Announcement PDF Avecho Biotechnology Limited ABN 32 056 482 403 Annual Report - 31 December 2022 Avecho Biotechnology Limited Contents 31 December 2022 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 17 18 19 20 21 22 50 51 55 Avecho Biotechnology Limited Corporate directory 31 December 2022 Directors Dr Gregory Collier (Chairman) Dr Ross Murdoch (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 2022 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 (referred to hereafter as the 'Consolidated Entity') at the end of, or during, the year ended 31 December 2022. 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 Gregory Collier (Chairman) Dr Ross Murdoch (Non-Executive Director) Mr Matthew McNamara (Non-Executive Director) Principal activities Avecho Biotechnology Limited develops and commercialises innovative Human and Animal Health products using its proprietary drug delivery system called TPM® (Tocopherol Phosphate Mixture). TPM® is derived from Vitamin E using unique, proprietary and patented processes and is proven to enhance the solubility and oral, dermal and transdermal absorption of drugs and nutrients. The Consolidated Entity’s major projects include delivering TPM® enhanced injectable, oral and topical products for the human health market, including the recently announced application of TPM® to cannabinoids. The Company is also developing TPM® to enhance feed efficiency and health of livestock. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations Phase III Clinical Study In December 2022, Avecho announced that it had received ethics approval to conduct a pivotal Phase III study investigating the effectiveness of its proprietary CBD soft-gel capsule in the treatment of insomnia. Titled ‘A randomised, double-blind, placebo-controlled Phase III clinical study evaluating the efficacy and safety of CBD TPM® capsules in adults for use in the reduction of insomnia severity,’ the study is set to be the largest randomised, placebocontrolled study being undertaken in Australia, and will support registration of cannabidiol as an over-the-counter medicine with the Therapeutic Goods Administration (TGA). Under the study design, which was developed and refined throughout 2022 in consultation with a number of international sleep experts, 540 patients will be enrolled across three treatment groups to compare nightly CBD doses of 75 and 150 mg CBD with placebo over an 8-week dosing period. The study will measure the effects of the treatments on reductions in insomnia severity, as measured by the Insomnia Severity Index (ISI), and subjective sleep efficiency. Additional data will be collected on other objective and subjective aspects of sleep. This will be a multicentre study, conducted in up to 10 sites around Australia. The lead site will be Monash Medical Centre in Melbourne, Australia under the supervision of Principal Investigator, Associate Professor Darren Mansfield, Deputy Director of Monash Health. Expanded cannabinoid portfolio This year saw the inclusion of a new clinical asset into Avecho’s cannabinoid product portfolio. A collaboration with the Lambert Initiative for Cannabinoid Therapeutics at the University of Sydney explored the effectiveness of a topical CBD TPM® formulation in the treatment of osteoarthritis of the hand. The outcomes from the Phase IIa study, which demonstrated significant improvements in self-reported measures of pain, grip strength, finger stiffness and hand functionality, now warrant further investigation in a larger placebo-controlled study. Having demonstrated the increased absorption of CBD from both oral and topical dosage forms, Avecho has now manufactured these same dosage forms incorporating THC, CBG, CBC and CBN, to further extend the portfolio of cannabinoid products available with increased absorption. These products have been placed on stability and are undergoing laboratory assessments for increased absorption. The topical CBG TPM® formulation has already been earmarked for a subsequent Phase II clinical trial with the Lambert Initiative, with the trial documentation currently under development. 3 Avecho Biotechnology Limited Directors' report 31 December 2022 The increasing body of clinical evidence supports the potent versatility of Avecho's CBD-TPM® proprietary combination and its potential to address diverse unmet clinical needs in the community, as well as becoming a unique point of difference within the lucrative recreational cannabis market in the United States. Review of financial results The loss for the Consolidated Entity after providing for income tax amounted to $2,342,391 (31 December 2021: $3,416,116). The company invested $1,593,880 in research and development during 2022, with the majority supporting the design, setup and ethics approval of the impending Phase III clinical trial and associated manufacturing work. Total revenue increased by 42% for the year to $1,129,261 (31 December 2021: $793,600), mainly attributable Vital ET® sales made to Ashland during the year. Other income decreased by 36% to $727,823 (31 December 2021: $1,144,568), largely attributed to R&D tax incentives of $622,923 (31 December 2021: $1,124,946). Overall reduction in the research and development activities compared to 2021 financial year was as the Company moved into pre-Phase-III trials of CBD soft-gel capsule during 2022 financial year. Expenses from continuing operations decreased by 24% to $3,863,332 (31 December 2021: $5,068,621), largely due to lower research and development cost of $1,593,880 (31 December 2021: $2,924,387). At 31 December 2022, the Consolidated Entity held $1,468,210 in cash and cash equivalents (31 December 2021: $3,264,764). The net assets of the Consolidated Entity decreased by $2,111,694 to $2,424,896 as at 31 December 2022 (31 December 2021: $4,536,590). Working capital, being current assets less current liabilities, was $2,105,685 (31 December 2021: $4,112,078). Significant changes in the state of affairs On 10 January 2022, the Company has issued 1,696,000 Fully Paid Ordinary Shares (Shares) to employees under the Company’s Equity Incentive Plan. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 31 December 2022 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 Development Program Avecho was actively engaged in a range of business development activities throughout 2022, both for its differentiated cannabinoid products and legacy pharmaceutical portfolio. Avecho conducted a study in dogs comparing the absorption of CBD form its oral CBD formulation with that of Epidiolex®, the only FDA approved CBD product. This study was conducted at the request of interested parties and demonstrated that Avecho’s oral CBD product increased bioavailability compared to Epidiolex®. Furthermore, the study found that adding TPM® directly to Epidiolex increased CBD absorption. Data from this study has formed a compelling piece of ongoing partnering discussions. Avecho signed a licensing and supply agreement with Team SAAS LLC in February for the use of its proprietary TPM® technology in a unique cannabis distillate to be developed by SAAS for use in the recreational cannabis market. This product has yet to be commercialized. However, Avecho has expanded its discussions with North American firms in the recreational market and has developed prototype cannabis edibles enhanced using TPM®. Avecho signed a development agreement with leading global consumer packaged goods company, Perrigo Company plc, for the development of a topical TPM®-enhanced ibuprofen gel for the US market. Perrigo plans to conduct a clinical trial in a pain-related indication using the ibuprofen TPM® gel in 2023. Pending positive results of this trial, the TPM®-enhanced gel has the potential to be the first topical ibuprofen product approved in the US. Avecho announced that global biopharmaceutical company Athenex had submitted Avecho’s TPM®-enhanced phytonadione injectable product to the FDA for feedback via a pre-IND meeting request. Pending positive FDA feedback, a license and development agreement will be finalised with Athenex, which will enable them to finish the remaining development stages with the goal of obtaining US registration. The Company looks forward to concluding further deals on various products during 2023. 4 Avecho Biotechnology Limited Directors' report 31 December 2022 Risks and uncertainties The Consolidated Entity is subject to risks that are specific to the Consolidated Entity and the Consolidated Entity’s business activities, as well as general risks. Future funding risks The Consolidated Entity had a cash and cash equivalents of $1.5 million, and net assets of $2.4 million. The Consolidated Entity require additional financing in the future to sufficiently fund the continued research, development and operations and its other longer-term objectives. The Consolidated Entity's ability to raise additional funds will be subject to, among other things, factors beyond the control of the Consolidated Entity and its Directors, including cyclical factors affecting the economy and share markets generally. If for any reason the Consolidated Entity was unable to raise future funds, its ability to achieve its milestones or continue future development / commercialisation of its technology / product would be significantly affected. The Directors regularly review the cash flow requirements to ensure that the Consolidated Entity has sufficient cash inflows to settle its creditors and other liabilities. In addition, the Consolidated Entity is eligible for certain government grants and R&D tax incentive. Research and development risk The Consolidated Entity's product range includes products that are in clinical development phase and need to be further tested before they can progress to human clinical trials. Pre-clinical and clinical development of the Consolidated Entity's products could take several years to complete and might fail for several reasons including but not limited to lack of efficacy, failure to obtain regulatory approval, difficulty or failure to manufacture the Consolidated Entity’s products on a large scale, or toxicity. The Consolidated Entity monitors product developments and engages proactively with key stakeholders to manage this risk. Regulatory and licensing risks The research, development, manufacture and sale of products is subject to a number of regulations prescribed by government authorities in Australia and overseas. Generally, there is a high rate of failure for drug candidates proceeding through pre-clinical and clinical trials. Further, even if the Consolidated Entity views the results of a trial to be positive, the FDA or other regulatory authorities may disagree with the Consolidated Entity’s interpretation of the data. Thus, any product deploying Avecho’ technology may be shown to be unsafe, non-efficacious, difficult or impossible to manufacture on a large scale, uneconomical to market, compete with superior products marketed by third parties, fail to secure meaningful reimbursement approval, or not be as attractive as alternative treatments. The Consolidated Entity monitors legislative and regulatory developments and engages proactively with key stakeholders to manage this risk. Dependence on service providers and third-party collaborators There is no guarantee that the Consolidated Entity will be able to find suitable third-party providers and third-partly collaborators including academic institutions to complete the development and commercialisation of its products. The Consolidated Entity therefore is exposed to the risk that any of these parties can experience problems related to operations, financial strength or other issues, and collaborative agreements may be terminable by the Consolidated Entity’s partners. Non-performance, suspension or termination of relevant agreements could negatively impact the progress or success of the Consolidated Entity’s product development efforts, financial condition and results of operations. The Consolidated Entity monitors commercial developments and engages proactively with key stakeholders to manage this risk. Reliance on key personnel The Consolidated Entity’s success depends to a significant extent upon its key management personnel, as well as other management and technical personnel including those employed on a contractual basis. The loss of the services of such personnel or the reduced ability to recruit additional personnel could have an adverse effect on the performance of the Consolidated Entity. The Consolidated Entity maintains a mixture of permanent staff and expert consultants to advance its programs and ensure access to multiple skill sets. The Consolidated Entity, reviews remunerations and staffing requirements regularly. 5 Avecho Biotechnology Limited Directors' report 31 December 2022 Intellectual property risk The Consolidated Entity’s ability to leverage its innovation and expertise is dependent on its ability to protect its intellectual property including maintaining patent protection for its product candidates and their respective targets and any improvements to it. A failure or inability to protect the Consolidated Entity’s intellectual property rights could have an adverse impact on operating and financial performance. The Consolidated Entity may incur significant costs in maintaining or defending its intellectual property rights. The Consolidated Entity proactively monitors applications and renewals of patents and licences; and requires relevant stakeholders to comply with the requirements set out in the confidentiality policy. IT system failure and cyber security risks Any information technology system is potentially vulnerable to interruption and/or damage from a number of sources, including but not limited to computer viruses, cyber security attacks and other security breaches, power, systems, internet and data network failures, and natural disasters. The Consolidated Entity is committed to preventing and reducing cyber security risks through outsourced the IT management to a reputable services provider. In addition, the Consolidated Entity has an insurance policy covering IT and cyber security matters. 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 breaches of any environmental regulations. Information on directors Name: Title: Qualifications: Experience and expertise: Dr Gregory Collier Non-Executive Chairman PhD Dr Collier has more than 20 years’ experience spanning operational, clinical and scientific aspects of pharmaceutical research, development and commercialisation. Dr Collier 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 Interests in shares: 2,000,000 ordinary shares Interests in options: 5,990,465 unlisted options 6 Avecho Biotechnology Limited Directors' report 31 December 2022 Name: Title: Qualifications: Experience and expertise: Dr Ross Murdoch Non-Executive Director PhD GAICD Dr Murdoch joined Avecho 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 has 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: 3,993,644 unlisted options Name: Title: Qualifications: Experience and expertise: Matthew McNamara Non-Executive Director BSc (Hons), MBA Mr Matthew McNamara has over 30 years’ executive and funds management experience in the healthcare and medical sciences sector. He has a BSc (Hons) in Molecular Biology, has an MBA, and is a GAICD. In 2003, he founded BioBridge Australia, a biotechnology commercialisation advisory company and advised a number of public biotechnology / investment companies. Mr McNamara is currently Director and Chief Investment Officer of Horizon 3 Healthcare, a healthcare fund manager that has invested in Avecho Biotechnology Limited through trustee Melbourne Securities Corporation Limited. He is presently a director of Microbio Pty Ltd, ESN Cleer Pty Ltd, Cardiac Dimensions Pty Ltd, and Grey Innovation Investment Partners Pty Ltd. He has held previous directorship in Adherium Ltd (ASX: ADR), Avita Medical Ltd (ASX: AVH), Bioxyne Ltd (ASX: BXN) and Saluda Medical Pty Ltd. Mr McNamara has also served as CIO of BioScience Manager Pty Ltd, and was CEO of SciCapital Pty Ltd, a Life Sciences Venture Capital fund. Other current directorships: None Former directorships (last 3 years): Adherium Ltd (ASX: ADR) Interests in shares: None Interests in options: 3,993,644 unlisted options (indirect) '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. 7 Avecho Biotechnology Limited Directors' report 31 December 2022 Company secretary Melanie Leydin - BBus (Acc. Corp Law) CA FGIA Ms 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 from February 2000 to October 2021 was the principal of Leydin Freyer. In November 2021 Vistra acquired Leydin Freyer and, Ms Leydin is now Vistra Australia's Managing Director. Vistra is a prominent provider of specialised consulting and administrative services to clients in the Fund, Corporate, Capital Markets, and Private Wealth sectors. Ms Leydin has over 25 years’ experience in the accounting profession and over 15 years’ experience holding Board positions including Company Secretary of ASX listed entities. 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, initial public offerings, secondary raisings and shareholder relations. Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') held during the year ended 31 December 2022, and the number of meetings attended by each director were: Full Board Held Attended Gregory Collier Ross Murdoch Matthew McNamara 6 6 6 6 5 6 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; and Acceptable to shareholders 8 Avecho Biotechnology Limited Directors' report 31 December 2022 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. Executive remuneration 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. Base pay and benefits 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. 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. 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 objectives 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. As at 31 December 2022, the Company issued nil performance rights (31 December 2021: nil) and nil unlisted options (31 December 2021: 97,844,268) under the Plan. 9 Avecho Biotechnology Limited Directors' report 31 December 2022 Non-executive remuneration The Company’s remuneration strategy for non-executive directors is to remunerate them appropriately for their time and expertise, which has been determined to involve a combination of fixed fees and a non-performance based equity component. All non-executive directors receive a fixed fee. Consolidated 31 December 31 December 2022 2021 $ $ Chairman Non-Executive Director 100,000 55,500 100,000 55,000 Fees are determined within an aggregate non-executive director's pool limit approved by shareholders. The aggregate currently stands at $400,000 and was approved by shareholders at 2014 Annual General Meeting. This amount, or part thereof, is divided among non-executive directors as determined by the Board and reflecting time and responsibility related to the Board and committees. The aggregate fees paid to non-executive directors was $210,500 (31 December 2021: $236,334). Directors' fees include statutory superannuation contributions as required under Australian superannuation guarantee legislation. Non-executive director’s fees are reviewed annually by the Board. Other than a revision to superannuation as required under the Australian superannuation guarantee legislation, there have been no changes to non-executive director fees in either 31 December 2022 or 31 December 2021. Other than statutory superannuation, Non-Executive Directors do not receive other retirement benefits nor do they participate in any short-term incentive programs. Non-executive directors are entitled to participate in the long-term incentive scheme as detailed in the Executive remuneration section. Use of remuneration consultants If remuneration consultants are to b