ORTHOCELL LIMITED — Interim / Quarterly Report 2017

Feb 27, 2017

Appendix 4D Half-yearly report for the 6 months to 31 December 2016 Orthocell Limited - ABN 57 118 897 135

1. Reporting period

Report for the half year ended 31 December 2016. Previous period is the half year ended 31 December 2015

2. Results for announcement to the market

	31 Dec 2016	31 Dec 2015	% change
Revenues from ordinary activities	401,626	627,834	(36.0)
Loss from ordinary activities after tax attributable to the	(2,849,724)	(2,349,626)	(21.3)
owners of Orthocell Limited
Loss for the half-year attributable to the owners of	(2,849,724)	(2,349,626)	(21.3)
Orthocell Limited
3. Net tangible assets per security
		31 Dec 2016	31 Dec 2015
		Cents	Cents
Net tangible assets per ordinary security		0.06	0.05

4. Dividends

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

There are no dividend or distribution reinvestment plans in operation.

5. Foreign entities

N/A

6. Gain or loss of control over entities

N/A

7. Associates and joint ventures

N/A

8. Audit qualification or review

Details of audit/review dispute or qualification (if any):

The Interim Report of Orthocell Limited for the half-year ended 31 December 2016 was were subject to a review by the auditors and the review report is attached as part of the Interim Report.

9. Signed

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Paul Anderson Managing Director Perth

Date: 28 February 2017

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Orthocell Limited ABN 57 118 897 135

Half-Year Report 31st December 2016

Ph: +61 8 9360 2888 Fax: +61 8 9360 2899 www.orthocell.com.au

CONTENTS

Corporate Directory ................................................................................................................................... 2 Directors’ report .......................................................................................................................................... 3 Auditor’s independence declaration ....................................................................................................... 4 Consolidated statement of profit or loss and other comprehensive income ....................................... 5 Consolidated statement of financial position .......................................................................................... 6 Consolidated statement of changes in equity ........................................................................................ 7 Consolidated statement of cash flows ..................................................................................................... 8 Notes to the financial statements ............................................................................................................. 9 Directors’ declaration .............................................................................................................................. 13 Independent auditor’s review report ...................................................................................................... 14

Consolidated Interim Statements for the Half-Year Ended 31 December 2016 1

1

CORPORATE DIRECTORY

Board of 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 & Principal Place of Business

Building 191, Murdoch University South Street Murdoch WA 6150, Australia

Share Register

Automic Registry Services Suite 1a, Level 1 7 Ventnor Avenue West Perth WA 6005, Australia

Auditor

PKF Mack 4th Floor, 35 Havelock Street West Perth WA 6005, Australia

Solicitors

Gilbert + Tobin 1202 Hay Street West Perth WA 6005, Australia

Bankers

Westpac Banking Corporation

Securities Exchange Listing

Australian Securities Exchange ASX code: OCC

Website

www.orthocell.com.au

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

2

DIRECTORS’ REPORT

The directors present their report, together with the consolidated financial statements, on the consolidated entity ('consolidated entity') consisting of Orthocell Limited ('Company' or 'parent entity') and the entity it controlled at the end of, or during, the half-year ended 31 December 2016.

1. Directors

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

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

Directors have been in office since the start of the financial year to the date of this report unless otherwise stated.

2. 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.

3. Summary review of operations

During the period the Company continued to progress the development of its lead regenerative medicine products and pipeline opportunities. Activities included pre-clinical, clinical studies and marketing activities to support the development and internationalisation of TGA licensed cell therapies for tendon and cartilage regeneration and Celgro® collagen based medical device technologies.

The Company was granted ethics approval for a human study using its Celgro® for peripheral nerve regeneration. This study adds to a broad clinical program aimed at validating the platform technology with active human trials utilising Celgro® to augment tendon, nerve, cartilage and bone regeneration in progress.

The Company progressed its CelGro® application for marketing authorisation (CE Mark) in Europe. Approval will trigger submissions for other regulatory approvals in the United States, Australia and Japan in 2017.

Orthocell received ethics approval to conduct a pivotal study to show that one single Ortho-ATI injection is superior or equivalent to more costly and invasive surgery for treatment of severe tennis elbow.

The Company announced the publication of positive data of Orthocell’s ‘Cell Factory’ technology for tissue specific Growth Factor production for regeneration of damaged bone, tendon and cartilage tissue.

Orthocell received the Innovation Excellence Award at the 2016 Annual Western Australian Industry & Export Awards for the development of CelGro® collagen based medical device platform technology.

Orthocell raised $4,000,000 via the placement of 10,000,000 shares at $0.40 per share. The funds will be used to further progress Orthocell’s technologies towards commercialisation.

The loss for the consolidated entity after income tax for the half-year amounted to $2,849,724 (31 December 2015: $2,349,626).

4. 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.

5. Directors’ resolution

This report is made in accordance with a resolution of directors, pursuant to section 306(3)(a) of the Corporations Act 2001.

On behalf of the directors

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Mr Paul Anderson Managing Director 28 February 2017 Perth

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

3

AUDITOR’S INDEPENDENCE DECLARATION

TO THE DIRECTORS OF ORTHOCELL LIMITED

In relation to our review of the financial report of Orthocell Limited for the half year ended 31 December 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.

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PKF MACK

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SIMON FERMANIS PARTNER

28 FEBRUARY 2017 WEST PERTH WESTERN AUSTRALIA

4

CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME

Consolidated statement of profit or loss & other comprehensive income for the half-year ended 31 December 2016

Note Revenue Sales revenue 3 Cost of goods sold Gross profit Other revenue 3 Expenses Research & development expenses Sales & marketing expenses Administrative & general expenses 4 Loss before income tax expenses Income tax benefit Loss after income tax expenses Other comprehensive income Other comprehensive income for the half-year, net of tax Total comprehensive loss Loss per share Basic earnings per share Diluted earnings per share	31 Dec 2016 31 Dec 2015 $ $ 309,025 450,832 (245,803) (335,683)
	63,222 115,149 92,601 177,002 (1,554,355) (1,323,270) (571,375) (513,586) (879,817) (804,921)
	(3,005,547) (2,641,777) (2,849,724) (2,349,626) - -
	(2,849,724) (2,349,626) - -
	(2,849,724) (2,349,626)
	$ $ (0.031) (0.028) (0.031) (0.028)

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

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

5

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Consolidated statement of financial position

Note Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Property, plant and equipment Intangibles Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employment benefits Other Total current liabilities Non-current liabilities Other Total non-current liabilities Total Liabilities Net assets Equity Issue capital 5 Share-based payment reserve 6 Accumulated losses Total equity	31 Dec 2016 30 Jun 2016 $ $ 6,065,972 5,181,812 157,241 185,147 105,063 134,161 38,890 58,862
	6,367,166 5,559,982
	285,933 289,172 1,290,337 1,264,030
	1,576,270 1,553,202
	7,943,436 7,113,184
	737,109 736,942 372,141 338,193 239,067 444,912
	1,348,317 1,520,047
	637,692 708,540
	637,692 708,540
	1,986,009 2,228,587
	5,957,427 4,884,597
	23,102,888 19,359,578 1,206,224 1,026,980 (18,351,685) (15,501,961)
	5,957,427 4,884,597

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

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

6

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Consolidated statement of changes in equity for the half-year ended 31 December 2016

Balance at 1 July 2015 Loss after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options Balance at 31 December 2015 Balance at 1 July 2016 Loss after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity Share equity costs Issue of options Balance at 31 December 2016	Issued Capital Share-based payment reserve Accumulated losses Total equity $ $ $ $ 15,302,482 798,405 (11,717,097) 4,383,790 - - (2,349,626) (2,349,626) - - - -
	- - (2,349,626) (2,349,626) 4,326,862 - - 4,326,862) (369,766) - - (369,766) - - - -
	19,259,578 798,405 (14,066,723) 5,991,260
	Issued Capital Share-based payment reserve Accumulated losses Total equity $ $ $ $ 19,359,578 1,026,980 (15,501,961) 4,884,597 - - (2,849,724) (2,849,724) - - - -
	- - (2,849,724) (2,849,724) 4,000,000 - - 4,000,000 (256,690) - - (256,690) - 179,244 - 179,244
	23,102,888 1,206,224 (18,351,685) 5,957,427

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

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

7

CONSOLIDATED STATEMENT OF CASH FLOWS

Consolidated statement of cash flows for the half-year ended 31 December 2016

Note Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers & employees (inclusive of GST) Interest received Net cash used in operating activities Cash flows from investing activities Payments for intangible assets Payments for property, plant & equipment 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 & cash equivalents at the beginning of the financial half-year Cash & cash equivalents at the end of the financial half-year	31 Dec 2016 31 Dec 2015 $ $ 357,808 658,162 (3,165,881) (3,087,521) 15,023 28,723
	(2,793,050) (2,400,636)
	(84,072) (187,358) (21,968) (37,886)
	(106,040) (225,244)
	4,000,000 4,326,862 (216,750) (369,766)
	3,783,250 3,957,096
	884,160 1,331,216 5,181,812 4,774,108
	6,065,972 6,105,324

Note: the above consolidated statement of cash flows should be read in conjunction with the accompanying notes

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Orthocell Limited (the “Company” or “Orthocell”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (“ASX”). The consolidated financial statements of the Group as at and for the half-year to 31 December 2016 comprise the Company and its subsidiaries.

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.

The consolidated interim financial statements were authorised by the directors on 27 February 2017.

Basis of preparation

The interim report has been prepared on a historical cost basis. Cost is based on the fair value of the consideration given in exchange for assets. The company is domiciled in Australia and all amounts are presented in Australian dollars, unless otherwise noted. For the purpose of preparing the interim report, the half-year has been treated as a discrete reporting period.

Statement of compliance

These interim consolidated financial statements are a general purpose financial report prepared in accordance with the requirements of the Corporations Act 2001, applicable accounting standards including AASB 134 ‘Interim Financial Reporting’, Accounting Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board (‘AASB’). Compliance with AASB 134 ensures compliance with IAS 34 ‘Interim Financial Reporting’.

This condensed half-year report does not include full disclosures of the type normally included in an annual financial report. Therefore, it cannot be expected to provide as full an understanding of the financial performance, financial position and cash flows of the Group as in the full financial report.

It is recommended that this financial report be read in conjunction with the annual financial report for the period ended 30 June 2016 and any public announcements made by Orthocell

Limited and its subsidiaries during the half-year in accordance with continuous disclosure requirements arising under the Corporations Act 2001 and the ASX Listing Rules.

The accounting policies adopted are consistent with those of the previous financial half-year and corresponding interim reporting period.

Critical accounting estimates and significant judgements

The preparation of interim financial reports requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates.

In preparing this interim report, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial report for the period ended 30 June 2016.

New and amended standards adopted by the

entity

A number of new or amended standards became applicable for the current reporting period, however, the Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

Impact of standards issued but not yet applied by

the entity

There were no new standards issued since 30 June 2016 that have been applied by Orthocell Limited. The 30 June 2016 annual report disclosed that Orthocell Limited anticipated no material impacts (amounts recognised and/or disclosed) arising from initial application of those standards issued but not yet applied at that date, and this remains the assessment as at 31 December 2016.

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 2. 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.

Note 3. Revenue

Sales revenue Sale of goods Other revenue Interest Commissions License fee & royalties Other Total revenue	31 Dec 2016 31 Dec 2015 $ $ 309,025 450,832
	309,025 450,832
	15,023 28,723 - 76,758 70,848 70,848 6,730 673
	92,601 177,002
	401,626 627,834

Note 4. Expenses

Loss before income tax includes the following specific expenses: Depreciation and amortisation Depreciation – plant & equipment Amortisation – patents & trademarks Total depreciation and amortisation Employment expenses Wages Superannuation Leave entitlements Payroll & other taxes Share-based payments Directors’ fees Other employment costs Net foreign exchange loss Net foreign exchange loss Rental expense relating to operating leases Minimum lease payments	31 Dec 2016 31 Dec 2015 $ $ 25,207 22,804 30,879 15,525
	56,086 38,329
	1,128,856 935,991 118,694 85,384 33,948 1,726 68,259 68,138 139,244 - 140,550 140,548 8,847 263
	1,638,398 1,232,050
	- 3,552
	39,654 39,655

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Equity – issued capital

Note 5. Equity – issued capital
Ordinary shares – fully paid Share equity costs	31 Dec 2016 30 Jun 2016 31 Dec 2016 30 Jun 2016 Shares Shares $ $ 101,479,437 91,479,437 24,664,002 20,664,002 - - (1,561,114) (1,304,424)
	101,479,437 91,479,437 23,102,888 19,359,578

Movements in ordinary share capital

Details Date Balance 1 Jan 2015 Issue of shares 19 Nov 2015 Balance 31 Dec 2015 Issue of shares 26 Feb 2016 Issue of shares 13 Dec 2016 Balance 31 Dec 2016	Shares Issue price 82,500,000 8,776,597 $0.490 91,276,597 202,840 $0.493 10,000,000 $0.400 101,479,437	$ 16,237,140 4,326,862
		20,564,002
		100,000 4,000,000
		24,664,002

Note 6. Share-based payment reserve

Share-based payment reserve	31 Dec 2016 30 Jun 2016 31 Dec 2016 30 Jun 2016 No of Options No of Options $ $ 12,222,500 10,782,500 1,206,224 1,026,980
	12,222,500 10,782,500 1,206,224 1,026,980

Movements in share-based payment reserve

Details Date Balance 1 Jan 2015 Balance 31 Dec 2015 Issue of options(1) 26 Feb 2016 Balance 30 Jun 2016 Issue of options(2) 13 Oct 2016 Issue of options(3) 12 Dec 2016 Issue of options(4) 13 Dec 2016 Balance 31 Dec 2016	No of options $ 9,432,500 798,405
	9,432,500 798,405
	1,350,000 228,575
	10,782,500 1,026,980
	650,000 108,160 190,000 31,084 600,000 40,000
	12,222,500 1,206,224

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Share-based payments reserve (continued)

For the options issued during the half year the valuation model inputs used to determine the fair value at the grant date are as follows:

	(1)	(2)	(3)
Grant date	26 Feb 2016	13 Oct 2016	12 Dec 2016
Expiry date	26 Aug 2019	12 Oct 2019	12 Dec 2019
Share price at grant date	$0.365	$0.435	$0.440
Exercise price	$0.560	$0.624	$0.648
Expected volatility	87.15%	71.64%	70.68%
Dividend yield	0%	0%	0%
Risk-free rate	1.72%	1.72%	1.75%
Fair value at grant date	$0.169	$0.166	$0.164

• (4) On 13 December 2016 600,000 options were granted as part payment for the provision of services in relation to a capital raising. The fair value of the service amounts to $240,000 as determined by market expectations. Of this fair value $200,000 was settled in cash and therefore the options are deemed to have a fair value of $40,000. The options have an exercise prices of $0.55 and an expiry date of 13 December 2019.

Note 7. Contingent assets

The consolidated entity has no contingent assets for the half-year ended 31 December 2016.

Note 8. Events after the reporting period

No matter or circumstance has arisen since 31 December 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 9. Commitments and contingences

There has been no change in contingent liabilities or commitments since the last annual reporting date.

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

12

DIRECTORS’ DECLARATION

In the directors' opinion:

• the attached financial statements and notes thereto comply with the Corporations Act 2001, Australian Accounting Standard AASB 134 'Interim Financial Reporting', the Corporations Regulations 2001 and other mandatory professional reporting requirements;

• the attached financial statements and notes thereto give a true and fair view of the consolidated entity's financial position as at 31 December 2016 and of its performance for the financial half-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.

Signed in accordance with a resolution of directors made pursuant to section 303(5)(a) of the Corporations Act 2001.

On behalf of the directors

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Paul Anderson Director 28 February 2017 Perth

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Consolidated Interim Statements for the Half-Year Ended 31 December 2016

13

INDEPENDENT AUDITOR’S REVIEW REPORT

TO THE MEMBERS OF

ORTHOCELL LIMITED

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Orthocell Limited (the Company) and controlled entities (consolidated entity) which comprises the condensed consolidated statement of financial position as at 31 December 2016, the condensed consolidated statement of profit or loss and other comprehensive income, the condensed consolidated statement of changes in equity and the condensed consolidated statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at 31 December 2016, or during the half year.

Directors’ Responsibility for the Half-Year Financial Report

The directors of the Company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with the Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine is necessary to enable the preparation of the halfyear financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and its performance for the half year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporation Regulations 2001. As the auditor of Orthocell Limited and the entities it controlled during the half year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

14

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. In accordance with the Corporations Act 2001, we have given the directors’ of the company a written Auditor’s Independence Declaration.

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Orthocell Limited is not in accordance with the Corporations Act 2001 including:

• (a) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and of its performance for the half-year ended on that date; and

• (b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

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PKF MACK

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SIMON FERMANIS PARTNER

28 FEBRUARY 2017 WEST PERTH WESTERN AUSTRALIA

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