SomnoMed : HFY17 – 23.2.17

SOMNOMED LIMITED‌ A B N 35 003 255 221 Appendix 4D and Half-Year Financial Report 31 December 2016

This half-year report is for the six months ended 31 December 2016. The previous corresponding period is the half-year ended 31 December 2015.

The information in this report should be read in conjunction with the most recent annual financial report.

Results for announcement to the market

Revenues from sale of goods and services, net of Up $2,453,445 to $23,786,511 discounts 11.5% Revenues from ordinary activities Up $2,480,474 to $23,855,885 11.6% Operating profit before corporate and business development expenses, non-cash items and Down ($70,945) to $2,428,148 income tax (2.8%) Profit/(loss) from ordinary activities after tax Down ($779,116) to ($600,587) attributable to members Net profit/(loss) for the period attributable to Down ($779,116) to ($600,587) members
Dividends	Amount per security	Franked amount per security
Final dividend Interim dividend	- ¢ - ¢	- ¢ - ¢
Record date for determining entitlements to the dividend Not applicable Brief explanation of any of the figures reported above: Refer to comments in the attached Directors' Report.
NTA Backing	31 December 2016	31 December 2015
Net tangible asset backing per share	40.07 cents	23.76 cents

DIRECTORS' REPORT

Your directors submit the financial report of the consolidated entity for the half-year ended 31 December 2016.

Directors

The names of directors who held office during or since the end of the half-year: Peter Neustadt

Lee Ausburn Robert Scherini

Review of Operations

The highlights of the first half of the financial year 2016/17 were the commencement of the operations of Renew Sleep Services, Inc. ("RSS") and the opening of its first treatment centres in the month of December. RSS will build a third distribution channel over the next few years complementing the distribution to SomnoMed's network of sleep dentists and the Managed Care channel, which contracts directly with insurers to treat their members suffering from obstructive sleep apnea.

Highlights of SomnoMed's core business during the six months' period were the continuing strong growth in Europe and a return to growth in SomnoMed's Australian business during the second quarter, after a weak start to the financial year. The US operation recorded slower than expected growth during the half year, having been affected by a reaction of some SomnoMed customers to the perceived channel conflict between their own sales and RSS. Better communication with these customers, a strong finish to the first half year period and initiatives in Managed Care allow SomnoMed to expect growth rates in North America to return to its 20%+ levels in the second half.

In the first half of the financial year 2016/17 SomnoMed's overall, global sales volume grew by 14.9% to 33,309 devices and group revenues reached $23.8 million (+11.5%). SomnoMed generated an EBITDA of $1.4m for the first half of the financial year, before accounting for the start-up and operating expenses linked to RSS. This represents an increase of 57% over the comparable period for the previous half year. After including the first half RSS' losses of $963,000, the combined group EBITDA was $465,000, resulting in the SomnoMed group generating a better than expected positive result overall for the first half of the financial year.

The start of RSS marked an important milestone in the history of SomnoMed. During the six months, a highly qualified executive team was recruited and based in Dallas. Locations for the first treatment centres were contracted and fitted out in Oklahoma City and Tulsa. Advertising campaigns were designed, head office and centre staff recruited and trained, leading up to a launch of the first two centres in December, ahead of plan. Whilst it is very early in this new exciting development, the response to the advertising was pleasing and first patients were treated in conjunction with certified sleep specialists and sleep dentists. Investment, start-up and operational expenses in these first outlets were below or on plan, confirming the model SomnoMed will adopt for the roll out of RSS centres across the US over the next 3 to 5 years. In line with SomnoMed's guidance, RSS expects to operate 5 centres by the end of this financial year and 15 by the end of June 2018. RSS centres will contribute to SomnoMed's North American sales during the second half and are expected to have a significant impact on the growth of device sales, revenues and operating profits from the next financial year onwards.

In the meantime, SomnoMed's core business continues its expansion. Sales of SomnoDent®units grew strongly in Europe. The 18% growth in sales volume in Europe was driven by a good performance in both mature and emerging markets. An increasing number of European countries, such as France, Belguim and Germany, have either adopted, announced or are in process of reviewing their reimbursement policies for COAT™ in the light of low compliance rates and high cost of CPAP. This indicates that strong growth is likely to continue for some time in Europe.

The North American business recorded growth of 15.5% over the same period last year. This is a transitional year for the North American market with establishment of RSS. The abovementioned perceived channel conflict shows signs of having stabilised, with the concept expected to broaden the public's knowledge about COAT™ as an effective, comfortable and reimbursed treatment alternative leading to a higher adoption of COAT™ and an increase in the patient flow across the board. It is expected RSS will increase the growth rate of our US business substantially from next financial year onwards and contribute to the overall increase in the adoption of COAT™. In the North American market the Company continued to invest in the Managed Care segment in the half year, with the first Kaiser treatment centre opened and another direct contract negotiated with a new insurer. The Managed Care segment should contribute to growth in the second half of the financial year, with the signing of additional direct contracts with insurers and further Kaiser treatment centres to open.

Review of Operations (cont.)

The APAC region is still dominated by Australia, where sales improved in the second quarter, as some practitioners returned to use predominantly SomnoDent®devices after unsuccessfully trying out an alternative device, which had been recently launched in the Australian market. The increase in demand observed in the

latter stages of the first half is expected to contribute to solid growth in the second half of the year. Growth in both Japan and South Korea was subdued due to the lack of any reimbursement offered for COAT™ in those countries.

SomnoMed entered the second half year again with a strong balance sheet. The Company has no third party loans and a cash position of $16.7 million.

At the beginning of the second half of the financial year, strong growth rates are continuing within the core business, allowing the Company to look with great confidence into the future. In addition the RSS business will continue to open and operate further centres contributing to the volume and revenue growth of the Group during this period and will be instrumental in SomnoMed's growth for 2017/18 and beyond.

Principal Activity

The principal activity of the Consolidated Entity during the half year was the commercialisation of the SomnoDent®MAS and other oral devices for sleep related disorders in Australia and overseas.

There were no other significant changes in the nature of the Consolidated Entity's principal activities during the half year.

Operating Results

The net loss before income tax expense for the half year ended 31 December 2016 was $372,048 (2015: net profit of $265,496). The net loss of the Consolidated Entity amounted to $802,324 (2015: net profit of $158,059).

Dividends Paid or Recommended

There is no dividend paid, declared or recommended.

Significant Changes in State of Affairs

Other than as stated above and in the accompanying financial report, there were no significant changes in the state of affairs of the Consolidated Entity during the reporting period.

After Balance Date Events

The directors are not aware of any matter or circumstance that has arisen since the end of the half year to the date of this report that has significantly affected or may affect:

1. The operations of the company and the entities that it controls

2. The results of those operations

3. The state of affairs of the Consolidated Entity in subsequent years, other than:

In January 2012 SomnoMed Limited entered into a contract to acquire the Dutch oral appliance distribution company Goedegebuure Staaptechniek B.V. with an upfront payment of 50% and the subsequent 50% to be paid over a period of 5 years in four annual portions commencing in 2014. Subsequent to reporting date, SomnoMed Limited made the final payment of $208,873 (EUR 143,016) in January 2017 with 50% in cash and 50% in SomnoMed shares (27,938 shares at the price of $3.74).

Future Developments

The Consolidated Entity will continue to produce and sell devices for the oral treatment of sleep related disorders in Australia and overseas.

Auditor's Independence Declaration

The auditor's independence declaration for the half year ended 31stDecember 2016 is set out on page 19 of these half yearly accounts.

Signed in accordance with a resolution of the Board of Directors.

Peter Neustadt (Chairman) Dated this 23rdFebruary 2017