Algae.Tec Annual Report 2012

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The algae fuel manufacturing company

Algae.Tec offers a sustainable and renewable advanced algae-to-biofuels technology.

The enclosed modular high-yield algae-to-biofuels bioreactor system uses waste C02 and sunlight to produce transport fuels such as biodiesel and jet fuel.

The fuel is designed to be a complete drop-in replacement solution that is cost competitive, and contributes to energy security.

Algae.Tec is publicly listed on the Australian Stock Exchange, the Frankfurt Stock Exchange and, in the USA, its ADRs are traded on the OTCQX®.

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Algae.Tec Annual Report 2012

  1. 1. ALGAE.TEC LIMITED ABN: 16 124 544 190 Financial Report For the Financial Year Ended 30 June 2012Financial Report – 30 June 2012 Page 1 of 65
  2. 2. CONTENTS Company Details 3 Directors’ Report 4 Corporate Governance Statement 16 Consolidated Statement of Comprehensive Income 26 Consolidated Statement of Financial Position 27 Consolidated Statement of Equity 28 Consolidated Statement of Cash Flows 29 Notes on the Financial Statements 30 Directors’ Declaration 59 Auditor’s Independence Declaration 60 Independent Auditor’s Report 61 Shareholder Information 63Financial Report – 30 June 2012 Page 2 of 65
  3. 3. Company Details Directors Roger Stroud Executive Chairman Peter Hatfull Managing Director Earl McConchie Executive Director Timothy Morrison Non-Executive Director Company Secretary Peter Hatfull Principal Registered Office in Australia Ground Floor, 516 Hay Street Subiaco WA 6008 Share Register Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth WA 6000 Auditors Somes Cooke Jack Milner 1304 Hay Street 1400 Buford Highway, Suite G-4 West Perth WA 6005 Sugar Hill, GA 30518-8727 Bankers National Australia Bank Commonwealth Bank of Australia International Operations Business and Private Banking Level 3, Building B, Level 1, 38 Adelaide Street Rhodes Corporate Park Fremantle WA 6160 1 Homebush Bay Drive Rhodes NSW 2138 Securities Exchange Australian Securities Exchange Frankfurt Stock Exchange New York Stock Exchange ASX FSE NYSE Level 5, 20 Bridge Street 60485 Frankfurt am Maim 11 Wall Street Sydney NSW 2000 Germany New York NY 10005 AEB GZA:GR ALGXY:USFinancial Report – 30 June 2012 Page 3 of 65
  4. 4. Directors’ ReportThe Directors present their report together with the financial report of Algae.Tec Limited (“theCompany”) and of the consolidated entity, being the Company and its controlled entity, for the yearended 30 June 2012.DirectorsThe names of the directors of the Company during or since the end of the financial year are: Mr Timothy Morrison Non - Executive Director Mr Peter Ernest Hatfull Managing Director and Company Secretary Garnet Earl McConchie Executive Director Roger Sydney Stroud Executive ChairmanInformation on DirectorsDetails of the Directors’ qualifications and experience are set out as follows:Timothy MorrisonNon-Executive DirectorTimothy Morrison is currently a partner at Empire Equity, a boutique corporate advisory group basedin Perth with offices in San Francisco and London. In this role, Mr Morrison is responsible forstructuring equity debt financing for mid-tier ASX listed companies. Prior to this role, Mr Morrisonwas CEO and Executive Chairman for a number of listed and private companies.Mr Morrison has previously served as a member of the investment committee for superannuationfunded private equity investment vehicles. In this role, Mr Morrison engaged in investment andmanagement of early stage technology ventures.Previously, Mr Morrison was General Manager of Murdoch Link Pty Ltd, the commercial arm ofMurdoch University, which is the dedicated provider of quality research consultancy services to theprofessions, industry and government.Tim has a BA (1st Hon) from Murdoch University, a Post Grad Diploma (Social Research Methods)from Murdoch, and an MBA (Financial Management) from the University of Western Australia.Interest in Shares and OptionsMr Timothy Morrison currently holds 2,000,000 ordinary shares in Algae.Tec Limited, and nil options.Financial Report – 30 June 2012 Page 4 of 65
  5. 5. Peter Ernest HatfullManaging Director and Company SecretaryPeter has over 30 years’ experience in a range of senior executive positions with Australian andinternational companies. He has an extensive skill-set in the areas of business optimisation, capitalraising and Group restructuring.Prior to becoming Managing Director of Algae. Tec Ltd, Peter held senior financial and Boardpositions in Australia, Africa and the UK. He has particular experience in turnaround and slowgrowth situations, where companies have struggled to expand their business. This has requiredrevitalising the business plan, attracting investor funding and implementing profitable strategies.Peter is currently a director of The GFR Group, Structerre Group, Barholdco Pty Ltd and is based inPerth, WA.Peter graduated as a Chartered Accountant in the United Kingdom, where he worked for Coopersand Lybrand (now PriceWaterhouseCoopers), and subsequently moved to Africa, where he spent 8years in Malawi. Peter moved to Perth in 1988.Interest in Shares and OptionsMr Peter Hatfull currently holds 9,697,865 ordinary shares in Algae. Tec Limited, and nil options.Garnet Earl McConchieExecutive DirectorEarl has over 35 years’ experience over a broad field of chemistry and associated technologies,including global markets, bulk chemicals and plastics, differentiated commodities and intermediates,specialty chemicals, polymers and interaction with environmental sectors.Earl’s field experience includes international business management, plant operations, and projectengineering in the US, Europe (especially Germany, Holland, Switzerland, UK and CIS), Latin America(Brazil, Argentina and Mexico) and Asia (Korea, China and Australia). Earl was employed with DowChemical Company for 25 years. He served as Global Director for chemicals and plastics in the latterpart of his employment.Subsequently Earl was employed with Lockwood Greene and Foster Wheeler Corporation.Earl has over 10 years of specific technical and business experience in the biodiesel and glycerineindustry sectors. He is a founding director and joint controlling shareholder of Teco.Bio LLC, and isbased in Atlanta, Georgia where he has co-ordinated the microalgae development.Earl has received a BSc (Chem. Eng) from Virginia Polytechnic Institute & State University, and a MEChemical Engineering from Texas A & M University. He is a registered Professional Engineer,Member of the National Society of Professional Engineers, The American Institute of ChemicalEngineers, and the Society of Plastic Engineers.Interest in Shares and OptionsMr Earl McConchie controls Dot-Bio Inc which holds 50% of Teco.Bio LLC which in turn holds 200million shares in Algae. Tec Ltd. An additional 4,500,000 shares are held by the immediate family ofMr Earl McConchie. Mr Earl McConchie currently holds nil options.Financial Report – 30 June 2012 Page 5 of 65
  6. 6. Directors’ ReportRoger Sydney StroudExecutive ChairmanRoger has over 35 years’ experience in a variety of industries. He spent over 10 years in finance in anumber of areas including credit, money market and investment banking for CitiNational(Citibank/National Mutual) merchant bank, predominantly in Sydney.Following the above, he floated a mining company, with a head office based in Sydney, andundertook the role of Managing Director for 8 years. After floating a manufacturing company, andoverseeing the building of modern brickworks in Perth, Roger provided advisory services to miningand manufacturing businesses for a number of years. In the late 1990s, Roger began the process ofbuilding businesses in the renewable fuel sector, primarily biodiesel. This included floating twoseparate biodiesel companies. Roger is a founding director and joint controlling shareholder ofTeco.bio LLC, and is based in Perth, WA.Roger has received a BSc from Sydney University, majoring in Chemistry and Geology and a BA(Economics) from Macquarie University. He is currently chairman of the “Centre for Research intoEnergy for Sustainable Transport,” a collaborative of Curtin and Murdoch Universities based onMurdoch Campus. Additionally, he is on the Board of the Fuels and Energy Technology Institute(FETI), situated at Curtin University.Interest in Shares and OptionsAs Mr Roger Stroud controls Teco Pty Ltd which holds 50% of Teco.Bio LLC which in turn holds 200million shares in Algae.Tec Ltd. An additional 321,549 shares are held indirectly. Mr Roger Stroudcurrently has nil options.Meetings of DirectorsThe following table sets out the number of directors’ meetings held during the financial year and thenumber of meetings attended by each Director. Directors Meeting No. of meetings held 7 No. Of meetings attended Mr Timothy Morrison 7 Mr Peter Ernest Hatfull 7 Garnet Earl McConchie 7 Roger Sydney Stroud 7Principal ActivitiesThe principal activity of the Group is to produce algal oil and algal biomass for sale as feedstock toproducers of biodiesel, jet fuel and ethanol.Financial Report – 30 June 2012 Page 6 of 65
  7. 7. Operating ResultsThe consolidated loss of the Group amounted to $6,771,109 (2011: Loss $2,468,569) after includinga tax refund for R & D activities in the financial year 2011 of $199,727.Net cash expensed through operating activities for the financial year was $6,181,409, a 239%increase on the $1,822,900 spent the prior year and which reflects the establishment of a full sizedevelopment facility in Nowra, NSW.Significant Changes in State of AffairsThe following significant changes in the state of affairs of the Group occurred during the financialyear:Review of Operations  Group overview The year to 30 June 2012 has been extremely rewarding for Algae. Tec Limited as the Company continued to develop its showcase demonstration facility at Nowra in New South Wales, and continues to form strong strategic relationships.  Holcim On 1 December 2011 the Company announced the signing of a collaboration contract with Holcim Lanka, one of the two largest cement manufacturers in the world. This contract detailed that Algae.Tec will build a facility of up to 5 modules in Sri Lanka, which on successful completion would be extended to a full commercial facility.  Convertible Note On 9 December 2011 the Company completed an agreement to enable the raising of convertible notes to raise up to $9 million.  Lufthansa On 22 December 2011 an MOU was signed with Europe’s largest airline, Lufthansa AG. This detailed a working collaboration between the companies to develop algae facilities for the generation of fuel for the aviation industry.  Atlanta Facility During the year Algae.Tec Limited signed a lease for a fourfold increase in area at its Atlanta development facility to enable it to build fabrication and manufacturing facilities for its photo bioreactors. This increase also gave space for increases in research and development facilities and for the building of a working demonstration bio reactor.  Chinese Strategic Partners The Company has been in discussions with various Chinese groups for a period of time, and this resulted in the signing of a binding MOU on 18 January 2012 with the Shandong Kerui Group. This was significant as the agreement details the building of a first commercial plant in the Shandong province.Financial Report – 30 June 2012 Page 7 of 65
  8. 8. Directors’ ReportSignificant Changes in State of Affairs (continued)  Capital Raising As a result of the above commercial discussions, on 23 January 2012 the Company announced the raising of $5 million through a placement of shares through Paterson’s Securities to enable it to fast track the commercial arrangements required for its strategic relationships.  ADR Facility With the increased interest in the Company’s technology in the USA, the Company announced the listing of the Company’s shares in the USA through a listing on the OTC market on 24 February 2012.DividendsNo dividends were paid or recommended by the Directors.Subsequent EventsOn 2 August 2012, Australia’s first advanced engineered algae to biofuels facility was officiallyopened by NSW Minister for Resources and Energy, the Honourable Chris Hartcher. This facility wasdesigned and built by the Company using its proprietary technology.On 17 September the Company signed a collaboration agreement with Deutsche LufthansaAktiengesellschaft. The agreement states that the parties will jointly develop a large scale algae toaviation biofuels production facility. This agreement builds on and supersedes the MOU signedbetween the two parties in January 2012.On 6 September 2012, Algae. Tec Limited entered into a facility agreement with Macquarie BankLimited. The facility will provide up to A$2,000,000 in advance funding of the Research andDevelopment Tax Incentive offered by the Australian Government.Macquarie Bank Limited will advance funds of eligible Research and Development expenditure. On10 September 2012 a drawdown on this facility was made in the amount of A$1,260,301 being 80%of the 2012 claim of $1,575,389 referred to in Note 6.As at the date of this Director’s report, the Directors are not aware of any other matter orcircumstance that has arisen in the interval between the end of the financial year under review andthe date of this Director’s report that, in the opinion of the Directors has significantly affected, ormay significantly affect, the operations of the consolidated entity, the results of those operations, orthe state of affairs of the consolidated entity in future financial years.Likely developments, future business strategies and prospectsInformation regarding the likely developments in the operations of the consolidated entity in futurefinancial years and the expected results of those operations is included in the Review of Operationson pages 8 to 9, which forms part of the Directors’ report.Some information regarding likely developments in the operations of the consolidated entity infuture financial years and the expected results of those operations has been omitted from thisDirectors’ report on the grounds that such disclosure is, in the Directors’ opinion, likely to result inunreasonable prejudice to the consolidated entity.Financial Report – 30 June 2012 Page 8 of 65
  9. 9. Environmental Regulations and PerformanceAlgae.Tec Ltd will not be subjected to significant environmental regulations under both theCommonwealth and State legislation.Corporate GovernanceIn recognising the need for high standards of corporate behaviour and accountability, the Directorssupport and have adhered to the ASX Corporate Governance Council’s Corporate GovernancePrinciples and Recommendations with 2010 Amendments (2nd Edition). The Company’s CorporateGovernance Statement is on pages 16 to 25 of this Annual Report.Remuneration Report – auditedThis Remuneration Report, sets out the information about the remuneration of the consolidatedentity’s Key Management Personnel (‘KMP’) for the financial year ended 30 June 2012. KMPcomprise of the directors of the Group. The prescribed details for each person covered by this reportare set out below.Details of DirectorsThe following persons acted as directors of the Company during or since the end of the financial year. Person Position Period in position during the year Directors: Executive Roger Stroud Executive Chairman Full year Peter Hatfull Managing Director Full year Earl McConchie Executive Director Full year Directors: Non - Executive Timothy Morrison Non-executive Director Full yearPrinciples used to determine the nature and amount of remunerationThe objective of the Company is to ensure that the level and composition of remuneration issufficient and reasonable and that its relationship to corporate and individual performance isdefined.The Board is responsible for making recommendations on remuneration packages and policiesapplicable to the KMP.The Board aims to ensure that executive director reward satisfies the following key criteria as part ofits good governance practices:  Competitiveness and reasonableness  Performance linkage/alignment of executive compensation  Deliver a balanced solution addressing all elements of total remuneration.Financial Report – 30 June 2012 Page 9 of 65
  10. 10. Directors’ ReportRemuneration Report – audited (continued)Non-Executive DirectorsFees and payments to Non-Executive Directors reflect the demand which are made to, and theresponsibilities of, the Non-Executive Directors’. Non-Executives Directors’ fees and payments arereviewed annually by the Board.Non-Executive Directors’ RemunerationThe Group’s Constitution provides that the remuneration of non-executive Directors will be notmore than the aggregate fixed sum determined by a general meeting. The aggregate remunerationfor non-executive Directors has been set an amount not to exceed $150,000 per annum. The actualNon-Executive Director’s fees for the reporting period were $50,000, but payments are no longermade in arrears. This has resulted in five payments being made in the financial year covering theJune 2011 quarter as well as the current financial year. There has been no increase in the feeamounts payable per annum. Non-Executive Directors’ are not eligible for any bonus or incentivepayments and the Non-Executive Directors do not participate in any share-based incentive plans.Executive Directors PayThe remuneration of Executive Directors are fixed by the Directors and paid by way of salary orconsultancy fee. The remuneration policy aims to provide fair and equitable remuneration in orderto retain and attract executives of sufficient calibre to facilitate the efficient and effectivemanagement of the Company’s operations. The policy has been consistently applied over past years,and sets remuneration levels that are:  Market competitive; and  Structured for the Managing Director and other Executive Directors to reward the achievement of defined annual goals directly linked to performance and the creation of longer term shareholder wealth.Executive directors and executives are offered performance bonuses based on set monetary figures,rather than proportions of their salary. The set bonuses are to encourage achievement of specificgoals that have been given a high level of importance in relation to the future growth andprofitability of the entity.The remuneration packages of the Managing Director and Executive Directors are reviewed annually.Use of Remuneration ConsultantsThe Group did not employ the services of any remuneration consultants during the financial yearended 30 June 2012.Details of remunerationDetails of the remuneration of the KMP are set out in the following tables. The KMP of Algae. TecLimited are: Person Position Employment Period Directors: Executive Roger Stroud Executive Chairman Full year Peter Hatfull Managing Director/Company Secretary Full year Earl McConchie Executive Director Full year Directors: Non - Executive Timothy Morrison Non-executive Director Full yearFinancial Report – 30 June 2012 Page 10 of 65
  11. 11. Remuneration Report – audited (continued)Table of Benefits and Payments for the year ended 30 June 2012 Post- employment Share-based Short term benefits benefits payments Salary and Directors Consulting Fees Fees Other Superannuation Shares/Options Total Bonus $ $ $ $ $ $ $ Key Management Personnel Roger Sydney Stroud - 360,000 33,000 - - - 393,000 Peter Ernest Hatfull 300,000 15,000 - 28,350 - 343,350 Garnet Earl McConchie 300,000 - 50,000 45,926 12,415 - 408,341 Tim Morrison - 50,000 - - - 50,000 Total 600,000 410,000 98,000 45,926 40,765 - 1,194,691Table of Benefits and Payments for the year ended 30 June 2011 Post- employment Share-based Short term benefits benefits payments Salary and Non Directors Consulting Monetary Fees Fees Benefits Superannuation Shares/Options Total $ $ $ $ $ $ Key Management Personnel Roger Sydney Stroud - 135,000 - - - 135,000 Peter Ernest Hatfull 90,000 - - 8,100 - 98,100 Garnet Earl McConchie 154,945 - - 4,352 - 159,297 Tim Morrison - 30,000 - - - 30,000 Total 244,945 165,000 - 12,452 - 422,397Financial Report – 30 June 2012 Page 11 of 65
  12. 12. Directors’ ReportSecurities Received that Are Performance RelatedNo members of key management personnel are entitled to receive securities which areperformance-based as part of their remuneration package.Cash BonusesExecutive directors and executives are offered performance bonuses based on set monetary figures,rather than proportions of their salary. The set bonuses are to encourage achievement of specificgoals that have been given a high level of importance in relation to the future growth andprofitability of the entity.During the year ended 30 June 2012, Roger Stroud received a cash bonus of $33,000, Peter Hatfullreceived a cash bonus of $15,000, and Earl McConchie received a cash bonus of USD$50,000.Service ContractsManaging DirectorSet out below are the key terms of the employment contract of the Managing Director, Peter Hatfull: From 1 October 2010 until one of the following occurs: Term a. The Company gives the Managing Director one month written notice; b. The Managing Director gives the Company one month written notice; or c. The Company terminates the contract due to actions of the Managing Director such as serious misconduct, dishonesty and bankruptcy. Payments on If the contract is terminated under (a) or (b) above, the Company is obliged Termination to pay the Managing Director equivalent amount of Remuneration in lieu of notice. If the contract is terminated under (c) above, the Company is only obliged to pay the Managing Director any accrued remuneration, including superannuation and leave entitlements. Fixed annual remuneration: Remuneration $327,000 comprising of base salary, including superannuation contributions and benefits as allocated by the Managing Director in accordance with the Companys policies. Review of remuneration: The remuneration will be reviewed at least annually, with any increase at the absolute discretion of the Company. Annual leave: Four weeks annual leave per annum (in addition to public holidays)Financial Report – 30 June 2012 Page 12 of 65
  13. 13. Service Contracts (continued)Executive DirectorSet out below are the key terms of the employment contract of the Executive Director, Algae Energy,Earl McConchie: From 1 October 2010 until one of the following occurs: Term a. The Company gives the Managing Director one months written notice; b. The Managing Director gives the Company one months written notice; c. The Company terminates the contract due to actions of the Managing Director such as serious misconduct, dishonesty and bankruptcy. Payments on If the contract is terminated under (a) or (b) above, the Company is obliged Termination to pay the Managing Director equivalent amount of Remuneration in lieu of notice. If the contract is terminated under (c) above, the Company is only obliged to pay the Managing Director any accrued remuneration, including superannuation and leave entitlements. Fixed annual remuneration: Remuneration A$300,000 gross salary per annum not inclusive of superannuation and health insurance benefits. Review of remuneration: The remuneration will be reviewed at least annually, with any increase at the absolute discretion of the Company. Annual leave: Six weeks annual leave per annum (in addition to public holidays)Key terms of consultant agreementSet out below are the key terms of consultant agreement of the Executive Chairman, Roger Stroud: Term From 1 July 2010 to end on 1 July 2013 unless otherwise negotiated. a. Either party may cancel this agreement on 30 days written notice b. The Company can terminate the agreement due to actions of the Consultant such as serious misconduct, dishonesty and bankruptcy. Payments on If the contract is terminated under (a) above, the Company is obliged to pay Termination the Consultant equivalent amount in lieu of notice. Remuneration The Consultant is paid a monthly rate of $30,000 for work performed in accordance with the agreement. The Company and Consultant agree that the Consultant will act as an independent contractor and is responsible for payment of all taxes. END OF AUDITED REPORTFinancial Report – 30 June 2012 Page 13 of 65
  14. 14. Directors’ ReportDirectors’ InterestsThe following table sets out each director’s relevant interest in shares at the date of this Directors’report: Received on Held at 1 July Granted as exercise of Other Held at 30 2011 Compensation options changes June 2012 No. No. No. No.1 No. 2 Roger Stroud 200,321,549 - - - 200,321,549 Peter Hatfull 9,497,565 - - 200,300 9,697,865 Garnet Earl McConchie 204,500,0003 - - - 204,500,000 Timothy Morrison 2,000,000 - - - 2,000,000 1. Other changes refers to shares acquired on the market 2. By virtue of Section608 (3) of the Corporations Act, as Mr Stroud controls Teco Pty Ltd which holds 50% of Teco.Bio LLC which in turn holds 200 million Shares. 3. By virtue of Section 608(3) of the Corporations Act, as Mr McConchie controls Dot-Bio Inc which holds 50% of Teco.Bio LLC which in turn holds 200 million Shares. Related parties of Mr McConchie together hold 4.5 million Shares.Options and Rights GrantedNo options or rights were granted to key management personnel during the year.Indemnification and Insurance of Officers and ExecutivesIndemnificationUnder the Company’s constitution and subject to Section 199A of the Corporations Act 2001, theCompany indemnifies in favour of persons who are, or have been, an Officer of the company.To the extent permitted by law, the Company indemnifies every person who is or has been:  An Officer against any liability to any person (other than the company or related entity) incurred while acting in the capacity and in good faith.  An Officer of the company against cost and expenses incurred by that person in that capacity in successfully defending legal proceedings and ancillary matters.Insurance of OfficersSince the end of 30 June 2012, Algae. Tec Limited has obtained Directors and Officers LiabilityInsurance. The insurance contract entered into prohibits disclosure of the specific nature of theliabilities covered by the insurance contracts and the amount of the premiums.Non-Audit ServicesDuring the year Jack Milner CPA, the subsidiary’s auditor, performed services in addition to hisstatutory duties. Jack Milner was paid a total of $34,272 (USD36,438) for these non-audit services.The Audit Committee has advised the Board, and the Directors are satisfied that the provision of thenon-audit services during the year is compatible with the general standard of independence forauditors imposed by the Corporations Act 2001 for the following reasons:Financial Report – 30 June 2012 Page 14 of 65
  15. 15. Non-Audit Services (continued)  J Milner services have not involved partners or staff in a managerial or decision making capacity with the consolidated entity or being involved in the processing or origination of transactions  J Milner non-audit services have only been provided where the Company is satisfied that the related function or process will not have a material bearing on the audit procedures  J Milner’s partners and staff involved in the provision of non-audit services have not participated in associated approval or authorisation processes  J Milner obtained prior approval from the Audit Committee for the provision of the non- audit services  A description of all non-audit services undertaken by J Milner and the related fees have been reported to the Board to ensure complete transparency in relation to the services provided.Auditor’s Independence DeclarationA copy of the auditor’s independence declaration as required under section 307C of theCorporations Act 2011 is set out on page 60.Signed at Perth, in accordance with a resolution of the directors,Peter HatfullManaging Director28 September 2012Financial Report – 30 June 2012 Page 15 of 65
  16. 16. Corporate Governance StatementThe Algae. Tec Limited Board is committed to achieving and demonstrating the highest standards ofcorporate governance. The Board guides and monitors the Company’s activities on behalf of theshareholders. In developing policies and standards the Board considers the ASX Group (ASX)Corporate Governance Principles and Recommendations (2nd Edition with 2010 Amendments (CGCRecommendations).The Corporate Governance Statement set out below describes the Company’s current corporategovernance principles and practices which the Board considers to comply with the CorporateGovernance Council Recommendations.As a framework of how the Board of Directors at Algae.Tec Limited (“Company”) carries out itsduties and obligations, the Board has considered the eight principles of corporate governance as setout in the ASX Corporate Governance Principles and Recommendations, 2nd Edition (“Principles”).The eight principles of corporate governance are:1. Lay solid foundations for management and oversight2. Structure the Board to add value3. Promote ethical and responsible decision-making4. Safeguard integrity in financial reporting5. Make timely and balanced disclosures6. Respect the right of shareholders7. Recognise and manage risk8. Remunerate fairly and responsiblyThere are a number of recommendations in the Principles with which the Company does not complydue to the size of the Company and the Board and its practical management requirements.A summary of the Principles and those recommendations with which the Company does not complyare detailed at the end of this statement.1. Lay solid foundations for management and oversightCompanies should establish and disclose the respective roles and responsibilities of board andmanagement.Recommendation 1.1: Companies should establish the functions reserved to the board and thosedelegated to senior executives and disclose those functions.The Board is responsible for the governance of the Company. The role of the Board is to providestrategic guidance and effective oversight of management. The Board derives its authority to actfrom the Company’s Constitution.The objective of Algae.Tec Limited’s governance framework is to allow the Board to: Reviewing and approving the Company’s strategic plans and performance objectives and reviewing the underlying assumptions and rationale. Monitoring financial outcomes and the integrity of reporting, and in particular, approving annual budgets and longer-term strategic and business plans.Financial Report – 30 June 2012 Page 16 of 65
  17. 17. Corporate Governance Statement (continued) Monitoring the effectiveness of the Company’s audit, risk management and compliance systems that are in place to protect the Company’s assets and to minimise the possibility of the Company’s operating beyond acceptable risk parameters. Monitoring compliance with legislative and regulatory requirements (including continuous disclosure) and ethical standards, including reviewing and ratifying codes of conduct and compliance systems. Selecting, appointing and monitoring the performance of the Senior Executives, and if appropriate, terminating the appointment of these Senior Executives. Reviewing senior management succession planning and development and ensuring appropriate resources are available to senior executives. Reviewing and recommending to shareholders the appointment or if appropriate the termination of the appointment of the external auditor. Monitoring the timelines and effectiveness of reporting to shareholders.The Board delegates to the Managing Director responsibility for implementing the Company’sstrategic direction and for managing the Company’s day to day operations. Clear lines ofcommunication have been established between the Chairman and the Managing Director to ensurethat the responsibilities and accountabilities of each are clearly understood.Recommendation 1.2: Company should disclose the process for evaluating the performance of theExecutive Team.All Executive Team members have formal position descriptions and each year key performancemeasures are established in line with their roles and responsibilities.The Managing Director has personal objectives related to business units and the Company as awhole.The Chairman together with the full Board assesses the performance of the Managing Directoragainst those objectives on a regular basis at Board meetings. The Board also monitors theperformance of the Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”), CompanySecretary and other members of the Executive Team. The Company will move to more formalprocesses with the introduction of the Remuneration Committee, which will be established duringthe year to June 2013.All newly appointed executives receive formal letters of appointment. The contents of theappointment letter contain sufficient information to allow the new Director to gain anunderstanding of. The Company’s financial position, strategies, operations and risk management policies. The rights, duties and responsibilities of Directors. The roles and responsibilities of the Executive Team. The role of Board Committees.Financial Report – 30 June 2012 Page 17 of 65
  18. 18. Corporate Governance Statement (continued)2. Structure of the board to add valueAs at the date of this report, the Board comprises of four directors. Algae. Tec Limited’s constitutionprovides for a minimum of three directors and not more than nine directors. The Board is composedof Directors with diverse skills and experience, relevant to the business of the Company and amixture of executives and independent non-executive director.The Board met 7 times during the financial year. Directors’ attendances are set out on Page 6 of thisreport.Recommendation 2.1: A majority of the board should be independent directors.The Board consists has one independent non-executive Director, Mr Timothy Morrison, who is not amajor shareholder (i.e. neither he nor his associates hold more than 5% of the Group’s paid upcapital and he has no association with any major shareholder). Due to the size of the Company, it isnot considered practical at this time to have a majority of independent directors. It is the Boards’intent to appoint more independent directors and move to a majority of independent directors asthe Company grows.The Company considers an independent Director to be a Director who does not have any materialrelationship with the Company that a reasonable person would consider may influence theDirector’s ability to: Objectively make decisions on matters that come before the Board Carry out their duties as a Director acting in the best interest of the Company Be free of real or reasonably perceived conflict of interest.In assessing independence, the Board reviews the relationship that the Director and their immediatefamily have with the Company. In Particular the Board applies the following criteria in determiningindependence.Non-Executive Director Is not a shareholder of the Company holding more than five per cent of the voting shares or an officer of or otherwise associated directly with, a shareholder of the Company holding more than five per cent. Within the last three years has not been a principal of a material professional adviser or a material consultant to the Company or any other group member, or an employee materially associated with the service provided. Is a material supplier or customer of the Company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer. Has no material contractual relationship with the Company or another Group member other than as a Director of the Company.The Board regularly assesses the independence of the Non-Executive Director and has specificallyconsidered the independence of the Non-Executive Director, in accordance with the above criteria,during the financial year. The Board has determined that the Non-Executive Director remainsindependent.The Directors in office at the date of this statement are: Mr Timothy Morrison Non - Executive Director Mr Peter Ernest Hatfull Managing Director and Company Secretary Garnet Earl McConchie Executive Director Roger Sydney Stroud Executive ChairmanFinancial Report – 30 June 2012 Page 18 of 65
  19. 19. Corporate Governance Statement (continued)Recommendation 2.2: The Chair should be an independent director.The Chairman, Mr Roger Stroud is currently not independent nor are the other two directors, MrPeter Hatfull and Mr Earl McConchie. Each of them are shareholders of the Group. As the Groupgrows, it is intended that an independent Chairman will be appointed.Recommendation 2.3: The roles of the chair and managing director should not be exercised by thesame individual.The roles of the Chairman and Managing Director are not exercised by the same individual. TheChairman Mr Roger Stroud is responsible for leading the Board in its Duties, facilitating effectivediscussions at Board level and ensuring that general meetings are conducted efficiently, whereas,the Managing Director, Mr Peter Hatfull, is responsible for the efficient operation of the Company.Recommendation 2.4: The Board should establish a nomination committee.The Board has not established a nomination committee. The Board, as a whole, deals with areasthat would normally fall within the charge of the Nomination Committee. These include mattersrelating to the renewal of Board Members and Board Performance.Recommendation 2.5: Companies should disclose the process for evaluating the performance ofthe Board, its committees and individual directors.The Board undertakes ongoing self-assessment and review of its performance and of theperformance of the Chairman and individual Directors.3. Promote ethical and responsible decision-makingCompanies should actively promote ethical and responsible decision-makingRecommendation 3.1: Companies should establish a code of conduct and disclose the code or asummary of the code as to: The Practices necessary to maintain confidence in the Company’s integrity. The Practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders. The responsibility and accountability of individuals for reporting and investigating reports of unethical practices.The Company is committed to Directors and employees maintaining high standards of integrity andensuring that activities are in compliance with the law and Company policies.Financial Report – 30 June 2012 Page 19 of 65
  20. 20. Corporate Governance Statement (continued)3. Promote ethical and responsible decision-making (continued)Directors are acquainted with obligations imposed on them and the Company by the CorporationsAct and are familiar with other documents prepared by the Company to meet Corporate Governancerequirements:  Algae.Tec Limited Corporate Governance Policy  Algae.Tec Limited Trading Policy  Algae.Tec Limited Code of ConductThe Objective of the Company’s Code of Conduct is to help Directors and Employees make informedchoices about their behaviour.The Company’s Corporate Governance Practices and Policies summarises the Corporate Governancepractices put in place by the Board, including: The Role of the Board Composition of the Board Independence of the Board Audit Committee and Risk Management Board Committees Ethical Standards Dealing with Shares Continuous DisclosuresRecommendation 3.2: Companies should establish policy diversity and disclose the policy or asummary of that policy. The policy should include requirements for the board to establishmeasurable objectives for achieving gender diversity and for the board to assess annually both theobjectives and progress in achieving them.The Company has established a Diversity Policy, however due to the Company’s size and shorthistory, there are aspects which do not comply with the CGC Principles and Recommendations 3.2and Recommendations 3.3 pertaining to disclosure for achieving gender diversity set by the Board.The Board at this juncture has not set measurable objectives. This policy will be reviewed as part ofthe annual compliance review to the Board to ensure that the Diversity Policy is being progressed asrequired and to set measurable objectives when appropriate for the Company.Recommendation 3.3: Companies should disclose in each annual report the measurable objectivesfor achieving gender diversity set by the board in accordance with the diversity policy and progresstowards achieving them.The Board at this juncture has not set measurable objectives. This policy will be reviewed as part ofthe annual compliance review to the Board to ensure that the Diversity Policy is being progressed asrequired and to set measurable objectives when appropriate for the Company.Financial Report – 30 June 2012 Page 20 of 65
  21. 21. Corporate Governance Statement (continued)3. Promote ethical and responsible decision-making (continued)Recommendation 3.4: Companies should disclose in each annual report the proportion of womenemployees in the whole organisation, women in senior executive positions and women on the board.The table in respect of this follows: Senior Gender Total Management Board Female 9 0 0 Male 24 3 4 %Female 27 0 0Recommendation 3.5: Companies should provide the information indicated in the Guide toreporting on Principle 3.The Company in respect of the Diversity Policy has followed the recommendations set by the ASXCorporate Governance Council for the whole period during the financial year ended 30 June 2012except for items noted above.4. Safeguard integrity in financial reportingCompanies should have a structure to independently verify and safeguard the integrity of theirfinancial reporting.Recommendation 4.1: The Board should establish an audit committee.The Board has established an Audit Committee.Recommendation 4.2: The audit committee should be structured so that it: Consist only of non-executive directors Consists of majority of independent directors Is chaired by an independent chair, who is not chair of the board Has at least three membersDue to the current size of the organisation, the audit committee does not have a majority ofindependent directors. However, the Audit Committee and the Board currently regularly;  Monitor and review the effectiveness of the Group’s control environment, reporting practices and responsibilities in the areas of accounting, risk management and safeguard of assets.  Review and approve internal audit plans including identified audit risk areas.  Oversee and appraise the quality of audits conducted and monitor their effectiveness.  Monitor and evaluate compliance processes and adherence.Financial Report – 30 June 2012 Page 21 of 65
  22. 22. Corporate Governance Statement (continued)4. Safeguard integrity in financial reporting(continued)Recommendation 4.3: The audit committee should have a formal charter.The committee is responsible for:  Providing assistance to the Board in fulfilling its corporate governance and oversight responsibilities in relation to the Group’s risk management systems, financial reporting, internal control structure and the internal and external audit functions.  Monitoring compliance with the Corporations Act, ASX Listing Rules and any matters outstanding with taxation and other regulatory authorities.  Nomination of external auditors; and  Overseeing the financial reporting process.Recommendation 4.4: Companies should provide the information indicated in the Guide toreporting on Principle 4.The Company will make the relevant material available, on its website in accordance with thisrecommendation.5. Making timely and balanced disclosureCompanies should promote timely and balanced disclosure of all material matters concerning theCompany.Recommendation 5.1: Companies should establish written policies designed to ensure compliancewith ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive levelfor that compliance and disclose those policies or a summary of those policies.The Company has obligations under the Corporations Act and ASX Listing Rules to keep the marketfully informed of information which may have a material effect on the price or value of its securities.The Company discharges these obligations by releasing information to ASX in the form of an ASXrelease or disclosure in other relevant documents (e.g. the Annual Report).The Company Secretary is responsible to the Board, through the Chairman, on all governancematters and maintaining compliance systems which ensure the Board and Company adhere to ASXListing Rules and the Corporations Act.Recommendation 5.2: Companies should provide the information indicated in the Guide toreporting on Principle 5.The Company will make available its Continuous Disclosure Policy on its website, in accordance withthis recommendation.Financial Report – 30 June 2012 Page 22 of 65
  23. 23. Corporate Governance Statement (continued)6. Respect the rights of shareholdersCompanies should respect the rights of shareholders and facilitate the effective exercise of thoserights.Recommendation 6.1: Companies should design a communications policy for promoting effectivecommunication with shareholders and encouraging their participation at general meetings anddisclose their policy or a summary of that policy.The Board recognises the important rights of shareholders and strives to communicate withshareholders regularly and clearly, both by electronic means and using more traditionalcommunication methods. Shareholders are encouraged to attend and participate at generalmeetings. The Company’s auditors attend the Annual General meeting of the Company and areavailable to answer shareholders’ questions.Consistent with this approach, the Company has adopted a Shareholder Communications Policy,which includes the following initiatives and practices. Communicating effectively with shareholders through releases to the market via the ASX, the media, the company’s website, information mailed to shareholders and the general meetings of the Company. Ensuring all information disclosed to the ASX is posted on the Company’s website when it is disclosed to the ASX. This includes presentation material used in public presentations and to brief analysts, which is also released to the ASX and posted on the Company’s website. Arranging for the external auditor to attend the Company’s Annual General Meeting and be available to answer shareholder questions about the conduct of the auditor and the preparation and content of the Auditor’s Report.Recommendation 6.2: Companies should provide the information indicated in the Guide toReporting on Principle 6.The Company will make the relevant material available, being its Shareholder CommunicationsPolicy, on its website in accordance with this recommendation.7. Recognise and manage riskCompanies should establish a sound system of risk oversight and management and internal control.Recommendation 7.1: Companies should establish policies for the oversight and management ofmaterial business risks and disclose a summary of those policies.The Board, together with management, has sought to identify, assess, monitor and mitigate risk.Internal controls are monitored on a continuous basis and wherever possible, improved. The Boarddetermines the Group’s risk profile and is responsible for overseeing and approving riskmanagement strategy and policies, internal compliance and internal control. The Board’s collectiveexperience will enable accurate identification of the principal risk that may affect the Group’sbusiness. Key operational risk and their management will be recurring items for deliberation atBoard Meetings.Financial Report – 30 June 2012 Page 23 of 65
  24. 24. Corporate Governance Statement (continued)7. Recognise and manage risk (continued)Recommendation 7.2: The board should require management to design and implement the riskmanagement and internal control system to manage the company’s material business risks andreport to it on whether those risks are being managed effectively. The board should disclose thatmanagement has reported to it as to the effectiveness of the company’s management of its materialbusiness risks.The Company performs regular audits of the internal control systems and risk managementcompliance across the Group. The audits take account of both the nature and materiality of risk.Management provide monthly reports to the Board which include the identification of materialbusiness risks and matters relating to the effectiveness of the Company’s management of itsmaterial business risk.Recommendation 7.3: The Board should disclose whether it has received assurance from the chiefexecutive officer (or equivalent) and the chief financial officer (or equivalent) that the declarationprovided in accordance with section 295A of the Corporations Act is founded on a sound system ofrisk management and internal control and that the systems is operating effectively in all materialrespects in relation to financial reporting risks.The Managing Director and Management Accountant confirm in writing to the Board that thedeclaration provided in accordance with s295A of hte Corporations Act is founded on sound riskmanagement and internal control systems and that the system is operating effectively in all materialaspects in relation to financial reporting risks.Recommendation 7.4: Companies should provide the information indicated in the Guide toreporting on Principle 7.The Company has included the information indicated in the Guide to reporting on Principle 7 in theCorporate Governance Statement. The Company will also place the material that the Guide specifiesand make publicly available on its website, in accordance with this recommendation.8. Remunerate fairly and responsiblyCompanies should ensure that the level and composition of remuneration is sufficient andreasonable and that its relationship to performance is clear.Recommendation 8.1: The board should establish a remuneration committee.The Board has not established a Remuneration Committee at this point in the Group’s development,but will soon as per point 1.2 It is considered that the size of the Board along with the level ofactivity of the Group renders this impractical and the full Board considers in detail all of the mattersfor which the directors are responsible. Remuneration to the independent Director is by way ofDirector Fees only, with the level of such fees, having been set by the Board to an amount itconsiders to be commensurate for a Group of its size and level of activity.Financial Report – 30 June 2012 Page 24 of 65
  25. 25. Corporate Governance Statement (continued)8. Remunerate fairly and responsibly (continued)The remuneration for the executive directors is as disclosed in the Directors’ Report. Non – executiveDirectors do not receive performance based bonuses and do not participate in equity schemes of theGroup, nor are they entitled to retirement allowances. There is currently no link betweenperformance and remuneration and there are no schemes for retirement benefits in existence.The Board is responsible for determining the remuneration of the Chief Executive Officer and seniorexecutives.Recommendation 8.2: The remuneration committee should be structured so that it consists of amajority of independent directors, is chaired by an independent chair, and has at least threemembers.Refer to recommendation 8.1 above.Recommendation 8.3: Companies should clearly distinguish the structure of non-executivedirectors’ remuneration from that of executive directors and senior executives.A description of the structure of Non-Executive Director’s remuneration and Executive Director’sremuneration is contained in the remuneration report on page 10 of this Annual Report.Recommendation 8.4: Companies should provide the information indicated in the Guide toreporting on Principle 8.The Company has included the information in the Guide to reporting on Principle 8 in this CorporateGovernance Statement. The Company will also place the material that the Guide specifies and makepublicly available on our website, in accordance with this recommendation.The Board of Directors and the Company Secretary are responsible for the corporate governance ofthe Group and were guided by the Director’s Code of Conduct, the Corporate Governance Policy andthe ASX Corporate Governance Council Principles and Recommendations during the financial year.The Board guides and monitors the business affairs of Algae. Tec Limited and its subsidiary Group onbehalf of the shareholder to whom they are accountable.Financial Report – 30 June 2012 Page 25 of 65
  26. 26. Consolidated Statement of Comprehensive IncomeFor the year ended 30 June 2012 Notes 2012 2011 $ $ REVENUE Interest 24,267 21,282 Derivative fair value movement 14 41,085 - Other 17,390 - 82,742 21,282 EXPENDITURE Employee benefits expenses (1,808,139) (554,105) Depreciation expense (80,500) (5,835) Advertising expenses (265,167) (232,133) Property rent & lease expenses (196,335) (49,136) Communication expenses (54,650) (17,175) Consultancy expenses (606,502) (315,651) Filing and listing fees (90,043) (1,303) Freight and courier expenses (137,576) (2,592) Insurance expenses (66,180) (14,094) Legal fees (80,930) (12,036) Materials and supplies (323,864) - Professional fees (1,219,996) (358,920) Repairs and maintenance expenses (349,293) (10,544) Travel expenses (499,962) (241,336) Finance costs (18,087) (2,376) Unrealised foreign exchange profit/(losses) 219,436 (274,559) Other expenses (487,148) (224,637) Research and development expenses (988,642) (173,417) LOSS BEFORE INCOME TAX 4 (6,970,836) (2,468,567) Income tax benefit 6 199,727 - NET LOSS ATTRIBUTABLE TO MEMBERS OF THE COMPANY (6,771,109) (2,468,567) Other Comprehensive Income (78,735) 31,080 TOTAL COMPREHENSIVE INCOME (6,849,844) (2,437,487) TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO MEMBERS OF THE COMPANY (6,849,844) (2,437,487) Earnings per share Basic earnings per share (cents per share) 16 (0.03) (0.01) Diluted earnings per share (cents per share) 16 (0.03) (0.01) The above consolidated statement of comprehensive income should be read In conjunction with the accompanying notesFinancial Report – 30 June 2012 Page 26 of 65
  27. 27. Consolidated Statement of Financial PositionAs at 30 June 2012 Notes 2012 2011 $ $ CURRENT ASSETS Cash and cash equivalents 8 1,586,787 2,434,251 Trade and other receivables 9 395,537 47,990 Other current assets 10 79,277 63,554 TOTAL CURRENT ASSETS 2,061,601 2,545,795 NON CURRENT ASSETS Property, plant, and equipment 11 1,095,532 127,554 Other non-current assets - 18,000 TOTAL NON CURRENT ASSETS 1,095,532 145,554 TOTAL ASSETS 3,157,133 2,691,349 CURRENT LIABILITIES Trade and other payables 12 349,892 81,386 Provisions 13 36,220 10,820 Borrowings 14 578,556 - TOTAL CURRENT LIABILITIES 964,668 92,206 NON CURRENT LIABILITIES Borrowings 14 11,305 - TOTAL NON CURRENT LIABILITIES 11,305 - TOTAL LIABILITIES 975,973 92,206 NET ASSETS 2,181,160 2,599,143 EQUITY Issued capital 15 11,878,665 5,446,804 Reserves 17 (47,655) 31,080 Accumulated losses (9,649,850) (2,878,741) TOTAL EQUITY 2,181,160 2,599,143 The above consolidated statement of financial position should be read In conjunction with the accompanying noteFinancial Report – 30 June 2012 Page 27 of 65
  28. 28. Consolidated Statement of Changes in EquityFor the year ended 30 June 2012 Foreign Issued Accumulated Exchange Total Capital Losses Reserves Equity $ $ $ $ BALANCE AT 1 JULY 2011 5,446,804 (2,878,741) 31,080 2,599,143 Net Loss (6,771,109) - (6,771,109) Other comprehensive income - - (78,735) (78,735) Total comprehensive income - (6,771,109) (78,735) (6,849,844) Share issued 6,880,081 - - 6,880,081 Share issue expenses (448,220) - - (448,220) BALANCE AT 30 JUNE 2012 11,878,665 (9,649,850) (47,655) 2,181,160 Foreign Issued Accumulated Exchange Total Capital Losses Reserves Equity $ $ $ $ BALANCE AT 1 JULY 2010 600,000 (410,174) - 189,826 Net loss - (2,468,567) - (2,468,567) Other comprehensive income - - 31,080 31,080 Total comprehensive income - (2,468,567) 31,080 (2,437,487) Share issued 5,325,987 - - 5,325,987 Share issue expenses (479,183) - - (479,183) BALANCE AT 30 JUNE 2011 5,446,804 (2,878,741) 31,080 2,599,143 The above consolidated statement of changes in equity should be read In conjunction with the accompanying notesFinancial Report – 30 June 2012 Page 28 of 65
  29. 29. Consolidated Statement of Cash FlowsFor the year ended 30 June 2012 2012 2011 Notes $ $ CASH FLOWS FROM OPERATING ACTIVITES Payments to suppliers and employees (inclusive of goods and services tax) (6,187,889) (1,836,504) Interest paid (18,087) (1,575) Interest received 24,267 15,179 Net cash outflows from operating activities 22 (6,181,409) (1,822,900) CASH FLOWS FROM INVESTING ACTIVITIES Loans to Directors - (25,000) Repayment of loans to Directors 25,000 - Payments for property, plant and equipment (1,061,419) (130,953) Net cash outflows from investing activities (1,036,419) (155,953) CASH FLOWS FROM FINANCING ACTIVITIES Issue of shares net of capital raising costs 15 4,831,780 4,646,804 Proceeds from borrowings 14,15 1,397,884 - Net cash inflows from financing activities 6,229,664 4,646,804 Net (decrease) / increase in cash and cash equivalents (988,164) 2,667,951 Effect of exchange rate translation (78,735) 31,080 Cash and cash equivalents at the beginning of the financial period 8 2,434,251 9,779 Effect of exchange rate changes of cash held in foreign currencies 219,435 (274,559) CASH AND CASH EQUIVALENTS AT THE END OF THE FINANCIAL PERIOD 8 1,586,787 2,434,251 The above consolidated statement of cash flows should be read In conjunction with the accompanying notesFinancial Report – 30 June 2012 Page 29 of 65
  30. 30. Notes to the Financial Statements30 June 2012The financial report of Algae.Tec Limited and its subsidiary (the Group) for the year to 30 June 2012was authorised for issue in accordance with the directors meeting of Friday 28 September 2012.Algae.Tec Limited is a company limited by shares, incorporated, and domiciled in Australia. It’sregistered office and principal place of business is 516 Hay Street, Subiaco, WA 6008.1. Significant accounting policiesStatement of complianceThe financial report is a general purpose financial report which has been prepared in accordancewith the Corporations Act 2001, Australian Accounting Standards and Interpretations, and otherauthoritive pronouncements. The financial report includes the consolidated financial statements ofthe Group.Compliance with Australian Accounting Standards ensures the financial statements and notes of theGroup comply with International Financial Reporting Standards (“IFRS”)Basis of preparationThe financial report has been prepared on the accruals basis, and on the basis of historical costexcept for the revaluation of financial instruments. Cost is based on the fair values of theconsideration given in exchange for assets. All amounts are presented in Australian dollars, unlessotherwise noted. Comparative information is reclassified where appropriate to enhancecomparability.Going ConcernThis financial report has been prepared on the going concern basis. The Directors are confident thatthe Company is a going concern for the following reasons: - A number Memorandum of Understandings and joint ventures have been established for the ongoing development of the technology and construction of commercial sized facilities; - Commencement of the construction ventures is expected to be towards the end of 2012 and it is anticipated that this will be funded through a combination of joint venture partners, capital raisings and specific project funding. The ongoing research and development costs associated with the business are currently covered through a number of facilities as follows: - Funding through the Australian Government for Research and Development expenditure – As outlined at Note 23, subsequent to year end, Macquarie Bank advanced 80% of the research and development rebate claimed by the company for expenditure incurred in the year to 30 June 2012. - A $20 million facility is in place with GEM, subject to the satisfaction of a number of conditions, the Company can require GEM drawdown on the Equity Line of Credit. - A convertible note facility is in place with La Jolla Cove Investors. This facility is to the value of $6 million (as at 30th June 2012, $1.5 million drawn down). This funding is paid on a monthly basis (minimum $200,000) with the amounts dependent upon the current share price. This note is expandable to $9 million at our request (further details at Note 14); and - If required, further share placements and/or capital raisings will take place to continue to fund further development of the technology.Financial Report – 30 June 2012 Page 30 of 65
  31. 31. Notes to the Financial Statements continued30 June 20121. Significant accounting policies (continued)Critical accounting judgements and key sources of estimation uncertaintyIn the application of the Group’s accounting policies, management is required to make judgementsestimates and assumptions about carrying values of assets and liabilities that are not readilyapparent from other sources. The estimates and associated assumptions are based on historicalexperience and other factors that are considered to be relevant. Actual results may differ fromthese estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions toaccounting estimates are recognised in the period in which the estimate is revised if the revisionaffects only that period or in the period of the revision and future periods if the revision affects bothcurrent and future periods. Refer to note 2 for a discussion of critical judgements in applying theentity’s accounting policies, and key sources of estimation uncertainty.Adoption of new and revised Accounting StandardsIn the current year, the Group has adopted all of the new and revised Standards and Interpretationsissued by the Australian Accounting Standards Board (AASB) that are relevant to its operations andeffective for the current annual reporting period. Details of the impact of the adoption of these newaccounting standards, if applicable are sets out in the individual accounting policy notes set outbelow.The following significant accounting policies have been adopted in the preparation and presentationfor the financial report.(a) Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and theentity controlled by the Company (it’s subsidiary) (referred to as ‘the Group’ in these financialstatements). Control is achieved where the Company has the power to govern the financial andoperating policies of an entity so as to obtain benefits from its activities.Where necessary, adjustments are made to the financial statements of subsidiaries to bring theiraccounting policies into line with those used by the Group.Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions with the exception of unrealised foreign exchange gains or losses onintercompany receivables and payables, are eliminated in preparing the consolidated financialstatements.(b) Business combinationsAcquisitions of subsidiaries and businesses are accounted for using the purchase method. The costof the business combination is measured as the aggregate of the fair values (at the date of exchange)of assets given, liabilities incurred or assumed, and equity instruments issued by the Group inexchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss asincurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet theconditions for recognitions under AASB3 ‘Business Combinations’ are recognised at their fair valuesat the acquisition date, except for non-current assets (or disposal groups) that are classified as heldfor sale in accordance with AASB5 ‘Non-current Assets Held for Sale and Discontinued Operations’which are recognised and measured at fair value less cost of sale.Financial Report – 30 June 2012 Page 31 of 65
  32. 32. Notes to the Financial Statements continued30 June 20121. Significant accounting policies (continued)Business combinations (continued)The Group measures goodwill as the fair value of the consideration transferred including therecognised amount of any non-controlling interest in the acquiree, less the net recognised amount(generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as ofthe acquisition date.(c) Foreign currenciesThe individual financial statements of each group entity are presented in its functional currencybeing the currency of the primary economic environment in which they operates. For the purposeof the consolidated financial statements, the results and financial position of each entity areexpressed in Australian dollars, which is the functional currency of Algae. Tec Limited and thepresentation currency for the consolidated financial statements.In preparing the financial statements of the individual entities, transactions in currencies other thanthe entity’s functional currency are recorded at the rates of exchange prevailing on the dates of thetransactions. At the end of each reporting period, monetary items denominated in foreigncurrencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fairvalue that are denominated in foreign currencies are retranslated at the rates prevailing on the datewhen the fair value was determined. Non-monetary items that are measured in terms of historicalcost in a foreign currency are not retranslated.Exchange difference arising on translation of foreign operations is transferred directly to the Group’sforeign currency translation reserve in the statement of financial position. These differences arerecognised in the statement of comprehensive income in the period in which the operation isdisposed.(d) Goods and services taxRevenues, expenses and assets are recognised net of the amount of GST, except where the amountof GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstancesthe GST is recognised as part of the cost of acquisition of the asset or as part of an item of theexpense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST.The net amount of GST recoverable from, or payable to, the ATO is included as a current asset orliability in the Statement of Financial Position.Cash Flows are included in the Statement of Cash Flows on a gross basis. The GST components ofcash flows arising from investing and financial activities which are recoverable from, or payable to,the ATO are classified as operating cash flows.(e) RevenueRevenue is recognised and measured at the fair value of the consideration received or receivable tothe extent it is probable that the economic benefits will flow to the consolidated entity and therevenue can be reliably measured. The following specific recognition criteria must also be metbefore revenue is recognised:Financial Report – 30 June 2012 Page 32 of 65
  33. 33. Notes to the Financial Statements continued 30 June 20121. Significant accounting policies (continued)Revenue (continued)Rendering of servicesConsulting services are performed by the parent for the Group’s controlled entity. Revenue isrecognised by reference to the actual labour hours delivered at standard rates and direct expensesincurred.Rental incomeRental income from the lease of Suite 9, 3 Centro Avenue, Subiaco is recognised in profit or loss on astraight line basis over the term of the lease.Interest incomeInterest revenue is recognised on a time proportionate basis that takes into account the effectiveyield on the financial asset.(f) Share-based paymentsThe Group provides benefits to its directors, employees and consultants (including senior executives)of the Group in the form of share-based payments, whereby employees render services in exchangefor shares or rights over shares (equity-settled transactions).The cost of these equity-settled transactions is measured by reference to the fair value of the equityinstruments at the date at which they are granted.In valuing equity-settled transactions, no account is taken of any performance conditions, other thanconditions linked to the price of shares of Algae. Tec Limited (market conditions) if applicable.The cost of equity-settled transactions is recognised, together with a corresponding increase inequity, over the period in which the performance and/or service conditions are fulfilled, ending onthe date on which the relevant employees become fully entitled to the award (the vesting period).The cumulative expense recognised for equity-settled transactions at each reporting date untilvesting date reflects (i) the extent to which the vesting period has expired and (ii) the Group’s bestestimate of the number of equity instruments that will ultimately vest. No adjustment is made forthe likelihood of market performance conditions being met as the effect of these conditions isincluded in the determination of fair value at grant date. The statement of comprehensive incomecharge or credit for a period represents the movement in cumulative expense recognised as at thebeginning and end of that period.No expense is recognised for awards that do not ultimately vest, except for awards where vesting isonly conditional upon a market condition. If the terms of an equity-settled award are modified, as aminimum an expense is recognised as if the terms had not been modified.In addition, an expense is recognised for any modification that increases the total fair value of theshare-based payment arrangement, or is otherwise beneficial to the employee, as measure at thedate of modification.If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, andany expense not yet recognised for the award is recognised immediately.However, if a new award is substituted for the cancelled award and designated as a replacementaward on the date that it is granted, the cancelled and new award are treated as if they were amodification of the original award, as described in the previous paragraph. The dilutive effect, if any,of outstanding options is reflected as additional share dilution in the computation of earnings pershare.Financial Report – 30 June 2012 Page 33 of 65
  34. 34. Notes to the Financial Statements continued30 June 20121. Significant accounting policies (continued)(g) TaxationCurrent TaxCurrent tax is calculated by reference to the amount of income taxes payable or recoverable inrespect of the taxable profit or tax loss for the year. It is calculated using tax rates and tax laws thathave been enacted or substantively enacted by reporting date. Current tax for current and prioryears is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).Deferred TaxDeferred tax is accounted for using the comprehensive balance sheet liability method in respect oftemporary differences arising from differences between the carrying amount of assets and liabilitiesin the Financial Information and the corresponding tax base of those items.In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred taxassets are recognised to the extent that it is probable that sufficient taxable amounts will beavailable against which deductible temporary differences or unused tax losses and tax offsets can beutilised. However, deferred tax assets and liabilities are not recognised if the temporary differencesgiving rise to them arise from the initial recognition of assets and liabilities (other than as a result ofa business combination) that affects neither taxable income nor accounting profit. Furthermore, adeferred tax liability is not recognised in relation to taxable temporary differences arising fromgoodwill.Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to theyear(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (andtax laws) that have been enacted or substantively enacted by reporting date. The measurement ofdeferred tax liabilities and asset reflects the tax consequences that would follow from the manner inwhich the Group expects at the report date, to recover or settle the carrying amount of its assetsand liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes leviedby the same taxation authority and the Group intends to settle its current tax assets and liabilities onthe net basis.Current and deferred tax for the year.Current and deferred tax is recognised as an expense or income in the income statement, exceptwhen it relates to items credited or debited directly to equity, in which case the deferred tax is alsorecognised directly in equity, or where it arises from the initial accounting for a businesscombination, in which case it is taken into account in the determination of good or excess.Research & Development ClaimsA claim of $1575,588 for research and development for the year ended 30 June 2012 has beensubmitted but not yet approved. The Group is also awaiting determination as to the eligibility ofoverseas research and development expenditure which would increase the provisional claim made.The Groups accounting policy is to account for the research and development claims as an incometax benefit in the year the claims are approved.Financial Report – 30 June 2012 Page 34 of 65
  35. 35. Notes to the Financial Statements continued30 June 20121. Significant accounting policies (continued)(h) Cash and cash equivalentsCash and cash equivalents comprise cash on hand, cash in banks and short-term deposits with anoriginal maturity of three months or less that are readily convertible to known amounts of cash andwhich are subject to an insignificant risk of changes in value.(i) Trade and Other PayablesTrade and other payables represent the liability outstanding at the end of the reporting period forgoods and services received by the Group during the reporting period which remains unpaid. Thebalance is recognises as a current liability with the amount being normally paid within 30 days ofrecognition of liability.(j) Segment ReportingOperating segments are reported in a manner consistent with the internal reporting provided to thechief operating decision maker. The chief operating decision maker, who is responsible forallocating resources and assessing performance of the operating segments, has been identified asthe Board of Directors.(k) Property, Plant and EquipmentPlant and equipment is stated at cost less accumulated depreciation and any accumulatedimpairment losses.Depreciation is calculated based upon the estimated useful life of the assets as follows:Computer Equipment 20% to 50% Straight LineComputer Software 25% (4 years) Straight LineOffice Equipment 20% (5 years) Straight LineFurniture & Fittings 14.3%(7 years) Straight LineFacility Improvements 14.3%(7 years) Straight LinePlant and equipment 14.3%(7 years) Straight LineLaboratory Systems 14.3%(7 years) Straight LineMotor Vehicles 22.5% Diminishing ValueThe assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted ifappropriate, at each financial year end.Gains and losses on disposal are determined by comparing proceeds with the carrying amount.These gains and losses are included in the statement of comprehensive income. When revaluedassets are sold, amounts included in the revaluation surplus relating to that asset are transferred toretained earnings.(l) BorrowingsBorrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings aresubsequently measured at amortised cost. Any difference between the proceeds (net of transactioncosts) and the redemption amount is recognised in the statement of comprehensive income overthe period of the borrowings using the effective interest method. Fees paid on the establishment ofloan facilities, which are not incremental costs relating to the actual draw down of the facility, arerecognised as prepayments and amortised on a straight line basis over the term of the facility.Financial Report – 30 June 2012 Page 35 of 65
  36. 36. Notes to the Financial Statements continued30 June 20121. Significant accounting policies (continued)(m) LeasingLease of assets under which the consolidated entity assumes substantially all the risks and benefitsof ownership are classified as finance leases as distinct from operating leases under which the lessoreffectively retains substantially all such risk and benefits. Property, plant and equipment acquiredby finance leases is capitalised at the present value of the minimum lease payments as a financelease asset and as a corresponding lease liability from date of inception of the lease. Lease assetsare amortised over the period the entity is expected to benefit from the use of the assets or theterm of the lease whichever is shorter. Finance lease liabilities are reduced by the component ofprincipal repaid. Lease payments are allocated between the principal component of the liability andinterest expense.(n) Employee benefitsWages, salaries, annual leave and sick leaveLiabilities for wages and salaries, including non-monetary benefits, annual leave and accumulatingsick leave expected to be settled within 12 months of the reporting date are recognised in otherpayables in respect of employees’ services up to the reporting date. They are measured at theamounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sickleave are recognised when the leave is taken and are measured at the rates paid or payable.Long service leaveThe liability for long service leave is recognised in the provision for employees’ benefits andmeasured as the present value of expected future payments to be made in respect of servicesprovided by employees up to the reporting date. Consideration is given to expect future wage andsalary levels, experience of employee departures, and period of service. Expected future paymentsare discounted using market yields at the reporting date of national government bonds with termsto maturity and currencies that match, as closely as possible, the estimated future cash outflows.(o) ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) as a resultof a past event, it is probable that the Group will be required to settle the obligation, and a reliableestimate can be made of the amount of the obligation.The amount recognised as a provision is the best estimate of the consideration required to settle thepresent obligation at reporting date, taking into account the risks and uncertainties surrounding theobligation. Where a provision is measured using the cash flows estimated to settle the presentobligation, its carrying mount is the present value of those cash flows.When some or all of the economic benefits required to settle a provision are expected to berecovered from a third party, the receivable is recognised as an asset if it is virtually certain thatreimbursement will be received and the amount of receivable can be measured reliably.Financial Report – 30 June 2012 Page 36 of 65

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