A N N U A L R E P O R T 2 0 1 8 MGC Pharmaceuticals Limited ABN 30 116 800 269 1 C o r p o r a t e D i r e c t o r y Corporate Directory Joint Company Secretaries Rachel Kerr & Kate Sainty Registered Office and Principal Place of Business 1202 Hay Street, West Perth WA 6005 Tel: +61 8 6382 3390 Solicitors Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street, Perth WA 6000 Auditors PKF Mack Level 4, 35 Havelock Street, West Perth WA 6005 Securities Exchange Listing MGC Pharmaceuticals Ltd securities are listed on the Australian Securities Exchange (ASX) ASX Code ‘MXC’ for Ordinary Shares and ‘MXCOD’ for Listed Options Share Registry Computershare Investor Services Pty Limited Level 11, 172 St Georges Terrace, Perth WA 6000 Ross Walker Non-Executive Director Brett Mitchell Executive Chairman Nativ Segev Executive Director Roby Zomer Managing Director C o n t e n t s 2 1 3 5 13 19 26 27 29 31 32 33 70 71 76 Welcome to our 2018 Annual Report Corporate Directory Executive Chairman’s Letter to Shareholders Review of Operations Directors’ Report Remuneration Report (Audited) Auditor’s Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to Members ASX Additional Information mgcpharma.com.au 3 E x e c u t i v e C h a i r m a n ’s L e t t e r t o S h a r e h o l d e r s Executive Chairman’s Letter to Shareholders 2 6 O c t o b e r 2 0 1 8 Dear Shareholders, The Board and I are pleased to report the 2018 financial year delivered excellent progress across all divisions as the Company achieved a number of significant operational milestones. The Company’s development has been supported by changes at the Board level with Roby Zomer stepping into the role of Managing Director of MXC to focus on execution of the Board’s strategy and Nativ Segev remaining a Director and appointed Head of Business Strategy, in charge of driving sales and new business including the MGC Derma transaction recently announced with CannaGlobal. With the guidance of an expert management team, the Company has focused on driving growth and commercialisation by leveraging its relationships, IP and expert knowledge in the development of pharmaceutical grade medicinal cannabis products. This pharmaceutical focus is underpinned by multiple research programmes underway with prestigious universities | Annual Report 2018 E x e c u t i v e C h a i r m a n ’s L e t t e r t o S h a r e h o l d e r s 4 – Melbourne’s RMIT and the University of Ljubljana and the Company’s ongoing plans to expand its cultivation of raw materials, production and manufacturing capabilities. The completion of the transaction will enable Management to focus on its core business, to become one of the leading Bio-Pharma operators in Europe. Management continues to focus its team and resources into the development of MXC’s European operations and has a clear strategy for commercialisation to target the strong growth in demand for medicinal cannabis products globally. Subsequent to the year end, the Company achieved a significant milestone as CannEpilTM became available for supply in Australia, following receipt of Human Research Ethics Committee endorsement from St Vincent Hospital Melbourne. This means the drug resistant epilepsy medicine can now be prescribed to patients by registered doctors under the TGA’s Authorised prescriber Scheme, which will generate MXC’s first material revenues from it’s Bio-Pharma operations. CannEpilTM is expected to be available for supply in Australia by December 2018 and represents a landmark reached for the Company as it signifies progress made towards becoming a Bio-Pharma company. Oh behalf of the MGC Pharmaceuticals’ Board, I would like to take this opportunity to thank all of our shareholders for their continued and unwavering support throughout the 2018 financial year and I look forward to another year of strong operational progress as we revolutionise the global medicinal cannabis industry. MGC Pharmaceuticals’ vision remains to become a leading Bio-Pharma company with operations in Europe and Australia. Having made great strides to achieve this, the Company has focused heavily on European development and here, the Pharma division’s progress has been exponential. The Company was recently awarded a full Good Manufacturing Practice (GMP) licence for its European Production and Manufacturing facility in Slovenia, following production of its first commercial batch of epilepsy medicine, CannEpil™. Receipt of this certification has advanced MGC Pharma towards the final stages for commercialisation which will follow the completion of final tests, CannEpilTM becoming available for supply in Australia under the Authorised Prescriber Scheme by the TGA, and its final validation. In a European milestone, MGC Pharmaceuticals’ delivered on its core seed-to-pharma strategy and was one of the first companies to be awarded approval from the Maltese Government to establish its second production and manufacturing facility, in Malta. The Company was then granted a 4000m2 plot of land on which to construct the facility, by Maltese Enterprise. This followed recent legislative changes on the production of cannabis for medical use and has significantly advanced the project. During 2017, the first crop was planted at the Company’s Czech Republic facility and flowers from this crop were harvested and processed with cannabidiol (CBD) was successfully extracted. This cannabidiol is used within the Company’s premium Nutraceuticals and Derma product ranges symbolising the Company’s growing seed-to-sale capabilities. Subsequent to the year-end, the Company signed a binding term sheet to sell 100% of MGC Derma to a Canadian private cannabis investment company. This is a transformational commercial transaction for the Company, which has built the MGC Derma CBD brand to be a leader in its market. mgcpharma.com.au 5 R e v i e w o f O p e r a t i o n s Review of Operations Corporate • Roby Zomer appointed Managing Director to implement the Board’s strategy across the Pharma, Botanic and Derma divisions. Nativ Segev remains a Director and becomes Head of Business Strategy to drive sales and secure additional distribution pipelines for MXC • $5m raised via oversubscribed share placement to sophisticated and professional investors and strategic funds, to help establish the Company’s Maltese medical cannabis production and cultivation facility and for general working capital Pharma division • Research projects with RMIT advanced, with library of cannabinoids established and the research team expanded to explore the properties and uses of medical cannabis in real-life applications Botanic division • Czech Republic’s first crop achieves major milestone as cannabidiol is successfully extracted from harvested flowers for use in the production of the Nutraceuticals and Derma ranges, demonstrating the Company’s seed-to-sale operations • The second Czech Republic crop planted in early Q2 2018 and has reached vegetation stage, with harvest expected in Q3 2018 • Full Good Manufacturing Practice (GMP) Certification • Genetic research programme at the University of Ljubljana and manufacturing licence received for MXC’s European production and manufacturing facility in Slovenia, representing a landmark for the Company which now has one of the most advanced facilities in Europe • First batch of CannEpilTM completed and to undergo one final assessment before commercial sales and distribution can commence • Malta Enterprise Corporation granted approval and a contract to establish a medical cannabis facility on the 4000m2 of land designated to MXC which demonstrates the agenda of seed-to-pharma operations • Supply agreements signed with specialist pharmaceutical distributors - HL Pharma in Australia, MW Pharma in New Zealand and Lenis in Europe, paving the way for high revenue generation and expedited distribution of MXC’s pharmaceutical products delivers positive results as MXC successfully produces flowers of specific genders and varying levels of CBD and THC content Derma division • Two new research backed and scientifically engineered products launched; the CBD Herbal Replenish Cream and CBD Herbal Repair Cream both targeting oily, itchy, flaky and acne prone skin • First significant MGC Derma supply agreements signed with leading retailers Cult Beauty and Harvey Nichols to sell MXC’s MGC Derma and Derma Plus ranges internationally, strengthening the brands exposure R e v i e w o f O p e r a t i o n s 6 7 R e v i e w o f O p e r a t i o n s R e v i e w o f O p e r a t i o n s 8 MGC Pharma Division A number of major milestones in the MGC Pharma division were delivered in FY18 significantly progressing the Company’s seed-to-pharma operations. Good Manufacturing Practice (GMP) Certificate and Manufacturing Licence During FY18, the MGC Pharma division achieved a major milestone with full GMP certification and manufacturing licence awarded for its European production and a manufacturing facility. Receipt of this licence enables the commercial scale production of GMP-grade medical cannabis pharmaceutical products and makes MXC one of the most advanced facilities of its kind within Europe. The Company’s facility in Slovenia was awarded GMP status following the completion of production of its first batch of drug- resistant epilepsy medication – CannEpil™ in March 2018. Malta - Awarded First Binding LOI & Designation of Land Additionally, MXC was provided a Letter of Intent, granting approval and a contract by Malta Enterprise Corporation to establish a state- of-the-art full medical cannabis production and cultivation facility in Malta and on the 4,000m2 of land designated to MXC by Malta Enterprise in April 2018. MXC was the very first to sign a binding Letter of Intent with the Maltese Authorities for a cultivation operation in March 2018. This represents a major milestone in the process of obtaining a formal contract to commence construction of the facility, which will house a research hub and, once approved, a GMP certified production and manufacturing facility. This supports MXC’s plan of a fully vertically integrated commercial medical cannabis seed to-pharma operation. Supply & Distribution Agreements The Company signed a supply agreement with specialist Australian pharmaceutical distributor HL Pharma and a five year supply and distribution agreement with European pharmaceutical distributor Lenis farmacevtika d.o.o. (Lenis) during the period. Under the terms of the agreements, HL Pharma and Lenis will distribute CannEpilTM and future MGC pharmaceutical products to the European and Australian markets respectively. The definitive agreements provide a clear pathway for the delivery of the first MXC medical cannabis products to Australian and European epilepsy patients in particular and cements the Company’s growth in those markets. Mabsut sales continue to reach the obligations on the supply agreement, with more products being developed by the MGC R&D team for Mabsut’s future product range. Research Projects Advanced with RMIT MXC’s research and development teams received approval from RMIT to construct a state-of-the-art facility on the grounds of the University. Construction of the facility has commenced and will house innovative research teams focussing on breeding and pre-clinical research into melanoma and prostate cancers using medicinal cannabis. A systematic review of the use of cannabinoids to treat melanoma and prostate cancers is currently underway and early results have been encouraging. During the financial year, the Company also delivered the world’s first library focussed on researching, compiling and analysing information on cannabinoids. Back end and user interface development was completed in late 2017 and the team has now been expanded with the addition of a further two specialist PhD students in FY19 focussing on software development, data retrieval and analytical solutions of the library. The team are currently working to refine the original prototype database by creating algorithms that can retrieve data from public sources. Once completed, the library will be an internationally recognised must-have tool in research into medicinal cannabis safety, efficacy and the development of personalised medications to drive better patient outcomes. Further to this, discussions have significantly advanced between MXC, RMIT and a leading university, based in Israel, to establish a Medicinal Cannabis Innovation Hub – a collaborative project focussing on innovative research into the benefits of cannabis as a treatment. Researchers from leading universities worldwide are expected to join to provide the centre with a vibrant and collaborative atmosphere for developing innovative healthcare solutions using medical cannabis. MGC Nutraceuticals The Pharma division also recently launched its Nutraceuticals range targeted at retail customers. The new product line is available for purchase at www.mgcnutraceuticals.com and is made up of CBD and hemp-enhanced products. The premium range of vegan and gluten-free products are engineered for daily use containing high-grade phytocannabinoids, proteins and vitamins, and is manufactured using CBD from the plants grown in the Czech Republic. The use of MXC’s Hemp proteins and cannabidiol across its other divisions demonstrates the Company’s seed-to-sale, seed-to- pharma operations and a fully vertically integrated supply chain. mgcpharma.com.au 9 R e v i e w o f O p e r a t i o n s MGC Botanic Division The first crop at MXC’s Czech Republic facility has reached its first milestone with cannabidiol successfully extracted from the facility’s first harvest. The cannabidiol extracted from the flowers of the first crop are being used to produce the Nutraceuticals and Derma ranges - demonstrating MXC’s seed-to-sale capabilities. The seedlings for the first crop were planted in 2017 and harvested following the transfer of the crop into MXC’s larger 1,100m2 glasshouse facility. The second crop at the facility was planted during Q2 2018 and has reached the vegetation stage which is expected to be ready for harvest in late 2018. Under the Botanic division’s partnership with the University of Ljubljana in Slovenia, medicinal cannabis seeds were planted in June 2017 for use in the genetic research program. The flowers harvested were examined under phase two of the program that focuses on the implementation and optimisation of molecular markers for sex determination and distinction between strains. The research aims to create genetic strains with high levels of CBD and new strains with high tetrahydrocannabinol (THC) levels for the treatment of specific disease symptoms. Following the phase two examination and using MXC genetics, the mother plants of three selected breeding lines were further analysed and evaluated based on their cannabinoid content and 23 were selected for cross-pollination. The 23 cross-pollinated flowers were successfully induced to produce female and male plants and the resulting flowers will be further analysed for CBD and THC content. Due to their pharmaceutical grade quality, going forward, plants of adequate quality will be selected for development of a high CBD – low THC seed propagated hemp variety and used to further research into new pharmaceutical products for the treatment of a range of medical conditions. | Annual Report 2018 R e v i e w o f O p e r a t i o n s 10 mgcpharma.com.au 11 R e v i e w o f O p e r a t i o n s R e v i e w o f O p e r a t i o n s 12 Derma Plus Collection During the period, MGC Derma launched two new products into the Derma Plus collection. The MGC Derma Plus CBD Herbal Replenish Cream, launched in May 2018 specifically developed for external skin care and relief from inflammatory skin conditions. A study independently assessed the cream on 24 volunteers over a 30 day period and concluded that the following calculated values presented percentage improvement in skin condition on day 301; Dry skin; 71% improvement, flaking skin; 65% improvement, itching skin; 86% improvement. Due to the results, 92% of patients said they would continue using the tested cream.1 The MGC Derma Plus CBD Herbal Repair Cream launched in January provides daily relief of mild forms of psoriasis. Independent tests to assess the impact on skin irritation, itchiness, flaking and severe dryness concluded that there was a 69% improvement in the skin condition.2 Psoriasis symptoms were successfully treated through independent tests completed to date include effective reduction of skin irritation (by 69 % after 4 weeks of evaluation), and treatment of skin itchiness, flaking and severe dryness. MGC Derma Division This year, the MGC Derma division achieved several milestones, signing a number of transformational supply agreements supporting the strategy of creating a global leading cannabidiol (CBD) cosmetic brand and launching two new products into the Derma Plus collection. The MGC Derma division is a 51:49 joint venture with well-credentialed cosmetic manufacturer, Dr. M. Burstein Ltd, of which MGC Pharmaceuticals owns 51% and holds management control. Sales and Distribution Agreements MXC signed two additional landmark sales and distribution agreements during the year. The first with leading online beauty retailer Cult Beauty, in February 2018 for the launch of 15 of MGC’s cannabidiol cosmetic products and its Derma Plus skin care range via Cult Beauty’s platform. The launch was supported by strong customer interest and sales were driven by a six month exclusive marketing campaign led by Cult Beauty. Under the second agreement with leading UK retailer Harvey Nichols, 18 premium CBD products from the MGC Derma and Derma Plus collections began sale at Harvey Nichols Knightsbridge flagship store on 29 June 2018. The products are available to consumers in store and online internationally, where legally permitted, and the launch was supported by a marketing campaign led by Harvey Nichols. Agreements with retail partners of this calibre provide MGC Derma an excellent opportunity to immediately increase its revenue and build strategic brand awareness in the high-end retail skincare and cosmetics market. 1 Independent study sponsored by MGC Pharmaceuticals 2 Independent study sponsored by MGC Pharmaceuticals mgcpharma.com.au 13 D i r e c t o r s R e p o r t Director’s Report D i r e c t o r s R e p o r t 14 The Directors present their report on MGC Pharmaceuticals Limited (“the Company”) and its controlled entities (“the Group”) for the financial year ended 30 June 2018. Directors The names of Directors in office at any time during or since the end of the year are: Directors have been in office since the start of the financial year to the date of this report. Joint Company Secretaries Rachel Kerr held the position of Company Secretary for the full financial year. On 1 January 2018, Kate Sainty was appointed Joint Company Secretary & both retain their role as Joint Company Secretary to the date of this report. Principal Activities The Company is a European based BioPharma company with many years of technical, clinical and commercial experience in the medical cannabis industry. The Company’s founders are key figures in the global medical cannabis industry, and the core business strategy is to develop and supply high quality Cannbinoids based pharmaceutical products for the growing demand in the medical markets in Europe, Australasia and North America. Operating Results The consolidated loss of the Group from continued operations amounted to $8,990,470 (2017: $8,502,025). Dividends Paid or Recommended No dividends have been paid or declared for payment during, or since, the end of the financial year. Significant Changes in State of Affairs In the opinion of the directors, there have been no significant changes to the state of affairs of the Group during the year other than those disclosed elsewhere in the financial report or the notes thereto. mgcpharma.com.au 15 D i r e c t o r s R e p o r t After Reporting Date Events 13 July 2018 GMP Certification and Manufacturing Licence Awarded to MXC’s European Facility The Company’s European medicinal cannabis compounding and manufacturing facility is now fully GMP certified, and has also been awarded the manufacturing licence for the production of GMP grade medicinal cannabis based medicines, signifying a major milestone for the Company. Receipt of formal licence demonstrates the facility complies with strict European production quality standards during the production process of pharmaceutical grade medicinal cannabis. The immediate production of pharmaceutical grade medicinal cannabis medicines can now commence. 31 July 2018 Neurology & Epilepsy Expert Joins MXC Medical Advisory Board Associate Professor Wendyl D’Souza has joined the MXC Medical Advisory Board to lead research and development into medicinal cannabis treatments for Epilepsy and other neurological disorders. Associate Professor D’Souza is an Authorised Prescriber of Medicinal cannabis and treats over 3,000 patients with drug-resistant epilepsy from currently available treatments in Australia. 8 August 2018 Harvey Nichols Expands MGC Derma Distribution into Two New UK Stores 27 August 2018 Harvey Nichols has extended sales of the MGC Derma and Derma Plus collections to an additional two UK stores, tripling the total number of stores and is expected to increase sales accordingly. Three MGC Derma Anti-Aging creams have also been short-listed for the Notebook Anti-Aging Beauty Awards providing strong validation of the products’ efficacy and booting the products’ recognition. Ethics Approval received for Australian Phase II Clinical Trial into Dementia In partnership with the Institute for Health Research at the Univertsity of Notre Dame, the Company has received Human Research Ethics Committee approval to conduct a Phase II clinical trial into the benefits of CogniCannTM in Dementia and Alzheimer patients. CogniCann™ is one of MXC’s medical cannabis pharmaceutical products with a THC:CBD ratio specifically formulated for the treatment of key Dementia symptoms and improving specific cognitive functions. The WA based trial is expected to commence in early 2019. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group or the results of those operations of the Group in future financial years. | Annual Report 2018 D i r e c t o r s R e p o r t 16 Environmental Issues Future Developments, Prospects and Business Strategies The Group’s operations are subject to various environmental laws and regulations under the relevant Governments’ legislation. Full compliance with these laws and regulations is regarded as a minimum standard for all operations to achieve. There have been no significant known breaches by the group during the financial year. The Company will continue to pursue its policy of enhancing the prospect of greater returns to its investors through further strategic investments during the next financial year. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report, because disclosure of the information would be likely to result in unreasonable prejudice to the Group. mgcpharma.com.au 17 D i r e c t o r s R e p o r t Information on Directors and Secretary Names, special responsibilities, qualifications and experience of current directors and company secretaries: Brett Mitchell, BEc Qualifications and Experience Interest in Shares and Options Directorships held in other listed entities in the past three years Roby Zomer Qualifications and Experience Interest in Shares and Options Executive Chairman Mr Mitchell is a corporate finance executive with over 25 years of experience in the venture capital, capital markets, tech and resources industries. He has been involved in the founding, financing and management of both private and publicly-listed companies, including the second listed medical cannabis company on the ASX – MGC Pharmaceuticals Ltd (MXC). Brett is also founder and director of Chieftain Securities Pty Ltd, a Perth based Corporate Advisory & Venture Capital firm and founder and shareholder of Graft Polymer (UK) Ltd. Brett and Michelle Mitchell20,458,889 Ordinary Shares Brett and Michelle Mitchell 5,735,005 Ordinary Shares Sky and Space Global Ltd (12 May 2016 – current) TNT Mines Limited (27 June 2017 – current) Acacia Coal Limited (18 December 2015 – 2 August 2016) Digital CC Limited (5 September 2014 – 24 July 2016) Managing Director Mr Zomer joined Mr Segev as co-founder of MGC Pharma and then as the Executive Director & CTO, following 10 years of experience in the BioTech and AgroTech sectors, alongside running large scale projects. Mr Zomer brings his extensive list of business contacts and scientific and engineering expertise to ensure MXC is positioned as a leader in research and development, in addition to guaranteeing top performance from global operations. Mr Zomer’s recent appointment to Managing Director follows successful implementation of MXC’s pipelines for pharmaceuticals in Europe and Australia, and indicates MXC’s commitment to scientific leadership. Chitta Lu Limited 10,000,000 Performance Shares HSBC Custody Nominees (Australia) Limited 30,000,000 Ordinary Shares Directorships held in other listed entities in the past three years Nil | Annual Report 2018 D i r e c t o r s R e p o r t 18 Brett Mitchell, BEc Executive Chairman Nativ Segev Executive Director and Head of Business Strategy Qualifications and Experience Mr Mitchell is a corporate finance executive with over 25 years of experience in Qualifications and Experience Mr Segev founded MGC Pharma in 2014 with a goal to expand into international markets and raise the quality of medicinal Phytocannabinoid products, in addition to making them accessible to patients all over the world. Prior to establishing MGC Pharma, Mr. Segev was a leader in the Medical Cannabis industry with a sizeable patient-base. He has over 10 years of experience in implementation, legislation and lobbying in the global Medical Cannabis industry, combined with over 15 years of experience in diverse executive roles. Interest in Shares and Options Brett and Michelle Mitchell Interest in Shares and Options 20,000,000 Performance Shares Directorships held in other listed entities in the past three years Nil HSBC Custody Nominees (Australia) Limited 52,500,000 Ordinary Shares Ross Walker, MBBS (Hons), FRACP, FCSANZ Non-Executive Director and Chairman of Strategic Advisory Board Qualifications and Experience Dr Ross Walker is an eminent practicing cardiologist with over 35 years’ experience as a clinician. For the past 20 years, he has been focusing on preventative cardiology and is one of Australia’s leading preventative health experts. Dr Walker is considered one of the world’s best keynote speakers and life coaches, he is the author of seven best-selling books, a health presenter in the Australian Media, including regular appearances on the Nine Network’s ‘Today Show’ and ‘A Current Affair’, and Sky News, Switzer Business. Interest in Shares and Options 4,000,000 Ordinary Shares Directorships held in other listed entities in the past three years Nil Rachel Kerr Qualifications and Experience Kate Sainty Qualifications and Experience Joint Company Secretary Mrs Kerr has 9 years’ experience as a Company Secretary on both private and public companies, working on acquisitions, capital raisings, listing of companies on ASX, due diligence reviews and compliance of public companies. Mrs Kerr is also Joint Company Secretary of Sky and Space Global. Joint Company Secretary Mrs Sainty is a Chartered Accountant and Chartered Secretary. Mrs Sainty was appointed to the position of Joint Company Secretary on 1 January 2018 and is an employee of Grange Consulting Group providing a unique range of corporate and financial services to listed and unlisted companies. Mrs Sainty is also Joint Company Secretary of Syntonic Limited. Directorships held in other listed entities Sky and Space Global Ltd (12 May 2016 – current) in the past three years TNT Mines Limited (27 June 2017 – current) Acacia Coal Limited (18 December 2015 – 2 August 2016) Digital CC Limited (5 September 2014 – 24 July 2016) Roby Zomer Qualifications and Experience Managing Director the venture capital, capital markets, tech and resources industries. He has been involved in the founding, financing and management of both private and publicly-listed companies, including the second listed medical cannabis company on the ASX – MGC Pharmaceuticals Ltd (MXC). Brett is also founder and director of Chieftain Securities Pty Ltd, a Perth based Corporate Advisory & Venture Capital firm and founder and shareholder of Graft Polymer (UK) Ltd. 20,458,889 Ordinary Shares Brett and Michelle Mitchell 5,735,005 Ordinary Shares Mr Zomer joined Mr Segev as co-founder of MGC Pharma and then as the Executive Director & CTO, following 10 years of experience in the BioTech and AgroTech sectors, alongside running large scale projects. Mr Zomer brings his extensive list of business contacts and scientific and engineering expertise to ensure MXC is positioned as a leader in research and development, in addition to guaranteeing top performance from global operations. Mr Zomer’s recent appointment to Managing Director follows successful implementation of MXC’s pipelines for pharmaceuticals in Europe and Australia, and indicates MXC’s commitment to scientific leadership. Chitta Lu Limited 10,000,000 Performance Shares HSBC Custody Nominees (Australia) Limited 30,000,000 Ordinary Shares Interest in Shares and Options Directorships held in other listed entities Nil in the past three years mgcpharma.com.au 19 R e m u n e r a t i o n R e p o r t ( A u d i t e d ) Remuneration Report (Audited) This report details the nature and amount of remuneration for each key management person of MGC Pharmaceuticals Ltd, and for the executives receiving the highest remuneration. The policy is designed to attract the highest calibre of executives and reward them for performance that results in long-term growth in shareholder wealth. Remuneration Policy The remuneration policy of MGC Pharmaceuticals Ltd has been designed to align key management personnel objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific long- term incentives based on key performance areas affecting the consolidated group’s financial results. The Board of MGC Pharmaceuticals Ltd believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best key management personnel to run and manage the Group, as well as create goal congruence between directors, executives and shareholders. The Board’s policy for determining the nature and amount of remuneration for key management personnel of the Group is as follows: • The remuneration policy, setting the terms and conditions for the key management personnel, was developed and approved by the Board. • All key management personnel receive a base salary (which is based on factors such as length of service and experience), superannuation, fringe benefits, options and performance incentives. • The Board reviews key management personnel packages annually by reference to the consolidated group’s performance, executive performance and comparable information from industry sectors. The performance of key management personnel is measured against criteria agreed annually with each executive and is based predominantly on the forecast growth of the Group’s profits and shareholders’ value. All bonuses and incentives must be linked to predetermined performance criteria. The Board may, however, exercise its discretion in relation to approving incentives, bonuses and options. Any changes must be justified by reference to measurable performance criteria. Key management personnel are also entitled to participate in the employee share and option arrangements. All remuneration paid to key management personnel is valued at the cost to the Company and expensed. Shares given to key management personnel are valued as the difference between the market price of those shares and the amount paid by key management personnel. Options are valued using the Black- Scholes methodology. The Board policy is to remunerate Non-Executive Directors at market rates for time, commitment and responsibilities. The Board determines payments to the Non-Executive Directors and reviews their remuneration annually, based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at the Annual General Meeting. Fees for Non-Executive Directors are not linked to the performance of the consolidated group. However, to align directors’ interests with shareholder interests, the Directors are encouraged to hold shares in the Company and are able to participate in the employee option plan. Performance-based Remuneration As part of each member of the key management personnel’s remuneration package there is a performance-based component, consisting of key performance indicators (KPIs). The intention of this program is to facilitate goal congruence between key management personnel with that of the business and shareholders. The KPIs are set annually, with a certain level of consultation with key management personnel to ensure buy- in. The measures are specifically tailored to the areas each key management personnel are involved in and have a level of control over. The KPIs target areas the Board believes hold greater potential for group expansion and profit, covering financial and non-financial as well as short- and long-term goals. The level set for each KPI is based on budgeted figures for the group and respective industry standards. | Annual Report 2018 R e m u n e r a t i o n R e p o r t ( A u d i t e d ) 20 Performance in relation to the KPIs is assessed annually, with bonuses being awarded depending on the number and deemed difficulty of the KPIs achieved. Following the assessment, the KPIs are reviewed by the Board in light of the desired and actual outcomes, and their efficiency is assessed in relation to the Group’s goals and shareholder wealth, before the KPIs are set for the following year. Company Performance, Shareholder Wealth and Director and Executive Remuneration Key Management Personnel Remuneration Policy The Board’s policy for determining the nature and amount of remuneration of key management for the Group is as follows: The remuneration structure for key management personnel is based on a number of factors, including length of service, particular experience of the individual concerned, and overall performance of the Company. The contracts for service between the Company and key management personnel are on a continuing basis, the terms of which are not expected to change in the immediate future. Upon retirement key management personnel are paid employee benefit entitlements accrued to date of retirement. All Directors had contracts in place with the Company during the financial year as detailed below: Current Directors Mr Brett Mitchell, Executive Chairman • Director Letter of Appointment dated 20 February 2016, no termination date or payment on termination; • MGC Pharmaceuticals Ltd executive services agreement was implemented on 20 February 2016, this agreement continues for 3 years unless terminated prior and will thereafter automatically renew every 12 months; - Fees of A$15,000 per month; as of 1 April 2017 the Board resolved to increase this to A$25,000 per month Mr Roby Zomer, Managing Director • MGC Pharmaceuticals Ltd executive services agreement was implemented on 20 February 2016, this agreement continues for 3 years unless terminated prior and will thereafter automatically renew every 12 months; - Fees of €10,000 per month plus benefits; as of 1 April 2017 the Board resolved to increase this to £15,000 per month plus benefits - A termination fee is payable and is dependent upon the Company terminating the services contract at its election, unless terminated by a just cause, and the payment would range between €192,000-€576,000 subject to the length of service provided to the Company • MGC Pharma (UK) Ltd Non-Executive Director agreement commenced 30 June 2016; no termination date or payment on termination; - Fees of £910 per month Mr Nativ Segev, Executive Director & Head of Business Strategy • MGC Pharmaceuticals Ltd executive services agreement was implemented on 20 February 2016, this agreement continues for 3 years unless terminated prior and will thereafter automatically renew every 12 months; - Fees of €12,500 per month plus benefits; as of 1 April 2017 the Board resolved to increase this to £17,000 per month plus benefits - A termination fee is payable and is dependent upon the Company terminating the services contract at its election, unless terminated by a just cause, with a termination fee of up to €800,000 payable. • MGC Pharma (UK) Ltd Non-Executive Director agreement commenced 30 June 2016; no termination date or payment on termination; - A termination fee is payable and is dependent upon the - Fees of £910 per month Company terminating the services contract at its election, unless terminated by a just cause, and the payment would range between €192,000-€576,000 subject to the length of service provided to the Company • MGC Pharma (UK) Ltd Non-Executive Director agreement commenced 30 June 2016; no termination date or payment on termination; - Fees of £910 per month Dr Ross Walker, Non-Executive Director and Chairman of Strategic Advisory Board • MGC Pharmaceuticals Ltd Director Letter of Appointment was implemented on 20 October 2015, no termination date and no payment upon termination; - Non-Executive Director fees of $3,000 per month and fees for Chairman of Strategic Advisory Board of $2,000 per month mgcpharma.com.au 21 R e m u n e r a t i o n R e p o r t ( A u d i t e d ) Details of Remuneration Compensation of Key Management Personnel Remuneration All Directors have contracts with the Company. Option Holdings of Key Management Personnel There were no Unlisted Options held by the Board or Key Management Personnel during the 2018 financial year. Details of options and rights held directly, indirectly or beneficially by KMP and their related parties are as follows: Unlisted Options exercisable at $0.025, $0.04 and $0.20 all expired 30 June 2017 | Annual Report 2018 R e m u n e r a t i o n R e p o r t ( A u d i t e d ) 22 Performance Shares held by Key Management Personnel Details of performance shareholdings held directly, indirectly or beneficially by KMP and their related parties are as follows: Performance Rights held by of Key Management Personnel Details of performance rights held directly, indirectly or beneficially by KMP and their related parties are as follows: 1 Net other changes are as a result of rights allotted on right issues and other movement due to changes in directors and directors’ related entities. mgcpharma.com.au 23 D i r e c t o r s R e p o r t Shareholdings of Key Management Personnel Details of equity instruments (other than options and rights) held directly, indirectly or beneficially by KMP and their parties are as follows: Shareholdings Share-based Compensation Value of Options There were no options over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the year ended 30 June 2018. Values of options over ordinary shares granted, exercised and lapsed for directors and other key management personnel in financial year 2017 as part of compensation are set out below: End of Remuneration Report | Annual Report 2018 D i r e c t o r s R e p o r t 24 Meetings of Directors The Directors attendances at Board meetings held during the year were: The Company does not have any remuneration, nomination or audit committees, these functions are performed by the Board as a whole. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of MGC Pharmaceuticals Ltd support and have adhered to the principles of sound corporate governance. The Board recognises the recommendations of the Australian Securities Exchange Corporate Governance Council, and considers that the Company is in compliance with many of those guidelines which are of importance to the commercial operation of the Company. During the financial year, shareholders continued to receive the benefit of an efficient and cost-effective corporate governance policy for the Company. The Company’s Corporate Governance Policy is available for review on the Company’s website www.mgcpharma.com.au Options At the date of this report the unissued ordinary shares of MGC Pharmaceuticals Ltd under option are as follows: mgcpharma.com.au 25 D i r e c t o r s R e p o r t Indemnifying Officers or Auditor During or since the end of the financial year, the Company has given an indemnity or entered into an agreement to indemnify, or paid or agreed to pay insurance premiums as follows: The Company has paid premiums to insure all of the Directors of the Company as named above, the company secretary and all executive officers of the Company against any liability incurred as such by a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the notice of the liability and the amount of the premium. The Company has not indemnified the auditor or paid any insurance premium on behalf of the auditor. Proceedings on behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit Services The Board of Directors is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • All non-audit services are reviewed and approved by the Board of Directors prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and • The nature of the service provided do not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. During the year, there were no fees paid or payable for non-audit services by PKF Mack and its related practices. Auditor’s Independence Declaration The lead auditor’s independence declaration for the year ended 30 June 2018 has been received and can be found on page 26 of the financial report. This report is made in accordance with a resolution of Directors. These financial statements were authorised for issue in accordance with a resolution by the Directors of the Company on 31 August 2018. Brett Mitchell Executive Chariman Dated 31 August 2018 | Annual Report 2018 A u d i t o r ’s I n d e p e n d e n c e D e c l a r a t i o n 26 mgcpharma.com.au 27 C o n s o l i d a t e d S t a t e m e n t o f P r o f i t o r L o s s a n d O t h e r C o m p r e h e n s i v e I n c o m e Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2018 | Annual Report 2018 C o n s o l i d a t e d S t a t e m e n t o f P r o f i t o r L o s s a n d O t h e r C o m p r e h e n s i v e I n c o m e 28 The accompanying notes form part of these financial statements The accompanying notes form part of these financial statements. mgcpharma.com.au 29 C o n s o l i d a t e d S t a t e m e n t o f F i n a n c i a l P o s i t i o n Consolidated Statement of Financial Position As at 30 June 2018 | Annual Report 2018 C o n s o l i d a t e d S t a t e m e n t o f F i n a n c i a l P o s i t i o n 30 The accompanying notes form part of these financial statements. mgcpharma.com.au 31 C o n s o l i d a t e d S t a t e m e n t o f C h a n g e s i n E q u i t y Consolidated Statement of Changes in Equity For the year ended 30 June 2018 The accompanying notes form part of these financial statements. | Annual Report 2018 C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s 32 Consolidated Statement of Cash Flows For the year ended 30 June 2018 The accompanying notes form part of these financial statements. mgcpharma.com.au 33 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s Notes to the Financial Statements 1. CORPORATE INFORMATION The financial statements of MGC Pharmaceuticals Limited for the year ended 30 June 2018 were authorised for issue in accordance with a resolution of Directors on 31 August 2018. These consolidated financial statements and notes represent those of MGC Pharmaceuticals Limited (the “Company”) and Controlled Entities (the “consolidated group” or “Group”). 2. SIGNIFICANT ACCOUNTING POLICIES a) Statement of Compliance The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001 as appropriate for ‘for-profit’ orientated entities. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in financial statements containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standard Board (“IASB”). Material accounting policies adopted in the preparation of these financial statements are presented below and they have been consistently applied unless otherwise stated. b) Basis of Preparation The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3. Financial report prepared on a going concern basis. The financial statements have been prepared on the going concern basis of accounting, which assumes the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. During the year ended 30 June 2018 the consolidated group incurred a loss from continuing operations of $8,990,470 (2017: $8,502,025), net operating cash outflows of $5,886,790 (2017: $4,655,863) and year-end cash and cash equivalents balance of $9,858,977 (2017: $11,363,902). Net losses include one-off non- cash adjustments of $1,900,000 (2017: $1,290,000) relating to the re-measurement of performance shares (note 19) and a share based payment expense of $1,072,681 (2017: $2,052,053). The consolidated group cashflow forecasts for the 12 months ending 31 August 2019 indicate that the consolidated group will be in a position to meet its committed operational and administrative expenditure and thus continue to operate as a going concern. In the Directors’ opinion there are therefore reasonable grounds to believe that the consolidated group will be able to pay its debts as and when they become due and payable. If the consolidated group are unable to continue as a going concern, then assets and liabilities will not be discharged in the normal course of business and at values specified in the financial report. c) Principles of Consolidation The consolidated financial statements comprise the financial statements of MGC Pharmaceuticals Ltd and its subsidiaries as at 30 June 2018 (“the Group”). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); • Exposure, or rights, to variable returns from its involvement with the investee; and • The ability to use its power over the investee to affect its returns. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 34 When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee; • Rights arising from other contractual arrangements; and • The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary it, de-recognises the assets (including goodwill) and liabilities of the subsidiary; de- recognises the carrying amount of any non-controlling interests; de-recognises the cumulative translation differences recorded in equity; recognises the fair value of the consideration received; recognises the fair value of any investment retained; recognises any surplus or deficit in profit or loss; and reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. d) Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss. It is then considered in the determination of goodwill. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of AASB 139 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognised either in profit or loss or as a change to OCI. If the contingent consideration is not within the scope of AASB 139, it is measured in accordance with the appropriate AASB. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. e) Investments in Associates and Joint Ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. mgcpharma.com.au 35 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s The considerations made in determining significant influence, or joint control, are similar to those necessary to determine control over subsidiaries. are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. The Group’s investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The statement of profit or loss reflects the Group’s share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognised directly in the equity of the associate or joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture. The aggregate of the Group’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate or joint venture. The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognises the loss as ‘Share of profit of an associate and a joint venture’ in the statement of profit or loss. Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss. f) Intangible Assets Intangible assets acquired as part of a business combination or asset acquisition, other than goodwill, are initially measured at their fair value at the date of acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. The gains and losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets Licenses/permit costs Costs associated with the acquisition of a license or permit to cultivate hemp are considered to be indefinite life identifiable intangible assets and are subject to regular impairment testing. g) Plant and Equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over their expected useful lives as follows: Plant and equipment (3-5 years) The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits. h) Inventories Inventories are stated at the lower of cost and net realisable value. Costs of inventories are determined on a first-in-first-out basis. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. i) Investments and Other Financial Assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. The fair values of quoted investments are based on current bid prices. For unlisted investments, the group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 36 Financial assets at fair value through profit or loss j) Impairment of Non-Financial Assets Financial assets at fair value through profit or loss are either: i) held for trading, where they are acquired for the purpose of selling in the short-term with an intention of making a profit; or ii) designated as such upon initial recognition, where they are managed on a fair value basis or to eliminate or significantly reduce an accounting mismatch. Except for effective hedging instruments, derivatives are also categorised as fair value through the statement of profit or loss. Fair value movements are recognised in the profit or loss. Available-for-sale financial assets At each reporting date, the Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of profit or loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Available-for-sale financial assets are non-derivative financial assets, principally equity securities that are either designated as available-for-sale or not classified as any other category. After initial recognition, fair value movements are recognised in other comprehensive income through the available-for-sale reserve in equity. Cumulative gain or loss previously reported in the available-for-sale reserve is recognised in the profit or loss when the asset is derecognised or impaired. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash- generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Impairment of financial assets The group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows.The amount of the impairment allowance for financial assets carried at cost is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for similar financial assets. De-recognition Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised where the related obligations are discharged, cancelled or expired. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. Available-for-sale financial assets are considered impaired when there has been a significant or prolonged decline in value below initial cost. Subsequent increments in value are recognised in other comprehensive income through the available-for-sale reserve. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease (refer 2i)). When an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase (refer 2i)). k) Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. mgcpharma.com.au 37 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s l) Trade and Other Receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost, using the effective interest rate method, less a provision for impairment. Trade receivables are generally due for settlement between thirty (30) and ninety (90) days from the date of recognition. They are presented as current assets unless collection is not expected for more than 12 months after reporting date. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in the profit or loss within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the profit or loss. m) Trade and Other Payables These amounts represent liabilities for goods and services provided to the group prior to the end of the financial year, which remain unpaid at year end. The amounts are unsecured and are usually paid within 60 days of recognition. They are recognised at fair value on initial recognition and subsequently at amortised cost, using the effective interest rate method. n) Borrowings All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the loans and borrowings using the effective interest method. All borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. o) Fair value measurement The group measures financial instruments and non-financial assets at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements on a recurring basis, the group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. p) Current and Non-Current Classification The group presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is: • Expected to be realised or intended to be sold or consumed in the normal operating cycle; • Held primarily for the purpose of trading; | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 38 • Expected to be realised within twelve months after • In respect of taxable temporary differences associated with the reporting period; or • A cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current. A liability is current when it is: • Expected to be settled in normal operating cycle; • Held primarily for the purpose of trading; • It is due to be settled within twelve months after the reporting period; or investments in subsidiaries, associates and interests and joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future extent that it is probable that the temporary differences can be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of profit or loss and other comprehensive income. • There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. Tax Consolidation The group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. q) Income Tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in the deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries and associates operate and generate taxable income. Deferred income tax is provided on all temporary differences at the statement of financial position date, arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements, and are recognised for all taxable temporary differences, • Except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses can be utilised: • Except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and The Company and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidated legislation. Each entity in the group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the ‘stand-alone taxpayer’ approach to allocation. The group notified the Australian Taxation Office that it had formed an income tax consolidated group to apply from 21 October 2005. The tax consolidated group has entered a tax funding agreement whereby each company in the group contributes to the income tax payable by the group in proportion to their contributions to the group’s taxable income. r) Employee Benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months after the period end in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. s) Contributed Equity Issued and paid up capital is recognised at the fair value of the consideration received by the group. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the proceeds received. t) Foreign Currency Translation Functional and Presentation Currency Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. mgcpharma.com.au 39 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s Transactions and Balances v) Revenue Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit and loss and other comprehensive income, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the statement of comprehensive income, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within other income or other expenses. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Transaction differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Group companies On consolidation, the assets and liabilities of foreign operations are translated into Australian dollars at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation purposes are recognised in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. u) Segment Reporting An operating segment is a component of the consolidated group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the consolidated group’s other components. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. Revenue is measured at the fair value of the consideration received or receivable. The group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each type of revenue as described below. Sale of goods Revenue from the sale of goods is recognised when the goods are delivered and titles have passed, at which time all the following conditions are satisfied: • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods; • the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; • the amount of revenue can be measured reliably; • it is probable that the economic benefits associated with the transaction will flow to the Group; and • the costs incurred or to be incurred in respect of the transaction can be measured reliably. Interest income Interest income is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. w) Government Grants Government grants are recognised when there is a reasonable assurance that the grant will be received and all attached conditions will be compiled with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the costs, which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset. x) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset, or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Specifically, the Group’s reportable segments under AASB 8 are currently based on its geographic location, being the Australian and Slovenian operations. Cash flows are presented in the consolidated statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 40 y) Rounding of Amounts Investments in subsidiaries, associates and joint venture entities The Company is a kind referred to in Legislative Instrument 2016/191 issued by the Australian Securities and Investment Commission, relating to the “rounding off” of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that class order to the nearest dollar. Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of MGC Pharmaceuticals Limited. Dividends received from associates are recognised in the parent entity’s statement of profit or loss when its right to receive the dividend is established. z) Share Based Payments 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Share based compensation relating to share options are recognised at fair value. The fair value of the options is recognised as an employee benefit expense in the statement of profit or loss and other comprehensive income, with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted, which includes any market performance conditions and the impact of any non-vesting conditions, but excludes the impact of any service and non- market performance vesting conditions. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs are allocated to share capital. aa) Earnings per Share Basic earnings per share Basic earnings per share is calculated by dividing the net profit or loss after income tax attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the post income tax effect of interest and other financing costs associated with dilutive potential ordinary share and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. bb) Parent entity financial information The financial information for the parent entity, MGC Pharmaceuticals Limited, disclosed in note 31 has been prepared on the same basis as the consolidated financial statements, except as set out below: The Directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group. a) Income Taxes The group expects to have carried forward tax losses which have not been recognised as deferred tax assets as it is not considered sufficiently probable that these losses will be recouped by means of future profits taxable in the relevant jurisdictions. b) Share Based Payments The assessed fair value at grant date of share based payments granted during the period was determined using a binomial option pricing model that takes into account the exercise price, the price of the underlying share at grant date, the life of the option, the volatility of the underlying share, the risk-free rate and expected dividend payout and any applicable vesting conditions. Management was required to make assumptions and estimates in order to determine the inputs into the binomial option pricing model. c) Contingent Liabilities A contingent consideration liability arose from the acquisition of MGC Pharma (UK) Limited, where Performance Shares can be converted into fully paid ordinary shares at a rate of one ordinary share for every Performance Share that converts. The determination of the fair value is based on a probability weighted payout approach, where key assumptions take into consideration the probability of meeting each milestone and any future development may require further revisions to the estimate. d) Estimations and judgements on Intangible Assets The intangible asset of the Group relates to a license to grow industrial cannabis in Slovenia. The Group tests the intangible asset for indications of impairment at each reporting period, in line with accounting policies. The intangible asset is a key asset and is recognized as an intangible asset with an indefinite useful life as only a simple renewal process is required annually. mgcpharma.com.au 41 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s The intangible asset is an integral part of the Slovenian operations becoming the Group’s main cash generating unit (CGU), being established as its first fully operational, producing and manufacturing unit, with GMP certification issued to produce API grade products. Accordingly for impairment testing purposes the Slovenian Operation is considered to be the CGU. The intangible asset was tested for impairment at reporting date using a value in use model and following this assessment it was determined that the recoverable amount of the intangible asset was in excess of its carrying value. In making this assessment significant assumptions, estimates and judgements were made in relation to the growth of the three revenue streams being botanical, cosmetic and medicinal pertaining to the CGU. A conservative discount rate of 10% was applied to net cashflows which is in excess of the Group’s current cost of capital. In addition to the forecast generation of revenues from contracted agreements as reflected in the Group’s cashflow forecast, other matters were considered, including the Group’s net asset position in comparison to its market capitalization and the ability of the Group to continue to raise capital. The impairment assessment also included a sensitivity analysis. The Directors believe the forecast net cashflows are achievable from current, contracted distribution agreements in place and the expected market share of medicinal products, in line with announced market data. 4. APPLICATION OF NEW AND REVISED ACCOUNTING STANDARDS a) New or revised standards and interpretations that are first effective in the current reporting period The Group has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (“AASB”) that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group during the financial year.Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. b) Accounting standards issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the group for the annual reporting period ending 30 June 2018, are set out below. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 42 The group has applied the following standards and amendment for the first time for their annual reporting period commencing 1 January 2018: • AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses • AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 • AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle • AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based payment transactions • IFRIC 22 Foreign Currency Transactions and Advance Consideration The adoption of these amendments did not have any impact on the amounts recognised in prior periods and will also not affect the current period or future periods. 43 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 5. REVENUE AND OTHER INCOME 6. COST OF GOODS SOLD 7. EMPLOYEE EXPENSES | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 44 8. INCOME TAX BENEFIT 9. AUDITOR’S REMUNERATION mgcpharma.com.au 45 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 10. EARNINGS PER SHARE 11. CASH AND CASH EQUIVALENTS 12. INVENTORY | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 46 13. TRADE AND OTHER RECEIVABLES Other receivables are non-interest bearing and are generally on terms of 30 days. 14. EXPLORATION AND EVALUATION EXPENDITURE – ASSETS HELD FOR SALE a) Assets classified as held for sale The Group entered into a Binding Term Sheet on 10 August 2016 to sell its Bouroubourou and Lingokoto permits to its joint venture partner Afrigem SL for $500,000, and completed the sale following receipt of the funds on 15 August 2016. b) Reconciliation of exploration and evaluation expenditure mgcpharma.com.au 47 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 15. PLANT AND EQUIPMENT 16. INTANGIBLE ASSETS Refer to note 3d) for detail on estimates and judgements pertaining to intangible assets. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 48 17. CONTROLLED ENTITIES The consolidated financial statements of the Group include: 18. TRADE AND OTHER PAYABLES Refer to note 30 for details on management of financial risk. mgcpharma.com.au 49 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 19. CONTINGENT CONSIDERATION The contingent consideration liability arose from the equity consideration issued by the Company to the vendors as part of the deal terms for the acquisition of MGC Pharma (UK) Limited in the previous financial year. The performance shares meet the definition of a financial liability where a variable amount of performance shares, contingent upon meeting the milestone, convert into fully paid ordinary shares at a rate of one ordinary share for every performance share that converts or consolidates into one performance share and converts to one ordinary share if no conversion occurs on or before the expiry date (3 years from completion of acquisition). The determination of the fair value is based on a probability weighted payout approach. The key assumptions take into consideration the probability of meeting the performance targets. As part of accounting for the acquisition of MGC UK, the contingent consideration was initially measured at acquisition with a probability of 50%, at which date the share price was $0.026. 30 June 2018 As at 30 June 2018 the share price as at that date was $0.066, and the probability of 95% was consistent with prior year; the increase in value of $1,900,000 (2017: $1,290,000) was taken to the consolidated statement of profit or loss and other comprehensive income Future developments may require further revisions to the estimate. 20. BORROWINGS 21. CONTRIBUTED EQUITY | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 50 a) Reconciliation of movement in share capital 51 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At the shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Ordinary shares have no par value. b) Capital risk management The group’s objective when managing capital is to safeguard their ability to continue as a going concern, so that they can continue to provide returns to shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the group manages its capital by assessing the group’s financial risk and adjusts its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. There have been no changes in the strategy adopted by management to control the capital of the group since the prior year. The group is not subject to any externally imposed capital requirements. 22. RESERVES This comprises the amortised position of the share based payment expense (refer note 27d). Exchange differences arising on translation of the foreign controlled entities are taken to the foreign currency translation reserve as described in note 1t). The reserve is recognised in profit and loss when the net investment is disposed of. 23. CONTINGENT LIABILITIES AND COMMITMENTS Commitments | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 52 Commitments mainly relate to Research and Development Agreements held with Royal Melbourne Institute of Technology, for both the Breeding and Pre-Clinical Research and the Library of Cannabinoids Project, in addition to the Biotechnical Faculty of the University of Ljubljana. During the financial year a Letter of Intent was entered into with the Malta Enterprise for the allocation of industrial space to setup a business in Malta for the growing and production of medical cannabis. Contingent on the allocation of a site, the Group are to invest circa €4,300,000 in improvements to site, plant, machinery and equipment, to be implemented within three years from the date of allocation of the site. As at the date of this report the formal allocation of the site is yet to be confirmed. There were no further commitments nor contingent liabilities other than those disclosed as at 30 June 2018. 24. RELATED PARTY TRANSACTIONS a) Key Management Personnel Remuneration Disclosures relating to key management personnel are in the Directors Report. b) Transactions with Director related entities Directors and officers, or their personally-related entities, hold positions in other entities that result in them having controls or significant influence over the financial or operating policies of those entities.Details of the transactions including amounts accrued but unpaid at the end of the year are as follows: for capital raising fees and administrative costs mgcpharma.com.au 53 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s (i) Mr Brett Mitchell is a Director of the Company. (ii) Brighght HK Ltd is a company associated with Mr Nativ Segev. (iii) Chieftain Securities Pty Ltd is a company associated with Mr Brett Mitchell. (iv) Chitta Lu Ltd is a company associated with Mr Roby Zomer. (v) Regeneration Pharma Pty Ltd is a company associated with Mr Brett Mitchell. (vi) Sibella Capital Pty Ltd is a company associated with Mr Brett Mitchell. (vii) Sky and Space Global Ltd (SAS) is a company associated with Mr Brett Mitchel who is currently a Director of SAS. (viii) Sputnik Enterprises Ltd is a company associated with Mr Brett Mitchell and Mr Roby Zomer, both of whom are Directors. (ix) Graft Polymer Ltd is a company associated with Mr Roby Zomer who is a Director and Mr Brett Mitchell who is a founder and shareholder. (x) TNT Mines Limited (TNT) is a company associated with Mr Brett Mitchell who is currently a Director of TNT. c) Transactions with related subsidiaries At the end of the period the following loans were owed by wholly owned subsidiaries of the Company: Details of interests in wholly owned controlled entities are set out in note 17. Loans between entities in the wholly owned group are denominated in AUD($) and Euro(€), they are non-interest bearing (with the exception of the loan with MGC Derma d.o.o which incurs interest of 10%), unsecured and are repayable upon reasonable notice having regard to the financial stability of the Company. d) Other related party transactions There were no other related party transactions. | Annual Report 2018 (i) Mr Brett Mitchell is a Director of the Company. (ii) Brighght HK Ltd is a company associated with Mr Nativ Segev. (iii) Chieftain Securities Pty Ltd is a company associated with Mr Brett Mitchell. (iv) Chitta Lu Ltd is a company associated with Mr Roby Zomer. (v) Regeneration Pharma Pty Ltd is a company associated with Mr Brett Mitchell. (vi) Sibella Capital Pty Ltd is a company associated with Mr Brett Mitchell. (vii) Sky and Space Global Ltd (SAS) is a company associated with Mr Brett Mitchel who is currently a Director of SAS. (viii) Sputnik Enterprises Ltd is a company associated with Mr Brett Mitchell and Mr Roby Zomer, both of whom are Directors. (ix) Graft Polymer Ltd is a company associated with Mr Roby Zomer who is a Director and Mr Brett Mitchell who is a founder and shareholder. (x) TNT Mines Limited (TNT) is a company associated with Mr Brett Mitchell who is currently a Director of TNT. c) Transactions with related subsidiaries At the end of the period the following loans were owed by wholly owned subsidiaries of the Company: 25. BUSINESS COMBINATIONS a) Acquisition of Subsidiary 30 June 2018 There were no subsidiaries acquired in the year ended 30 June 2018. 30 June 2017 Acquisition of Panax Pharma s.r.o N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 54 During the year, through its subsidiary MGC Pharma (UK) Ltd, the Group completed its 80% acquisition of the equity of Panax Pharma s.r.o (“Panax”), a company incorporated in Czech Republic, as follows: (i) 25% equity in Panax issued; (ii) 55% equity in Panax issued for the Group’s commitment to fund the first 12 months operating costs (capped at €700,000); and An option (exercisable within 3 years following the end of the 12-month funding period) to acquire the final 20% equity in Panax at the Group’s election for €600,000 of the Group’s ordinary shares to be issued on a 20-day VWAP at the date of option exercise. As at 30 June 2018 this option has not been exercised. The acquisition is considered to be an asset acquisition as Panax does not constitute a ‘business’ under relevant standards. b) Disposal of Subsidiary On 12 July 2017 (“completion date”) the Group completed the disposal of its Erin Mineral Resources Pty Limited (“EMRPL”) subsidiary, and the entities EMRPL controls which hold the remaining Senegal gold assets, to Chesser Resources Ltd (“CHZ”). On completion CHZ issued the following as Consideration: • • • • • 1,214,286 fully paid ordinary shares; 95,000 unlisted options, exercisable at $0.06 per share with an expiry date of 31 December 2019; 95,000 unlisted options exercisable at $0.06 per share with an expiry date of 31 December 2020; 5,714,286 Class A Performance Shares to convert into fully paid ordinary shares upon certification by an independent Competent Person of a JORC Mineral Resource of 0.5Moz Au with an average grade of at least 2.0g/t gold in relation to the Projects; and 5,714,286 Class B Performance Shares to convert into fully paid ordinary shares upon certification by an independent Competent Person of a JORC Mineral Resource of 1.5Moz Au with an average grade of at least 2.0g/t gold in relation to the Projects. In line with relevant standards, the consideration is fair valued as at the date of disposal at which point the effective share price of the CHZ shares was $0.042 per share. mgcpharma.com.au 55 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s The Performance Shares are contingent on the completion of certain milestones. The directors currently assess the likelihood of these milestones being achieved at nil and therefore no value is assigned to these performance shares. Assets, liabilities, financial performance and cash flow information for the EMRPL Group were considered immaterial. The gain on disposal of subsidiary includes a deconsolidation adjustment totalling $33,167. 26. NON-CONTROLLING INTEREST 27. SHARE BASED PAYMENTS The fair value for all share options, as detailed below, are determined using a binomial option pricing method that takes into account the exercise price, the term of the option, the probability of exercise, the share price at grant date and expected volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The inputs used for the valuations are tabled below for each class of option issued. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. The probability of the performance conditions occurring, where applicable are included in determining the fair value of the options. a) Valuation of the Voluntary Holding Lock Shares As part of the acquisition consideration of Erin Mineral Resources Limited (EMRL), Voluntary Holding Lock shares were issued to the EMRL shareholders as performance based consideration relating to the EMRL assets. The Voluntary Holding Lock shares (VHL Shares) may only be released from their holding lock upon the earlier of the following being satisfied: a) a change in control of the Company; or b) the Company achieving an enterprise value of at least $25 million for ten consecutive trading days. The VHL Shares will be fully paid ordinary shares that will rank equally with all existing shares on issue. If, within 5 years from the date of issue of the VHL shares, the milestone is not reached by the EMRL assets and there is no change of control event, in relation to MGC, the VHL Shares will be cancelled by way of selective capital reduction or share buyback at a price of $0.000001 per share. The VHL shares were included in the acquisition fair value of exploration and evaluation expenditure, and amortised over a period of 5 years. Amounts are written off in line with treatment of exploration and evaluation expenditure. As at 30 June 2017 the shares were fully amortised. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 56 b) Valuation of options issued Unlisted options (i) 4 million unlisted options In part consideration for the provision of corporate advisory services to the Company, the Company issued 4,000,000 unlisted options to Verona Capital Pty Ltd. The options have an exercise price of $0.20 each expiring on or before 30 June 2017. The options will only vest and become exercisable upon the voluntary holding lock in respect of the VHL Shares being released. The options are amortised over their expected life, being 5 years, and included in the fair value acquisition cost of exploration and evaluation expenditure, and are therefore written off in line with the treatment of exploration and evaluation expenditure. As at 30 June 2017 these options expired. (ii) 3.5 million unlisted options On 22 July 2014, 3.5 million unlisted options in two tranches of 1,750,000 were issued to Key Personnel for their past and ongoing services to the Company. These options expired on 30 June 2017. (iii) 2 million unlisted options On 23 January 2013, a total of 2 million unlisted share options were issued to Mr Paul Cranney in consideration for geological consultancy services provided to the Company. The options were issued in three tranches and have an expiry date of 23 January 2018. The options are amortised over their vesting date, and are expensed accordingly. These options were fully expired as at 30 June 2018. The following table lists the inputs to the model used for valuation of options: mgcpharma.com.au 57 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s (iv) 19 million unlisted options On 17 September 2014, 19 million unlisted options were issued in tranches of 9.5 million to Directors (and a past director) for their services to the Company. These options expired on 30 June 2017. (v) 20.5 million unlisted options Following shareholder approval on 22 November 2017, 20.5m unlisted options were issued to employees subject to the following terms and conditions: The following milestones are also applied to tranches 1 and 2 above: Tranche 3 are not subject to any vesting conditions and vest immediately on issue The following table lists the inputs to the model used for valuation of options: | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 58 (vi) 10m unlisted options 10m unlisted options were issued for lead advisory services following the $5m placement completed on 17 April 2018. The options are exercisable at $0.15 on or before 30 June 2021. The following table lists the inputs to the model used for valuation of options: These costs are included in costs of capital for the year ended 30 June 2018. Listed options (vii) 56 million listed options Pursuant to the capital raising, completed on 12 May 2016, the Company issued 56,818,380 listed options as free attaching options at one for every three shares issued, on 6 October 2016. (viii) 35 million listed options On 10 November 2016, 35 million listed options were issued to consultants and advisors of the Company as detailed in the Notice of General Meeting issued on 26 August 2016, and as approved by shareholders on 27 September 2016. The options are exercisable at $0.065 each expiring on or before 30 June 2019. The following table lists the inputs to the model used for valuation of options: (c) Issue of Performance Rights (i) 32.5 million and 4 million Performance Rights Following shareholder approval at the General Meeting held on 27 September 2016, 32.5 million unlisted Performance Rights were issued to Directors on 17 October 2016 and a further 4 million were issued on 23 December 2016 as approved at the Annual General Meeting on 29 November 2016. The principal terms and conditions of the Performance Rights include, continuous service in their capacity as Director or Executive to the Company, or as otherwise agreed and are subject to vesting milestones as detailed below. mgcpharma.com.au 59 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s (ii) 22.2 million Performance Rights Following shareholder approval at the General Meeting held on 27 September 2016, 22.2 million unlisted Performance Rights were issued to relevant employees of the Company on 23 December 2016. The principal terms and conditions of the Performance Rights include, continuous service to the Company in their capacity as a full-time employee and permanent part-time employee, within set milestones as detailed below. d) Reconciliation of share based payment expense | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 60 mgcpharma.com.au 61 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 62 mgcpharma.com.au 63 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 28. SEGMENT REPORTING For management purposes, the Group is organised into business units based on its geographical locations and it was determined that there are two reportable segments: • Australia – corporate and administrative function • Europe – production and supply of medicinal cannabis products The Europe operations relate to MGC Slovenia, MGC Derma and Panax which, based on their level of activities for the year ended 30 June 2018, have been aggregated as one reportable operating segment as each company exhibit similar economic characteristics in respect of their inputs, processes, outputs and their regulatory environments, being that of the production and sale of medicinal cannabis for pharmaceutical and cosmetic purposes. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 64 29. CASH FLOW INFORMATION Changes in assets and liabilities, net of the effects of purchase of subsidiaries (Increase) in inventory (Increase) in trade and other receivables Increase in trade payables and accruals Cash flow from operations 30. FINANCIAL RISK MANAGEMENT The group’s financial instruments consist mainly of cash at bank, payables and receivables. The group has not formulated any specific management objectives and policies in respect to debt financing, derivatives or hedging activity. As a result, the group has not formulated any specific management objectives and policies in respect to these types of financial instruments. Should the group change its position in the future, a considered summary of these policies will be disclosed at that time. The Group’s current exposure to the risk of changes in the market is managed by the Board of Directors. Market risks The Group is exposed to a variety of financial risks through its financial instruments for example, interest rate risk, liquidity risk and credit risk, as well as foreign currency risk. Interest rate risk At reporting date, the Group does not have long term borrowings and its exposure to interest rate risk is assessed as low. The risk monitors its interest rate risk through sensitivity analysis, as outlined below. The consolidated group’s exposure to interest rate risk which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets of the group are summarised in the following tables: mgcpharma.com.au 65 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s At 30 June 2018, if interest rates had changed by -/+100 basis points from the year-end rates with all other variables held constant, post- tax profit for the year would have been $98,575 lower/higher (2017: $113,619). Liquidity risk Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient cash to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the group’s reputation. The group monitors forecast cash flows on regular basis to manage its liquidity risk. Credit risk Management has assessed the credit risk exposure as minimal at reporting date. Credit risk arises from exposure to customers and deposits with banks. Management monitors its exposure to ensure recovery and repayment of outstanding amounts. Cash deposits are only made with reputable banking institutions. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 66 Foreign currency risk The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the GBP (£), Euro (€) and CZK (K ). č Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using cash flow forecasting. The consolidated entity has not entered into any derivative financial instruments to hedge such transactions and anticipated future receipts or payments that are denominated in a foreign currency. The board manages the purchase of foreign currency to meet operational requirements. The consolidate entity’s exposure to foreign currency risk at the reporting date was as follows: A 10% increase or decrease in value of Australia dollar against the above currencies at 30 June would have an immaterial effect. FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, as described at note 1o). The following table presents the Group’s financial assets and liabilities measured and recognised at fair value. mgcpharma.com.au 67 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s i) Valuation techniques used to derive Level 1 fair values The fair value of financial instruments recognised under Level 1 are measured based on the active market value, determined in this case by the value a third party is willing to pay for the assets (refer note 14a). ii) Valuation techniques used to derive Level 3 fair values The fair value of financial instruments that are not traded in an active market are determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. | Annual Report 2018 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 68 The contingent consideration was valued by applying the probability weighted payout approach as described in note 19, and is reviewed on a six monthly basis. A 5% increase or decrease in the probability applied, or MGC’s share price, would result in the following movements: iii) Fair value of other financial instruments The group also has a number of financial instruments that are not measured at fair value in the balance sheet. The carrying value of cash, trade receivables and payables is a reasonable approximation of their fair values due to their short-term nature. 31. PARENT COMPANY DISCLOSURES i) Summary of financial information The individual financial statements for the parent entity show the following aggregate amounts: ii) Commitments and contingent liabilities of the parent The parent entity did not have any contingent liabilities or commitments, as at 30 June 2018 (30 June 2017: nil) other than as disclosed at note 23. iii) Guarantees entered into the parent entity There were no guarantees entered into by the parent entity. 69 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 32. EVENTS AFTER THE REPORTING DATE 33. DIVIDENDS No dividends have been paid or provided during the year. | Annual Report 2018 Directors’ Declaration D i r e c t o r ’s D e c l a r a t i o n 70 The Directors’ of the Company declare that in their opinion: 1. The financial statements and notes, as set out in pages 27 to 69, are in accordance with the Corporations Act 2001 and: a) comply with Accounting Standards and the Corporations Regulations 2001; b) are in accordance with International Financial Reporting Standards, as stated in note 2a to the financial statements; and c) give a true and fair view of the Company’s and consolidated group’s financial position as at 30 June 2018 and their performance for the year ended on that date. 2. The Directors have been given the declaration required by section 295A of the Corporations Act 2001. 3. The remuneration disclosures contained in the Remuneration Report comply with s300A of the Corporations Act 2001. 4. In the Directors opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Brett Mitchell Executive Chairman 31 August 2018 mgcpharma.com.au 71 I n d e p e n d e n t A u d i t o r ’s R e p o r t I n d e p e n d e n t A u d i t o r ’s R e p o r t 72 73 I n d e p e n d e n t A u d i t o r ’s R e p o r t | Annual Report 2018 I n d e p e n d e n t A u d i t o r ’s R e p o r t 74 mgcpharma.com.au 75 I n d e p e n d e n t A u d i t o r ’s R e p o r t | Annual Report 2018 A S X A d d i t i o n a l I n f o r m a t i o n 76 ASX Aditional Information EXCHANGE LISTING MGC Pharmaceuticals Ltd shares are listed on the Australian Securities Exchange. The Company’s ASX code is MXC for ordinary shares and MXCOD for Listed Options. SUBSTANTIAL SHAREHOLDERS (HOLDING NOT LESS THAN 5%) As at 30 September 2018 the Company did not have any shareholder holding not less than 5%. CLASS OF SHARES AND VOTING RIGHTS At 30 September 2018 there were 13,808 holders of 1,212,830,412 ordinary fully paid shares of the Company. The voting rights attaching to the ordinary shares are in accordance with the Company’s Constitution being that: a) each Shareholder entitled to vote may vote in person or by proxy, attorney or Representative; b) on a show of hands, every person present who is a Shareholder or a proxy, attorney or Representative of a shareholder has one vote; c) and on a poll, every person present who is a shareholder or a proxy, attorney or Representative of a shareholder shall, in respect of each fully paid Share held by him, or in respect of which he is appointed a proxy, attorney or Representative, have one vote for the Share, but in respect of partly paid Shares, shall, have such number of votes as bears the proportion which the paid amount (not credited) is of the total amounts paid and payable (excluding amounts credited). At 30 September 2018, the number of shareholders holding less than a marketable parcel is 4,428. UNLISTED OPTIONS AND PERFORMANCE SHARES ESCROWED SECURITIES The Company currently has 12,652,458 VHL Ordinary Shares subject to voluntary imposed escrow. CASH USAGE Since the time of listing on ASX, the entity has used its cash and assets in a form readily converted to cash that it had at the time of admission to the official list of ASX in a manner which is consistent with its business objectives. mgcpharma.com.au 77 A S X A d d i t i o n a l I n f o r m a t i o n TOP 20 LISTED OPTION HOLDERS AS AT 30 SEPTEMBER 2018 OPTIONS ARE EXERCISABLE AT $0.065 EXPIRING 30 JUNE 2019 MR MARK ANDREW LINNEY MBM CORPORATION PTY LTD MR MICHAEL RODNEY BARRETT MR EDWARD BRIDGMAN MR PHILLIP NOEL HARRIS + MRS PRUNELLA SUSAN HARRIS MR PETER WALLIS JAMES KING MRS JOSEPHINE RYAN 2,837,959 3.11 1,803,355 1,800,000 1,500,000 1,440,540 1,250,000 1.98 1.97 1.64 1.58 1.37 37,823,674 53,462,415 41,43 58,57 A S X A d d i t i o n a l I n f o r m a t i o n 78 RANGE OF LISTED OPTION HOLDERS AS AT 30 SEPTEMBER 2018 4 276 8,943 12,389,406 78,798,786 RANGE OF ORDINARY SHARES AS AT 30 SEPTEMBER 2018 504 884 2,965 7,647 1,831 160,500 3,880,166 24,286,002 288,801,425 895,702,319 0.01 13.57 86.3 0.01 0.32 2.00 23.81 73.85 mgcpharma.com.au 79 A S X A d d i t i o n a l I n f o r m a t i o n TOP 20 SHAREHOLDERS AS AT 30 SEPTEMBER 2018 126,158,774 37,002,890 10.40 3.05 6,772,613 5,735,005 5,385,972 5,046,936 4,893,782 4,408,400 0.56 0.47 0.44 0.42 0.40 0.36 3,700,832 0.31 3,000,000 0.25 281,006,622 931,823,790 23.17 76.83 | Annual Report 2018 MGC Pharmaceuticals Limited 1202 Hay Street, West Perth WA 6005 Tel: +61 8 6382 3390 Email: info@mgcpharma.com.au mgcpharma.com.au