Announcement PDF Avecho Biotechnology Limited ABN 32 056 482 403 Annual Report - 31 December 2020 Avecho Biotechnology Limited Contents 31 December 2020 Corporate directory Directors' report Auditor's independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members of Avecho Biotechnology Limited Shareholder information 1 2 3 18 19 20 21 22 23 49 50 54 Avecho Biotechnology Limited Corporate directory 31 December 2020 Directors Dr Greg Collier (Non-Executive Chairman) Dr Ross Murdoch (Non-Executive Director) Mr David Segal (Non-Executive Director) Mr Matthew McNamara (Non-Executive Director) Chief Executive Officer Dr Paul Gavin Company Secretary Ms Melanie Leydin Registered office and Principal place of business Unit A8, 2A Westall Road Clayton VIC 3168 Australia Telephone: +61 3 9002 5000 Email: info@avecho.com.au Share register Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford VIC 3067 Australia Telephone: +61 3 9415 5000 Fax: +61 3 9473 2500 Auditor Grant Thornton Audit Pty Ltd Collins Square Tower 5 727 Collins Street Melbourne VIC 3008 Stock exchange listing Avecho Biotechnology Limited securities are listed on the Australian Securities Exchange. (ASX code: AVE) Website www.avecho.com.au 2 Avecho Biotechnology Limited Directors' report 31 December 2020 The directors present their report, together with the financial statements, on the consolidated entity consisting of Avecho Biotechnology Limited (referred to hereafter as the 'company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 31 December 2020. Directors The following persons were directors of Avecho Biotechnology Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Dr Greg Collier (Non-Executive Chairman) (Executive Chairman until 30 April 2020, and becoming Non-Executive Chairman on 1 May 2020) Dr Ross Murdoch (Non-Executive Director) Mr David Segal (Non-Executive Director) Mr Matthew McNamara (Non-Executive Director) (appointed 13 January 2020) Principal activities The principal activities of the consolidated entity are the development, production, sale and licensing of products incorporating its patented platform technology TPM, for the pharmaceutical, animal health and nutrition industries. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations Avecho’s core business strategy is to develop and commercialise differentiated products containing its TPM® technology. Each of the business divisions, Human Health, Animal Health and Nutrition, and Production, have progressed with the common goal of advancing commercialisation of the Company’s TPM® enhanced products. Avecho remained largely unaffected by the current COVID-19 crisis. Strict social distancing guidelines and work from home practices were implemented, and staff continued to work to advance the ongoing programs. There were delays where research studies relied on partnership or collaboration with third parties around the world, as local shutdowns for specific countries have affected ongoing laboratory practices and the ability to transport material. During the 12 months ending 31 December 2020. Avecho completed a management restructure, with the appointment of Dr Paul Gavin and Dr Roksan Libinaki, as CEO and COO, respectively. Human Health A new TPM® Cannabinoid program was formally announced to the market during 2020, and will remain the focus of the company over the coming years. Early work undertaken by Avecho and partners demonstrated that TPM® could increase the solubility of cannabinoids, a limitation that leads to poor oral bioavailability, high variability in absorption, and difficulty in developing aqueous dosage forms. Avecho’s cannabinoid program aims to develop pharmaceutical cannabinoid products of our own, as well as supporting the benefits of including TPM® in natural medicinal cannabis extracts. This will open additional licensing opportunities for the use of TPM® in third-party medicinal cannabis products, both in Australia and around the world, including the large North American markets. The Company signed supply partnerships with Purisys and Tasmanian Alkaloids for the provision of both synthetic cannabinoids and natural cannabis extracts to facilitate the early research and development. Avecho began formulation development using both in-vitro and in-vivo models of digestion. Researchers at Bioneer:FARMA, located within the University of Copenhagen, completed the first round of formulation testing in vitro. This work was supplemented by supporting experiments at The Monash Institute of Pharmaceutical Sciences. Various formulations containing TPM ® were assessed for their ability to solubilize CBD during simulated gastro-intestinal digestion, which is required for drug absorption in-vivo. Test formulations containing TPM® were found to significantly increase the solubilisation of CBD during gastric and intestinal in vitro digestion. These formulations were subsequently tested for their ability to increase oral bioavailability invivo, the results of which were recently communicated to the market. The TPM ® formulations increased oral CBD absorption by ~4-40 times when compared to control formulations containing CBD alone. 3 Avecho Biotechnology Limited Directors' report 31 December 2020 Formulations identified through the development campaign were selected for testing in human clinical trials. As a first step, Avecho joined Australia’s largest running observational study of medicinal cannabis products, the CA clinics Observational Study (CACOS). Avecho will test the performance of its enhanced oral cannabidiol (CBD) TPM ® formulation in human patients being prescribed medicinal cannabis for a range of indications. Performance will be compared against commonly prescribed CBD formulations. Recruitment for the study began late December, and will continue on an ongoing basis throughout 2021 to maximize the number of patients dosed with both the CBD TPM ® and commercial comparator formulations. In parallel, Avecho began planning a second clinical trial; a Phase I pharmacokinetic study designed to characterise the drug absorption from the Avecho CBD formulation. Together, the data from these studies will direct the pharmaceutical CBD TPM® formulation towards the most appropriate clinical indications for a subsequent Phase III study and product registration. The Company conducted a successful capital raise of $5.06M early 2021 to fund these later stage development activities. Our core injectables program continued to advance. The Propofol TPM ® formulation, improved by Avecho to increase its safety, resumed toxicology testing at Charles River. The prior formulation had been developed in collaboration with Terumo Corporation, Japan, but was proven to be unsafe unsuitable for a continuous 24 hour infusion. The improved formulation was designed to allow a safe, 24 hour infusion of the product as indicated by the commercial product label. A successful safety study was critical for the future licensing of the product. Avecho began an external licensing campaign in Q3, with a focus on partnering the human health assets. A number of discussions were initiated with new companies that had not previously encountered Avecho’s reformulated products. These discussions are ongoing and encompass a broad range of products in the human health portfolio. Whilst the Company would like to conclude these discussions as rapidly as possible, the timeframe for decision making is ultimately in the hands of the potential licensees and their commercial assessments. Animal Health portfolio The Company continued to pursue animal health opportunities with third parties. Commercial partners continued to evaluate the utility of TPM® in feed and veterinary products for livestock. Performance and proof-of-concept studies are being undertaken by and with these partners. In parallel, as we reported in August 2019, we have progressed our European Food Safety Authority (EFSA) application for TPM® to be utilised as a feed additive in the EU, by being advised by the EU Reference Lab that they have approved that the TPM® in-feed data and assays provided are confirmed ‘fit for purpose’. While this was an important milestone, we are continuing to work through questions from the agency as they arise. We plan to work with the interested third parties in undertaking any further studies that may be required by the agency. Production portfolio The Company continued to manufacture and supply Vital ET® to Ashland whilst they continued to transfer the manufacturing methods to their US facility. Avecho sold 1.8 tonnes of Vital-ET to Ashland under this arrangement, which is expected to continue into 2021. Review of financial results The loss for the consolidated entity after providing for income tax amounted to $2,634,853 (31 December 2019: profit of $849,955). Total revenue decreased by 90.9% for the year to $384,627 (2019: $4,238,113), mainly due to prior period revenue including one-time licence fee from Ashland for the global exclusive manufacturing rights to Vital ET® and TPM® for use in personal care products. Other income increased by 66.6% to $778,476 (2019: $467,300), attributed to COVID-19 PAYG and payroll tax subsidy of $120,245 from the Australian Federal and State Government (2019: nil), $64,072 EMDG grant (2019: nil), and net foreign exchange gain of $173,058 (2019: 25,421) Expenses from continuing operations were $3,654,241 (2019: $3,640,885), consisting of: ● ● higher employment costs due to non-cash ESOP expenses of $530,322 (2019: $18,684); and lower travel costs of $7,448 (2019: $116,664) as a result of COVID-19 travel restrictions. 4 Avecho Biotechnology Limited Directors' report 31 December 2020 At the end of December 2020, the consolidated entity held $1,872,776 in cash and cash equivalents (2019: $3,210,540). The net assets of the consolidated entity decreased by $2,104,531 to $2,654,420 as at 31 December 2020 (2019: $4,758,951). Working capital, being current assets less current liabilities, was $2,087,020 (2019: $3,733,319). The net operating cash outflow for the year was $1,423,960 (2019: inflow of $1,177,750). This is mainly due to $3,571,429 received for the one-time licence fee from Ashland received in prior year. Significant changes in the state of affairs On 27 April 2020, the Company issued 20,000,000 fully paid ordinary shares to employees as a Sign-on Bonus in accordance with their letter of appointment. These shares were valued at $0.006 (0.6 cents) per share. On 18 August 2020, the Company issued 7,221,847 unlisted performance rights to a consultant for services to be provided over a certain period. Each performance right is a right to acquire one fully paid share, subject to the satisfaction of vesting conditions. On 20 November 2020, the Company granted 83,866,515 unlisted options to all Executives and staff at an exercise price of $0.0169 (1.69 cents) per option, expiring on 20 May 2024. These options will vest in four tranches: ● ● ● ● 25% on 20 November 2020; 25% on 20 November 2021: 25% on 20 November 2022; and 25% on 20 November 2023. The Directors had also been offered 17,971,397 Options at the same exercise price of $0.0169 (1.69 cents) per option. These options will be subject to Shareholder approval being received at the 2021 Annual General Meeting of the Company. On 23 December 2020, the Company issued 1,437,260 fully paid ordinary shares in respect of short term incentives issued under the Company's Equity Incentive Plan Rules. These shares were valued at $0.018 (1.8 cents) per share. On 23 December 2020, the Company announced that it had begun participation in Australia’s largest running observational study of medicinal cannabis products, the CA Clinics Observational Study (CACOS). Avecho will test the performance of its enhanced oral cannabidiol (CBD) TPM® formulation in human patients being prescribed medicinal cannabis for a range of indications. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year On 10 February 2021, the Company announced that it received firm commitments through the issue of 229,999,999 fully paid ordinary shares (“New Shares”) at an issue price of $0.022 per share to raise proceeds of $5.06m (before costs). Each New Share will have attaching Listed Options (“New Options”) on a 1:2 basis, exercisable at $0.035 each, expiring on 31 December 2023. The placement was completed on 16 February 2021. 229,999,999 fully paid ordinary shares and 112,500,000 listed options were issued to institutional and sophisticated investors. No other matter or circumstance has arisen since 31 December 2020 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. Business Strategy and Future Developments The Company will continue to use its cash resources to invest in research and development activities with the major focus being the clinic advancement of the cannabinoid program. The Company continues to pursue commercialisation of all its development pipeline via licensing agreements appropriate for the stage of each product’s development and continues to look at new opportunities to build value for shareholders. In line with the company’s strategic intent, Avecho will continue to pursue opportunities to monetise certain assets to extend its financial runway and free up resources for prioritised assets and activities. 5 Avecho Biotechnology Limited Directors' report 31 December 2020 Human Health The Company’s key Human Health focus will remain the development of a pharmaceutical cannabinoid formulation. Having conducted pre-clinical formulation development in 2020, the Company will focus on the subsequent clinical trial and regulatory activities to support future product registration. The first clinical trial, an open label observational study, began late in Q4 2020. This study will continue throughout 2021, with the intent to assess the effectiveness of the Avecho CBD formulation in patients undergoing medicinal cannabis therapy. The second will be a formal Phase I clinical trial that characterises the absorption profile of CBD in healthy volunteers. The absorption profile from this Phase I clinical trial will inform the future product label and clinical indication. Together, these trials will support licensing discussions and potential sales through SAS-B. The enhanced CBD formulation will be presented in single dose capsules for the Phase I clinical trial, at doses designed to be compliant with the recent down-scheduling of CBD by the TGA. The manufacturing piece will be ongoing throughout H1 2021 and will form also a pivotal part of a future dossier for TGA submission. In parallel with the initial clinical trials and manufacturing, Avecho will determine the development program required to complete product registration and submit a dossier to the TGA for approval. This will include the clinical indication being pursued and the design of the pivotal Phase III indication. A pre-submission meeting with the TGA will be requested in order to validate the clinical development plans. This plan will be communicated to shareholders once completed. A capital raise of $5.06M was completed by the company early 2021 to fund this work. It is anticipated that the additional funds could be sufficient to take the product toward regulatory submission. In parallel with the development of the cannabinoid products, it is anticipated the Company will begin licensing discussions related to the use of TPM in cannabinoid products. The Company will continue to support ongoing stability trials on various the TPM® products within its portfolio. These products will remain the focus of ongoing business development discussions, which the Company will aim to conclude during 2021. Animal Health and Nutrition Avecho will continue to support the clinical assessment of its TPM® technology by third parties in the animal health space. Out-licencing of the technology to suitable animal health partner/s, continues to be the focus. Production Avecho will continue to support Ashland during 2021 as they continue to transfer and validate the methods used to manufacture Vital-ET®. Environmental regulation The Company is registered with relevant authorities to use certain compounds in the manufacture of goods. All waste chemicals are disposed of using accredited service providers with notification to the relevant authorities. The Company is not aware of any material breaches of any environmental regulations. 6 Avecho Biotechnology Limited Directors' report 31 December 2020 Information on directors Name: Title: Qualifications: Experience and expertise: Dr Greg Collier Non Executive Chairman (Executive Chairman until 30 April 2020, and becoming NonExecutive Chairman on 1 May 2020) PhD Dr Collier has more than 20 years’ experience spanning operational, clinical and scientific aspects of pharmaceutical research, development and commercialisation. He has led the planning and execution of multiple commercial transactions including in and out licensing deals and major M&A activities, and he has successfully taken a drug from discovery through to regulatory approval. Notably, Dr Collier steered ChemGenex Pharmaceuticals Limited from a researchbased Company with a market capitalisation of $10 million to a Company with completed clinical trials and regulatory dossiers submitted to the FDA and EMA. In 2011, ChemGenex was sold to Cephalon Inc. (now subsidiary of Teva Pharmaceuticals Industries Limited) for $230 million. Prior to his commercial pharmaceutical career, Dr Collier had an outstanding academic career resulting in over 150 peer reviewed publications, and senior authorship on 33 patents. Dr Collier was the inaugural Alfred Deakin Professor at Deakin University, and also held positions at Melbourne University, Monash University and the University of Toronto. In 2010, Dr Collier was awarded the Roche Award of Excellence for his contribution to the biotechnology industry. Other current directorships: None Former directorships (last 3 years): Invion Limited (ASX: IVX) Interests in shares: 2,000,000 ordinary shares Interests in options: 2,250,000 options Name: Title: Qualifications: Experience and expertise: Ross Murdoch Non-Executive Director PhD GAICD Dr Murdoch joined Avecho (formerly Phosphagenics Limited) as CEO in January 2015 and was appointed as director in April 2015. He has almost 30 years’ experience as a leader within the global healthcare, pharmaceutical and biotechnology industries. He is currently the Chief Executive Officer of Extractas Bioscience. He has previously held senior management and executive positions in Australia, the USA and Europe, with responsibility for the strategy, development and commercialisation of products, product portfolios and the building and rebuilding of new and existing businesses. Highlights of his career include Senior Vice President at Shire Pharmaceuticals (one of the world’s leading specialty pharmaceutical companies), based in the USA and Switzerland, where he founded and grew both the Emerging Products Business and Haematology Business, and President and COO of Prana Biotechnology Limited based in Australia. Dr Murdoch has a BSc degree with honours from Monash University, a PhD in Clinical Pharmacology from the University of Melbourne and additional postgraduate training in Health Economics from Monash University Business School. He is also a Graduate of the Australian Institute of Company Directors. Other current directorships: None Former directorships (last 3 years): None Interests in shares: 1,666,667 ordinary shares Interests in options: None 7 Avecho Biotechnology Limited Directors' report 31 December 2020 Name: Title: Qualifications: Experience and expertise: Mr David Segal Non-Executive Director B.Com B.Law Mr Segal was the Investor Relations Manager at Avecho (formerly Phosphagenics Limited) from 2011 to 2015. Prior to this he worked for over 30 years in stockbroking, including setting up, raising capital for and running Trent Securities which was absorbed into Shaw Stockbroking in 1992. Mr Segal has been a shareholder of Avecho since 1999. Mr Segal has a law/commerce degree from Melbourne University and is a graduate of the Australian Institute of Company Directors. Other current directorships: None Former directorships (last 3 years): None Interests in shares: 18,491,281 ordinary shares Interests in options: 1,500,000 options Name: Title: Qualifications: Experience and expertise: Matthew McNamara Non-Executive Director (appointed on 13 January 2020) BSc (Hons), MBA Mr McNamara joined the Board in January 2020. He has over 30 years’ experience in the healthcare and medical sciences sector. He is currently the Chief Investment Officer and Board Director of Horizon 3 Biotech Fund. In 2003, he founded BioBridge Australia, a biotechnology commercialisation advisory company and advised a number of public biotechnology / investment companies. He is presently a director of Adherium Ltd (ASX:ADR), SciCapital Pty Ltd, Microbio Pty Ltd, ESN Cleer Pty Ltd and Grey Innovation Group Pty Ltd. He has held previous directorship in Avita Medical Ltd, Bioxyne Ltd, and Saluda Medical Pty Ltd. Mr McNamara has also served as CIO of BioScience Managers Pty Ltd, was CEO of SciCapital Pty Ltd, a Life Sciences Venture Capital fund, SVP Business Development for eBioinformatics Inc, General Manager of Vistakon Pty Ltd (a Johnson & Johnson Medical franchise), and held numerous management positions in Australia with Merck & Co. Other current directorships: Adherium Ltd (ASX: ADR) Former directorships (last 3 years): None Interests in shares: None Interests in options: None 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretary Melanie Leydin - BBus (Acc. Corp Law) CA FGIA Melanie Leydin holds a Bachelor of Business majoring in Accounting and Corporate Law. Ms Leydin is a member of the Institute of Chartered Accountants, Fellow of the Governance Institute of Australia and is a Registered Company Auditor. Ms Leydin graduated from Swinburne University in 1997, became a Chartered Accountant in 1999 and since February 2000 has been the principal of Leydin Freyer. The practice provides outsourced company secretarial and accounting services to public and private companies across a host of industries including but not limited to the resources, technology, bioscience, biotechnology, and health sectors. Ms Leydin has over 25 years’ experience in the accounting profession and over 15 years as a Company Secretary. Ms Leydin has extensive experience in relation to public company responsibilities, including ASX and ASIC compliance, control and implementation of corporate governance, statutory financial reporting, reorganisation of Companies and shareholder relations. 8 Avecho Biotechnology Limited Directors' report 31 December 2020 Meetings of directors The number of meetings of the company's Board of Directors ('the Board') held during the year ended 31 December 2020, and the number of meetings attended by each director were: Full Board Attended Held Greg Collier Ross Murdoch David Segal Matthew McNamara 8 8 8 7 8 8 8 7 Held: represents the number of meetings held during the time the director held office. The full Board assumes the responsibility of the Remuneration Committee and Audit Committee. Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: ● Principles used to determine the nature and amount of remuneration ● Details of remuneration ● Service agreements ● Share-based compensation ● Relationship between remuneration and the Group's performance ● Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity's executive remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors ('the Board') ensures that executive reward satisfies the following key criteria for good reward governance practices: ● Competitive and reasonable, enabling the Company to attract and retain key talent ● Aligned to the Company’s strategic and business objectives and creation of shareholder value ● Transparent and easily understood ● Acceptable to shareholders The Board is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the consolidated entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The Board has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the consolidated entity. The executive remuneration framework has three components: ● Base pay and benefits ● Short-term incentives ● Long-term incentives through participation in Avecho Equity Incentive Plan (EIP) A combination of these components comprises an executive’s total remuneration, with base pay and benefits at an appropriate level to competitive market benchmarks. 9 Avecho Biotechnology Limited Directors' report 31 December 2020 Base pay and benefits Australian based executives receive their base pay and benefits structured as a Total Remuneration Package (TRP) which may be delivered as a combination of cash and prescribed non-financial benefits at the executive’s discretion. Superannuation is included in the TRP. Short term incentives The Company has in place a Short Term Incentive Program for all employees to reward for achievement of defined Company and agreed individual performance expectations for 12 months ending 31 December each year. Eligible employees can receive cash bonus based on a percentage of their fixed base salary should they meet expected KPIs. Executives including CEO and COO are eligible to receive up to 20% of their fixed base salary as a bonus. Executive bonus is set to be paid on an annual basis as 50% cash and 50% in terms of fully paid ordinary shares. The bonus outcomes are discretionary and are based on performance criteria outlined in their respective contracts, the overall health of the business and other factors which may arise. The Board approves the total bonus pool, the corporate component as well as the total awarded to each KMP. Long term incentives On 13 July 2020, the shareholders approved the Equity Incentive Plan during 2020 Annual General Meeting. The Plan would enable eligible directors, officers, employees and contractors (including Executive and Non-Executive directors, officers, employees and contractors of the Company’s subsidiaries) to receive shares, options to acquire shares in the Company, other securities, or rights or interests such as performance rights. No directors or their associates can or will be issued shares, options or other securities or rights under the Plan unless shareholder approval of specific issues to them is obtained. Under the Plan the Company may acquire shares on market to be held on trust for directors or their associates. The Company can issue up to 157 million equity securities (shares, options or other rights including performance rights each conditionally entitling the applicable holder to one fully paid ordinary shares upon exercise or achievement of the applicable milestone). This number includes 78 million equity securities which the Company may issue to senior executives who are not directors of the Company. Any additional issues under the Plan above that number would require further shareholder approval, unless the total number of securities issued does not exceed 5% of the then issued shares of the Company. The objects of the Plan are to: ● ● ● ● ● provide eligible employees with an additional incentive to work to improve the performance of the Company; attract and retain eligible employees essential for the continued growth and development of the Company; promote and foster loyalty and support amongst eligible employees for the benefit of the Company; enhance the relationship between the Company and eligible employees for the long-term mutual benefit of all parties; and provide eligible employees with the opportunity to acquire shares, options or rights in the Company, in accordance with the Plan.