| Intangible Assets | Note
20. Intangible assets
Consolidated
30 June 30 June
$ $
Non-current assets
Trade Secrets and Patents– at cost 23,857,306 23,857,306
Less: Accumulated amortisation (3,634,171 ) (2,441,300 )
Net carrying value 20,223,135 21,416,006
Patents and trademarks - at cost 89,268 47,840
Add: Additions 145,021 41,428
Less: Accumulated amortisation (19,465 ) (11,613 )
Net carrying value 214,823 77,655
20,437,958 21,493,661 Reconciliation Reconciliations
of the written down values at the beginning and end of the current and previous financial year are set out below:
Trade Patents
& trademarks Total
$ $ $
Consolidated
Balance at 1 July 2022 22,608,877 39,844 22,648,721
Additions - 41,428 41,428
Amortisation expense (1,192,871 ) (3,617 ) (1,196,488 )
Balance at 30 June 2023 21,416,006 77,655 21,493,661
Additions - 145,021 145,021
Amortisation expense (1,192,871 ) (7,853 ) (1,200,724 )
Balance at 30 June 2024 20,223,135 214,823 20,437,958 Trade
secrets were acquired during 2021 financial year by the Consolidated Entity and are amortised over its useful life estimate of 20 years.
As at June 30, 2024 the remaining useful life of the trade secrets is 17 years (June 30, 2023:18 years). Assessment for
impairment - 2024 For the year ended 30
June 2024, management has performed an impairment assessment in accordance with IAS 36. As part of this process, management obtained
a valuation of the intangible assets by an independent expert valuer. Methodology An impairment loss expense
in the profit or loss is recognised when the carrying amount of an asset exceeds its recoverable amount. The Consolidated Entity determined
the recoverable amounts of the Gelteq Consolidated Entity as one CGU using a fair value less cost to sell approach. The recoverable amount
of the CGU has been determined by a forecast model that estimated the future cash flows based on budgets and forecasts for five years
prepared by management. The independent expert valuers extended the forecasts for an additional 4 years for a total forecast period of
9 years on the basis that, in the case of early stage businesses that are reasonably expective of high growth for a significant period
of time, it is generally necessary to forecast cash flows for a period greater than five years to reflect the business reaching a mature
stable level of growth to enable the application of a terminal value calculation. Also included at the end of the forecast period is a
terminal value reflecting a continuing value at the end of the forecast period on the basis of capitalising free cash flows in perpetuity
at a growth rate of 2.5% per annum. These cash flows were
then discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the
risks specific to the CGU. The independent valuer then cross-checked the total of the discounted cash flows against the Company’s
IPO share price and subsequent trading of the Company’s shares. A reference to Financial Years
(FY), refers to a period covering July 1 st th st st The discounted cash flow
model used in the assessment of fair value less cost to sell is sensitive to a number of key assumptions, including revenue growth rates,
discount rates and operating costs. These assumptions can change over short periods of time and can have a significant impact on the carrying
value of the assets. For any AUD figures presented from the valuation analysis, these have been obtained by conversion from USD at an
exchange rate of 1 AUD = 0.66 USD. Fair value less cost
to sell and key assumptions The Company estimates
the fair value less cost to sell of the Gelteq Consolidated Entity cash generating unit (CGU) using discounted cash flows. Management
assumptions were developed incorporating internal and external market information, although the extent to which they rely on past experience
of the Consolidated Entity is limited given the consolidated entity has not yet started full scale operations, pending completion of capital
raising activities where necessary, with external sources of information having been adjusted to reflect factors specific to the Consolidated
Entity. Fair value less cost to sell is categorised within level 3 of the fair value hierarchy. For the 2024 reporting
period, the recoverable amount of the CGU was determined based on fair value less cost to sell calculations which required the use of
key assumptions: Operating Segments
● The Consolidated Entity’s cash flows are generated from
one CGU which covers nutraceuticals for humans and animals, pharmaceutical for humans and animals and controlled substances. Cash Flow projections
● The calculations used cash flow projections based on financial budgets
and forecasts approved by management covering FY25 to FY29. The projections included negative undiscounted operating cash flows between
FY25 and FY27 before making positive operating returns from FY28 onwards as the business scales up operations and operating margins that
are in line with industry averages in similar industries. A full 5 years of cash flow projections were used to allow for 2 years
of positive cash flow projections in the management forecast period. The independent valuation experts extended the forecasts for an additional
4 years for a total forecast period of 9 years on the basis that, in the case of early stage businesses that are reasonably expective
of high growth for a significant period of time, it is generally necessary to forecast cash flows for a period greater than five years
to reflect the business reaching a mature stable level of growth to enable the application of a terminal value calculation.
● A pre-tax discount rate range of 22-24%, reflecting rates of return
required by typical investors in early-stage businesses similar to the Consolidated Entity, was applied. Revenue
● Management have implemented a hybrid revenue model with revenue generated
from manufacturing and royalties (on each individual order).
● The forecast model is based on a 4 year compound average growth rate
of 82%, based on management forecasts to FY29. The model forecast revenue growth rates 259% in FY26, 117% in FY27, 86% in FY28 and 38%
in FY29, following revenue growth in FY25 from a close to nil Gross Margins
● Gross margin is
forecast to increase from 49% in FY25 to 58% in FY29 and beyond. The scale benefits of manufacturing larger quantities are considered
to be forecast relatively conservatively as different clients will have different formulations which may mean scale benefits are lower
than for the production of homogenous products. The forecast gross margins are in line with comparable industry gross margins. Operating Expense
● The largest operating expense is employee costs. Salary and benefits
are forecast to increase by 215% in FY25, 113% in FY26, 26% in FY27, 20% on FY28, 12% in FY29, with growth rates declining thereafter,
in line with reducing revenue growth, and oncosts are forecast at 18-19% of salaries. EBITDA
● The forecast model is based on a long-term EBITDA margin of 29%. Forecast
EBITDA is negative in early years, which is expected for an early stage startup business where typically the average timeframe to profitability
is 2 -3 years. The forecast model’s EBITDA margins are -109% in FY25, -29% in FY26, 7% in FY27, 25% in FY28, and 29% in FY29 and
beyond, with the ongoing EBITDA being comparable to that of comparable industries in relevant world markets. CAPEX
● No material Capex has been forecast as the costs borne by Gelteq in
working with clients to develop products is included in other forecast expenses. As such, forecast capex for relevant supporting assets
is $50,000 in FY25, increasing at 5% per annum thereafter. Tax Rate
● A tax rate of 30% has been applied in line the with the corporate
tax rate in Australia. Whilst the tax rate may be lower in earlier years, this tax rate is in line with the Consolidated Entity’s
long term tax rate and the tax rate of a likely acquirer. Working Capital
● Model forecasts the receivables at 30 days and payables at 31 days
in line with management expectations. Payables days are only applied to operating expenses as all manufacturing costs are paid prior
to dispatch to customers. Other balance Sheet
Items
● There are no other assumptions that result it material balance
sheet movements that affect forecast cash flow. Terminal growth rate ● Long term growth rate, used for the terminal value calculation, is 2.5%, reflecting the Australian long term nominal inflation rate. Apart from the considerations
described in determining the value-in-use of the cash-generating units described above, management is not currently aware of any other
probable changes that would necessitate changes in its key estimates Impairment The
Consolidated Entity has performed an impairment assessment based on its cash generating unit (CGU). The Consolidated Entity determined that the recoverable amount in relation the CGU exceeded its carrying value of assets as at 30 June 2024,
therefore no adjustment to its carrying value (impairment) was required. The directors have reviewed and are comfortable with the significant assumptions determined by management. Based on the above, the directors
believe that no impairment charge is required to the value of the intangible asset at 30 June 2024. Sensitivity The sensitivities on
the updated discounted cash flow model are as follows:
● Revenue would require a reduction of 19.3% to the compounded growth
rate over 9 years (30 June, 2023, 13% over 6.5 years) before the intangible asset value would need to be impaired, with all
other assumptions remaining constant.
● EBITDA margin would need a reduction of 11.8 % per annum over 9 years
(30 June, 2023, 20% over 6.5 years) years before the intangible asset value would need to be impaired, with all other assumptions
remaining constant.
● The discount rate would be required to increase to 33.8 % (30 June,
2023, 43%) before the intangible asset value would need to be impaired, with all other assumptions remaining constant.
● Long Term growth rate would need to be reduced to be in negative (consistent
with the 30 June, 2023, valuation) in the cashflow modelling before the intangible asset value would need to be impaired, with all other
assumptions remaining constant. Management believes that
other reasonable changes in the key assumptions on which the recoverable amount on intangible asset is based would not cause the carrying
amount to exceed its recoverable amount. Management notes that
if performance is not as expected, an impairment charge against these assets could be recognised in future financial years’ accounts.
This estimation of uncertainty is expected to reduce over time as the Consolidated Entity’s business develops and matures. Assessment for
impairment - 2023 As disclosed in note 3, management has made judgements
and estimates in respect of impairment testing of intangible assets. Since 30 June, 2022, the Company issued 746,268 fully paid Ordinary
Shares at an issue price of USD$1.34 (AUD$1.92) totaling USD$1,000,000. As the issue price was lower than previous share issuances and
substantially lower than the fair market value derived by the independent valuation expert for June 30, 2022, this is an indicator
of potential impairment. In addition, since 30 June 2022, market interest rates have increased significantly. These two events are
indicators of potential impairment and as a result, per IAS36, the Consolidated Entity engaged the independent valuation expert to provide
an updated discounted cash flow model based on information as at 31 March 2023, to estimate the updated recoverable amount.
The discounted cash flow model was revised for the 31 March 2023 period by the independent valuation expert and the discount rate
applied in the valuation was increased from a midpoint of 25% to 26.5%, together with pushing forward by one year the cash flow estimates.
Management has reviewed all other estimates and assumptions performed in the 31 March 2023 valuation and based on further interest rate
rises between 31 March 2023 and 30 June 2023, management decided to lift the discount rate midpoint by 0.5% to 27%, with no
other changes being required. Whilst the revised management cash flow model recoverable value mid-point decreased, there is still significant
headroom (over 200%) over the carrying value of the intangible asset at 30 June, 2023. As a result, the Consolidated Entity determined
that the recoverable amount in relation the CGU exceeded its carrying value of assets as at 30 June, 2023, and no adjustment to its carrying
value (impairment) was required. Based on the above, the directors believe that
no impairment charge is required to the value of the intangible asset at 30 June, 2023. Methodology An impairment loss expense in the profit or loss
is recognised when the carrying amount of an asset exceeds its recoverable amount. The Consolidated Entity determined the recoverable
amounts of the Gelteq Consolidated Entity as one CGU using a fair value less cost to sell approach. The recoverable amount of the CGU has been determined
by a forecast model that estimated the future cash flows based on approved budgets extrapolated for five years by management. The
independent valuation experts made a number of material changes to the model, including the revenue generation profile, a decrease in
gross margin and an increase in operating expenses and capital expenditure, and extending the forecasts for an additional 1.5 years for
a total of 6.5 years. Management has continued to adopt this extended
period for the purposes of the cash flow estimates included in the Fair value less cost to sell recoverable value as at 30 June 2023.
This was discounted to their present value using a discount rate that reflects current market assessments of the time value of money and
the risks specific to the CGU. When referring to Financial Years (FY), this refers to a period covering July 1 st th st st The discounted cash flow model used in the assessment
of fair value less cost to sell is sensitive to a number of key assumptions, including revenue growth rates, discount rates and operating
costs. These assumptions can change over short periods of time and can have a significant impact on the carrying value of the assets.
For any AUD figures presented from the valuation analysis, these have been obtained by conversion from USD at an exchange rate of 1 AUD$
= 0.6630 USD$ Fair value less cost to sell and key assumptions The Company estimates the fair value less cost
to sell of the Gelteq Consolidated Entity cash generating unit (CGU) using discounted cash flows. Management assumptions were developed
in conjunction with its external valuation advisors. Management incorporated internal and external market information developing these
assumptions, although the extent to which they rely on past experience of the Consolidated Entity is limited given the consolidated entity
has not yet started full scale operations, pending capital raising activities where necessary, with external sources of information having
been adjusted to reflect factors specific to the Consolidated Entity. Fair value less cost to sell is categorised within level 3 of the
fair value hierarchy. For the 2023 reporting period, the recoverable
amount of the CGU was determined based on fair value less cost to sell calculations which required the use of key assumptions:
● Operating Segments —
● The Consolidated Entity’s cash flows are generated from
one CGU which covers nutraceuticals for humans and animals, pharmaceutical for humans and animals and controlled substances.
● Cash Flow projections —
● The calculations used cash flow projections based on financial
budgets approved by management covering FY24 to FY27. With extrapolations using growth assumptions utilized up to the end of CY29. The
projections included negative undiscounted operating cash flows between CY23 and CY25 before making positive operating returns from CY26
onwards as the business scales up operations and operating margins that are in line with industry averages in similar industries. A full
6.5 years of cash flow projections were used to allow for 3 years of positive cash flow projections.
● Weighted average cost of capital of 27%, for early-stage businesses
similar to the Consolidated Entity, was applied. This is an appropriate discount rate as management have relied upon number of studies
investigating rates of return required by investors in early stage businesses similar to Consolidated Entity.
● Revenue —
● Management have implemented a hybrid revenue model with revenue
generated from manufacturing and royalties (on each individual order). For simplicity, the DCF model has excluded royalty revenue from
the calculations.
● The model is based on a 6.5 year compound average growth rate
of 92%. The model forecast revenue growth rates at 147% in CY25, 179% in CY26, 96% in CY27, 54% in CY28 and 26% in CY29.
● Gross Margins —
● The Consolidated Entity has forecast sales on an exclusive
and non-exclusive basis. Exclusive sales are for products that can only be sold by one retailer in an agreed territory. Non-exclusive
sales mean more than one party can sell the same product in a particular territory. Higher margins are forecast for exclusive sales as
the customer gets the benefit of exclusivity. Management has forecast gross margin on exclusive sales of 65% in CY24, increasing to 75%
from CY25 onwards. As the initial orders may be offered at a discount, with market pricing on subsequent orders, in the valuation model
the gross margin assumptions is adjusted to start at 50% in CY24 and increase by 4% per annum to 70% in CY29. Lower margins are forecast
on non-exclusive sales with adjusted management forecast to reflect a more gradual increase in gross margin from 30% in CY24, increasing
by approximately 4% per annum to 50% in CY29.
● Operating Expense —
● The largest operating expense is employee costs. Salary and
benefits are forecast to increase by 176% in CY24, 64% in CY25, 24% in CY26 and 8% thereafter and oncosts are forecast at 17% of salaries.
● EBITDA —
● The model is based on a long-term EBITDA margin of 45%. The
model forecast the EBITDA margin at -127% in CY24, -58% in CY25, 4% in CY26, 28% in CY27, 39% at CY28 and 45% at CY29.
● CAPEX —
● Model forecast capex on intangibles at A$1.1 million
per annum to account for continued research and development in new products and technology. Capex requirements for PP&E is relatively
immaterial and has been forecast at A$0.2 million per annum.
● Amortisation —
● Amortisation has been estimated at 5% of the opening intangibles
balance each year. This roughly equates to an average useful life of 20 years for intangibles, which is in line with the Consolidated
Entity’s current policy.
● Tax Rate
● A tax rate of 30% has been applied in line the with the corporate
tax rate in Australia. Whilst the tax rate may be lower in earlier years, this tax rate is in line with the Consolidated Entity’s
long term tax rate and the tax rate of a likely acquirer.
● Working Capital
● Model forecasts the receivables and payables at 30 days
in line with management expectations. Payables days are only applied to operating expenses as all manufacturing costs are paid prior
to dispatch to customers.
● Other balance Sheet Items
● There are no other assumptions that result it material balance
sheet movements that affect forecast cash flow. Apart from the considerations described in determining
the value-in-use of the cash-generating units described above, management is not currently aware of any other probable changes that would
necessitate changes in its key estimates. Impairment The Consolidated Entity has performed an impairment
assessment based on its cash generating unit (CGU). The Consolidated Entity determined that the recoverable
amount in relation the CGU exceeded its carrying value of assets as at 30 June 2023, therefore no adjustment to its carrying value
(impairment) was required. The directors have reviewed and are comfortable
with the significant assumptions determined by management. Based on the above, the directors believe that no impairment charge is required
to the value of the intangible asset at 30 June 2023. Sensitivity The sensitivities on the updated discounted cash
flow model are as follows:
● Revenue would require a reduction of 13% to the compounded
growth rate over 6.5 years before the intangible asset value would need to be impaired, with all other assumptions remaining constant.
● EBITDA margin would need a reduction of 20% over 6.5 years
before the intangible asset value would need to be impaired, with all other assumptions remaining constant.
● The discount rate would be required to increase to 43% before
the intangible asset value would need to be impaired, with all other assumptions remaining constant.
● Long Term growth rate would need to be reduced to be in negative
in the cashflow modelling before the intangible asset value would need to be impaired, with all other assumptions remaining constant. Management believes that other reasonable changes
in the key assumptions on which the recoverable amount on intangible asset is based would not cause the carrying amount to exceed its
recoverable amount. Management notes that if performance is not as
expected, an impairment charge against these assets could be recognised in the next financial year’s accounts. This estimation of
uncertainty is expected to reduce over time as the Consolidated Entity’s business develops and matures. |
