repair of articular cartilage; and

• Autologous Tenocyte Implantation (“Ortho-ATI[®] ”) for chronic, treatment resistant tendon regeneration.

CelGro[®] is targeted to a variety of orthopaedic, reconstructive and surgical applications and is being readied for first regulatory approval in Europe in 2016. Orthocell’s CelGro[®] scaffold represents a paradigm shift in soft tissue reconstruction and exhibits a number of qualities that make it ideal for use as a guided tissue reconstruction and soft tissue repair device.

Orthocell’s Ortho-ATI[®] is a unique regenerative treatment that uses a minimally invasive, non-surgical approach that uses each patient’s own tendon derived stem cells to stimulate tendon regeneration and is delivered via ultrasound guided injection under local anaesthetic. Published data demonstrates that Ortho-ATI[®] is a durable disruptive technology facilitating the healing of tendons which are resistant to existing therapies.

Summary of key events

The Company has achieved significant progress in the clinical development of CelGro[®] in 2015/16 by demonstrating that this novel medical device has unique characteristics and competitive advantages over existing tissue repair scaffolds, particularly in the areas of cell compatibility, tensile strength and promotion of quality tissue in-growth and scar-less repair:

• In November 2015, the Company announced initial positive safety and tolerability results for CelGro[®] in a pilot clinical study examining the safety and effectiveness of CelGro[®] for the treatment of bone defects around dental implants.

• In December 2015, the Company received approval for a human clinical study examining the safety and effectiveness of its CelGro[®] scaffold, to be used as an augment to the surgical repair of the rotator cuff tendon in the shoulder (The Rotator Cuff Tendon Study or RCTS). In June 2016, the Company released initial positive safety and tolerability results for the RCTS demonstrating that the scaffold is safe and has been well tolerated with no inflammatory reactions or complications.

• In May 2016, Orthocell received human ethics approval to conduct a clinical trial for the use of CelGro[®] in the treatment and augmentation of articular cartilages surgeries (CelGro[®] Hip Study). The study involves 25 patients and aims to demonstrate that CelGro[®] can be used as an augment to hip cartilage surgery and is a safe and tolerable treatment.

2

Orthocell Limited Directors’ report 30 June 2016

During the year the Company received numerous national and international patents for its world leading regenerative medicine technologies. The patents provide important protection of its technologies as Orthocell prepares for registration and commercialisation in global markets. Australian and Chinese patents were granted for CelGro[®] relating to the method of manufacture of novel bio-scaffolds to aid in the surgical repair of soft tissue injuries. US and Canadian CelGro[®] patents were granted for the process of combining tendon stem cells seeded onto collagen based scaffolds for the repair of soft tissue injuries. A Hong Kong patent was awarded for method to manufacture Ortho-ATI[®] for the regeneration of damaged tendons. In January 2016, Orthocell announced issuance of a US patent for cell-factory derived bioactive molecules for the generation of tissue specific growth factors to enhance tissue regeneration.

In November 2015, the Company raised $4.4m via a placement to selected institutional investors in the US, Australia and, following shareholder approval received on 27 January 2016, from various directors and officers of the Company. The Company also issued investors who participated in the placement free attaching unlisted warrants on the basis of 1.35 warrants for each share issued in the placement.

In May 2016, Orthocell received an R&D tax incentive cash refund of $1,507,774 for the financial year 2014/2015. The R&D refund strengthened the Company’s balance sheet and increased the operational runway during a very active clinical trial program for its collagen platform technology, CelGro[®] and cellular therapy for tendon regeneration, Ortho-ATI[®] .

The effectiveness of Ortho-ATI[®] , the world leading tendon regeneration technology was further validated during the year with the release of new positive results from a study of its tendon cell treatment for tennis elbow in 25 workers compensation patients. The data shows Ortho-ATI[®] significantly improved the clinical outcomes of patients with long-term tennis elbow degeneration, showing reduced pain and increased functionality enabling 88% of patients to return to work and more than 50% of these returned at full capacity following Ortho-ATI[® ] treatment. The Company also held its inaugural user group meeting in Sydney. Attendees included 40 leading orthopaedic surgeons, sports physicians, radiologists, physiotherapists and pain clinicians from Australia and New Zealand. The meeting brought together some of Australia’s leading doctors to discuss their positive experiences and clinical outcomes which further demonstrated that Ortho-ATI[®] technology is a safe and effective treatment for degenerate tendons.

Orthocell’s regenerative cell therapy for cartilage repair, Ortho-ACI[®] was applied to its first patient in Singapore in November 2015. Singapore is the latest international market Orthocell has expanded Ortho-ACI[®] into, following its successful entry to Hong Kong earlier this year where the therapy was used on patients with articular cartilage damage within the knee joint.

The Company progressed its exciting pipeline regenerative medicine technologies in lab grown tendons and cell factory derive growth factors for the repair of tendon, ligament and bone defects. Orthocell has made yet another step towards the potential for an off the shelf product for doctors and patients seeking out cost effective treatments to alleviate symptoms that affect their mobility and quality of life.

• The Company partnered in the receipt of an Australian Research Council (ARC) grant of $430,000 to further investigate tendon tissue and develop novel therapies such as the laboratory fabricated tendon project announced by Orthocell in November 2014.

• The presentation by Orthocell’s collaborators of its successful ‘cell factory’ data at the European Bone and Joint Infection Society in Estoril Portugal September 2015. The data has supported the role of growth factors and extracellular matrix proteins which were derived by the researchers from bone cells cultivated in a cell factory, to be combined with scaffolds, to regenerate serious bone defects.

• In April 2016, the Company announced the publication of a study undertaken by leading researchers in the respected Journal ACS Applied Materials and Interfaces verifying that cell factory derived bioactive molecules in combination with a scaffold promotes bone healing.

During the year the company presented at numerous leading national and international congresses further supporting the international interest, safety and effectiveness of its tendon regeneration product (Ortho-ATI[®] ) and cartilage regeneration (Ortho-ACI[®] ) products, as well as its pipeline products. Presentations included:

• Previously released positive follow up data for the treatment of recalcitrant tendon injuries in the hip (2 year data) and the elbow (4.5 year data) at the 16th Biennial Congress of the South African Sports Medicine Association;

3

Orthocell Limited Directors’ report 30 June 2016

• Positive two year follow up data for Ortho-ACI[®] treatment for articular cartilage defects of the knee and ankle at two leading regional orthopaedic association annual scientific meetings in Brisbane (Australian Orthopaedic Association) and Singapore (Singapore Orthopaedic Association);

• Previously announced “tendon outside the body” tendon bioreactor work at the Australian Orthopaedic Association;

• Previously released positive data around its Ortho-ATI[®] treatment for degenerate tendon and pipeline opportunities at the international stem cell meeting in the US and Barcelona.

• Previously released positive two year follow up data for the treatment of recalcitrant tendon injuries in the hip at the 3rd Melbourne International Hip Arthroscopy meeting.

In March 2016, Paul Anderson (CEO, Orthocell) presented at the 28th Annual Roth Capital Partners conference in California highlighting the Company’s progress and confirming that the Company is deal ready and positioned for growth. Mr Anderson also presented during extensive promotional roadshows in Perth (December 2015) and Melbourne and Sydney (April 2016).

Dividends

No dividends were paid during the current or previous financial years and no dividends have been declared subsequent to the financial year end and up to the date of this report.

Significant changes in the state of affairs

There were no significant changes in the state of affairs of the consolidated entity during the financial year.

Likely developments and expected results of operations

Having completed its successful capital raise in November 2015, the Company will continue the development and commercialisation of cell therapies and related technologies. The Company expects to complete and publish clinical trials currently being conducted and progress regulatory approvals.

Environmental regulation

The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law.

Therapeutic Goods Administration regulation

Orthocell Limited is subject to Australian federal legislation administered by the Therapeutic Goods Administration (TGA). Orthocell hold a manufacturing license (MI-19052008-LI-002420-11) provided by the TGA for tissue processing, on site storage and release for supply of autologous tenocytes and chondrocytes.

4

Orthocell Limited Directors’ report 30 June 2016

Information on directors

Name:	Dr Stewart Washer
Title:	Executive Chairman
Experience and expertise:	Dr Washer has over 20 years of CEO and Board experience in medical
	technology, biotech and agrifood companies. He is currently the Chairman
	of Cynata Therapeutics Ltd (ASX:CYP), a company developing stem cell
	therapies and Chairman of Minomic International Ltd who have an accurate
	test for prostate cancer. He is also a founder of Zelda Therapeutics and
	AusCann which operate in the medicinal therapies space, and Firefly
	Health, developing a digital health device for diabetes.
	Dr Washer was previously the CEO of Calzada Ltd (ASX:CZD), the
	founding CEO of Phylogica Ltd (ASX:PYC) and before this, the CEO of
	Celentis managing the commercialisation of intellectual property from
	AgResearch in New Zealand with 650 Scientists and $130 million
	revenues. Dr Washer was a founder of a NZ$120m New Zealand based life
	science fund and Venture Partner with the Swiss based Inventages Nestlé
	Fund. He was also a Senator with Murdoch University
Directorships (last 3 years):	Dr Washer is currently a director of Cynata Therapeutics Ltd (ASX:CYP). In
	the past 3 years Dr Washer has been a director of iSonea Ltd (ASX:ISN,
	from 2012 to 2014).
Interest in shares:	475,261
Interests in options:	1,745,842
Name:	Mr Paul Anderson
Title:	Managing Director
Experience and expertise:	Mr Anderson has over 20 years’ experience in the medical device and
	regenerative medicine fields with expertise in bridging the gap between
	research and clinical practice in the development of emerging medical
	technologies. He also has extensive expertise in the establishment of GMP
	manufacturing facilities and scale-up activities for cell therapies and
	biological medical devices, and the associated regulatory filings.
	Mr Anderson has a proven track record with over 15 years’ experience in
	CEO and board roles. His intimate knowledge of the regenerative medicine
	fields compliments his insight and know-how in taking biological therapies
	from research to clinical applications and market introduction.
Directorships (last 3 years):	Nil
Interest in shares:	6,973,750
Interests in options:	2,763,692

5

Orthocell Limited Directors’ report 30 June 2016

Information on directors (continued)

Name:	Mr Matthew Callahan
Title:	Non-Executive Director
Experience and expertise:	Mr Callahan is a founding director of Orthocell. He is also the founding
	CEO of iCeutica, and a co-inventor of some of the technologies that
	comprise the SoluMatrix Fine Particle Technology™ for improving the
	bioavailability of pharmaceuticals. iCeutica and its partner Iroko
	Pharmaceuticals have successfully secured the approval of three drugs by
	US FDA . He has more than 20 years legal, licensing and investment
	management experience and was also the founding CEO of Dimerix
	Bioscience Pty Ltd and is a director of Glycan Bioscience LLC.
	Mr Callahan has worked as investment director for two venture capital firms
	investing in life sciences and other sectors. He was General Manager and
	General Counsel with an ASX listed patent licensing company where he
	was responsible for licensing programs that have generated over $100
	million in revenue.
Directorships (last 3 years):	Botanix Pharmaceuticals Limited (ASX:BOT)
Interest in shares:	10,204,559
Interests in options:	1,650,000
Name:	Professor Lars Lidgren
Title:	Independent Non-Executive Director
Experience and expertise:	Professor Lidgren has authored and co-authored over 250 original
	publications, and has more than 150 patents/applications. He was
	spokesman for Biomaterials in the Nordic Orthopaedic Society, Chairman
	for the Swedish National Knee Register, Director of the National Board of
	Health and Welfare, Musculoskeletal Competence Centre and member of
	several editorial boards. Professor Lidgren initiated and has led the UN
	ratified Bone and Joint Decade and founded Scandimed, a global leading
	company in bone cements and delivery, acquired by Biomet. Professor
	Lidgren is the inventor, founder and board member of Bone Support, an
	emerging leader in bone therapeutics.
Directorships (last 3 years):	Professor Lidgren is currently Chairman of GWS Production AB (Nasdaq:
	OMX).
Interest in shares:	964,091
Interests in options:	204,767

6

Orthocell Limited Directors’ report 30 June 2016

Name:	Mr Qi Xiao Zhou
Title:	Non-Executive Director
Experience and expertise:	Mr Zhou has 16 years’ experience within China as a senior business
	manager and executive. Mr Zhou is the founding CEO of Shenzhen
	Lightning Digital Technology Co Ltd, a company focused on the
	manufacture and distribution of electronic semiconductor since 2001. Mr
	Zhou has experience within the public markets in Hong Kong, China and
	Taiwan and brings to the Board a wealth of business management and
	development experience. In particular Mr Zhou has broad connections and
	experience in the licensing of technologies into the Asian region.
Directorships (last 3 years):	Nil
Interest in shares:	5,996,241
Interests in options:	204,767

Company Secretary

Simon Robertson has held the role of Company Secretary since 8 November 2012. Mr Robertson gained a Bachelor of Business from Curtin University in Western Australia and Master of Applied Finance from Macquarie University in New South Wales. He is a member of the Institute of Chartered Accountants and the Governance Institute of Australia. Mr Robertson currently holds the position of Company Secretary for a number of publically listed companies and has experience in corporate finance, accounting and administration, capital raisings and ASX compliance and regulatory requirements.

Meetings of directors

The number of meetings of the Company's Board of Directors ('the Board') held during the year ended 30 June 2016, and the number of meetings attended by each director was:

	Full	Board	Remuneration	Committee
	Attended	Held(1)	Attended	Held(1)
Dr Stewart Washer	5	5	1	1
Mr Paul Anderson	5	5	-	-
Mr Matthew Callahan	4	5	1	1
Professor Lars Lidgren	5	5	1	1
Mr Qi Xiao Zhou	4	5	-	-

(1) Held: represents the number of meetings held during the time the director held office.

7

Orthocell Limited Directors’ report 30 June 2016

Remuneration report (audited)

This Remuneration Report outlines the director and executive remuneration arrangements of the Company and the consolidated entity in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel (KMP) of the consolidated entity are defined as those persons having the authority and responsibility for planning, directing and controlling the major activities of the Company and the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the parent Company.

Remuneration Philosophy

The performance of the Company depends upon the quality of its directors and executives. To prosper, the Company must attract, motivate and retain highly skilled directors and executives.

To this end, the Company embodies the following principles in its remuneration framework:

• Provide competitive rewards to attract high calibre executives.

• Link executive rewards to shareholder value.

• A portion of executive remuneration may be put ‘at risk’, dependent on meeting pre-determined performance benchmarks.

• Where appropriate, establish performance hurdles in relation to variable executive remuneration.

Due to the early stage of development which the Company is in, shareholder wealth is directly affected by the Company share price, the Company is not in a position to pay dividends. By remunerating directors and Executives in part by options, the Company aims to align the interests of directors and executives with shareholder wealth, thus providing individual incentive to perform and thereby improving overall Company performance and associated value.

Remuneration structure

Non-executive director remuneration

Objective

The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

Structure

The maximum aggregate amount of fees that can be paid to non-executive Directors is subject to approval by shareholders at General Meetings and is currently set at $450,000.

The amount of aggregate directors’ fees sought to be approved by shareholders and the manner in which it is apportioned amongst directors will be reviewed annually. The Board may consider advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process.

Each non-executive director receives a fee for being a director of the Company. In addition, if a director performs extra or special services beyond their role as a director, the Board may resolve to provide additional remuneration for such services.

Fees for directors are not linked to the performance of the consolidated entity however, to align all directors’ interests with shareholder interests, directors are encouraged to hold shares in the Company and may receive options. This effectively links directors’ performance to the share price performance and therefore to the interests of shareholders. For this reason there are no performance conditions prior to grant, but instead an incentive to increase the value to all shareholders.

8

Orthocell Limited Directors’ report 30 June 2016

Executive remuneration

Objective

The Company aims to reward executives (both directors and Company executives) with a level and mix of remuneration commensurate with their position and responsibilities within the Company so as to:

• Attract and retain high quality individuals.

• Reward executives for Company performance.

• Align the interest of executives with those of shareholders.

• Link reward with the strategic goals and performance of the Company.

• Ensure total remuneration is competitive by market standards.

Structure

Executive remuneration consists of both fixed and variable (at risk) elements.

Fixed Remuneration

Objective

The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market.

Fixed remuneration is reviewed annually or upon renewal of fixed term contracts by the Board and the process consists of a review of Company and individual performance, relevant comparative remuneration in the market and internal policies and practices.

Structure

Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the Company.

Variable Remuneration

Objective

The objective of variable remuneration provided is to reward executives in a manner which aligns this element of remuneration with the creation of shareholder wealth.

Structure

Variable remuneration may be delivered in the form of a cash bonuses, or share options. During the financial year ended 30 June 2016 the Company did not grant any options to Executives.

The remuneration of executives for the years ended 30 June 2015 and 30 June 2016 are detailed in the tables below.

Details of remuneration

Amounts of remuneration

Details of the remuneration of the key management personnel of the consolidated entity are set out in the following tables.

The key management personnel of the consolidated entity consisted of the following directors of Orthocell Limited:

Dr Stewart Washer Executive Chairman Mr Paul Anderson Managing Director Mr Matthew Callahan Non-Executive Director Professor Lars Lidgren Independent Non-Executive Director Mr Qi Xiao Zhou Non-Executive Director

9

Orthocell Limited Directors’ report 30 June 2016

Year ended 30/06/2015 Non-Executive Directors: Mr M Callahan Prof L Lidgren Mr QX Zhou Executive Directors: Mr P Anderson Dr S Washer Total Year ended 30/06/2016 Non-Executive Directors: Mr M Callahan Prof L Lidgren Mr QX Zhou Executive Directors: Mr P Anderson Dr S Washer Total	Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash salary and fees Bonus(1) Super- annuation Long service leave Total Performance related $ $ $ $ $ $ % 113,331 - - - 142,756 256,087 55.7% 40,000 - - - 11,349 51,349 22.1% 36,530 - 3,470 - 11,349 51,349 22.1% 280,000 30,000 29,462 17,152 169,236 525,850 37.9% 120,000 - - - 142,756 262,756 54.3%
	589,861 30,000 32,932 17,152 477,446 1,147,391 44.2%
	120,000 - - - - 120,000 0.0% 45,000 - - - - 45,000 0.0% 41,097 - 3,903 - - 45,000 0.0% 326,000 75,000 30,970 5,962 - 437,932 17.1% 150,000 - - - - 150,000 0.0%
	682,097 75,000 34,873 5,962 - 797,932 9.4%

(1) Discretionary bonus as approved by the board.

Share-based compensation

There were no share-based compensation payments to key management personnel during the year ended 30 June 2016.

During the year ended 30 June 2015 the following share-based payments of options were made to key management personnel for nil consideration:

Grant date	Exercise Price	Expiry date	No. issued	Fair value per option	Total fair value
3 Aug 2014	$0.50	3 Aug 2017	4,250,000	$0.09	$382,476
24 Nov 2014	$0.62	23 Nov 2017	2,100,000	$0.08	$158,880

10

Orthocell Limited Directors’ report 30 June 2016

Additional disclosures relating to key management personnel

Shareholding

The number of shares in the Company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below:

Ordinary shares Mr Paul Anderson Mr Matthew Callahan(1) Professor Lars Lidgren Dr Stewart Washer Mr Qi Xiao Zhou	Balance 01/07/2015 Additions Disposals/ Other Balance 30/06/2016 6,963,608 10,142 - 6,973,750 10,204,559 - - 10,204,559 923,523 40,568 - 964,091 369,267 105,994 - 475,261 5,955,673 40,568 - 5,996,241
	24,416,630 197,272 - 24,613,902

There were no shares issued as part of directors’ remuneration during the financial year.

• (1) Mr Callahan is a founder and director of Stone Ridge Ventures Pty Ltd which is the manager of the SRV Tech Trust, a venture capital fund. Mr Callahan’s interest in shares is held indirectly through:

• SRV Custodians Pty Ltd as trustee for the SRV Tech Trust which is the venture capital fund (574,026 shares) in respect of which AustralianSuper Investments Pty Ltd, as trustee of the AustralianSuper Private Equity Trust is the sole unit holder; and

• SRV Nominees Pty Ltd as trustee for the SRV Trust which is the carry trust for the SRV Tech Trust (40,154 shares).

• Mr Callahan is considered to have a relevant interest in these shares due to his position as a director or shareholder of the respective trustee companies and holds a beneficial interest in the SRV Trust.

Options / warrants holdings

The number options/warrants over ordinary shares in the Company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below:

	Balance at			Expired/	Balance at
	the start of	Warrants		forfeited/	the end of
	the year	Granted	Exercised	other	the year
Options / warrants over ordinary
shares:
Mr Paul Anderson	2,750,000	13,692	-	-	2,763,692
Dr Stewart Washer	1,650,000	95,842	-	-	1,745,842
Mr Matthew Callahan	1,650,000	-	-	-	1,650,000
Professor Lars Lidgren	150,000	54,767	-	-	204,767
Mr Qi Xiao Zhou	150,000	54,767	-	-	204,767

Other transactions with key management personnel and their related parties There were no transactions with key management personnel.

11

Orthocell Limited Directors’ report 30 June 2016

Employment Contracts

The Company has entered into employment agreements with the following key employees (each an Executive) on the following material terms and conditions.

Name	Position	Salary	Short term incentive	Notice period
Mr Paul Anderson	Managing Director	$350,000 per annum plus superannuation	A bonus of a maximum of 25% of Base Salary may be payable each year subject to achievement of key performance indicators to be agreed by the Board.	6 months

Under the employment agreement:

• (i) either party may terminate the employment agreement by providing the amount of notice set out in the table above. The Company may terminate the agreement without notice (and without having to pay the Executive an amount in lieu of notice) if the Executive engages in serious or wilful misconduct;

• (ii) the Executive is entitled to 20 days annual leave and 10 days personal leave per annum, and to long service leave and other paid and unpaid leave in accordance with applicable legislation;

• (iii) the Executive acknowledges that intellectual property created by the Executive will be owned by the Company;

• (iv) the Executive agrees to keep confidential information secret and confidential except to the extent required by law; and

• (v) during the employment and for a period of 12 months post-employment (or less if a court finds 12 months to be invalid), the Executive agrees not to carry on any business that competes with the business of the Company, solicit, employ or engage any director, employee or contractor of the Company, or entice, provide services to, or accept services from any customer, contractor or supplier of the Company to discontinue their relationship with the Company or otherwise reduce the amount of business they do with the Company. This restraint applies in Australia and New Zealand (or if a court finds this invalid, across, Australia, or if a court finds this invalid, across Western Australia.

Consulting arrangements

The Company has entered into the consulting agreements with the parties set out below under which directors Mr Matthew Callahan and Dr Stewart Washer are to provide services to the Company. The key terms of the consulting agreements are as follows:

Contractor / Key Employee	Consulting fee	Consulting services
Bocca Consulting Pty Ltd / Mr Matthew Callahan	$1,500 per day	Advisory services to the Company on general matters relating to the Company’s business, identifying, evaluating and developing new opportunities, performing duties as a non- executive director and any other duties as may be delegated by the Board from time to time.
Biologica Ventures Pty Ltd / Dr Stewart Washer	$150,000 per annum	Services to the Company in relation to acting as Chairman of the Company. The Company and Dr Washer acknowledge that Dr Washer will be the Executive Chairman of the Company pursuant to this consultancy agreement.

12

Orthocell Limited Directors’ report 30 June 2016

The Company can terminate a consulting agreement on 3 months’ notice. The Company may terminate the agreement without notice (and without having to pay the Consultant an amount in lieu of notice) if the Consultant or the Key Employee is guilty of gross misconduct, the Key Employee dies, or becomes permanently incapacitated or incapacitated for a period of 2 months in any 6 month period, the Consultant or the Key Employee breaches the agreement and does not rectify the breach, the Key Employee ceases to be a Director, the Consultant or the Key Employee fails to provide the services under the agreement or breaches the covenants under the agreement. The Consultant may terminate the agreement by 6 months’ notice or by notice if the Company breaches the agreement or fails to observe any provision and has not adequately responded to the breach or non-observance within 15 days.

The consultants and the key employees acknowledges that intellectual property created by them in providing services under the agreements will be owned by the Company, and undertakes not to divulge any confidential information except so far as may be necessary in connection with the proper performance of their obligations to the Company under the agreement or with the consent of the Company.

Non-Executive Directors letters of appointment

Pursuant to letters of continuing appointment Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou are continuing their appointments to the Board as a Non-Executive Directors following listing. Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou will each be paid a directors fee of $45,000 per annum. Mr Callahan, Professor Lars Lidgren and Mr Qi Xiao Zhou are also entitled to fees or other amounts as the Board determines where they perform special duties or otherwise perform special duties or otherwise perform services outside the scope of the ordinary duties of a director. They may also be reimbursed for all reasonable and properly documented expenses incurred in performing their duties.

This concludes the remuneration report, which has been audited.

Directors’ and Officers’ deeds of indemnity, access and insurance

The Company has entered into a deed of indemnity, access and insurance with each of its Directors and the Company Secretary. Under these deeds, the Company agrees to indemnify each officer to the extent permitted by law against any loss which the officer may incur, or be liable for, arising from or in connection with the officer acting as an officer of the Company. Under the deeds, the Company is also required to enter into an insurance policy for the benefit of the officer that insures the officer for all liability to which the officer is exposed in providing services in the capacity of an officer of the Company for which insurance may be legally obtained. When the policy expires, the Company must ensure that it maintains an insurance policy for the officer during the officer’s term of appointment that is on terms no less favourable to the officer (subject to the ability of the Company to reduce the scope of the insurance to the extent it considers reasonable, if it is determined that the cost of maintaining it is such that it is not in the interests of the Company to maintain it, or the Company is unable to obtain the insurance on reasonable terms).

Shares under option

At the date of this report the following options and warrants are on issue:

Grant date	Expiry date	Exercise price	Number of options
3 August 2014	3 August 2017	$0.50	5,912,500
24 November 2014	24 November 2017	$0.62	3,520,000
19 November 2015	19 November 2020	$0.58	12,122,237
26 February 2016	26 February 2019	$0.56	1,350,000

Shares issued on the exercise of options

There were no shares of the Company issued during the year ended 30 June 2016 and up to the date of this report on the exercise of options granted.

Indemnity and insurance of officers

The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith.

During the financial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The Company paid a premium of $12,631 in respect of this policy.

13

Orthocell Limited Directors’ report 30 June 2016

Indemnity and insurance of auditor

The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor.

During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity.

Proceedings on behalf of the Company

No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings.

Matters subsequent to the end of the financial year

No matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years.

Non-audit services

Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 21 to the consolidated financial statements.

The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The directors are of the opinion that the services as disclosed in note 21 to the consolidated financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons:

• all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and

• none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards.

Officers of the Company who are former audit partners of PKF Mack

There are no officers of the Company who are former audit partners of PKF Mack.

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 the following page.

Auditor

PKF Mack continues in office in accordance with section 327 of the Corporations Act 2001.

This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001.

On behalf of the directors

==> picture [182 x 67] intentionally omitted <==

Mr Paul Anderson Managing Director 12 September 2016 Perth

14

AUDITOR’S INDEPENDENCE DECLARATION

TO THE DIRECTORS OF ORTHOCELL LIMITED

In relation to our audit of the financial report of Orthocell Limited for the year ended 30 June 2016, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

==> picture [105 x 43] intentionally omitted <==

PKF MACK

==> picture [127 x 73] intentionally omitted <==

SIMON FERMANIS PARTNER

12 SEPTEMBER 2016 WEST PERTH, WESTERN AUSTRALIA

15

Orthocell Limited Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2016

Note Revenue Sales revenue 3 Cost of goods sold 4 Gross profit Other revenue 3 Expenses Administrative & general expenses Sales & marketing expenses Orthopaedic distributor costs Employment expenses Laboratory / research & development costs Other expenses 4 Loss before income tax expense Income tax benefit 5 Loss after income tax expense Other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive loss Loss per share Basic earnings per share 29 Diluted earnings per share 29	Consolidated 2016 2015 $ $ 666,499 790,430 (497,589) (652,856)
	168,910 137,574 520,713 899,878 (989,766) (894,737) (583,897) (575,127) (27,638) (395,540) (3,333,342) (3,339,507) (1,047,618) (733,077) - -
	(5,982,261) (5,937,988) (5,292,638) (4,900,536) 1,507,774 1,157,821
	(3,784,864) (3,742,715) - -
	(3,784,864) (3,742,715)
	$ $ (0.04) (0.05) (0.04) (0.05)

The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes

16

Orthocell Limited Consolidated statement of financial position As at 30 June 2016

Note Assets Current assets Cash and cash equivalents 6 Trade and other receivables 7 Inventories 8 Other 9 Total current assets Non-current assets Property, plant and equipment 10 Intangibles 11 Total non-current assets Total assets Liabilities Current liabilities Trade and other payables 12 Employee benefits 13 Other 14 Total current liabilities Non-current liabilities Other 15 Total non-current liabilities Total liabilities Net assets Equity Issued capital 16 Reserves 17 Accumulated losses 18 Total equity	Consolidated 2016 2015 $ $ 5,181,812 4,774,108 185,147 178,377 134,161 150,665 58,862 82,052
	5,559,982 5,185,202
	289,172 306,129 1,264,030 1,044,802
	1,553,202 1,350,931
	7,113,184 6,536,133
	736,942 755,863 338,193 310,395 444,912 235,849
	1,520,047 1,302,107
	708,540 850,236
	708,540 850,236
	2,228,587 2,152,343
	4,884,597 4,383,790
	19,359,578 15,302,482 1,026,980 798,405 (15,501,961) (11,717,097)
	4,884,597 4,383,790

The above statement of financial position should be read in conjunction with the accompanying notes

17

Consolidated statement of changes in equity For the year ended 30 June 2016

Orthocell Limited

Balance at 1 July 2014 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options Balance at 30 June 2015 Balance at 1 July 2015 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options Balance at 30 June 2016	Issued capital $ Option reserve $ Accumulated losses $ Total equity $ 8,050,570 - (7,974,382) 76,188 - - (3,742,715) (3,742,715) - - - -
	- - (3,742,715) (3,742,715) 8,000,000 - - 8,000,000 (748,088) - - (748,088) - 798,405 - 798,405
	15,302,482 798,405 (11,717,097) 4,383,790
	Issued capital $ Option reserve $ Accumulated losses $ Total equity $ 15,302,482 798,405 (11,717,097) 4,383,790 - - (3,784,864) (3,784,864) - - - -
	- - (3,784,864) (3,784,864) 4,426,862 - - 4,426,862 (369,766) - - (369,766) - 228,575 - 228,575
	19,359,578 1,026,980 (15,501,961) 4,884,597

The above statement of changes in equity should be read in conjunction with the accompanying notes

18

Orthocell Limited Consolidated statement of cash flows For the year ended 30 June 2016

Note Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Receipt from license fee Grants received R&D tax concession received Interest received Net cash used in operating activities 28 Cash flows from investing activities Payments for property, plant and equipment Payments for intangible assets Net cash used in investing activities Cash flows from financing activities Share subscription funds received Share equity costs Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 6 Cash and cash equivalents at the end of the financial year 6	Consolidated 2016 2015 $ $ 924,551 1,266,115 (5,938,693) (5,647,332) 3,480 270,356 119,926 62,058 1,507,774 1,157,821 61,844 123,369
	(3,321,118) (2,767,613)
	(40,958) (56,111) (287,316) (263,235)
	(328,274) (319,346)
	4,426,862 5,014,900 (369,766) (621,185)
	4,057,096 4,393,715
	407,704 1,306,756 4,774,108 3,467,352
	5,181,812 4,774,108

The above statement of cash flows should be read in conjunction with the accompanying notes

19

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies

The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

New, revised or amending Accounting Standards and Interpretations adopted

The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period.

Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted.

The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity.

Basis of preparation

These general purpose consolidated financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These consolidated financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB').

The financial statements cover Orthocell Limited as a consolidated entity consisting of Orthocell Limited and its subsidiary. Orthocell Limited is a listed public company limited by shares, incorporated and domiciled in Australia. A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue in accordance with a resolution of directors on 12 September 2016. The directors have the power to amend and reissue the financial statements.

Historical cost convention

The consolidated financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss, investment properties, certain classes of property, plant and equipment and derivative financial instruments.

Critical accounting estimates

The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.

Parent entity information

In accordance with the Corporations Act 2001, these consolidated financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 26.

Principles of consolidation

The consolidated financial statements incorporate the assets and liabilities and results of Orthocell Limited ('Company' or 'parent entity') and its subsidiary Ausbiomedical Pty Ltd as at 30 June 2016. Orthocell Limited and its subsidiary together are referred to in these consolidated financial statements as the 'consolidated entity'.

Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases.

20

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent.

Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deficit balance.

Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss.

Operating segments

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.

Foreign currency translation

The consolidated financial statements are presented in Australian dollars, which is Orthocell Limited's functional and presentation currency.

Foreign currency transactions

Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

Revenue recognition

Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable.

Sale of goods

Sale of goods revenue is recognised at the point of sale, which is where the customer has taken delivery of the goods, the risks and rewards are transferred to the customer and there is a valid sales contract. Amounts disclosed as revenue are net of sales returns and trade discounts.

Research and development tax incentive

The research and development tax incentives are recognised at their fair value on receipt when all conditions have been complied with. The research and development tax incentives are recognised as income tax benefits in the consolidated statements of profit or loss and other comprehensive income.

Interest

Interest revenue is recognised when it is received or due to be received.

Other revenue

Other revenue is recognised when it is received or when the right to receive payment is established.

21

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Income tax

The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for:

• When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or

• When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset.

Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entity's which intend to settle simultaneously.

Current and non-current classification

Assets and liabilities are presented in the statement of financial position based on current and non-current classification.

An asset is current when it is expected to be realised or intended to be sold or consumed in normal operating cycle, it is held primarily for the purpose of trading, it is expected to be realised within twelve months after the reporting period, or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current.

A liability is current when it is expected to be settled in normal operating cycle, it is held primarily for the purpose of trading, it is due to be settled within twelve months after the reporting period, or there is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. All other liabilities are classified as non-current.

Deferred tax assets and liabilities are always classified as non-current.

Cash and cash equivalents

Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade and other receivables

Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days.

22

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.

Other receivables are recognised at amortised cost, less any provision for impairment.

Inventories

Inventory relates to work in progress which consists of the costs of patients’ cells being held in the laboratory awaiting delivery and implantation into the patient. Inventory items are stated at the lower of cost and net realisable value. Inventory comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure based on normal operating capacity.

As indicated in Note 2, when making the decision whether inventory items should be carried forward in the statement of financial position, or written off, management must consider the likelihood of whether each particular patient will proceed to implantation. This requires a degree of estimation and judgement based on historical sales experience, the ageing of the inventories and other demographic and market factors. At present management consider that 2 years is a reasonable period of time to hold inventory in the statement of financial position for each patient unless there is further particular information that would indicate otherwise. This policy is reviewed annually.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Investments and other financial assets

Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted.

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are either: i) held for trading, where they are acquired for the purpose of selling in the short-term with an intention of making a profit; or ii) designated as such upon initial recognition, where they are managed on a fair value basis or to eliminate or significantly reduce an accounting mismatch. Except for effective hedging instruments, derivatives are also categorised as fair value through profit or loss. Fair value movements are recognised in profit or loss.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets, principally equity securities, which are either designated as available-for-sale or not classified as any other category. After initial recognition, fair value movements are recognised in other comprehensive income through the available-for-sale reserve in equity. Cumulative gain or loss previously reported in the available-for-sale reserve is recognised in profit or loss when the asset is derecognised or impaired.

23

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Impairment of financial assets

The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor, a breach of contract such as default or delinquency in payments, the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do, it becomes probable that the borrower will enter bankruptcy or other financial reorganisation, the disappearance of an active market for the financial asset, or observable data indicating that there is a measurable decrease in estimated future cash flows.

The amount of the impairment allowance for financial assets carried at cost is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for similar financial assets.

Available-for-sale financial assets are considered impaired when there has been a significant or prolonged decline in value below initial cost. Subsequent increments in value are recognised in other comprehensive income through the available-for-sale reserve.

Property, plant and equipment

Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows:

Leasehold improvements	Straight line	40 years
Plant and equipment	Diminishing value	3-7 years
Computer software	Straight line	2-3 years
Furniture and fittings	Diminishing value	10-15 years

The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date.

Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter.

An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits.

Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits.

Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability.

24

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term.

Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straightline basis over the term of the lease.

Intangible assets

Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period.

Research and development

Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility, the consolidated entity is able to use or sell the asset, the consolidated entity has sufficient resources, and intent to complete the development and its costs can be measured reliably. Capitalised development costs are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years.

Patents and trademarks

Significant costs associated with patents and trademarks are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 20 years. Capitalisation commences on application for the patents or trademark. Amortisation commences once the patent or trademark has been granted over the remaining useful life of the patent. The useful life is taken as 20 years from the date of application. Patents and trademarks are sought globally in various jurisdictions. If a patent or trademark is unsuccessful the costs are then fully written off. All patents and trademarks once granted have an annuity commitment over the term of their life and these are detailed in note 24.

Impairment of non-financial assets

Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount.

Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit.

Trade and other payables

These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition.

Employee benefits

Other long-term employee benefits

The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date is recognised in non-current liabilities, provided there is an unconditional right to defer settlement of the liability. The liability is measured at current value and is not discounted if the effect of discounting is immaterial. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service.

25

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Short-term employee benefits

Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled.

Defined contribution superannuation expense

Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred.

Share-based payments

Equity-settled share-based compensation benefits are provided to employees.

Equity-settled transactions are awards of shares, or options over shares, which are provided to employees in exchange for the rendering of services.

The costs of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions.

The costs of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods.

Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met provided all other conditions are satisfied.

If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification.

If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited.

If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification.

Fair value measurement

When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and assumes that the transaction will take place either in the principle market or in the absence of a principal market in the most advantageous market.

Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

26

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed each reporting date and transfers between levels are determined based on a reassessment of the lowest level input that is significant to the fair value measurement.

For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data.

Issued capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Dividends

Dividends are recognised when declared during the financial year and no longer at the discretion of the Company.

Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to the shareholders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year.

Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

Goods and Services Tax ('GST') and other similar taxes

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense.

Receivables and payables are stated inclusive of the GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position.

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows.

Commitments and contingencies are disclosed net of GST recoverable from, or payable to, the tax authority.

27

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 1. Significant accounting policies (continued)

New Accounting Standards and Interpretations not yet mandatory or early adopted

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2016. The consolidated entity has not assessed of the impact of these new or amended Accounting Standards and Interpretations.

AASB No.	Title	Application date of **standard ***	Issue date
AASB 9	Financial Instruments	1 Jan 2018	Dec 2014
AASB 2010-7	Amendments arising from Accounting Standards arising from AASB 9 (December 2010)	1 Jan 2018	Sep 2012
AASB 2014-1	Amendments to Australian Accounting Standards Part D - Consequential Amendments arising from AASB 14 Regulatory Deferral Accounts Part E - Financial Instruments	Part D - 1 Jan 2016 Part E - 1 Jan 2018	Jun 2014
AASB 2014-3	Amendments to Australian Accounting Standard – Accounting for Acquisition of Interest in Joint Operations [AASB 1 & AASB 11]	1 Jan 2016	Aug 2014
AASB 2014-4	Amendments to Australian Accounting Standard - Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to AASB 116 and AASB 138)	1 Jan 2016	Au 2014
AASB 2014-5	Amendments to Australian Accounting Standard Arising From AASB 15	1 Jan 2018	Dec 2014
AASB 2014-6	Amendments to Australian Accounting Standard – Agriculture: Bearer Plants [AASB 101,AASB 116,AASB 117,AASB 123,AASB 136,AASB 140 & AASB 141]	1 Jan 2016	Dec 2014
AASB 2014-7	Amendments to Australian Accounting Standard Arising From AASB 9 (December 2014)	1 Jan 2018	Dec 2014
AASB 2014-9	Amendments to Australian Accounting Standard - Equity Method in Separate Financial Statements	1 Jan 2016	Dec 2014
AASB 2014-10	Amendments to Australian Accounting Standard - Sale of Contribution of Assets Between Investors and its Associates or Joint Venture	1 Jan 2018	Dec 2014
AASB 2015-1	Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle	1 Jan 2016	Jan 2015
AASB 2015-2	Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101	1 Jan 2016	Jan 2015
AASB 2015-5	Amendments to Australian Accounting Standards – Investment Entities: Applying the Consolidation Exception	1 Jan 2016	Jan 2015
AASB 2015-6	Amendments to Australian Accounting Standards – Extending Related Party Disclosures to NFP Public Sector Entities	1 Jul 2016	Mar 2015
AASB 2015-7	Amendments to Australian Accounting Standards – Fair Value Disclosures of Not-for-Profit Public Sector Entities	1 Jul 2016	Jul 2015
AASB 2015-8	Amendments to Australian Accounting Standards – Effective Date of AASB 15	1 Jan 2018	Oct 2015
AASB 2015-9	Amendments to Australian Accounting Standards – Scope and Application Paragraphs	1 Jan 2016	Nov 2015
AASB 2015-10	Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128.	1 Jan 2018	Dec 2015
AASB 2016-1	Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses[AASB 112]	1 Jan 2017	Feb 2016
AASB 2016-2	Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107	1 Jan 2017	Mar 2016
AASB 2016-3	Amendments to Australian Accounting Standards – Clarifications to AASB 15	1 Jan 2018	May 2016
AASB 2016-4	Amendments to Australian Accounting Standards – Recoverable Amount of a Non-Cash Generating Specialised Assets of Not-for-Profit Entities	1 Jan 2017	Jun 2016
AASB 14	Regulatory Deferral Account	1 Jan 2016	Jun 2014
AASB 15	Revenues from Contracts with Customers	1 Jan 2018	Oct 2015
AASB 16	Leases	1 Jan 2019	Feb 2016
AASB 1056	Superannuation Entities	1 Jul 2016	Jun 2014
AASB 1057	Application of Australian Accounting Standards	1 Jan 2016	Nov 2015

• Annual reporting periods beginning after

28

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 2. Critical accounting judgements, estimates and assumptions

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below.

Share-based payment transactions

The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the BlackScholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity.

Provision for impairment of receivables

The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtor’s financial position.

Impairment of work in progress

Work in progress comprises patient cells taken via biopsy and cryopreserved awaiting implantation at the patients discretion at a future date. Impairment of work in progress assessment requires a degree of estimation and judgement. While the patient cells held can be preserved indefinitely the company has estimated that if the patient has not proceeded with implantation within 2 years from biopsy, resulting in a sale of the product, the value of the work in progress is impaired to nil.

Estimation of useful lives of assets

The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. The useful life of patents and trademarks is based on the period of the life of the patent or trademark, which is usually 20 years.

Impairment of non-financial assets other than goodwill and other indefinite life intangible assets

The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves value-in-use calculations, which incorporate a number of key estimates and assumptions.

Employee benefits provision

As discussed in note 1, the liability for employee benefits expected to be settled more than 12 months from the reporting date is recognised and measured at current value and is not discounted if the effect of discounting is immaterial. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account.

29

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 3. Revenue

ote 3. Revenue
Sales revenue Sale of goods Other revenue Interest Commissions Export market development grant License fee and royalties Other Total revenue	Consolidated 2016 2015 $ $ 666,499 790,430
	666,499 790,430
	61,844 123,369 191,894 569,571 119,926 62,058 146,005 141,696 1,044 3,184
	520,713 899,878
	1,187,212 1,690,308

Note 4. Expenses

Loss before income tax includes the following specific expenses: Cost of sales Cost of sales Depreciation and amortisation Depreciation - plant and equipment Amortisation - patents and trademarks Total depreciation and amortisation Net foreign exchange loss Net foreign exchange loss Rental expense relating to operating leases Minimum lease payments Employment expenses Salaries and wages Employee benefits Superannuation expense Consultants’ fees Directors’ fees Payroll & other taxes Other employment costs Share-based payments expense Allocated to cost centres Total employment expenses Write off of assets Inventories	497,589 652,856
	47,963 34,445 52,218 24,910
	100,181 59,355
	4,327 1,097
	115,976 114,351
	2,069,277 1,904,735 27,798 78,385 178,528 177,658 526,219 465,500 281,097 236,530 129,067 86,954 1,502 44,342 228,575 798,405 (108,721) (453,002)
	3,333,342 3,339,507
	59,767 43,303

30

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 5. Income tax expense

Income tax expense Current tax benefit relating to ordinary activities Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Income tax expense is attributable to: Profit from continuing operations Profit from discontinued operations Aggregate income tax expense at statutory rate of 28% (2015: 30%) Deferred tax included in income tax expense comprises: Increase in deferred tax assets Increase/(decrease) in deferred tax liabilities Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Loss before income tax expense from continuing operations Tax at the statutory tax rate of 28% (2015: 30%) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible items Research and development expenditure Research and development rebate received Share-based payments Sundry items Income tax benefit not brought to account Adjustment recognised for prior periods Research and development tax benefit received Income tax benefit The following deferred tax balances have not been recognised: Deferred tax assets at 28% (2015: 30%): Provisions and accruals Unrealised FX loss Capital raising costs Carried forward revenue losses	Consolidated 2016 2015 $ $ 1,507,774 1,157,821 - - - -
	1,507,774 1,157,821
	- - - -
	- - - - - - - - (3,784,864) (3,742,715) (1,078,686) (1,122,815) 12,443 13,025 258,988 184,714 (452,332) (347,347) (35,978) (18,617) 68,573 239,595 1,226,992 1,051,445
	- - 1,507,774 1,157,821
	1,507,774 1,157,821
	107,464 107,026 - 329 245,651 229,773 1,939,642 1,498,615
	2,292,757 1,835,743

The tax benefits of the above deferred tax assets will only be obtained if:

(i) The company derives future assessable income of a nature and an amount sufficient to enable the benefits to be utilised;

(ii) The company continues to comply with the conditions for deductibility imposed by law; and

(iii) No changes in income tax legislation adversely affects the company in utilising the benefits.

31

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 6. Cash and cash equivalents

Cash at bank Reconciliation to cash and cash equivalents at the end of the financial year The above figures are reconciled to cash and cash equivalents at the end of the financial year as shown in the statement of cash flows as follows: Balance as above Cash and cash equivalents Balance as per statement of cash flows	Consolidated 2016 2015 $ $ 5,181,812 4,774,108
	5,181,812 4,774,108
	5,181,812 4,774,108
	5,181,812 4,774,108

Note 7. Trade and other receivables

Trade receivables Other receivables: Sundry debtors GST refund due	125,888 144,249
	4,044 774 55,215 33,354
	59,259 34,128
	185,147 178,377

Impairment of receivables

There has been no impairment of receivables in the year ended 30 June 2016 (30 June 2015: $0).

Past due but not impaired

Customers with balances past due but without provision for impairment of receivables amount to $15,779 as at 30 June 2016 (30 June 2015: $56,622)

The consolidated entity did not consider a credit risk on the aggregate balances after reviewing credit terms of customers based on recent collection practices.

The ageing of the past due but not impaired receivables are as follows:

0 to 3 months overdue 3 to 6 months overdue	11,049 36,074 4,730 20,548
	15,779 56,622

Note 8. Inventories

Consumables – at cost Work in progress – at cost	15,974 4,990 118,187 145,675
	134,161 150,665

32

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 9. Other

ote 9. Other
Accrued revenue Prepayments Other	Consolidated 2016 2015 $ $ - 77,590 58,862 4,302 - 160
	58,862 82,052

Note 10. Property, plant and equipment

Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation	272,502 272,502 (63,633) (56,820)
	208,869 215,682
	400,981 375,838 (335,616) (299,461)
	65,365 76,377
	37,760 34,312 (22,822) (20,242)
	14,938 14,070
	289,172 306,129

Reconciliations

Reconciliations of the written down values at the beginning and end of the current and previous financial years are set out below:

Consolidated Balance at 30 June 2014 Additions Disposals Depreciation expense Balance at 30 June 2015 Additions Disposals Depreciation expense Balance at 30 June 2016	Leasehold improvements Plant and equipment Furniture and fittings Total $ $ $ $ 222,494 51,233 13,166 286,893 - 51,372 3,126 54,498 - (817) - (817) (6,812) (25,411) (2,222) (34,445)
	215,682 76,377 14,070 306,129
	- 27,556 3,450 31,006 - - - - (6,813) (38,568) (2,582) (47,963)
	208,869 65,365 14,938 289,172

33

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 11. Intangibles

Patents and trademarks – at cost Less: Accumulated amortisation	Consolidated 2016 2015 $ $ 1,357,080 1,085,633 (93,050) (40,831)
	1,264,030 1,044,802

Reconciliations

Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below:

Balance at 30 June 2014 Additions Amortisation expense Balance at 30 June 2015 Additions Amortisation expense Balance at 30 June 2016	$ 799,714
	269,998 (24,910)
	1,044,802
	271,446 (52,218)
	1,264,030

Note 12. Trade and other payables

Trade payables Other payables Note 13. Employee benefits Annual leave entitlements Long service leave entitlements	648,795 628,941 88,147 126,922
	736,942 755,863
	196,840 196,307 141,353 114,088
	338,193 310,395

Amounts not expected to be settled within the next 12 months

The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months.

34

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 14. Other current liabilities

Accrued expenses Revenue received in advance Note 15. Other non-current liabilities Revenue received in advance	Consolidated 2016 2015 $ $ 303,212 94,149 141,700 141,700
	444,912 235,849
	708,540 850,236
	708,540 850,236

Note 16. Equity – issued capital

Ordinary shares – fully paid Share equity costs – ordinary shares	Consolidated 2016 2015 2016 2015 Shares Shares $ $ 91,479,437 82,500,000 20,664,002 16,237,140
	91,479,437 82,500,000 20,664,002 16,237,140 - - (1,304,424) (934,658)
	91,479,437 82,500,000 19,359,578 15,302,482

Movements in ordinary share capital:

Details Date Balance 1 Jul 2014 Conversion of preference shares to ordinary shares 1 Aug 2014 Division of shares 1 Aug 2014 Issue of shares at IPO 4 Aug 2014 IPO share issue costs Balance 30 Jun 2015 Issue of shares 11 Nov 2015 Issue of shares 26 Feb 2016 Share issue costs Balance 30 Jun 2016	No of shares Issue price 2,166,026 1,699,830 58,634,144 20,000,000 $0.40 - 82,500,000 8,776,597 $0.49 202,840 $0.49 - 91,479,437	$ 3,313,427
		4,923,713 - 8,000,000 (934,658)
		15,302,482 4,326,862 100,000 (369,766)
		19,359,578

35

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 16. Equity – issued capital (continued)

Movements in redeemable preference series A share capital:

Details Date Balance 1 July 2014 Conversion of preference shares to ordinary shares 1 August 2014 Balance 30 June 2015 Balance 30 June 2016 Movements in redeemable preference series A2 share capital: Details Date Balance 1 July 2014 Conversion of preference shares to ordinary shares 1 August 2014 Balance 30 June 2015 Balance 30 June 2016	No of shares Issue price 1,361,230 (1,361,230) - - No of shares Issue price 338,600 (338,600) - -	$ 3,423,714
		(3,423,714)
		-
		-
		$ 1,500,000
		(1,500,000)
		-
		-

Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. The Company does not have any externally imposed capital requirements.

On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

Redeemable preference series A and A2 shares

The rights, privileges and conditions attached to the Series A and Series A2 Preference Shares (Preference Shares) on issue at 30 June 2014 are the same as the ordinary shares in the Company except as set out below:

• (a) The Preference Shares shall rank for dividends pari passu with the ordinary shares in the company on an as converted basis.

• (b) A holder of Preference Shares is entitled at any time to convert part or the whole of their Preference Shares into Ordinary Shares.

• (c) The Preference Shares will automatically convert into fully paid Ordinary Shares on the closing of a qualifying public offering being upon the closing of a firmly underwritten or completed public offering of Ordinary Shares in the Company at a price per share of at least three times the original price of the Series A Preference Share issued pursuant to the Series A Subscription Agreement of $1, and a total new raising of at least A$5,000,000 (before deduction of underwriters commissions and expenses).

• (d) If immediately prior to a conversion, the conversion ratio is not 1:1, the converting Preference Shares will be subdivided into a greater number of Preference Shares reflected by the conversion ratio so that conversion into Ordinary Shares is always on a 1:1 basis. Fractions of a share will be rounded up for the purposes of conversion.

• (e) The Preference Shares will confer on their holders the right to receive notices of and to attend and vote at general meetings.

36

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 16. Equity – issued capital (continued)

• (f) Subject to Chapter 2H, Part 2.H2 of the Corporations Act 2001 (Cth) a holder of Preference Shares may redeem its Preference Shares at their issue price if an Event of Default contained in the Shareholders Agreement occurs.

• (g) In the event of any liquidation or winding up of the Company holders of Preference Shares shall be entitled to receive in preference to the holders of other Shares an amount equal to the issue price of the Preference Shares together with any declared, accrued and unpaid dividends, following which the holders of Ordinary Shares and Preference Shares, on an as converted basis, will participate pro rata in any remaining proceeds available for distribution.

• (h) In the event of a sale of Shares that includes a sale of Preference Shares or In the event of a sale of all or substantially all of the assets of the Company, holders of Preference Shares shall be entitled to receive in preference to the holders of other Shares an amount equal to the issue price of the Preference Shares together with any declared, accrued and unpaid dividends, following which the holders of Ordinary Shares and Preference Shares, on an as converted basis, will participate pro rata in any remaining proceeds available for distribution.

Following shareholder approval received on 2 May 2014 and ASX providing conditional approval for Official Quotation on 1 August 2014, all redeemable preference series A and A2 shares were converted into ordinary shares on 4 August 2014.

Capital Management Policy

The consolidated entity's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company's share price at the time of the investment. The consolidated entity is not actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies.

Note 17. Option reserve

Share option reserve	Consolidated Consolidated 2016 2015 2016 2015 Options Options $ $ 10,782,500 9,432,500 1,026,980 798,405
	10,782,500 9,432,500 1,026,980 798,405

Movement in option reserve

Movement in option reserve during the current and previous financial year are set out below:

Date Balance at 30 June 2014 Options issued(1) 3 August 2014 Options issued(2) 24 November 2014 Balance at 30 June 2015 Options issued(3) 26 February 2016 Balance at 30 June 2016	No of options Total $ - - 5,912,500 532,092 3,520,000 266,313
	9,432,500 798,405
	1,350,000 228,575
	10,782,500 1,026,980

37

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 17. Option reserve (continued)

The share based payments reserve is used to record the value of share based payments provided to employees, including Key Management Personnel, as part of their remuneration. The options issued in this financial year were to employees.

For the options granted the valuation model inputs used to determine the fair value at the grant date are as follows:

	(1)	(2)	(3)
Grant date	3 Aug 2014	24 Nov 2014	26 Feb 2016
Expiry date	3 Aug 2017	24 Nov 2017	26 Feb 2019
Share price at grant date	$0.40	$0.427	$0.365
Exercise price	$0.50	$0.62	$0.56
Expected volatility	40%	40%	87%
Dividend yield	0%	0%	0%
Risk-free rate	3.08%	3.08%	1.72%
Fair value at grant date	$0.09	$0.08	$0.169

Set out below are summaries of options granted by the Company:

Exercise Grant date Expiry date Price 2015 03/08/2014 03/08/2017 $0.50 24/11/2014 24/11/2017 $0.62 2016 03/08/2014 03/08/2017 $0.50 24/11/2014 24/11/2017 $0.62 19/11/2015 19/11/2020 $0.58 26/02/2016 26/02/2019 $0.56	Balance at Expired/ Balance at the start of forfeited/ the end of the year Granted Exercised other the year - 5,912,500 - - 5,912,500 - 3,520,000 - - 3,520,000
	- 9,432,500 - - 9,432,500
	5,912,500 - - - 5,912,500 3,520,000 - - - 3,520,000 - 12,122,237 - - 12,122,237 - 1,350,000 - - 1,350,000
	9,432,500 13,472,237 - - 22,904,737

Note 18. Equity – accumulated losses

ote 18. Equity – accumulated losses
Accumulated losses at the beginning of the financial year Loss after income tax expense for the year Accumulated losses at the end of the financial year	Consolidated 2016 2015 $ $ 11,717,097 7,974,382 3,784,864 3,742,715
	15,501,961 11,717,097

38

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 19. Financial instruments

(a) Financial risk management

The Company’s principal financial instruments comprise cash.

The main purpose of these financial instruments is to fund expenditure on the Company’s operations. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. It is, and has been throughout the period under review, the Company’s policy that no trading in financial instruments shall be undertaken.

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in Note 1.

(b) Interest rate risk

At reporting date the Company had the following financial assets exposed to interest rate risk:

	Consolidated	Consolidated
	2016	2015
	$	$
Cash(1)	5,181,812	4,774,108

(1) The weighted average interest rate of cash is 1.29% (2015: 2.06%)

None of the consolidated entity’s financial liabilities are interest bearing.

(c) Credit risk

Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The consolidated entity’s maximum exposure to credit risk in relation to each class of financial asset is the carrying amount of those assets as indicated in the Statement of Financial Position.

The consolidated entity has in place policies that aim to ensure that counterparties and cash transactions are limited to high credit quality financial institutions and that the amount of credit exposure to one financial institution is limited as far as is considered commercially appropriate.

Since the consolidated entity trades only with recognised third parties, there is no requirement for collateral.

(d) Liquidity risk

Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company’s reputation.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

As at 30 June 2016: Trade and other payables As at 30 June 2015: Trade and other payables	Less than 6 months $ 6 – 12 months $ 1 – 2 years $ 2 – 5 years $ Over 5 years $ Total contractual cash flows $ Total carrying amount $ 952,207 - - - - - 952,207
	850,012 - - - - - 850,012

39

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 19. Financial instruments (continued)

(e) Net fair values

The carrying amount of financial assets and financial liabilities recorded in the financial statements represents their respective net fair values, determined in accordance with the accounting policies disclosed in Note 1.

(f) Sensitivity analysis

The following tables summarise the sensitivity of the consolidated entity’s financial assets to interest rate risk. Had the relevant variables, as illustrated in the tables, moved, with all other variables held constant, post-tax profit/(loss) and equity would have been affected as shown. The analysis has been performed on the same basis for 2015 and 2015. None of the Company’s financial liabilities are interest bearing.

30 June 2016 Financial assets Cash 30 June 2015 Financial assets Cash	Carrying amount $ 5,181,812	Carrying amount $ 5,181,812	Interest rate risk -1% Net profit Equity $ $ (51,818) (51,818)	Interest rate risk -1% Net profit Equity $ $ (51,818) (51,818)	Interest rate risk 1% Net profit Equity $ $ 51,818 51,818
	4,774,108 (47,741) (47,741) 47,741 47,741
	4,774,108	(47,741) (47,741)		47,741 47,741

Note 20. Key management personnel disclosures

Compensation

The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below:

onsolidated entity is set out below:
Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments	Consolidated 2016 2015 $ $ 757,097 619,861 34,873 32,932 5,962 17,152 - 477,446
	797,932 1,147,391

Note 21. Remuneration of auditor

During the financial year the following fees were paid or payable for services provided by PKF Mack, the auditor of the Company, its network firms and unrelated firms:

Audit services – PKF Mack Audit or review of the consolidated financial statements Other services – PKF Mack Preparation of the tax return Other matters	30,600 31,250
	5,850 2,000 3,200 8,250
	9,050 10,250
	39,650 41,500

40

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 22. Contingent liabilities

The consolidated entity has no contingent liabilities for the years ended 30 June 2016 or 30 June 2015.

Note 23. Contingent assets

For the year ended 30 June 2015, following the acquisition of Biomet Australia Pty Ltd by Zimmer Pty Ltd on 30 June 2015 Orthocell signed a Deed of Termination Release and Transition (Termination Agreement) with Biomet Australia Pty Ltd and Zimmer Pty Ltd, thus terminating Orthocell’s Distributor Agreement with Biomet Pty Ltd.

Under the terms of the Termination Agreement Orthocell were entitled to termination payments totalling $268,652 over the 12 months ending 30 June 2016 provided the terms of the Termination Agreement are followed. Of this amount $76,758 was received and included as revenue in the profit and loss in June 2015. The remaining termination payments totalling $191,894 were received in the year ended 30 June 2016. No asset was recognised within the financial statements for the year ended 30 June 2015.

The consolidated entity has no contingent assets for the year ended 30 June 2016.

Note 24. Commitments

Patent annuity commitments To maintain patent rights the following commitments will need to be met by the Company: Within one year One to five years More than five years Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Total commitments	Consolidated 2016 2015 $ $ 32,351 25,382 174,515 168,154 432,068 434,862
	638,934 628,398
	151,126 32,899 603,141 33,496 36,917 -
	791,184 66,395
	1,430,118 694,793

Operating lease commitments includes contracted amounts for various equipment under non-cancellable operating leases expiring within one to ten years and the current office and laboratory rental lease under an operating lease expiring in five years.

Note 25. Related party transactions

Parent entity: Orthocell Limited is the parent entity Subsidiaries: Interests in subsidiaries are set out in note 26. Key management personnel: Disclosures relating to key management personnel are set out in note 20 and the remuneration report in the Directors' Report. Loans to/from related parties: There were no loans to or from related parties at the current and previous reporting dates Terms and conditions: All transactions were made on normal commercial terms and conditions and at market rates.

41

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 26. Parent entity and interests in subsidiaries

The consolidated financial statements incorporate the assets, liabilities and results of the following wholly-owned subsidiaries in accordance with the accounting policy described in note 1:

		2016	2015
Name of entity	Country of incorporation	%	%
Ausbiomedical Pty Ltd	Australia	100	100

Ausbiomedical Pty Ltd has no assets or liabilities and does not trade in its own right.

As the Company’s only subsidiary, Ausbiomedical Pty Ltd, does not trade or have any assets and liabilities, the consolidated entity and parent entity disclosures are the same.

Note 27. Events after the reporting period

No other matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years.

Note 28. Reconciliation of loss after income tax to net cash from operating activities

Loss after income tax expense for the year Adjustments for: Depreciation and amortisation Share-based payments Inventory write-off Loss on disposal of fixed assets Change in operating assets and liabilities: (Increase)/decrease in debtors (Increase)/decrease in prepayments (Increase)/decrease in inventories (Increase)/decrease in accrued revenue Increase/(decrease) in creditors Increase/(decrease) in accruals Increase/(decrease) in employee entitlements Increase/(decrease) in unearned income Net cash used in operating activities

Consolidated 2016 2015 $ $ (3,784,864) (3,742,715) 100,181 59,355 228,575 798,405 59,767 43,303 15,090 (75,473) (54,399) (1,917) (43,262) (42,098) 77,590 (19,028) (14,961) 22,326 209,063 (16,442) 27,798 78,385 (141,696) 128,286

(3,321,118) (2,767,613)

42

Orthocell Limited Notes to the consolidated financial statements For the year ended 30 June 2016

Note 29. Loss per share

ote 29. Loss per share
Loss per share Loss after income tax Weighted average number of shares used in calculating basic and diluted loss per share	Consolidated 2016 2015 $ $ (3,784,864) (3,742,715)
	Number Number 87,965,279 75,657,100

Options are considered to be potential ordinary shares and have only been included in the determination of diluted loss per share to the extent to which they are dilutive.

At the date of this report has 91,479,437 ordinary shares on issue.

Note 30. Operating segments

The consolidated entity has identified its operating segments based on the internal reports that are reviewed and used by the Chief Operating Decision Maker to make decisions about resources to be allocated to the segments and assess their performance.

The financial information presented in the statement of profit or loss and other comprehensive income and statement of financial position is the same as that presented to the chief operating decision makers.

The consolidated entity predominately operates in the regenerative medicine industry in Australia.

43

Orthocell Limited Directors’ declaration For the year ended 30 June 2016

In the directors’ opinion:

• the attached consolidated financial statements and notes thereto and the remuneration report contained in the directors’ report comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;

• the attached consolidated financial statements and notes thereto comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the consolidated financial statements;

• the attached consolidated financial statements and notes thereto give a true and fair view of the consolidated entity's financial position as at 30 June 2016 and of its performance for the financial year ended on that date; and

• there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

The directors have been given the declarations required by section 295A of the Corporations Act 2001.

Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001.

On behalf of the directors

==> picture [164 x 62] intentionally omitted <==

Mr Paul Anderson Director

12 September 2016

Perth

44

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF

ORTHOCELL LIMITED

Report on the Financial Report

We have audited the accompanying consolidated financial report of Orthocell Limited (the company), which comprises the consolidated statement of financial position as at 30 June 2016, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the company and the consolidated entity. The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements that the financial statements comply with International Financial Reporting Standards.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

45

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Opinion

In our opinion:

• (a) the financial report of Orthocell Limited is in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2016 and of their performance for the year ended on that date; and

• (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and

• (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 8 to 13 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion, the Remuneration Report of Orthocell Limited for the year ended 30 June 2016, complies with section 300A of the Corporations Act 2001.

==> picture [106 x 43] intentionally omitted <==

PKF MACK

==> picture [128 x 73] intentionally omitted <==

SIMON FERMANIS PARTNER

12 SEPTEMBER 2016 WEST PERTH, WESTERN AUSTRALIA

46