QRxPharma Limited Annual Report 2013

Plain-text annual report

2013 ANNUAL REPORT QRxPharma Limited is an Australian-based commercial-stage specialty pharmaceutical company focused on the development and commercialisation of new pain management and abuse prevention products. Based on a development strategy that focuses on enhancing the clinical utility of currently approved compounds as well as bringing new products to market, the Company’s portfolio includes both late and early stage clinical drug candidates with the potential for reduced risk, abbreviated development paths, and improved patient outcomes. The Company’s lead product candidate, immediate release MOXDUO®, is presently under review at the US Food and Drug Administration. QRxPharma entered into strategic collaborations with Actavis Inc. in December 2011, Paladin Labs Inc. in October 2012 and Aspen Group in September 2013 for the commercialisation of immediate release MOXDUO in the United States, Canadian and Australian (including New Zealand and Oceania) acute pain markets. The Company’s clinical pipeline includes an intravenous (IV) and controlled release (CR) formulation of MOXDUO. The Company also established a collaboration agreement with Aesica Formulation Development Limited, for the worldwide promotion of QRxPharma’s proprietary Stealth Beadlets® abuse deterrence technology. For more information, visit www.qrxpharma.com. QRxPHARMA LIMITED ABN 16 102 254 151 TABLE OF CONTENTS Corporate directory Letter from the Chairman CEO review Directors’ report Auditor’s independence declaration Corporate governance statement Financial report Directors’ declaration Independent auditor’s report to the members of QRxPharma Limited Shareholder information 1 2 3 4 23 24 31 70 71 73 CORPORATE DIRECTORY DIRECTORS Peter C Farrell PhD, ScD, AM Non-Executive Chairman John W Holaday PhD Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer R Peter Campbell FCA, FTIA Gary W Pace PhD Michael A Quinn MBA SECRETARY Chris J Campbell CA NOTICE OF ANNUAL GENERAL MEETING The annual general meeting of QRxPharma Limited will be held at time date DibbsBarker Level 8, Angel Place, 123 Pitt Street, Sydney 10.00am Wednesday, 13 November 2013 PRINCIPAL REGISTERED OFFICE IN AUSTRALIA QRxPharma Limited Level 1, 194 Miller St, North Sydney NSW 2060 SOLICITORS DibbsBarker Level 8, Angel Place, 123 Pitt Street Sydney NSW 2000 Bryan Cave LLP 1155 F Street, N.W. Washington, D.C. 20004, U.S.A BANKERS Westpac Banking Corporation Level 9 Keycorp Tower, 799 Paciﬁ c Highway Chatswood NSW 2067 Silicon Valley Bank 3003 Tasman, Santa Clara, California 95054 U.S.A STOCK EXCHANGE LISTINGS QRxPharma Limited shares are listed on the Australian Securities Exchange. Listing Code: QRX QRxPharma Limited American Depositary Receipts are listed on the OTCQX. Symbol: QRXPY SHARE REGISTER Link Market Services Limited Level 12, 680 George Street, Sydney NSW 2000 WEBSITE ADDRESS www.qrxpharma.com AUDITOR Deloitte Touche Tohmatsu Eclipse Tower 60 Station Street, Parramatta, NSW 2150 www.qrxpharma.com www.qrxpharma.com 1 1 LETTER FROM THE CHAIRMAN Dear Shareholder, On behalf of QRxPharma’s Board and management, I am pleased to provide you with our 2013 Annual Report. In the past year, we have focused on gaining US Food and Drug Administration (FDA) approval for MOXDUO®, as well as working with our various strategic partners. QRxPharma recently announced the receipt of a Complete Response Letter (CRL) in response to our New Drug Application (NDA) for immediate release MOXDUO. In order to maintain FDA review, the Company needs to re-ﬁ le the NDA. We had immediately informed the FDA after we noticed that some of the data in our originally submitted Study 022, outlining better respiratory data on MOXDUO than either opiate given alone, were unfortunately corrupted in our original ﬁ ling. We have since reprocessed the data and the conclusions showing that MOXDUO was better than either morphine or oxycodone alone were reconﬁ rmed. We will resubmit the corrected data in a revised NDA in Q4 2013, following a review meeting with the FDA to be held on 3 October 2013. With an Advisory Committee meeting and a new Prescription Drug User Fee Act (PDUFA) date now anticipated to occur in Q2 2014, we believe that a launch of MOXDUO into the US acute pain market is now within reach. The FDA previously conﬁ rmed that there were no safety issues in any of the previously submitted studies. The data we are to resubmit also conﬁ rm our previous conclusions that MOXDUO has a better respiratory proﬁ le than either of the other opiates given by themselves. We have continued to deliver on our commercial strategy. In the past year, we have signed agreements with Paladin Labs Inc. and Aspen Group to commercialise immediate release MOXDUO in the Canadian and Australian / New Zealand / Oceania, acute pain markets respectively, and Aesica Formulation Development Limited for the worldwide promotion of QRxPharma’s proprietary Stealth Beadlets®. Actavis, our commercialisation partner for the US, remains supportive of our efforts. In this vein, we look forward to successfully launching immediate release MOXDUO into the US market in the near future. Our scientiﬁ c and clinical teams, alongside partners like Actavis, Paladin, Aspen and Aesica, are laying the marketing and distribution groundwork for product launches in our target markets. While there are no guarantees of success with any FDA submission, we have complied with all FDA expectations to the letter of the law. I would like to take this opportunity to thank my fellow Board members, senior management, and the entire QRxPharma staff in both Australia and the US. We also greatly appreciate your patient and consistent support as shareholders. Sincerely, Peter C Farrell, PhD, ScD, AM Chairman 2 QRxPharma Annual Report 2013 CEO REVIEW As mentioned in the Chairman’s Letter, QRxPharma anticipates reﬁ ling its NDA for immediate release MOXDUO with the FDA in Q4 2013. The FDA has previously conﬁ rmed that the Company’s Combination Rule Trial (Study 008) satisﬁ ed efﬁ cacy requirements, and that there were no safety issues in any of the studies submitted as part of the original NDA. In various clinical trials, QRxPharma has demonstrated a 25% to 75% reduction in nausea, vomiting, dizziness, headaches and sleepiness compared to equal analgesic doses of widely prescribed acute pain opioids. The revised NDA requires the inclusion of additional information and analysis of Study 022 data. This comparative study of MOXDUO with single equi-analgesic doses of morphine and oxycodone indicated that MOXDUO resulted in less severe respiratory depression than either morphine or oxycodone given separately. We have been heartened by the fact that additional analyses conducted of the over 30 million data points for oxygen saturation obtained from the 375 patients who received either MOXDUO, morphine or oxycodone continue to support and strengthen these earlier conclusions. We are conﬁ dent that further analysis of Study 022, and the entirety of our NDA data, will conﬁ rm MOXDUO’s potential as a safe, effective alternative to other opioid formulations. Worldwide sales for all opioids are US$14 billion and continue to grow at 6% per annum. QRxPharma’s proprietary Dual Opioid® technology, a ﬁ xed 3:2 ratio of morphine and oxycodone, are ﬁ rst-in-class and at present there are no combination opioid - opioid products available commercially anywhere in the world. Further, as mentioned last year, the FDA requires all combination paracetamol (acetaminophen) / opioid acute pain products containing more than 325 mg of paracetamol to be removed from the market by January 2014, due to concerns over the safety of paracetamol. This accounts for over 100 million prescriptions for Vicodin alone, the predominant acute pain opioid in the US, and creates a window of opportunity for new, potentially safer alternatives like MOXDUO. The Company is well positioned to take advantage of this environment and assuming approval of the NDA for immediate release MOXDUO in Q2 2014, commercialisation lead by our US partner, Actavis, will follow shortly thereafter. Complementing our portfolio and commercial partnerships, the Company recently signed a collaboration agreement with Aesica Pharmaceuticals Limited for the worldwide promotion of QRxPharma’s proprietary Stealth Beadlets® abuse deterrent technology. This technology, developed for the MOXDUO controlled release formulation, may be incorporated into almost any potentially abused drug (e.g. opioids, amphetamines, sedatives, etc.) that are sold in solid dosage forms such as tablet, sachet or capsule. The non-exclusive agreement will see Aesica promote this technology to their clients for inclusion in their existing formulations of controlled drugs. Further, the Company’s efforts during the year to strengthen its intellectual property portfolio were rewarded with the issue of patent number 8,462,171 expiring in 2031, titled “Hybrid Opioid Compounds and Compositions”. This patent covers a hybrid morphine-oxycodone molecule where these two different opioids are chemically linked and forms part of a broad portfolio of patents that protect MOXDUO in various formulations up until 2029. My team and I are determined to obtain approval for MOXDUO in the coming year and we are tremendously excited about the approaching transition into a commercial stage company. I would like to thank you, our shareholders, for your support of QRxPharma, and I am conﬁ dent of a successful year ahead. John W Holaday, PhD Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer www.qrxpharma.com 3 Your directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of QRxPharma Limited (referred to hereafter as the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2013. DIRECTORS The following persons were directors of QRxPharma Limited during the whole of the ﬁ nancial year and up to the date of this report: Peter C Farrell John W Holaday R Peter Campbell Gary W Pace Michael A Quinn PRINCIPAL ACTIVITIES During the year the principal continuing activities of the Group consisted of the development and commercialisation of biopharmaceutical products based on largely Australian research, targeting global markets with the initial efforts being focused on the US and European markets. RESULTS The net loss of $10.1 million (2012: net loss $16 million) from ordinary activities resulted from the Company’s continuing efforts to secure approval for immediate release MOX- DUO®. This included efforts to obtain approval from the United States Food and Drug Administration (FDA) of a New Drug Application (NDA) in the United States (US), and activities associated with the preparation of the regulatory ﬁ lings in Canada, Europe and Australia. Total expenditure during FY2013 decreased with the reduction in clinical activities and the focus by the Company on the reﬁ ling of the NDA and efforts to obtain approval from the FDA for immediate release MOXDUO. Revenue from continuing operations were up 112% to $4.1 million (2012: $1.9 million) primarily through the recognition of revenue associated with the following licences: • On 20 December 2011, the Company signed a binding Letter of Intent (LOI) with Actavis Inc. (Actavis) to commercialise immediate release MOXDUO in the US. The LOI was secured by a non-refundable, non-creditable up front signing fee of $5.9 million (US$ 6 million). The fee revenue will be recognised from the date of the signing of the LOI to the anticipated FDA approval date representing an approximation of the time relating to the submission of the ﬁ ling with the FDA and associated processes. The Group has recognised $3.5 million (2012: $1.8 million) as revenue and $592,000 (2012: $4.1 million) as deferred revenue in the year to 30 June 2013. • On 9 October 2012, the Company signed a license agreement with Paladin Labs Inc. (Paladin) to commercialise immediate release MOXDUO in Canada. The license agreement was secured by a one-time, non-refundable, non-creditable upfront fee in the amount of $485,000 (US$ 500,000). The fee has been recognised as revenue in the year to 30 June 2013. DIRECTORS’ REPORT 4 QRxPharma Annual Report 2013 Operating expenditures were down by 26% to $14.9 million (2012: $20.2 million) and were inclusive of the following: • • Research and development expenditure of $8.3 million (2012: $9.2 million) which includes $3.8 million (2012: $3.1 million) for clinical and regulatory activities associated with the progression of the NDA for immediate release MOXDUO with the FDA, including preparation for the FDA Advisory Committee; $0.6 million (2012: $0.4 million) for advancing the regulatory ﬁ lings for immediate release MOXDUO in Canada, Europe and Australia and $2.9 million (2012: $2.9 million) for product and manufacturing process development. The FY2012 expenditure also included clinical costs of $1.3 million for two Phase I studies for MOXDUO CR, the controlled release formulation, and $0.3 million for the Torsin programme. Employee beneﬁ ts expense of $4.2 million (2012: $7.2 million), which comprises salaries and wages expense of $2.8 million (2012: $4.0 million) and non cash share based payments expense of $1.4 million (2012: $2.2 million). These employee beneﬁ ts expenses were lower for FY2013 following a reduction in employee head count after the receipt of the Complete Response Letter (CRL) in June 2012 from the FDA. Further, $nil bonuses were awarded during FY2013 (2012: $1.0 million). • Business development expenses of $0.7 million (2012: $1.3 million) associated with MOXDUO. • Other expenses of $1.7 million (2012: $2.5 million). In FY2012 these other expenses included $0.4 million for the impairment in the carrying value of the available-for-sale ﬁ nancial asset, representing the 6.98% investment in Venomics Hong Kong Limited by Venomics Pty Limited, as well as $0.2 million for the purchase of foreign exchange option contracts. LOSS PER SHARE 2013 Cents 2012 Cents (7.0) (11.2) (7.0) (11.2) (a) Basic loss per share Loss from continuing operations attributable to the ordinary equity holders of the Company (b) Diluted loss per share Loss from continuing operations attributable to the ordinary equity holders of the Company DIVIDENDS QRXPHARMA LIMITED No dividends were paid or declared since the start of the ﬁ nancial year (2012: $nil). REVIEW OF OPERATIONS Product Pipeline QRxPharma is developing proprietary Dual Opioid® formulations for treating patients with moderate to severe acute or chronic pain. This patented Dual Opioid product pipeline combines morphine and oxycodone to potentially offer physicians broader treatment options than traditional opioids, a large and growing market hindered by older therapies with debilitating side effects. Worldwide sales for all opioids are $14 billion and growing at 6%. The Company’s Dual Opioids are ﬁ rst in class and at present there are no combination opioid - opioid products available commercially anywhere in the world. The Company’s proprietary Dual Opioid pipeline includes three complementary products to address various pain management needs: • immediate release MOXDUO, an oral capsule for the treatment of moderate to severe acute pain; • MOXDUO CR, a controlled-release oral tablet for chronic pain; and • MOXDUO IV, an intravenous formulation for hospital use. QRxPharma has also developed a proprietary abuse deterrence technology, referred to as Stealth Beadlets®, which was developed for the controlled release MOXDUO formulation for the treatment of chronic pain. Stealth Beadlets may be incorporated into almost any potentially abused drug (e.g. opioids, amphetamines, sedatives, etc.) that are sold in solid dosage forms (e.g. tablet, capsule, sachet); they provide signiﬁ cant resistance against the extraction of active ingredients if crushed, solubilized or heated. The Company signed a non-exclusive Collaboration Agreement with Aesica Formulation Development Limited (Aesica) to promote QRxPharma’s Stealth Beadlets technology for inclusion in their clients’ existing formulations of controlled drugs. Regulatory The near term commercial opportunity for the Group rests with the regulatory approval of immediate release MOXDUO in the US. Having been denied in June 2012 a ﬁ rst cycle approval by the FDA of its NDA, the Company continued to progress towards an approval during the ﬁ nancial year culminating in the following key regulatory events: • February 2013: resubsmission of a NDA to the FDA which included a comprehensive analysis of an additional study (Study 022), which demonstrated the lower risks of respiratory depression of immediate release MOXDUO when compared to either of its components; morphine or oxycodone. www.qrxpharma.com 5 DIRECTORS’ REPORT (CONTINUED) 6 QRxPharma Annual Report 2013 REVIEW OF OPERATIONS (continued) Regulatory (continued) • March 2013: the FDA accepted the reﬁ led NDA for review and set 26 August 2013 as the Prescription Drug User Fee Act (PDUFA) date for action on the Company’s resubmitted NDA. • March 2013: whilst the FDA conﬁ rmed that there were no efﬁ cacy or safety issues in any of the studies that were part of the original NDA, it determined that the resubmitted NDA, including new results from Study 022, would undergo review by an FDA Advisory Committee to evaluate the approvability of MOXDUO in the management of acute pain. The FDA subsequently set 17 July 2013 as the date for the Advisory Committee meeting. • June 2013: the Advisory Committee Meeting of 17 July 2013 was delayed in order to allow the Company and the FDA time to fully consider more results of recent ﬁ ndings for Study 022. During preparation for the Advisory Committee Meeting, the Company found that for 17% of the 375 patients enrolled in Study 022, the timing of the electronically collected oxygen desaturation information at one trial site, did not accurately reﬂ ect the local time zone or changes relating to daylight savings time. For these patients, this resulted in a displacement of electronic oxygen desaturation data relative to nurse-reported events by 1 or 2 hours out of the 48-hour study. • August 2013: the FDA issued QRxPharma a Complete Response Letter (CRL) regarding the Company’s MOXDUO NDA. This will allow the Company time to complete the audit of all 30 million oxygen desaturation data points conﬁ rming data integrity and to submit further information required for the FDA to fully consider the respiratory safety advantages of MOXDUO from Study 022. With the issue of the CRL, in order to maintain FDA review, the Company is required to resubmit its NDA. QRxPharma plans to complete its reﬁ ling in Q4 2013, inclusive of the additional information and analysis as requested by the FDA. QRxPharma anticipates a new PDUFA date in Q2 2014, preceded by an Advisory Committee meeting. • September 2013: a review meeting has been scheduled with the FDA on 3 October 2013. The meeting was granted by the FDA after issuance of the CRL, and will focus on outstanding issues that need to be addressed in the revised NDA and data validation documentation. Commercialisation The Company has entered into strategic collaborations with Actavis Inc. (Actavis) in December 2011, Paladin Labs Inc.(Paladin) in October 2012 and Aspen Group in September 2013 for the commercialisation of immediate release MOXDUO in the US, Canadian and Australian / New Zealand / Oceania, acute pain markets respectively. In July 2013 the Company signed a Collaboration Agreement with Aesica for the world-wide promotion of the Company’s proprietary Stealth Beadlets abuse deterrent technology. Aesica supplies pharmaceutical contract development and manufacturing services globally and operates six manufacturing sites across the UK, Germany and Italy. Under the Collaboration Agreement Aesica will enter into fee-for-service contracts with such third parties for the development of the new Abuse Deterrent Formulations (ADF) of speciﬁ c drugs of interest, whilst QRxPharma will negotiate license terms directly with each party. Intellectual Property The Company continued to stengthen its intellectual property portfolio during the year. In June 2013 the United States Patent and Trademark Ofﬁ ce (USPTO) issued the Company US Patent No 8,461,171, expiring in 2031, titled “Hybrid Opioid Compounds and Compositions”. While immediate release MOXDUO is a combination of two separate opioid salts in the same capsule, this patent covers a hybrid morphine-oxycodone molecule where these two different opioids are chemically linked. The resulting new composition of matter has activity that is greater than equimolar amounts of the molecules administered separately. The patent covers the development of new chemical entities that have the potential to provide better pain relief and fewer side effects than their individual components. This patent is part of a portfolio of Company patents that extend the duration of protection for MOXDUO in various formulations until 2029. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS No signiﬁ cant changes in the state of affairs of the Group were noted during the ﬁ nancial year that have not otherwise been disclosed in this report or in the ﬁ nancial statements. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR The Company announced on 28 August 2013 that the FDA had issued a Complete Response Letter (CRL) regarding the Company’s MOXDUO NDA for the treatment of moderate to severe acute pain. The Company conﬁ rmed the issuance of the CRL was to allow time to submit and evaluate further information required for the FDA to fully consider the respiratory safety advantages of MOXDUO from Study 022. With the issue of the CRL, in order to maintain FDA review, the Company is required to resubmit its NDA. QRxPharma plans to complete its reﬁ ling in Q4 2013, inclusive of the additional information and analysis as requested by the FDA. QRxPharma anticipates a new PDUFA (Prescription Drug User Fee Act) date in Q2 2014, preceded by an Advisory Committee meeting. No other signiﬁ cant events have occurred after the balance sheet date which would have a material impact on the ﬁ nancial results of the Group. The Company plans to complete this reﬁ ling in Q4 2013 and anticipates a new PDUFA date in Q2 2014, preceded by an Advisory Committee meeting. The NDA is the basis for US regulatory approval of immediate release MOXDUO for the treatment of moderate to severe acute pain, a $2.5 billion segment of the $8 billion spent annually on prescription opioids in the US. The commercial strategy of the Group involves the securing of out-licensing deals with partners that have the regulatory and commercial capability to take MOXDUO to market. The out-license deals secured to date cover the US, Canadian and Australian / New Zealand / Oceania, acute pain markets and upon gaining marketing approval of MOXDUO in these territories, these licenses have the potential to deliver signiﬁ cant revenue streams in future years. The Group intends to complete regulatory ﬁ lings for immediate release MOXDUO in Europe, Canada and Australia over the next 12 months and will continue to pursue additional out-license deals in Europe and other geographies. In addition to the commercialisation of MOXDUO the Company intends to work closely with Aesica to promote QRxPharma’s Stealth Beadlets technology. As at 30 June 2013, the Group holds cash and cash equivalents of $12 million (2012: $23 million). As detailed in note 1 (b) of the Financial Report the ﬁ nancial statements have been prepared on the going concern basis. This matter has been considered by the Group’s auditors Deloitte Touche Tohmatsu and the ﬁ nancial statements are subject to a Matter of Emphasis as noted in the Independent auditors’ report to the members of QRxPharma Limited on pages 71 to 72 of this Annual Report. BUSINESS RISKS The Group is currently loss-making being in a pre-product sales phase with the long term ﬁ nancial success of the Group measured ultimately on the basis of proﬁ table operations. Key to becoming proﬁ table is the successful development, approval and commercialisation of our product portfolio. BUSINESS STRATEGIES AND FUTURE PROSPECTS The Group’s strategy focuses on the development and commercialisation of new treatments for pain management. The following speciﬁ c risks have the potential to affect the Group’s achievement of its long term ﬁ nancial success. This is not an exhaustive list with the board and management continually reviewing risks of the business and their potential impact. Key to the development strategy is the approval of the immediate release MOXDUO NDA by the FDA which remains the principal objective of the Group for the ﬁ nancial year ending 30 June 2014. The regulatory position was clariﬁ ed with the issue by the FDA of a CRL on 26 August 2013 advising that QRxPharma is required to resubmit its NDA for immediate release MOXDUO. • Regulatory risk. Products and their testing may not be approved by, or can be delayed by regulatory bodies (e.g. FDA) whose approvals are necessary before products can be sold in market. www.qrxpharma.com 7 DIRECTORS’ REPORT (CONTINUED) 8 QRxPharma Annual Report 2013 BUSINESS RISKS (continued) • Partnering risk. Future product sales are dependent on managing existing commercial relationships together with the ability to attract new partners. There are risks in establishing and maintaining these relationships, and with the manner in which partners execute on these collaborative agreements. The Group has ongoing discussions with a variety of potential commercial partners and proactively seeks to broaden strategic alliances. • • Intellectual property risk. Future product sales revenues are impacted by the extent to which there is patent protection over the products. Patent coverage risk includes the risk that competitive products do not infringe the Group’s intellectual property and also that our products do not infringe on other parties’ products. The Group constantly monitors its patent portfolio and the intellectual property competitive landscape. Funding risk. The Group currently does not earn revenues from product sales. Accordingly, the ability of the Company to successfully bring products to market relies on having access to continued sources of funding, including from partners and investors. ENVIRONMENTAL REGULATION There are no particular and signiﬁ cant environmental regulations under a law of the Commonwealth or of a State or Territory of Australia affecting the Group. INFORMATION ON DIRECTORS PETER C FARRELL PhD, ScD, AM. Non-Executive Chairman. Experience and expertise Dr Farrell has over 35 years executive and consulting experience in the medical device industry. Dr Farrell is a Fellow of several professional bodies, including the Australian Academy of Technological Sciences and Engineering, and the Australian Institutes of Management and Company Directors. He is a former Chair of the Executive Council of the Division of Sleep Medicine at Harvard Medical School but still serves on their Board. He also serves on the Boards of the Rady Management and the Jacobs Engineering Schools of the University of California, San Diego (UCSD) and is also on the Health Sciences Advisory Board of UCSD’s School of Medicine. Dr Farrell is a Visiting Professor at the University of New South Wales (UNSW) and is also Chair of the UNSW Centre for Innovation and Entrepreneurship. Dr Farrell has received numerous prestigious awards and was admitted to membership of the Order of Australia in 2004. In 2012 he was admitted to the US National Academy of Engineering. He holds Bachelors and Masters degrees in chemical engineering from the University of Sydney and the Massachusetts Institute of Technology (MIT) respectively, a PhD in bioengineering from the University of Washington in Seattle, and a ScD from the UNSW for research related to dialysis and renal medicine. Other current directorships Dr Farrell is the Executive Chairman of ResMed Inc (ASX and NYSE: RMD), which he founded in 1989. He is also a Director of Nuvasive Inc (NASDAQ: NUVA) (director since January 2005) serving on the nominations and governance committees. Former directorships in last 3 years Nil. Special responsibilities Chairman of the board. Chairman of nominations committee. Chairman of remuneration committee. Interests in shares and options 1,983,955 ordinary shares and 829,089 options over ordinary shares. JOHN W HOLADAY PhD. Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer. Experience and expertise Dr Holaday brings four decades of experience as a scientist, founder and executive manager of biotechnology and biopharmaceutical companies, and as a banker. Dr Holaday served as a Captain in the US Army, until 1972, and as managing founder of the Neuropharmacology Branch at the Walter Reed Army Institute of Research until 1988. Dr Holaday has extensive experience in building private and publicly traded biopharmaceutical companies. In 1988, Dr Holaday co- founded Medicis Pharmaceutical Corporation (NYSE: MRX), where he served as Director and as Senior Vice President for Research and Development. In 1992, Dr Holaday founded EntreMed Inc (NASDAQ: ENMD), where he served as President, Chief Executive Ofﬁcer, and Chairman of the board until 2002. Dr Holaday also founded MaxCyte Inc, a cell therapy company, where he served as Chairman until 2003. Dr Holaday was founder, Chairman and Chief Executive Ofﬁ cer of CNSCo, Inc, a private company which was acquired by QRxPharma Limited in April 2007. Dr Holaday serves as an ofﬁ cer and Fellow in several biomedical societies, has authored and edited over 200 scientiﬁ c articles in journals and books, and holds over 70 patents. He served as Chairman of the Maryland BioAlliance representing over 360 biotech companies. He was a Judge for the Ernst and Young Entrepreneur of the Year Award (2003 to 2008) and was named to the Ernst and Young Entrepreneur of the Year Hall of Fame in 2006. Dr Holaday was formerly an Associate Professor of Anaesthesiology and Critical Care Medicine and Senior Lecturer in Medicine at The Johns Hopkins University of Medicine and remains as Adjunct Professor of Psychiatry at the Uniformed Services University School of Medicine, Bethesda, Maryland. Dr Holaday serves on the Board of Math for America DC, Carnegie Institute. He has received numerous honours and awards, including the 2008 Algernon Sydney Sullivan award as outstanding alumnus of the University of Alabama. Dr Holaday obtained his Doctorate in Pharmacology at the University of California, San Francisco in 1977. Other current directorships Nil. Former directorships in last 3 years Director of Neuren Pharmaceuticals Limited (ASX: NEU) (2009-August 2013). Special responsibilities Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer. President of QRxPharma, Inc. Member of remuneration committee. Interests in shares and options 7,609,635 ordinary shares (including ordinary shares held by John Holaday, John Holaday as trustee for the John Holaday Foundation and Dorinda Holaday) and 1,905,452 options over ordinary shares. R PETER CAMPBELL FCA, FTIA. Non-Executive Director. Experience and expertise Mr Campbell is a Chartered Accountant and company director with more than 40 years of business consulting and advisory experience, and operates his own chartered accountancy practice based in Sydney. He is a Fellow of both the Institute of Chartered Accountants in Australia and the Taxation Institute of Australia and is a registered company auditor. Other current directorships Chairman of Sonic Healthcare Limited (ASX: SHL) (director since January 1993) and Director of Silex Systems Limited (ASX: SLX) (ex-Chairman, director since July 1996). Former directorships in last 3 years Nil. Special responsibilities Chairman of audit committee. Member of nominations committee. Interests in shares and options 183,380 ordinary shares (including shares held by Mithena Holdings Pty Limited) and 466,635 options over ordinary shares. GARY W PACE PhD. Non-Executive Director and Consultant. Experience and expertise Dr Pace is a co-founder of QRxPharma Limited and continues to work with the Group. Dr Pace is a seasoned biopharmaceutical executive with over 35 years of experience in the industry. He has co-founded a number of early stage life science companies where he built products from the laboratory to commercialisation. www.qrxpharma.com 9 DIRECTORS’ REPORT (CONTINUED) 10 QRxPharma Annual Report 2013 INFORMATION ON DIRECTORS (continued) Dr Pace is an elected Fellow of the Australian Academy of Technological Sciences and Engineering, author and co-author of over 50 research papers, reviews and patents. In 2003, Dr Pace was awarded a Centenary Medal by the Australian Government for service to Australian society in research and development. Dr Pace holds a Bachelor of Science (Honours) from the University of New South Wales (UNSW) and a PhD from Massachusetts Institute of Technology (MIT), where he was a Fulbright Scholar. Other current directorships Director of ResMed Inc (ASX and NYSE: RMD) (director since 1995), Transition Therapeutics Inc (TSX and NASDAQ: TTH) (director since 2002), Pacira Pharmaceuticals (NASDAQ: PCRX) (director since 2009). Former directorships in last 3 years Celsion Corp (NASDAQ: CLSN) (2002 – August 2011). Special responsibilities Nil Interests in shares and options 3,615,268 ordinary shares and 627,726 options over ordinary shares. MICHAEL A QUINN MBA. Non-Executive Director. Experience and expertise Mr Quinn is managing partner of Innovation Capital and has more than 35 years executive experience in technology companies in Australia, the US and the UK. Mr Quinn holds a Bachelor of Science, a Bachelor of Economics, and an MBA from Harvard. Mr Quinn is Chairman of the New South Wales Entrepreneurship Centre Limited, a not-for-proﬁ t organisation that trains entrepreneurs. In 1983 he co founded Memtec Limited (NYSE and ASX), and has also served as Chief Executive Ofﬁ cer of an ASX listed manufacturer and distributor of health care and scientiﬁ c products. Mr Quinn has been a Director of several listed companies in Australia, the US and the UK and numerous unlisted life science and other technology based companies. Other current directorships Director of ResMed Inc (ASX and NYSE: RMD) (director since 1992) and a member of its audit committee. Former directorships in last 3 years Director of CAP-XX Limited (AIM:CPX) (ex-chairman, director from 1998 – December 2012). Special responsibilities Member of nominations committee. Member of audit committee. Member of remuneration committee. Interests in shares and options 608,987 ordinary shares (including ordinary shares held by Innovation Capital Associates Pty Limited, Kaylara Pty Limited and Rosemary Quinn). 627,726 options over ordinary shares (including options held by Innovation Capital Limited and Innovation Capital LLC). COMPANY SECRETARY Chris J Campbell holds a Bachelor of Commerce and is an Associate of the Institute of Chartered Accountants in Australia. He also holds the position of Chief Financial Ofﬁ cer of QRxPharma Limited. He has over 30 years’ experience with major accounting ﬁ rms and as the Chief Financial Ofﬁ cer of publicly traded companies. MEETINGS OF DIRECTORS The numbers of meetings of the Company’s board of directors and of each board committee held during the year ended 30 June 2013, and the numbers of meetings attended by each director were: Full meetings of directors Meetings of non-executive directors MEETINGS OF COMMITTEES Audit and risk Nominations Remuneration A 5 5 5 5 5 B 5 5 5 5 5 A 4 4 4 4 B 4 4 4 4 A ** ** 5 ** 5 B 5 5 A 1 ** 1 ** 1 B 1 1 1 A 4 4 ** ** 4 B 4 4 4 Peter C Farrell John W Holaday* R Peter Campbell Gary W Pace Michael A Quinn A = Number of meetings attended B = Number of meetings held during the time the director held ofﬁ ce or was a member of the committee during the year * = Not a non-executive director ** = Not a member of the relevant committee REMUNERATION REPORT The directors are pleased to present the Group’s 2013 remuneration report which sets out remuneration information for QRxPharma Limited’s non-executive directors, executive director and other key management personnel. DIRECTORS AND KEY MANAGEMENT PERSONNEL DISCLOSED IN THIS REPORT NAME POSITION Non-executive and executive directors – see pages 8 to 10 above Other key management personnel Edward M Rudnic Chris J Campbell Chief Operating Ofﬁ cer Chief Financial Ofﬁ cer Richard A Paul (to 20 January 2013) Executive Vice President Drug Development M. Janette Dixon Vice President Global Business Development Changes since the end of the reporting period There have been no changes since the end of the reporting period. Role of the remuneration committee The remuneration committee is a committee of the board. It is primarily responsible for making recommendations to the board on: • remuneration levels of executive directors and other key management personnel • the over-arching executive remuneration framework and operation of the incentive plan, and • key performance indicators and performance hurdles for the executive team. www.qrxpharma.com 11 DIRECTORS’ REPORT (CONTINUED) 12 QRxPharma Annual Report 2013 REMUNERATION REPORT (continued) Role of the remuneration committee (continued) Their objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the long-term interests of the Company. In doing this, the remuneration committee may seek advice from independent remuneration consultants. No renumeration consultants were engaged during the current ﬁ nancial year. The Corporate Governance Statement provides further information on the role of this committee. Non-executive directors remuneration policy Fees and payments to non executive directors reﬂ ect the demands which are made on, and the responsibilities of, the directors. The fees were set on 27 April 2007 ahead of the Company completing its initial public offering. There is an annual base fee payable six months in arrears, currently $60,000 for the Chairman and $40,000 for the other non- executive directors (which also covers serving on a committee) and long term incentives through participation in the QRxPharma Limited Employee Share Option Plan. Non-executive directors’ fees are determined within an aggregate directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at $400,000 per annum and was approved by shareholders at the Annual General Meeting on 24 April 2007. Retirement allowances for non-executive directors There are no retirement allowances for non-executive directors, in line with guidance from the ASX Corporate Governance Council on non-executive directors’ remuneration. Superannuation contributions required under the Australian superannuation guarantee legislation continue to be made. Executive remuneration policy and framework As a Company building a speciality pharmaceutical business to compete internationally, QRxPharma Limited requires a board and senior management team that have both the technical capability and relevant business experience to execute the Group’s strategy. The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms with market practice for delivery of reward. The board ensures that executive reward satisﬁ es the following key criteria for good reward governance practices: • competitiveness and reasonableness • acceptability to shareholders • performance linkage / alignment of executive compensation • transparency • capital management The Group has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the organisation. Alignment to shareholders’ interests: • focuses on sustained growth in share price as well as focusing the executive on key non-ﬁ nancial drivers of value • attracts and retains high calibre executives. Alignment to program participants’ interests: • rewards capability and experience • reﬂ ects competitive reward for contribution to growth in shareholder wealth • provides recognition for contribution. The framework provides a blend of ﬁ xed pay, and short and long- term incentives. The executive pay and reward framework has three components: • base pay and beneﬁ ts, including superannuation • short-term performance incentives, and • long-term incentives through participation in the QRxPharma Limited Employee Share Option Plan. The combination of these comprises the executive’s total remuneration. Base pay and beneﬁ ts Structured as a total employment package which may be delivered as a combination of cash and prescribed non-ﬁ nancial beneﬁ ts at the executives’ discretion. Executives are offered a competitive base pay that comprises the ﬁ xed component of pay and rewards. Base pay for executives is reviewed annually and every two years a market survey is conducted to ensure the executive’s pay is competitive with the market. An executive’s pay is also reviewed on promotion. There are no guaranteed base pay increases included in any executives’ contracts. Executives receive beneﬁ ts including health insurance. Superannuation The Group does not maintain a Group superannuation plan. The Group makes ﬁ xed percentage contributions for Australian resident employees to complying third party superannuation funds and where requested, for US resident employees to complying pension plans. Short-term incentives A variable cash incentive component is payable annually dependent upon achievement of performance targets. Individual performance targets are set by reference to components of the Group’s business plan for which the individual executive is responsible. Maximum available bonuses vary from a ﬁ xed amount of $108,150 to 50% of base pay. Each executive has a target short-term incentive opportunity depending on the accountabilities of the role and impact on the organisation. Each year, the remuneration committee considers the appropriate targets and key performance indicators (KPIs) for each executive. For the year ended 30 June 2013, all group executives were assessed on the achievement of a single KPI. The remuneration committee is responsible for assessing whether the KPIs are met. To help make this assessment, the committee receives detailed reports on performance from management. Long-term incentives Long term incentives are provided to certain employees through participation in the QRxPharma Limited Employee Share Option Plan, which was approved by shareholders at the extraordinary general meeting of members held on 24 April 2007. The QRxPharma Limited Employee Share Option Plan is designed to provide long-term incentives for executives to deliver long-term shareholder value and as an additional mechanism to attract and retain high calibre executives. Participation in the plan is at the board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed beneﬁ ts. The vesting period for each option issued up to 31 December 2008 is 3 years, or as varied by the board, one-third vesting 12 months from the date of grant and the balance vesting equally each year over the remaining two year period. Options issued from 1 January 2009 generally vest over 3 years with the initial vesting on the ﬁ rst anniversary of the date of the grant and subsequent vestings in 8 equal tranches on the ﬁ rst day of each calendar quarter over the following 2 years. Most option grants generally have a seven year life, after which time, if they are not exercised, the options are forfeited. Options are granted under the plan for no consideration. Voting and comments made at the Company’s 2012 Annual General Meeting QRxPharma Limited received more than 86% of “yes” votes on its remuneration report for the 2012 ﬁ nancial year. The Company did not receive any speciﬁ c feedback at the AGM or throughout the year on its remuneration practices. www.qrxpharma.com 13 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (continued) DETAILS OF REMUNERATION Details of the remuneration of the directors and the key management personnel (as deﬁ ned in AASB 124 Related Party Disclosures) of QRxPharma Limited and the Group are set out in the following tables. Key management personnel and other executives of QRxPharma Limited and the Group are the same. SHORT-TERM EMPLOYEE BENEFITS POST- EMPLOYMENT BENEFITS LONG- TERM BENEFITS SHARE- BASED PAYMENTS** Cash salary and fees Cash bonus Non- monetary beneﬁ ts Other Super- annuation Retirement beneﬁ ts Long service leave Options Total $ $ $ $ $ $ $ $ 20132013 Name Non-executive directors Peter C Farrell R Peter Campbell Michael A Quinn Gary W Pace ^ 60,000 40,000 40,000 40,000 Sub-total non-executive directors 180,000 Executive directors John W Holaday 401,205 Other key management personnel (Group) Edward M Rudnic ° Chris J Campbell Richard A Paul∞ (to 20 January 2013) M. Janette Dixon * Total key management personnel compensation (Group) 337,250 219,724 165,116 286,900 1,590,195 $ - - - - - - - - 237,685 - 3,600 - - 3,600 - - 19,775 - - - 237,685 23,375 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 30,858 26,794 26,794 30,858 90,858 70,394 66,794 70,858 115,304 298,904 223,785 624,990 386,013 139,346 (194,148) 723,263 378,845 208,653 192,610 479,510 862,910 2,714,165 ** Renumeration in the form of options includes negative amounts for options forfeited during the year. ^ Gary Pace was paid $81,049 for consulting services provided to the Company during the year in addition to the amount in the above table. ° Edward M Rudnic received an additional bonus of $14,329 relating to the ﬁ nancial year ended 30 June 2012 which has been included in the above table. He also received share based payments to the value of $121,809 for options granted when he was engaged as a consultant in prior years, and share based payments to the value of $10,860 for options granted while he was a member of the Scientiﬁ c Advisory Board in prior years, which are not included in the above table. ∞ Richard A Paul received $237,685 per the conditions of his separation agreement. * Fee payments were made to M. Janette Dixon pursuant to consultancy agreements held with BioComm Paciﬁ c Pte Limited. 14 QRxPharma Annual Report 2013 Key management personnel and other executives of QRxPharma Limited and the Group were the same in 2012. SHORT-TERM EMPLOYEE BENEFITS POST- EMPLOYMENT BENEFITS LONG- TERM BENEFITS SHARE- BASED PAYMENTS Cash salary and fees Cash bonus Non- monetary beneﬁ ts Other Super- annuation Retirement beneﬁ ts Long service leave Options Total 20122012 Name Non-executive directors Peter C Farrell R Peter Campbell Michael A Quinn Gary W Pace^ Sub-total non-executive directors Executive directors John W Holaday $ 60,000 40,000 40,000 40,000 180,000 $ - - - - - 368,170 190,054 Other key management personnel (Group) Edward M Rudnic° Chris J Campbell Richard A Paul M. Janette Dixon* Total key management personnel compensation (Group) 121,895 227,057 288,057 271,511 63,605 108,150 119,311 123,251 1,456,690 604,371 $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - 3,600 - - 3,600 - - 30,169 - - 33,769 - - - - - - - - - - - - - - - - - - - - - - 46,416 46,416 46,416 46,416 106,416 90,016 86,416 86,416 185,664 369,264 233,609 791,833 75,997 118,183 194,350 163,231 261,497 483,559 601,718 557,993 971,034 3,065,864 ^ Gary Pace was paid $81,202 for consulting services provided to the Company during the year in addition to the amount in the above table. ° Edward M Rudnic was appointed Chief Operating Ofﬁ cer on 13 February 2012. For the period from 1 July 2011 to 12 February 2012, he received consulting fees of $210,412 and share based payments to the value of of $76,349 for options granted while he was engaged as a consultant. Additionally he received a fee of $10,161 and share based payments to the value of $19,359 for options granted during the ﬁ nancial year as a member of the Company’s Scientiﬁ c Advisory Board. None of these amounts have been included in the table above. * Fees and bonus payments were made to M. Janette Dixon pursuant to consultancy agreements held with BioComm Paciﬁ c Pte Limited. The relative proportions of remuneration that are linked to performance and those that are ﬁ xed are as follows: Name Directors of QRxPharma Limited Peter C Farrell R Peter Campbell Michael A Quinn Gary W Pace John W Holaday Other key management personnel of the Group Edward M Rudnic Chris J Campbell Richard A Paul (to 20 January 2013) M. Janette Dixon FIXED REMUNERATION AT RISK–STI AT RISK–LTI 20132013 2012 20132013 2012 20132013 2012 66% 62% 60% 56% 64% 47% 63% 100% 60% 56% 48% 46% 46% 46% 47% 52% 48% 49% - - - - - - - - - - - - - 24% 24% 24% 20% 22% 34% 38% 40% 44% 36% 53% 37% ** 40% 44% 52% 54% 54% 30% 29% 24% 32% 29% Since the long term incentives are provided exclusively by way of options, the percentages disclosed also reﬂ ect the value of the remuneration consisting of options, based on the value of options expensed during the year. ** Percentage not disclosed as the total amount of LTI remuneration expense was negative for the relevant period. www.qrxpharma.com 15 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (continued) SERVICE AGREEMENTS On appointment to the board, all non-executive directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the board policies and terms, including compensation, relevant to the ofﬁ ce of director. Remuneration and other terms of employment for the Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer and the other key management personnel are also formalised in service agreements. Each of these agreements provides for the provision of performance related cash bonuses, other beneﬁ ts including health insurance and tax advisory services, and participation, when eligible, in the QRxPharma Limited Employee Share Option Plan. Other major provisions of the agreements relating to remuneration are set out below. John W Holaday, Managing Director, Chief Executive Oﬃ cer and Chief Scientiﬁ c Oﬃ cer • Term of agreement – 2 years to 28 February 2014 (with annual extension) renegotiated from 28 February 2012. • Base salary, inclusive of retirement or pension contribution, for the year ended 30 June 2013 of US$400,000, to be reviewed annually by the remuneration committee. • Payment of a termination beneﬁ t on early termination by the Company, other than for gross misconduct, equal to the annual base salary. Edward M Rudnic, Chief Operating Oﬃ cer • Term of agreement – 2 years (with annual extension) from 13 February 2012. • Base salary, inclusive of retirement or pension contribution, for the year ended 30 June 2013 of US$330,000, to be reviewed annually by the remuneration committee. • Payment of a termination beneﬁ t on early termination without notice by the Company, other than for gross misconduct, equal to the annual base salary. Chris J Campbell, Chief Financial Oﬃ cer • Term of agreement – ongoing, commencing 1 March 2007. • Base salary, inclusive of superannuation, for the year ended 30 June 2013 of $239,499, to be reviewed annually by the remuneration committee. • Payment of a termination beneﬁ t on early termination without notice by the Company, other than for gross misconduct, equal to three months’ salary. • Contract can be terminated by either party with three months’ notice. Richard A Paul, Executive Vice President Drug Development (to 20 January 2013) • Term of agreement – 2 years (with annual extension) renegotiated from 1 March 2012. • Base salary, inclusive of retirement or pension contribution, for the year ended 30 June 2013 of US$310,000, to be reviewed annually by the remuneration committee. • Payment of a termination beneﬁ t on early termination by the Company, other than for gross misconduct, equal to the annual base salary. M. Janette Dixon, Vice President Global Business Development • Term of agreement – ongoing, commencing 17 August 2009 with QRxPharma Limited, and 1 October 2009 with Venomics Pty Limited. Agreements are held with M. Janette Dixon as the principal of BioComm Paciﬁ c Pte Limited. • Base consulting fee for the contract with QRxPharma Limited for the year ended 30 June 2013 of US$283,260 per annum (pro rata). • Each agreement can be terminated by either party with two months’ notice. Gary W Pace, Non-Executive Director, Consultant • Term of agreement – 1 year, renegotiated from 25 May 2013. • Base consulting fee for the contract year ending 25 May 2013 of US$83,000 per annum. • Agreement can be terminated by either party with one month’s notice. • No termination beneﬁ t payable on early termination by the Company. 16 QRxPharma Annual Report 2013 SHARE-BASED COMPENSATION Options Options over shares in QRxPharma Limited are granted under the QRxPharma Limited Employee Share Option Plan (ESOP). The ESOP is designed to provide long term incentives for executives to deliver long term shareholder returns. The maximum number of options available to be issued under the ESOP is 10% of diluted ordinary share capital in the Company as at the date of issue of the relevant options. All employees and directors are eligible to participate in the ESOP, but do so at the invitation of the remuneration committee. The term of option issues are determined by the remuneration committee. Options issued up to 31 December 2008 were generally granted for no consideration and generally vest annually over 3 years in equal proportions with the initial vesting on the ﬁ rst anniversary of the date of grant. Options issued from 1 January 2009 have also been issued for no consideration and generally vest over 3 years with the initial vesting on the ﬁ rst anniversary of the date of the grant and subsequent vestings in 8 equal tranches on the ﬁ rst day of each calendar quarter over the following 2 years. The exercise price is set by the remuneration committee but being not less than the market price of ordinary shares immediately prior to the grant date of the options. Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. The terms and conditions of each grant of options affecting remuneration in the previous, this or future reporting periods are as follows: Grant date 31 March 2007 14 April 2007 25 May 2007 25 May 2007 1 September 2007 1 October 2007 9 October 2007 1 January 2008 1 April 2008 1 April 2008 1 October 2008 4 November 2008 1 January 2009 1 January 2009 31 August 2009 1 October 2009 16 November 2009 1 January 2010 17 February 2010 24 March 2010 1 July 2010 24 August 2010 1 October 2010 25 October 2010 8 November 2010 1 January 2011 1 January 2011 7 July 2011 28 September 2011 18 November 2011 23 January 2012 23 January 2012 1 April 2012 7 November 2012 7 November 2012 7 November 2012 7 November 2012 19 February 2013 Vested and exercisable Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 6 months Over 6 months Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Over 3 years Immediately Over 3 years Expiry date Exercise price 31 March 2014 14 April 2014 25 May 2014 25 May 2014 1 September 2014 1 October 2014 9 October 2014 1 January 2015 1 April 2015 1 April 2015 1 October 2015 4 November 2015 1 January 2016 1 January 2016 31 August 2016 1 October 2016 16 November 2016 1 January 2017 17 February 2017 24 March 2014 1 July 2017 24 August 2017 1 October 2017 25 October 2014 8 November 2017 1 January 2018 1 January 2015 7 July 2018 28 September 2018 18 November 2018 23 January 2019 23 January 2016 1 April 2019 7 November 2019 7 November 2016 7 November 2019 7 November 2019 19 February 2020 $1.42 $1.00 $1.00 $2.00 $1.70 $1.45 $1.34 $1.11 $1.05 $1.04 $0.60 $0.37 $0.20 $0.20 $0.65 $0.90 $1.12 $0.78 $0.84 $1.26 $1.15 $0.95 $0.93 $1.24 $1.00 $1.40 $2.00 $1.70 $1.22 $1.60 $1.50 $2.15 $1.72 $1.00 $1.03 $0.72 $0.72 $0.94 Value per option at grant date $1.31 $1.46 $1.46 $1.15 $0.98 $0.83 $0.77 $0.64 $0.60 $0.60 $0.24 $0.07 $0.10 $0.10 $0.44 $0.61 $0.76 $0.53 $0.57 $0.38 $0.88 $0.72 $0.71 $0.48 $0.75 $1.07 $0.77 $1.30 $0.93 $1.20 $1.12 $0.80 $1.29 $0.50 $0.38 $0.53 $0.53 $0.70 % Vested 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 92% 92% 83% 83% 83% 75% 75% 58% 58% 50% 42% 42% 33% 0% 0% 0% 0% 0% The exercise price in respect of an option granted shall be the market price for a share prevailing at the time of grant unless the board decides otherwise. Options will lapse if they are not exercised before the expiration date or if the option holder leaves the employment of the Group. www.qrxpharma.com 17 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (continued) SHARE BASED COMPENSATION (continued) Details of options over ordinary shares in the Company provided as remuneration to each director of QRxPharma Limited and each of the key management personnel of the parent entity and the Group are set out below. When exercisable, each option is convertible into one ordinary share of QRxPharma Limited. Further information on the options is set out in notes 21 and 30 to the ﬁ nancial statements. The plan rules contain a restriction on removing the “at risk” aspect of instruments granted to executives. Plan participants may not enter into any transaction designed to remove the “at risk” aspect of an instrument before it vests. Number of options granted during the year Value of options at grant date* $ Number of options vested during the year Number of options lapsed during the year Value at lapse date** $ Directors of QRxPharma Limited Peter C Farrell R Peter Campbell Michael A Quinn Gary W Pace John W Holaday Other key management personnel Edward M Rudnic^ Chris J Campbell Richard Paul (to 20 January 2013) M. Janette Dixon 75,000 75,000 75,000 75,000 37,500 28,500 28,500 37,500 50,000 50,000 50,000 50,000 300,000 150,000 208,333 500,000 200,000 265,000 76,000 116,667 137,500 - - - - - - - - - - - - - - 150,000 79,500 - 600,000 571,000 200,000 106,000 133,333 - - * The value at grant date is calculated in accordance with AASB 2 Share-based Payment of options granted during the year as part of remuneration. ** The value at lapse date of options that were granted as part of remuneration and that lapsed during the year because a vesting condition was not satisfied. The value is determined at the time of lapsing, but assuming the condition was satisfied. ^ In addition to the above, 91,667 options vested during the year in relation to options Edward M Rudnic received as a consultant and 24,167 options vested during the year in relation to options he received as a member of the Scientific Advisory Board. The assessed fair value at grant date of options granted to the individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. Shares provided on exercise of remuneration options There were no ordinary shares in the Company provided as a result of the exercise of remuneration options to each director of QRxPharma Limited and other key management personnel of the Group in the year to 30 June 2013. 18 QRxPharma Annual Report 2013 Details of remuneration: Bonuses and share-based compensation beneﬁ ts For each cash bonus and grant of options included in the tables on pages 14, 15 and 18, the percentage of the available bonus or grant that was paid, or that vested, in the ﬁ nancial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. No part of the bonus is payable in future years. The vesting period for each option issued up to 31 December 2008 is 3 years, or as varied by the board, one third vesting 12 months from the date of grant and the balance vesting equally each year over the remaining two year period. Options issued from 1 January 2009 generally vest over 3 years with the initial vesting on the ﬁ rst anniversary of the date of the grant and subsequent vesting’s in 8 equal tranches on the ﬁ rst day of each calendar quarter over the following 2 years. No options will vest if the conditions are not satisﬁ ed, hence the minimum value of the option yet to vest is nil. The maximum value of the options yet to vest has been determined as the amount of the grant date fair value of the options that is yet to be expensed. Name Directors of QRxPharma Limited Peter C Farrell R Peter Campbell Michael A Quinn Gary W Pace John W Holaday Other key management personnel Chris J Campbell Edward M Rudnic M. Janette Dixon Richard A Paul BONUS SHARE-BASED COMPENSATION BENEFITS (OPTIONS) Paid % Forfeited % Year Granted Vested % Forfeited % Financial years in which options may vest - - - - - - - - - - - - - - - - - 100% 2013 2011 2007 2013 2011 2007 2013 2011 2007 2013 2011 2007 2013 2012 2011 2010 2007 2013 2012 2011 2010 2009 2007 2013 2012 2013 2012 2011 2010 2010 2009 2013 2012 2011 0% 83% 100% 0% 83% 100% 0% 83% 100% 0% 83% 100% 0% 50% 83% 100% 100% 0% 42% 75% 100% 100% 100% 0% 33% 0% 42% 75% 100% 100% 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 100% 100% 100% 2014 - 2016 2014 - 2014 - 2016 2014 - 2014 - 2016 2014 - 2014 - 2016 2014 - 2014 - 2016 2014 - 2015 2014 - - 2014 - 2016 2014 - 2015 2014 - - - 2014-2016 2014-2015 2014 - 2016 2014 - 2015 2014 - - - - - - www.qrxpharma.com 19 DIRECTORS’ REPORT (CONTINUED) SHARES UNDER OPTION Unissued ordinary shares of QRxPharma Limited under option at the date of this report are as follows: DATE OPTIONS GRANTED EXPIRY DATE ISSUE PRICE OF SHARES NUMBER UNDER OPTION 31 March 2007 14 April 2007 25 May 2007 25 May 2007 1 September 2007 1 October 2007 9 October 2007 1 January 2008 1 April 2008 1 April 2008 1 January 2009 31 August 2009 16 November 2009 1 January 2010 17 February 2010 24 March 2010 1 July 2010 24 August 2010 1 October 2010 25 October 2010 8 November 2010 1 January 2011 1 January 2011 7 July 2011 28 September 2011 18 November 2011 23 January 2012 23 January 2012 1 April 2012 7 November 2012* 7 November 2012* 7 November 2012* 19 February 2013 31 March 2014 14 April 2014 25 May 2014 25 May 2014 1 September 2014 1 October 2014 9 October 2014 1 January 2015 1 April 2015 1 April 2015 1 January 2016 31 August 2016 16 November 2016 1 January 2017 17 February 2017 24 March 2014 1 July 2017 24 August 2017 1 October 2017 25 October 2014 8 November 2017 1 January 2018 1 January 2015 7 July 2018 28 September 2018 18 November 2018 23 January 2016 23 January 2019 1 April 2019 7 November 2019 7 November 2016 7 November 2019 19 February 2020 $1.42 $1.00 $1.00 $2.00 $1.70 $1.45 $1.34 $1.11 $1.04 $1.05 $0.20 $0.65 $1.12 $0.78 $0.84 $1.26 $1.15 $0.95 $0.93 $1.24 $1.00 $1.40 $2.00 $1.70 $1.22 $1.60 $2.15 $1.50 $1.72 $1.00 $1.03 $0.72 $0.94 402,726 2,013,630 502,726 1,398,450 50,000 75,000 50,000 200,000 75,000 600,000 60,000 299,583 300,000 100,000 404,584 276,250 225,000 50,000 150,000 25,000 850,000 832,500 290,000 150,000 15,000 250,000 300,000 870,000 350,000 450,000 430,000 1,065,000 300,000 13,410,449 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. *Included in these options were options granted to key management personnel which are disclosed on page 18. 20 QRxPharma Annual Report 2013 SHARES ISSUED ON THE EXERCISE OF OPTIONS The following ordinary shares of QRxPharma Limited were issued during the year ended 30 June 2013 on the exercise of options granted under the QRxPharma Limited Employee Option Plan. No further shares have been issued since that date. No amounts are unpaid on any of the shares. Date options granted 1 January 2009 31 August 2009 1 October 2009 Issue price of shares $0.20 $0.65 $0.90 Number of shares issued 40,000 30,900 137,500 208,400 INDEMNIFICATION The Company has entered into Deeds of Access, Indemnity and Insurance with each of the directors and executive ofﬁ cers of the Group against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as directors and executive ofﬁ cers of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the amount of any such liabilities, including costs and expenses. INSURANCE OF OFFICERS The directors have not included details of the nature of liabilities covered nor the amount of the premium paid in respect to Directors and Ofﬁ cers liability insurance contracts, as such disclosure is prohibited under the terms of the contracts. PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to 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 part of those proceedings. No proceedings have been brought or intervened in on behalf of the company with leave of the Court under section 237 of the Corporations Act 2001. NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the company and/or the Group are important. Details of the amounts paid or payable to the auditor (Deloitte Touche Tohmatsu) for non-audit services provided during the year are set out below. The board of directors has considered the position and, in accordance with advice received from the audit committee, is satisﬁ ed that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisﬁ ed that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. www.qrxpharma.com 21 DIRECTORS’ REPORT (CONTINUED) NON-AUDIT SERVICES (continued) (a) Auditor of the Group Taxation services Tax compliance services PricewaterhouseCoopers Australia Tax consulting and advice Deloitte Touche Tohmatsu Australia PricewaterhouseCoopers Australia Total remuneration for taxation services (b) Related practices of the Auditor Taxation services Tax compliance services PricewaterhouseCoopers International tax consulting and advice PricewaterhouseCoopers Total remuneration for taxation services Total remuneration for non-audit services 20132013 $ 2012 $ - 9,270 12,500 - 12,500 - - - 12,500 - 106,788 116,058 33,974 11,006 44,980 161,038 AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 23. ROUNDING OF AMOUNTS The Company is a kind referred to in Class order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the ﬁ nancial or directors report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. AUDITOR Deloitte Touche Tohmatsu continues in ofﬁ ce in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors. Peter C Farrell Director Sydney 19 September 2013 22 QRxPharma Annual Report 2013 22 QRxPharma Annual Report 2013 Deloitte Touche Tohmatsu ABN 74 490 121 060 Eclipse Tower Level 19 60 Station Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au The Board of Directors QRxPharma Limited 1/194 Miller Street North Sydney NSW 2060 19 September 2013 Dear Board Members QRxPharma Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of QRxPharma Limited. As lead audit partner for the audit of the financial statements of QRxPharma Limited for the year ended 30 June 2013, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit, and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU X Delaney Partner Chartered Accountants Parramatta, 19 September 2013 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited www.qrxpharma.com 23 CORPORATE GOVERNANCE STATEMENT 24 QRxPharma Annual Report 2013 QRxPharma Limited (Company) and the board are committed to achieving and demonstrating the highest standards of corporate governance. The board continues to review the framework and practices to ensure they meet the interests of shareholders. The Company and its controlled entities together are referred to as the Group in this statement. A description of the Group’s main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year. They comply with the ASX Corporate Governance Principles and Recommendations. PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT The relationship between the board and senior management is critical to the Group’s long term success. The directors are responsible to the shareholders for the performance of the Group in both the short and the longer term and seek to balance sometimes competing objectives in the best interests of the Group as a whole. Their focus is to enhance the interests of shareholders and other key stakeholders and to ensure the Group is properly managed. The responsibilities of the board include: • providing strategic guidance to the Group including contributing to the development of and approving the corporate strategy • reviewing and approving business plans, the annual budget and ﬁ nancial plans including available resources and major capital expenditure initiatives • overseeing and monitoring: • organisational performance and the achievement of the Group’s strategic goals and objectives • compliance with the Company’s Code of conduct • progress in relation to the Company’s diversity objectives and compliance with its diversity policy • progress of major capital expenditures and other signiﬁ cant corporate projects including any acquisitions or divestments • monitoring ﬁ nancial performance including approval of the annual and half-year ﬁ nancial reports and liaison with the Company’s auditors • appointment, performance assessment and, if necessary, removal of the managing director • ratifying the appointment and/or removal and contributing to the performance assessment for the members of the senior management team including the Chief Executive Ofﬁ cer (CEO) and the Company Secretary • ensuring there are effective management processes in place and approving major corporate initiatives • enhancing and protecting the reputation of the organisation • overseeing the operation of the Group’s system for compliance and risk management reporting to shareholders • ensuring appropriate resources are available to senior management Day to day management of the Group’s affairs and the implementation of the corporate strategy and policy initiatives are formally delegated by the board to the CEO and senior executives as set out in the Group’s delegations policy. These delegations are reviewed on an annual basis. A performance assessment for senior executives last took place in May 2013 during the remuneration committee’s annual assessment of performance bonuses. To help make this assessment, the committee receives detailed reports on performance from management. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE The board operates in accordance with the broad principles set out in its charter which together with all other charters and policies referred to in this Statement are available from the corporate governance information section of the Company website at www. qrxpharma.com. The charter details the board’s composition and responsibilities. Board composition The charter states: • the board is to be comprised of both executive and non-executive directors with a majority of non-executive directors. Non- executive directors bring a fresh perspective to the board’s consideration of strategic, risk and performance matters • in recognition of the importance of independent views and the board’s role in supervising the activities of management, the Chair must be an independent non-executive director, the majority of the board must be independent of management and all directors are required to exercise independent judgement and review and constructively challenge the performance of management • the Chair is elected by the full board and is required to meet regularly with the managing director • the Company aims to maintain a mix of directors on the board from different genders, age groups, ethnicity and cultural and professional backgrounds who have complementary skills and experience • the board is to establish measurable board gender diversity objectives and assess annually the objectives and progress in achieving them • the board is required to undertake an annual board performance review and consider the appropriate mix of skills required by the board to maximise its effectiveness and its contribution to the Group. The board seeks to ensure that: • at any point in time, its membership represents an appropriate balance between directors with experience and knowledge of the Group and directors with an external or fresh perspective • the size of the board is conducive to effective discussion and efﬁ cient decision making. Directors’ independence The board has adopted speciﬁ c principles in relation to directors’ independence. These state that to be deemed independent, a director must be a non-executive and the board should consider whether the director: • is a substantial shareholder of the Company or an ofﬁ cer of, or otherwise associated directly with, a substantial shareholder of the Company • is or has been employed in an executive capacity by the Company or any other Group member, within three years before commencing to serve on the board • within the last three years has been a principal of a material professional adviser or a material consultant to the Company or any other Group member, or an employee materially associated with the service provided • is a material supplier or customer of the Company or any other Group member, or an ofﬁ cer of or otherwise associated directly or indirectly with a material supplier or customer • has a material contractual relationship with the company or a controlled entity other than as a director of the Group • is free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Group. At present, materiality for these purposes is determined as a relationship or contract where the Company or Group pays in excess of $100,000. The board regularly assesses director independence having regard to the criteria outlined in the Principles. To enable this process, the directors must provide all information that may be relevant to the assessment. During the ﬁ nancial year ended 30 June 2013, Peter C Farrell, R Peter Campbell and Gary W Pace were considered to be independent for the entire year, while Michael A Quinn is considered to be independent from 21 November 2012. Board members Details of the members of the board, their experience, expertise, qualiﬁ cations, term of ofﬁ ce, relationships affecting their independence and their independent status are set out in the directors’ report under the heading “Information on directors” on pages 8 to 10. At the date of signing the directors’ report, there is one executive director and four non-executive directors. Non-executive directors The four non-executive directors met four times during the year, in scheduled sessions without the presence of management, to discuss the operation of the board and a range of other matters. Relevant matters arising from these meetings were shared with the full board. Term of oﬃ ce The Company’s Constitution speciﬁ es that all directors excluding the CEO must retire from ofﬁ ce no later than the third annual general meeting (AGM) following their last election. Chair The Chair of the board of the Company is an independent, non- executive director. The Chair is responsible for leading the board, ensuring directors are properly briefed in all matters relevant to their role and responsibilities, facilitating board discussions and managing the board’s relationship with the Group’s senior executives. In accepting the position, the Chair has acknowledged that it will require a signiﬁ cant time commitment and has conﬁ rmed that other positions will not hinder his effective performance in the role of the Chair. www.qrxpharma.com 25 CORPORATE GOVERNANCE STATEMENT (CONTINUED) PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE (continued) Chief Executive Oﬃ cer (CEO) The CEO is responsible for implementing Group strategies and policies. Commitment The number of meetings of the Company’s board of directors and of each board committee held during the year ended 30 June 2013, and the number of meetings attended by each director is disclosed on page 11. The board will meet as frequently as required but must not meet less than four times each year. The commitments of non-executive directors are considered by the nomination committee prior to the directors’ appointment to the board of the Company. Independent professional advice Directors and board committees have the right, in connection with their duties and responsibilities, to seek independent professional advice. With the approval of the Chairman this advice will be at the expense of the Company. Avoidance of conﬂ ict of interest In addition to the issue of independence, the directors have a continuing responsibility to avoid conﬂ icts of interest (both real and apparent) between their duty to the Company and their own interests. Directors are required to disclose any actual or potential conﬂ ict of interest on appointment and are required to keep this disclosure up to date. A director that has an actual or potential conﬂ ict must immediately inform the board and remove themselves from any discussions or decision making in relation to the actual or potential conﬂ ict. Performance assessment The board has undertaken annual self-assessments of its collective performance, the performance of the Chairman and its committees. The results and any action plans are documented together with speciﬁ c performance goals which are agreed for the coming year. Board committees The board has established a number of committees to assist in the execution of its duties and to allow detailed consideration of complex issues. Current committees of the board are the nominations, remuneration and audit and risk committees. The nominations and audit and risk committees are comprised entirely of non-executive directors. Each committee has its own written charter setting out its role and responsibilities, composition, structure, membership requirements and the manner in which the committee is to operate. All of these charters are reviewed on an annual basis and are available on the Company website. All matters determined by committees are submitted to the full board as recommendations for board decisions. Minutes of committee meetings are tabled at the subsequent board meeting. Additional requirements for speciﬁ c reporting by the committees to the board are addressed in the charter of the individual committees. Nominations committee The nominations committee is currently comprised of Peter C Farrell (Chairman), Michael A Quinn, and R Peter Campbell, all independent, non-executive directors. 26 QRxPharma Annual Report 2013 Details of these directors’ attendance at nomination committee meetings are set out in the directors’ report on page 11. The main responsibilities of the committee are to: • conduct an annual review of the membership of the board having regard to present and future needs of the Company and to make recommendations on board composition and appointments • conduct an annual review of and conclude on the independence of each director • propose candidates for board vacancies • oversee the annual performance assessment program • oversee board succession, including the succession of the Chair, and review whether succession plans are in place to maintain an appropriately balanced mix of skills, experience and diversity on the board • manage the processes in relation to meeting board diversity objectives • assess the effectiveness of the induction process. Whilst the nominations committee may recommend new director candidates, it is the full board that is responsible for the actual appointment of new directors and any candidate appointed must stand for election at the next annual general meeting of the Company. The committee’s nomination of existing directors for reappointment is also not automatic and is contingent on their past performance, contribution to the Company and the current and future needs of the board and Company. PRINCIPLE 3: PROMOTE ETHICAL AND RESPONSIBLE DECISION MAKING Code of Conduct The Company adopted a statement of values and a Code of conduct (the Code) on 17 August 2011 which has been fully endorsed by the board and applies to all directors and employees. The Code is regularly reviewed and updated as necessary to ensure it reﬂ ects the highest standards of behaviour and professionalism and the practices necessary to maintain conﬁ dence in the Group’s integrity and to take into account legal obligations and reasonable expectations of the Company’s stakeholders. In summary, the Code requires that at all times all Company personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and Company policies. The Company maintains a Securities Trading Policy, which was amended on 17 August 2011, and is available on the Company website. It is contrary to the Company’s policy for directors, ofﬁ cers and employees to be engaged in short term trading of the Company’s securities. All directors, ofﬁ cers and employees are prohibited from dealing in any QRxPharma Limited securities, except while not in possession of unpublished price sensitive information. Directors, ofﬁ cers and employees may only then deal in the Company’s securities during a speciﬁed period of 45 days after the release of the Company’s half-yearly or annual results, after release of the Company’s Appendix 4C quarterly report for the quarter ended 31 March, after the AGM, or during the period in which the Company has a prospectus or other disclosure documents on issue under which people can subscribe for securities. Directors must obtain the approval of the Chairman and employees the approval of the Company Secretary prior to dealing in the Company’s securities outside those periods. The directors are satisﬁ ed that the Group has complied with its policies on ethical standards, including trading in securities. Diversity Policy The Company values diversity and recognises the beneﬁ ts it can bring to the organisation’s ability to achieve its goals. Accordingly the Company adopted a diversity policy on 17 August 2011. This policy outlines the establishment of the Company’s diversity objectives in relation to gender, age, cultural background and ethnicity. It includes requirements for the board to establish measurable objectives for achieving diversity, and for the board to assess annually both the objectives, and the Company’s progress in achieving them. The board has considered its responsibilities in relation to establishing measureable objectives to achieve diversity and has decided not to create formal objectives given the size of the Company’s workforce and its high staff retention rate. Whilst the board has elected not to establish formal objectives for diversity, it remains responsible for managing the diversity of the Company’s workforce and will give due consideration to these responsibilities in determining any future appointments. The Group’s gender diversity statistics are as follows; • Proportion of female employees in the Group • Proportion of females in senior executive positions of the Group • Proportion of females on the Board 64% 33% 0% PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING Audit and risk committee The audit and risk committee is currently comprised of R Peter Campbell (Chairman), and Michael A Quinn, both independent, non-executive directors. Details of these directors’ qualiﬁ cations and attendance at audit committee meetings are set out in the directors’ report on pages 9 to 11. The audit and risk committee has appropriate ﬁ nancial expertise and all members are ﬁ nancially literate and have an appropriate understanding of the industry in which the Group operates. The committee’s composition does not comply with the Principles in that it does not include at least three members. The board considers that the audit and risk committee as represented by the two non-executive directors noted above is suitably structured and qualiﬁ ed to fully discharge its responsibilities at this stage of the Company’s development. www.qrxpharma.com 27 CORPORATE GOVERNANCE STATEMENT (CONTINUED) 28 QRxPharma Annual Report 2013 PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING (continued) Audit and risk committee (continued) The audit and risk committee operates in accordance with a charter which is available on the Company website. The main responsibilities of the committee include: : • review, assess and approve the annual full and concise reports, the half-year ﬁ nancial report and all other ﬁ nancial information published by the Company or released to the market • assist the board in reviewing the effectiveness of the organisation’s internal control environment covering: • effectiveness and efﬁ ciency of operations • reliability of ﬁ nancial reporting • compliance with applicable laws and regulations • oversee the effective operation of the risk management framework • recommend to the board the appointment, removal and remuneration of the external auditors, and review the terms of their engagement, the scope and quality of the audit and assess performance • consider the independence and competence of the external auditor on an ongoing basis • review and approve the level of non-audit services provided by the external auditors and ensure it does not adversely impact on auditor independence • review and monitor related party transactions and assess their propriety • report to the board on matters relevant to the committee’s role and responsibilities. In fulﬁ lling its responsibilities, the audit and risk committee: • receives regular reports from management and external auditors • meets with the external auditors at least twice a year, or more frequently if necessary • reviews the processes the CEO and Chief Financial Ofﬁ cer (CFO) have in place to support their certiﬁ cates to the board • reviews any signiﬁ cant disagreements between the auditors and management, irrespective of whether they have been resolved • meets separately with the external auditors at least twice a year without the presence of management • provides the external auditors with a clear line of direct communication at any time to either the Chair of the audit and risk committe or the Chair of the baord The audit and risk committee has authority, within the scope of its responsibilities, to seek any information it requires from any employee or external party. External auditors The Company and audit and risk committee policy is to appoint external auditors who clearly demonstrate quality and independence. Deloitte Touche Tohmatsu is the incumbent external auditor. It is Deloitte Touche Tohmatsu’s policy to rotate audit engagement partners on listed companies at least every ﬁ ve years. An analysis of fees paid to the external auditors, including a breakdown of fees for non-audit services, is provided in the directors’ report and in note 22 to the ﬁ nancial statements. It is the policy of the external auditors to provide an annual declaration of their independence to the audit committee. The external auditor will attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the annual report. PRINCIPLES 5 AND 6: MAKE TIMELY AND BALANCED DISCLOSURES AND RESPECT THE RIGHTS OF SHARE- HOLDERS Continuous disclosure and shareholder communication The Company has written policies on information disclosure that focus on continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Company’s securities. These policies also include the arrangements the Company has in place to promote communication with shareholders and encourage effective participation at general meetings. The Shareholder Communication Policy and Continuous Disclosure Policy having regard to the ASX Code of Best Practice for Reporting by Life Science Companies, are available on the Company’s website. The Company Secretary has been nominated as the person responsible for communications with the ASX. This role includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules and overseeing and co- ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. All disclosures made to the ASX, and all information provided to analysts or the media during brieﬁ ngs are promptly posted on the Company’s website. Procedures have also been established for reviewing whether any price sensitive information has been inadvertently disclosed and, if so, this information is also immediately released to the market. All shareholders have the option to receive a copy of the Company’s annual report. In addition, the Company seeks to provide opportunities for shareholders to participate through electronic means. All Company announcements, media brieﬁ ngs, details of Company meetings, press releases and ﬁ nancial reports for the last three years are available on the Company’s website. Where possible, the Company arranges for advance notiﬁ cation of signiﬁ cant Group brieﬁ ngs and makes them widely accessible, including through the use of mass communication mechanisms as may be practical. PRINCIPLE 7: RECOGNISE AND MANAGE RISK The board is responsible for satisfying itself annually, or more frequently as required, that management has developed and implemented a sound system of risk management and internal control. Detailed work on this task is delegated to the audit and risk committee and reviewed by the full board as detailed in the Risk Management Policy adopted by the Company on 17 August 2011. The audit and risk committee is responsible for ensuring there is an adequate framework in relation to risk management, compliance and internal control systems. In providing this oversight, the committee: • reviews the framework and methodology for risk identiﬁ cation, the degree of risk the Company is willing to accept, the management of risk and the processes for auditing and evaluating the Company’s risk management system • reviews Group-wide objectives in the context of the above mentioned categories of corporate risk • reviews and, where necessary, approves guidelines and policies governing the identiﬁ cation, assessment and management of the Company’s exposure to risk • reviews and approves the delegations of ﬁ nancial authorities and addresses any need to update these authorities on an annual basis, and • reviews compliance with agreed policies. The committee recommends any actions it deems appropriate to the board for its consideration. Management is responsible for designing, implementing and reporting on the adequacy of the Company’s risk management and internal control system and has to report to the audit committee on the effectiveness of: • the risk management and internal control system during the year, and • the Company’s management of its material business risks. Corporate Reporting In complying with recommendation 7.3, the CEO and CFO have provided the following written declarations in accordance with section 295A of the Corporations Act: • that the Company’s ﬁ nancial reports are complete and present a true and fair view, in all material respects, of the ﬁ nancial condition and operational results of the Company and Group and are in accordance with relevant accounting standards • that the above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board and that the Company’s risk management and internal compliance and control is operating efﬁ ciently and effectively in all material respects in relation to ﬁ nancial reporting risks. PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY Remuneration Committee The remuneration committee is currently comprised of Peter C Farrell (Chairman) and Michael A Quinn, both independent, non-executive directors, and John W Holaday, the Managing Director, CEO and Chief Scientiﬁ c Ofﬁ cer (CSO). Whilst Dr. Holaday sits on the remuneration committee, he does not participate in decisions relating to his own performance and remuneration. Details of these directors’ attendance at remuneration committee meetings are set out in the directors’ report on page 11. www.qrxpharma.com 29 CORPORATE GOVERNANCE STATEMENT (CONTINUED) PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY (continued) Remuneration Committee (continued) The remuneration committee operates in accordance with its charter which is available on the Company website. The remuneration committee assists the board to discharge its responsibilities to attract and retain senior executives and directors who will create value for shareholders. The remuneration committee advises the board on remuneration and incentive policies and practices generally, and makes speciﬁ c recommendations on remuneration packages and other terms of employment for senior executives and directors. Each member of the senior executive team signs a formal employment contract at the time of their appointment covering a range of matters including their duties, rights, responsibilities and any entitlements on termination. The standard contract refers to a speciﬁ c formal job description. This job description is reviewed by the remuneration committee on an annual basis and, where necessary, is revised in consultation with the relevant employee. Further information on directors’ and executives’ remuneration is set out in the Directors’ Report under the heading “Remuneration Report’’. In accordance with Group policy, participants in equity based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. Details of this policy can be found on the Company’s website. The committee also assumes responsibility for overseeing management succession planning, including the implementation of appropriate executive development programmes and ensuring adequate arrangements are in place, so that appropriate candidates are recruited for later promotion to senior positions. This includes ensuring due consideration is given to diversity of executives and staff below board level. 30 QRxPharma Annual Report 2013 FINANCIAL REPORT These ﬁ nancial statements are the consolidated ﬁ nancial statements of the consolidated entity consisting of QRxPharma Limited and its subsidiaries. The ﬁ nancial statements are presented in the Australian currency. QRxPharma Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered ofﬁ ce and principal place of business is: QRxPharma Limited Level 1, 194 Miller Street North Sydney NSW 2060. The ﬁ nancial statements were authorised for issue by the directors on 19 September 2013. The directors have the power to amend and reissue the ﬁ nancial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, ﬁ nancial reports and other information are available at the Investors tab on our website: www.qrxpharma.com. Consolidated statement of proﬁ t or loss and other comprehensive income Consolidated statement of ﬁ nancial position Consolidated statement of changes in equity Consolidated statement of cash ﬂ ows Notes to the consolidated ﬁ nancial statements Directors' declaration Independent auditor's report to the members of QRxPharma Limited Shareholder information 32 33 34 35 36 70 71 73 www.qrxpharma.com 31 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2013 Revenue from continuing operations Other income Research and development expense Employee beneﬁ ts expense Depreciation and amortisation Business development expense Other expenses Income tax beneﬁ t Loss from continuing operations Notes 5 6 7 7 7 8 Loss before income tax Loss for the year Other comprehensive income Items that may be reclassiﬁ ed subsequently to proﬁ t or loss Exchange differences on translation of foreign operations Other comprehensive income for the year, net of tax Total comprehensive (loss) for the year Loss for the year is attributable to: Owners of QRxPharma Limited Non-controlling interests Total comprehensive (loss) is attributable to: Owners of QRxPharma Limited Non-controlling interests 20132013 $’000 4,066 747 (8,260) (4,204) (64) (675) (1,690) (10,080) - (10,080) (10,080) 2012 $’000 1,919 2,266 (9,162) (7,192) (65) (1,343) (2,468) (16,045) - (16,045) (16,045) 149 149 (9,931) 82 82 (15,963) (10,075) (5) (10,080) (9,926) (5) (9,931) (15,949) (96) (16,045) (15,867) (96) (15,963) Earnings per share for loss attributable to the ordinary equity holders of the company: Basic loss per share Diluted loss per share 28 28 Cents (7.0) (7.0) Cents (11.2) (11.2) The above consolidated statement of proﬁ t or loss and other comprehensive income should be read in conjunction with the accompanying notes. 32 QRxPharma Annual Report 2013 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2013 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other current assets Non-current assets Plant and equipment Available-for-sale ﬁ nancial assets Intangible assets Total current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Other current liabilities Non-Current liabilities Provisions EQUITY Contributed equity Reserves Accumulated losses Total current liabilities Total non-current liabilities Total liabilities Net assets Capital and reserves attributable to owners of QRxPharma Limited Non-controlling interests Total equity Notes 9 10 11 12 13 14 15 16 17 16 18 19(a) 19(b) 20 20132013 $’000 11,960 308 220 12,488 135 - - 135 12,623 1,710 240 592 2,542 234 234 2,776 9,847 144,433 12,846 (147,381) 9,898 (51) 9,847 The above consolidated statement of ﬁ nancial position should be read in conjunction with the accompanying notes. 2012 $’000 22,950 1,212 458 24,620 191 - - 191 24,811 1,533 824 4,055 6,412 201 201 6,613 18,198 144,281 11,269 (137,306) 18,244 (46) 18,198 www.qrxpharma.com 33 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2013 ATTRIBUTABLE TO THE OWNERS OF QRXPHARMA LIMITED Contributed equity $’000 118,809 - - - Reserves Accumulated Losses Total Non- controlling interests Total equity $’000 9,025 - 82 82 $’000 $’000 $’000 $’000 (121,357) (15,949) 6,477 (15,949) 50 (96) 6,527 (16,045) - 82 - 82 (15,949) (15,867) (96) (15,963) Balance at 1 July 2011 Loss for the year as reported in the 2012 ﬁ nancial statements Other comprehensive income Total comprehensive loss for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Employee share scheme Balance at 30 June 2012 Loss for the year Other comprehensive income Total comprehensive loss for the year 25,472 - - 25,472 - 25,472 - 25,472 144,281 - - - 2,162 2,244 11,269 - 149 149 - (15,949) (137,306) (10,075) - (10,075) 2,162 11,767 18,244 (10,075) 149 (9,926) - (96) (46) (5) - (5) 2,162 11,671 18,198 (10,080) 149 (9,931) Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Employee share scheme Balance at 30 June 2013 152 - - 152 - 152 - 152 144,433 1,428 1,577 12,846 - (10,075) (147,381) 1,428 (8,346) 9,898 - (5) (51) 1,428 (8,351) 9,847 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 34 QRxPharma Annual Report 2013 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2013 Cash ﬂ ows from operating activities Receipts from licensees of cost recoveries Payments to suppliers and employees (inclusive of goods and services tax) Interest received License fee received Grant received Net cash (outﬂ ow) from operating activities Cash ﬂ ows from investing activities Payments for plant and equipment Net cash (outﬂ ow) from investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issue of shares Payments made in relation to capital raising Net cash inﬂ ow from ﬁ nancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the ﬁ nancial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Notes 5 5 6 27 18 6 9 20132013 $’000 1,635 (14,056) (12,421) 60 485 150 (11,726) (13) (13) 152 - 152 (11,587) 22,950 597 11,960 2012 $’000 - (17,760) (17,760) 114 5,918 - (11,728) (60) (60) 26,750 (1,278) 25,472 13,684 7,291 1,975 22,950 The above consolidated statement of cash ﬂ ows should be read in conjunction with the accompanying notes. www.qrxpharma.com 35 CONTENTS OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 36 QRxPharma Annual Report 2013 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Summary of signiﬁ cant accounting policies Financial risk management Critical accounting estimates and judgements Segment information Revenue Other income Expenses Income tax beneﬁ t Current assets – Cash and cash equivalents Current assets – Trade and other receivables Current assets – Other current assets Non-current assets – Plant and equipment Non-current assets – Available-for-sale ﬁ nancial assets Non-current assets – Intangible assets Current liabilities – Trade and other payables Provisions Other current liabilities Contributed equity Reserves and accumulated losses Non-controlling interests Key management personnel disclosures Remuneration of auditors Contingencies Commitments Related party transactions Subsidiaries Reconciliation of loss after income tax to net cash outﬂ ow from operating activities Loss per share Parent entity ﬁ nancial information Share based payments Events occurring after the balance sheet date 37 47 49 50 50 50 51 51 52 52 53 53 53 54 55 55 55 55 57 58 58 62 63 63 63 64 64 64 65 66 69 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the consolidated ﬁ nancial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The ﬁ nancial statements are for the consolidated entity consisting of QRxPharma Limited and its subsidiaries. a) Basis of preparation These general purpose ﬁ nancial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. QRxPharma Limited is a for-proﬁ t entity for the purpose of preparing the ﬁ nancial statements. (i) New and amended standards adopted by the Group None of the new standards and amendments to standards that are mandatory for the ﬁ rst time for the ﬁ nancial year beginning 1 July 2012 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. (ii) Compliance with IFRS The consolidated ﬁ nancial statements of QRxPharma Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (iii) Historical cost convention These ﬁ nancial statements have been prepared under the historical cost convention, as modiﬁ ed by the revaluation of available-for-sale ﬁ nancial assets and liabilities (including derivative instruments) at fair value through proﬁ t or loss. (iv) Critical accounting estimates The preparation of ﬁ nancial statements in conformity with Australian International Financial Reporting Standards (AIFRS) requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are signiﬁ cant to the ﬁ nancial statements are disclosed in note 3. (v) Early adoption of standards The Group has elected not to apply any pronouncement before their operative date in the annual reporting period beginning 1 July 2012. and the realisation of assets and the settlement of liabilities in the ordinary course of business. During the year ended 30 June 2013, the Group incurred a net loss of $10.1 million (2012: $16 million) and had net cash outﬂ ows from operating activities of $11.7 million (2012: $11.7 million). As at 30 June 2013, the Group holds cash and cash equivalents of $12 million (2012: $23 million). The ability of the Company and the Group to continue as going concerns for 12 months from the date of signing this ﬁ nancial report is dependent upon the Company being successful in completing a further capital raising to provide the necessary funding to meet the Company’s ongoing research and development costs and execute on the corporate strategy. Given the success of past capital raisings by the Company and management’s plan to raise further funds, the directors remain conﬁ dent about the successful outcome of the above factors and that it is therefore appropriate to prepare the ﬁ nancial statements on the going concern basis. However, in the event that the Company is unable to complete a further capital raising sufﬁ cient to meet its research and development requirements, signiﬁ cant uncertainty would exist as to whether the Company and the Group will continue as going concerns and, therefore, whether they will realise their assets and settle their liabilities and commitments in the normal course of business. The ﬁ nancial statements do not include any adjustments relating to the recoverability and classiﬁ cation of recorded asset amounts or to the amounts and classiﬁ cation of liabilities that might be necessary should the Company and the Group not continue as going concerns. c) Principles of consolidation (i) Subsidiaries The consolidated ﬁ nancial statements incorporate the assets and liabilities of all subsidiaries of QRxPharma Limited (‘’company’’ or ‘’parent entity’’) as at 30 June 2013 and the results of all subsidiaries for the year then ended. QRxPharma Limited and its subsidiaries together are referred to in this ﬁ nancial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the ﬁ nancial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. b) Going concern The ﬁ nancial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. www.qrxpharma.com 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 38 QRxPharma Annual Report 2013 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) c) Principles of consolidation (continued) Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and balance sheet respectively. Investments in subsidiaries are accounted for at cost in the separate ﬁ nancial statements of QRxPharma Limited. (ii) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reﬂ ect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of QRxPharma Limited. When the Group ceases to have control, joint control or signiﬁ cant inﬂ uence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in proﬁ t or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or ﬁ nancial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets and liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassiﬁ ed to proﬁ t or loss. If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or signiﬁ cant inﬂ uence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassiﬁ ed to proﬁ t or loss. d) Segment reporting 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 identiﬁ ed as the executive management team. e) Foreign currency translation (i) Functional and presentation currency Items included in the ﬁ nancial 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 ﬁ nancial statements are presented in Australian dollars, which is QRxPharma Limited’s functional and presentation currency. (ii) Transactions and balances 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 year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income, except when they are deferred in equity as qualifying cash ﬂ ow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses are presented in the income statement on a net basis within other income or net foreign exchange loss. 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. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through proﬁ t or loss are recognised in proﬁ t or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classiﬁ ed as available-for-sale ﬁ nancial assets are recognised in other comprehensive income. (iii) Group companies The results and ﬁ nancial position of all the Group entities (none of which has the currency of a hyperinﬂ ationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet • income and expenses for each proﬁ t and loss are translated at the exchange rate on the dates of the transactions, and • all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other ﬁ nancial instruments designated as hedges of such investments, are taken to other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences are recognised in the proﬁ t and loss as part of the gain or loss on sale where applicable. f) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns and trade allowances. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic beneﬁ ts will ﬂ ow to the entity and speciﬁ c criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on current available information, taking into consideration the type of customer, the type of transaction and the speciﬁ cs of each arrangement. Interest income Interest income is recognised on a time proportion basis using the effective interest method. g) 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 national income tax receivable rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated ﬁ nancial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable proﬁ t or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Tax consolidation legislation QRxPharma Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, QRxPharma Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. h) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition- by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non- controlling interest’s proportionate share of the acquiree’s net identiﬁ able assets. www.qrxpharma.com 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 40 QRxPharma Annual Report 2013 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) h) Business combinations (continued) The excess of the consideration transferred, the amount of any non-controlling interest in the acquire and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identiﬁ able assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identiﬁ able assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in proﬁ t or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent ﬁ nancier under comparable terms and conditions. Contingent consideration is classiﬁ ed either as equity or a ﬁ nancial liability. Amounts classiﬁ ed as a ﬁ nancial liability are subsequently remeasured to fair value with changes in fair value recognised in proﬁ t or loss. i) Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁ able cash inﬂ ows which are largely independent of the cash inﬂ ows from other assets or groups of assets (cash generating units). Non-ﬁ nancial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. j) Grant income Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. k) Cash and cash equivalents For cash ﬂ ow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with ﬁ nancial 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 insigniﬁ cant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. l) Investments and other ﬁ nancial assets Classiﬁ cation The Group classiﬁ es its investments in the following categories: ﬁ nancial assets at fair value through proﬁ t or loss, loans and receivables, held to maturity investments and available-for-sale ﬁ nancial assets. The classiﬁ cation depends on the purpose for which the investments were acquired. Management determines the classiﬁ cation of its investments at initial recognition and, in the case of assets classiﬁ ed as held-to-maturity, re-evaluates this designation at each reporting date. (i) Financial assets at fair value through proﬁ t or loss Financial assets at fair value through proﬁ t or loss are ﬁ nancial assets held for trading. A ﬁ nancial asset is classiﬁ ed in this category if acquired principally for the purpose of selling in the short term. Derivatives are classiﬁ ed as held for trading unless they are designated as hedges. (ii) Loans and receivables Loans and receivables are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classiﬁ ed as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet (note 10). (iii) Held-to-maturity investments Held-to-maturity investments are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments and ﬁ xed maturities that the Group’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insigniﬁ cant amount of held-to-maturity ﬁ nancial assets, the whole category would be tainted and reclassiﬁ ed as available-for-sale. Held-to-maturity ﬁ nancial assets are included in non-current assets, except for those with maturities less than 12 months from the reporting date, which are classiﬁ ed as current assets. (iv) Available-for-sale ﬁ nancial assets Available-for-sale ﬁ nancial assets, comprising principally equity securities, are non-derivatives that are either designated in this category or not classiﬁ ed in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of the investment within 12 months of the end of the reporting period. Investments are designated as available-for-sale if they do not have ﬁ xed maturities and ﬁ xed or determinable payments and management intends to hold them for the medium to long term. Recognition and derecognition Regular purchases and sales of ﬁ nancial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash ﬂ ows from the ﬁ nancial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classiﬁ ed as available-for-sale are sold, the accumulated fair value adjustments recognised in other comprehensive income are reclassiﬁ ed to proﬁ t or loss as gains and losses from investment securities. value through proﬁ t or loss, transaction costs that are directly attributable to the acquisition of the ﬁ nancial asset. Transaction costs of ﬁ nancial assets carried at fair value through proﬁ t or loss are expensed in proﬁ t or loss. Loans and receivables and held to maturity investments are carried at amortised cost using the effective interest method. Available-for-sale ﬁ nancial assets and ﬁ nancial assets at fair value through proﬁ t or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the “ﬁ nancial assets at fair value through proﬁ t or loss’ category are presented in proﬁ t or loss within other income or other expenses in the period in which they arise. Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a ﬁ nancial asset or group of ﬁ nancial assets is impaired. A ﬁ nancial asset or a group of ﬁ nancial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash ﬂ ows of the ﬁ nancial asset or group of ﬁ nancial assets that can be reliably estimated. In the case of equity investments classiﬁ ed as available-for-sale, a signiﬁ cant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired. (i) Assets carried at amortised cost For loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash ﬂ ows (excluding future credit losses that have not been incurred) discounted at the ﬁ nancial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. If a loan or held- to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement. Measurement At initial recognition, the Group measures a ﬁ nancial asset at its fair value plus, in the case of a ﬁ nancial asset not at fair (ii) Assets classiﬁ ed as available-for-sale If there is objective evidence of impairment for available-for-sale ﬁ nancial assets, the cumulative loss – measured as the difference www.qrxpharma.com 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 42 QRxPharma Annual Report 2013 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) l) Investments and other ﬁ nancial assets (continued) between the acquisition cost and the current fair value, less any impairment loss on that ﬁ nancial asset previously recognised in proﬁ t or loss – is removed from equity and recognised in proﬁ t or loss. Impairment losses on equity instruments that were recognised in proﬁ t or loss are not reversed through proﬁ t or loss in a subsequent period. If the fair value of a debt instrument classiﬁ ed as available-for-sale increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognised in proﬁ t or loss, the impairment loss is reversed through proﬁ t or loss. m) Plant and equipment Plant and equipment are stated at historical costs less depreciation. Depreciation on plant and equipment is calculated using the straight line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: Plant and equipment 4-5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. n) Intangible assets (i) Intellectual property Costs incurred in acquiring intellectual property are capitalised and amortised on a straight line basis over the period of the expected beneﬁ t. Costs include only those costs directly attributable to the acquisition of the intellectual property. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). (ii) Research and development Research expenditure on internal development projects is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic beneﬁ ts and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight line basis over its useful life. o) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of ﬁ nancial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. p) Leases Leases in which a signiﬁ cant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classiﬁ ed as operating leases (note 24). Payments made under operating leases (net of any incentive received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. q) Employee beneﬁ ts (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non monetary beneﬁ ts and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. (ii) Long service leave The liability for long service leave is recognised in the provision for employee beneﬁ ts and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outﬂ ows. (iii) Retirement beneﬁ t obligations The Group does not maintain a Group superannuation plan. The Group makes ﬁ xed percentage contributions for all Australian resident employees to complying third party superannuation funds and for US resident employees to complying pension funds if requested. The Group’s legal or constructive obligation is limited to these contributions. Contributions to complying third party superannuation funds and pension plans are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (iv) Share-based payments Share based compensation beneﬁ ts are provided to employees via the QRxPharma Limited Employee Share Option Plan. Information relating to this scheme is set out in note 30. The fair value of options granted under the QRxPharma Limited Employee Share Option Plan is recognised as an employee beneﬁ t expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date is independently determined using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. The fair value of the options granted is adjusted to reﬂ ect market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, proﬁ tability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee beneﬁ t expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. (v) Bonus plans The Group recognises a liability and an expense for bonuses in accordance with the terms of employment contracts. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (vi) Employee beneﬁ t on-costs Employee beneﬁ t on-costs are recognised and included in the employee beneﬁ t liabilities and costs when the employee beneﬁ ts to which they relate are recognised. www.qrxpharma.com 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 44 QRxPharma Annual Report 2013 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) q) Employee beneﬁ ts (continued) (vii) Termination beneﬁ ts Termination beneﬁ ts are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these beneﬁ ts. The Group recognises termination beneﬁ ts when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination beneﬁ ts as a result of an offer made to encourage voluntary redundancy. Beneﬁ ts falling due more than 12 months after the end of the reporting period are discounted to present value. r) Contributed equity Ordinary shares are classiﬁ ed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. s) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the proﬁ t 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 ﬁ nancial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the ﬁ gures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other ﬁ nancing costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. t) Derivatives Derivatives that do not qualify for hedge accounting Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or other expenses. u) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash ﬂ ows are presented on a gross basis. The GST components of cash ﬂ ows arising from investing or ﬁ nancing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash ﬂ ow. v) Rounding of amounts The company is a kind referred to in Class order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the ﬁ nancial report. Amounts in the ﬁ nancial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. w) Parent entity ﬁ nancial information The ﬁ nancial information for the parent entity, QRxPharma Limited, disclosed in note 29 has been prepared on the same basis as the consolidated ﬁ nancial statements, except as set out below. (i) Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries are accounted for at cost in the ﬁ nancial statements of QRxPharma Limited. (ii) Tax consolidation legislation QRxPharma Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, QRxPharma Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. (iii) Share based payments The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution to that subsidiary undertaking. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. x) New accounting standards and interpretations (i) Standards and interpretations adopted during the period The Group has adopted the amendments to Australian Accounting Standards during the current reporting period as a consequence of AASB 2011-9 ‘Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income’. The adoption of the amendments has not resulted in any changes to the Group’s accounting policies and has no effect on the amounts reported for the current or prior interim periods. However, the application of AASB 2011-9 has resulted in changes to the Group’s presentation of, or disclosure in, its ﬁ nancial statements. AASB 2011-9 introduces new terminology for the statement of comprehensive income and income statement. Under the amendments to AASB 101, the statement of comprehensive income is renamed as a statement of proﬁ t or loss and other comprehensive income and the income statement is renamed as a statement of proﬁ t or loss. The amendments to AASB 101 retain the option to present proﬁ t or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to AASB 101 require items of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not be reclassiﬁ ed subsequently to proﬁ t or loss and (b) items that may be reclassiﬁ ed subsequently to proﬁ t or loss when speciﬁ c conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis – the amendments do not change the option to present items of other comprehensive income either before tax or net of tax. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modiﬁ ed to reﬂ ect the changes. Other than the above mentioned presentation changes, the application of the amendments to AASB 101 does not result in any impact on proﬁ t or loss, other comprehensive income and total comprehensive income. (ii) Standards and interpretations in issue not yet adopted At the date of authorisation of the ﬁ nancial statements, a number of standards and interpretations were in issue but not yet effective. The reported results and position of the Group will not change on adoption of these pronouncements as currently there are no transactions that will be impacted materially by these pronouncements. Adoption will, however, result in changes to information currently disclosed in the ﬁ nancial statements. The Group does not intend to adopt any of these pronouncements before their effective dates. www.qrxpharma.com 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) x) New accounting standards and interpretations (continued) Standard/Interpretation AASB 9 Financial Instruments (December 2009), AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9, AASB 2012-6 ‘Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures’ AASB 10 Consolidated Financial Statements AASB 11 Joint Arrangements AASB 12 Disclosure of Interests in Other Entities AASB 127 Separate Financial Statements (2011) Effective for annual reporting periods beginning on or after Expected to be initially applied in the ﬁ nancial year ending 1 January 2015 30 June 2016 1 January 2013 1 January 2013 1 January 2013 1 January 2013 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 AASB 128 Investments in Associates and Joint Ventures (2011) 1 January 2013 AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements standards AASB 119 Employee Beneﬁ ts (2011), AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (2011) 1 January 2013 30 June 2014 1 January 2013 30 June 2014 AASB 13 Fair Value Measurement, AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 1 January 2013 30 June 2014 AASB 2012-5 ‘Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle’ 1 January 2013 30 June 2014 46 QRxPharma Annual Report 2013 2 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of ﬁ nancial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of ﬁ nancial markets and seeks to minimise potential adverse effects on the ﬁ nancial performance of the Group. The Group uses derivative ﬁ nancial instruments such as foreign exchange contracts to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, not as trading or other speculative instruments. Cash and cash equivalents are invested exclusively with ‘A’ rated ﬁ nancial institutions, at a minimum, with capital preservation being the stated investment objective. Risk management is carried out under policies approved by the board of directors. The Group holds the following ﬁ nancial instruments: Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables 20132013 $’000 11,960 308 2012 $’000 22,950 1,187 12,268 24,137 1,710 1,710 1,533 1,533 (a) Market risk (i) Foreign exchange risk The Group is exposed to foreign exchange risk arising from currency exposure to the US dollar. 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 Group’s exposure to foreign currency risk at the reporting date was as follows: 30 June 2013 30 June 2013 EUR USD GBP 30 June 2012 EUR USD GBP $’000 $’000 $’000 $’000 $’000 $’000 Cash at bank Term deposits Trade payables 381 9,820 15 - - - - - - 563 22,047 14 2 - - 29 - - www.qrxpharma.com 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 48 QRxPharma Annual Report 2013 2 FINANCIAL RISK MANAGEMENT (continued) Group sensitivity Based on the ﬁ nancial instruments held at 30 June 2013, had the Australian dollar weakened / strengthened by 15% (2012: 15%) against the US dollar with all other variables held constant, the Group’s post-tax loss for the year would have been $2.0 million lower / $1.5 million higher (2012: $4.6 million lower / $3.4 million higher), mainly as a result of foreign exchange gains / losses on translation of US dollar denominated ﬁ nancial instruments as detailed in the above table. The Group’s exposure to other foreign exchange movements is not material. (ii) Price risk The Group and the parent entity are not exposed to equity securities price risk or commodity price risk. (iii) Cash ﬂ ow and interest rate risk The Group’s main interest rate risk arises from the holding of cash and cash equivalents. During the year, the Group held signiﬁ cant interest-bearing bank term deposits exposing the Group’s income and operating cash ﬂ ows to changes in market interest rates. The value of borrowings at 30 June 2013 was $nil (2012: $nil), thus limiting the Group’s exposure to any cash ﬂ ow risk in relation to liabilities. Group sensitivity As at 30 June 2013, if interest rates had changed by -17 / + 25 basis points (2012: -25 / + 40 basis points) from the year-end rates with all other variables held constant, the post-tax loss for the year would have been $6,000 higher / $4,000 lower (2012: $21,000 higher / $13,000 lower), mainly as a result of lower / higher interest income from cash and cash equivalents. (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and deposits with banks and ﬁ nancial institutions. For banks and ﬁ nancial institutions, only independently rated parties with a minimum rating of ‘A’ are acceptable. At 30 June 2013, cash equivalents were held with ﬁ nancial institutions rated Aa2 by Moody’s. (c) Liquidity risk Prudent liquidity risk management implies maintaining sufﬁ cient cash and marketable securities. The Group has experienced recurring operating losses and operating cash outﬂ ows since inception to 30 June 2013. Due to negative operating cash ﬂ ow position the Group has not committed to any credit facilities and relied upon equity ﬁ nancing through private and public equity investors. The Group entity’s exposure to liquidity risk is restricted to the value of outstanding trade creditors. Trade payables generally have 30 day payment terms, and at 30 June 2013, the Group had no overdue liabilities. The value of trade creditors at 30 June 2013 for the Group was $1,160,000 (2012: $757,000) which is payable within 1 month of year end and at 30 June 2013, the entity carried cash and cash equivalents of $12 million (2012: $23 million). Other payables for the Group include accruals for employee beneﬁ ts and other accruals to the value of $1,024,000 (2012: $1,801,000). The fair value of ﬁ nancial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. Quoted market prices for similar instruments and recent transactions are used to estimate fair value. The Group has fully impaired the available-for-sale ﬁ nancial assets to $nil at 30 June 2013 (2012: $nil). The carrying value of trade and other payables is assumed to approximate their fair values due to their short-term nature. Management monitors rolling forecasts of the Group’s liquidity reserve and cash and cash equivalents on the basis of expected cash ﬂ ows. The Group’s liquidity management policy involves projecting cash ﬂ ows in major currencies and considering the level of liquid assets necessary to meet these. (d) Fair value measurements The fair value of ﬁ nancial assets and ﬁ nancial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). (c) The fair value of ﬁ nancial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. Quoted market prices for similar instruments and recent transactions are used to estimate fair value. The level 3 instrument was fully written down during the ﬁ nancial year ended 30 June 2012. The carrying value of trade and other payables is assumed to approximate their fair values due to their short-term nature. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a ﬁ nancial impact on the entity and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by deﬁ nition, seldom equal the related actual results. The estimates and assumptions that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. Research and development expenditure The Group has expensed all internal research and development expenditure incurred during the year as the costs relate to the initial expenditure for research and development of biopharmaceutical products and the generation of future economic beneﬁ ts are not considered certain. It was considered appropriate to expense the research and development costs as they did not meet the criteria to be capitalised under AASB 138. Impairment of intangible assets The Group reviews deﬁ nite life intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Group makes estimates and assumptions about the recoverability of intellectual property. Where the carrying value of the intellectual property exceeds the recoverable amount, an impairment loss is recognised to record the intellectual property at its recoverable amount. Black-Scholes option pricing model During the year, the Group expensed $1.4 million of share based payments as determined through the application of the Black-Scholes option pricing model. The Black-Scholes model is dependent on a number of variables and estimates fully described in note 30. Impairment of available-for-sale ﬁ nancial assets The Group follows the guidance of AASB 139 Financial Instruments: Recognition and Measurement to determine when an available-for- sale ﬁ nancial asset is impaired. This determination requires signiﬁ cant judgement. In making this judgement, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost and the ﬁ nancial health of and short-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and ﬁ nancing cash ﬂ ows. In the 2013 ﬁ nancial year, the fair value of the relevant asset was assessed and determined to be $nil (2012: $nil). www.qrxpharma.com 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) Revenue recognition The Group is recognising revenue associated with the receipt in December 2011 of a non- refundable, non-creditable up front signing fee of $5.9 million (US$6 million) from Actavis Inc. from the date of receipt to the anticipated FDA approval date representing an approximation of the time relating to the submission of the ﬁ ling with the FDA and associated processes. The Group recognised $3.5 million (2012:$1.8 million) of revenue during the year and has deferred $592,000 (2012: $4.1 million). 4 SEGMENT INFORMATION Based on the internal reports that are reviewed and used by the executive management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources, the Group has determined that it operates within a single operating segment. The operating segment is that of the research and development of biopharmaceutical products for commercial sale. 5 REVENUE From continuing operations License fee received Interest 20132013 $’000 4,006 60 4,066 2012 $’000 1,805 114 1,919 On 20 December 2011, the Company signed a binding Letter of Intent (LOI) with Actavis Inc to commercialise immediate release MOXDUO in the USA. The LOI was secured by a non- refundable, non-creditable up front signing fee of $5.9 million (US$6 million). The fee revenue will be recognised from the date of the signing of the LOI to the anticipated FDA approval date representing an approximation of the time relating to the submission of the ﬁ ling with the FDA and associated processes. The Group has recognised $3.5 million (2012: $1.8 million) as revenue and $592,000 (2012: $4.1 million) as deferred revenue in the year to 30 June 2013. On 9 October 2012, the Company signed a license agreement with Paladin Labs Inc. to commercialise immediate release MOXDUO in Canada. The license agreement was secured by a one-time, non-refundable, non-creditable upfront fee in the amount of $485,000 (US$500,000). The fee has been recognised as revenue in the year to 30 June 2013. 6 OTHER INCOME Foreign exchange gain Export market development grant Sale of derivative ﬁ nancial instrument 20132013 $’000 597 150 - 747 2012 $’000 1,975 - 291 2, 266 50 QRxPharma Annual Report 2013 During the year ended 30 June 2013 there were no purchases of foreign exchange option contracts and no contracts on hand at the end of the ﬁ nancial year. In the previous ﬁ nancial year ended 30 June 2012 the Group purchased a number of foreign exchange option contracts at a cost of $152,000 to protect against adverse movements between the AU$ and US$. These option contracts were not utilised during the period and were repurchased by the bank for $291,000 netting the Group a gain on sale of foreign currency option contracts of $139,000. 7 EXPENSES Loss before income tax includes the following speciﬁ c expenses: Research and development Research and development expense 8,260 9,162 20132013 $’000 2012 $’000 Employee beneﬁ ts expense Employee beneﬁ ts expense Deﬁ ned contribution superannuation expense Share-based payments Depreciation and amortisation Plant and equipment Rental expenses relating to operating leases 2,731 45 1,428 4,204 64 4,965 65 2,162 7,192 65 Minimum lease payments 158 137 8 INCOME TAX BENEFIT 20132013 $’000 2012 $’000 (a) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense (10,075) (16,045) Tax at the Australian tax rate of 30% (2012 – 30%) (3,023) (4,814) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Share-based payments Impairment of ﬁ nancial asset Adjustment for current tax of prior periods Income tax losses not recognised Income tax expense (b) Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax beneﬁ t @ 30% 428 - (2,595) (343) 2,938 - 20132013 $’000 107,304 32,191 649 122 (4,043) 1,083 2,960 - 2012 $’000 97,511 29,253 www.qrxpharma.com 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8 INCOME TAX BENEFIT (continued) No deferred tax asset has been recognised for the tax losses generated from operations in both Australia and the USA, as the beneﬁ t for tax losses will only be obtained if: (i) the Group derives future assessable income of a nature and of an amount sufﬁ cient to enable the beneﬁ t from the deductions for the losses to be realised, or (ii) the Group continues to comply with the conditions for deductibility imposed by tax legislation, and (iii) no changes in tax legislation adversely affect the Group in realising the beneﬁ t from the deduction for the losses. (c) Tax consolidation legislation QRxPharma Limited and its wholly owned Australian controlled entities have implemented the tax consolidation legislation as of 7 December 2002. The accounting policy in relation to this legislation is set out in note 1(g). 9 CURRENT ASSETS - CASH AND CASH EQUIVALENTS Cash at bank Term deposits 20132013 $’000 568 11,392 11,960 2012 $’000 796 22,154 22,950 (a) Cash at bank These bear an average interest rate of 2.84% (2012: 4.07%) for the AUD accounts and 0% (2012: 0%) for the USD accounts. (b) Term deposits These are term deposits held in US dollars and Australian dollars. The USD deposits bear an average ﬁ xed interest rate of 0.16% (2012: 0.21%). These deposits have a maturity of less than 3 months. The AUD deposits bear an average ﬁ xed interest rate of 3.8% (2012: 5.15%). These deposits have a maturity of less than 3 months. 10 CURRENT ASSETS - TRADE AND OTHER RECEIVABLES Interest receivable Other receivables 20132013 $’000 4 304 308 2012 $’000 10 1,202 1,212 Information about the Group’s exposure to credit risk, foreign currency and interest rate risk in relation to other receivables is provided in note 2. Due to the short term nature of these receivables, their carrying amount is assumed to approximate their fair value and at 30 June 2013 no receivables were impaired or past due (30 June 2012: $nil). 52 QRxPharma Annual Report 2013 11 CURRENT ASSETS - OTHER CURRENT ASSETS Prepayments 20132013 $’000 220 2012 $’000 458 12 NON-CURRENT ASSETS – PLANT AND EQUIPMENT At 1 July 2011 Cost Accumulated depreciation Net book amount Year ended 30 June 2012 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2012 Cost Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2013 Cost Accumulated depreciation Net book amount $’000 478 (282) 196 196 60 (65) 191 538 (347) 191 191 13 (5) (64) 135 532 (397) 135 13 NON-CURRENT ASSETS - AVAILABLE-FOR-SALE FINANCIAL ASSETS Unlisted Securities Equity securities 20132013 $’000 2012 $’000 - - Investments in related parties At 30 June 2012, the carrying value of the available-for-sale ﬁ nancial asset, representing the 6.98% investment in Venomics Hong Kong Limited by Venomics Pty Limited was assessed and determined to be $nil. Accordingly, the investment has been fully impaired to $nil. www.qrxpharma.com 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14 NON CURRENT ASSETS - INTANGIBLE ASSETS Patents, trademarks and other rights $’000 Other intangible assets $’000 - - - - Total $’000 - - - - - - - - 15,502 889 16,391 (15,502) (889) (16,391) Year ended 30 June 2012 Opening net book amount Impairment of intellectual property Amortisation charge Closing net book amount At 30 June 2012 Cost Accumulated amortisation and impairment Net book amount - - - Patents, trademarks and other rights $’000 Other intangible assets $’000 - - - - Total $’000 - - - - - - - - 15,502 889 16,391 (15,502) (889) (16,391) - - - Year ended 30 June 2013 Opening net book amount Impairment of intellectual property Amortisation charge Closing net book amount At 30 June 2013 Cost Accumulated amortisation and impairment Net book amount 54 QRxPharma Annual Report 2013 15 CURRENT LIABILITIES - TRADE AND OTHER PAYABLES Trade payables Other payables 16 PROVISIONS Employee Beneﬁ ts Current Non-current 20132013 $’000 1,160 550 1,710 20132013 $’000 240 234 474 2012 $’000 757 776 1,533 2012 $’000 824 201 1,025 The current provision represents beneﬁ ts that are due to be settled within 12 months after the end of the reporting period to 30 June 2013. 17 OTHER CURRENT LIABILITIES Deferred revenue – see note 5 18 CONTRIBUTED EQUITY (a) Share capital Ordinary shares - fully paid 20132013 $’000 592 2012 $’000 4,055 20132013 Shares 2012 Shares 20132013 $’000 2012 $’000 144,785,606 144,577,206 144,433 144,281 www.qrxpharma.com 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18 CONTRIBUTED EQUITY (continued) (b) Movements in ordinary share capital: Date 30 June 2011 Details Number of shares Issue price Balance 125,824,127 28 July 2011 2 August 2011 2 August 2011 30 August 2011 26 September 2011 2 November 2011 2 November 2011 2 November 2011 19 December 2011 31 January 2012 31 January 2012 31 January 2012 1 February 2012 6 February 2012 6 February 2012 3 March 2012 3 March 2012 19 March 2012 22 March 2012 22 March 2012 17 April 2012 17 April 2012 18 May 2012 Less: Transaction costs arising on issue of shares 30 June 2012 Share placement Exercise of employee options Exercise of employee options Rights Issue Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options 17,241,379 30,000 20,000 1,046,351 20,000 8,000 5,000 50,000 33,333 7,000 3,125 8,333 25,000 50,000 60,000 3,125 8,333 16,600 25,000 15,000 20,000 20,000 37,500 Balance 144,577,206 20 December 2012 14 January 2013 8 May 2013 31 May 2013 11 June 2013 30 June 2013 Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Balance 40,000 27,500 3,400 105,000 32,500 144,785,606 56 QRxPharma Annual Report 2013 $1.45 $0.20 $0.65 $1.45 $0.20 $0.20 $0.65 $0.84 $0.65 $0.20 $0.65 $0.84 $0.20 $0.60 $0.20 $0.65 $0.84 $0.65 $0.20 $0.65 $0.65 $0.20 $0.84 $0.20 $0.65 $0.65 $0.90 $0.90 $’000 118,809 25,000 6 13 1,517 4 2 3 42 22 1 2 7 5 30 12 2 7 11 5 10 13 4 32 (1,278) 144,281 8 18 2 95 29 144,433 (c) Ordinary shares Each ordinary shareholder maintains, when present in person or by proxy or by attorney at any general meeting of the company, the right to cast one vote for each ordinary share held. Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. (d) Options Information relating to the QRxPharma Limited Employee Share Option Plan, including details of options issued, exercised and lapsed during the ﬁ nancial year and options outstanding at the end of the ﬁ nancial year are set out in note 30. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (e) Capital risk management The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so they can continue to provide returns for shareholders and beneﬁ ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group predominantly uses equity to ﬁ nance its projects. In order to maintain or adjust the capital structure, the Group may return capital to shareholders, issue new shares or sell assets. 19 RESERVES AND ACCUMULATED LOSSES (a) Reserves Share-based payments reserve Foreign currency translation reserve Transactions with non-controlling interest reserve Movements: Share-based payments reserve Balance 1 July 2012 Option expense Balance 30 June 2013 Foreign currency translation reserve Balance 1 July 2012 Currency translation differences arising during the year Balance 30 June 2013 Transactions with non-controlling interest reserve Balance 1 July 2012 Balance 30 June 2013 (b) Accumulated losses Movements in accumulated losses were as follows: Balance at 1 July 2012 Net loss for the year Balance 30 June 2013 20132013 $’000 12,074 316 456 12,846 10,646 1,428 12,074 167 149 316 456 456 2012 $’000 10,646 167 456 11,269 8,484 2,162 10,646 85 82 167 456 456 20132013 $’000 (137,306) (10,075) (147,381) 2012 $’000 (121,357) (15,949) (137,306) www.qrxpharma.com 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19 RESERVES AND ACCUMULATED LOSSES (continued) (c) Nature and purpose of reserves (i) Share-based payments reserve The share-based payment reserve is used to recognise: • the fair value of options issued to employees but not exercised • the fair value of shares issued to employees (ii) Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entity are taken to the foreign currency translation reserve, as described in note 1(e). The reserve will be recognised in proﬁ t and loss when the net investment is disposed. (iii) Transactions with non-controlling interests This reserve is used to record amounts which may arise as a result of transactions with non- controlling interests that do not result in a loss of control. 20 NON-CONTROLLING INTERESTS Interests in: Share capital Reserves Retained earnings 20132013 $’000 122 122 (295) (51) 2012 $’000 122 122 (290) (46) 21 KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Directors The following persons were directors of QRxPharma Limited during the ﬁ nancial year: (i) Chairman - non-executive Dr Peter C Farrell (ii) Executive director Dr John W Holaday, Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer (iii) Non-executive directors Dr Gary W Pace, Consultant Michael A Quinn R Peter Campbell 58 QRxPharma Annual Report 2013 (b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the ﬁ nancial year: Name John W Holaday Managing Director, Chief Executive Ofﬁ cer and Chief Scientiﬁ c Ofﬁ cer Position Edward M Rudnic Chief Operating Ofﬁ cer Chris J Campbell Chief Financial Ofﬁ cer Richard A Paul Executive Vice President Drug Development (to 20 January 2013) M. Janette Dixon Vice President of Global Business Development c) Key management personnel compensation Short-term employee beneﬁ ts Post-employment beneﬁ ts Share-based payments 20132013 $ 1,827,880 23,375 862,910 2,714,165 2012 $ 2,061,061 33,769 971,034 3,065,864 The Company has taken advantage of the relief provided by Corporations Regulations and has transferred the detailed remuneration disclosures to the directors’ report. The relevant information can be found in the remuneration report on pages 11 to 19. (d) Equity instrument disclosures relating to key management personnel (i) Options provided as remuneration and shares issued on exercise of such options. Details of options provided as remuneration and shares issued on the exercise of such options, together with terms and conditions of the options, can be found in the remuneration report on pages 11 to 19. (ii) Option holdings The numbers of options over ordinary shares in the company held during the ﬁ nancial year by each director of QRxPharma Limited and other key management personnel of the Group, including their personally related parties, are set out on the following page. www.qrxpharma.com 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21 KEY MANAGEMENT PERSONNEL DISCLOSURES (continued) (d) Equity instrument disclosures relating to key management personnel (continued) Name Balance at start of the year Granted as compensation Exercised Forfeited Balance at end of the year Vested and exercisable Unvested 20132013 Directors of QRxPharma Limited Peter C Farrell John W Holaday Gary W Pace Michael A Quinn R Peter Campbell 754,089 1,605,452 552,726 552,726 391,635 Other key management personnel of the Group Edward M Rudnic Chris J Campbell Richard A Paul (to 20 January 2013) M. Janette Dixon 350,000 915,226 450,000 150,000 700,000 200,000 75,000 300,000 75,000 75,000 75,000 500,000 200,000 - - - - - - - - - - - - - - - - 829,089 729,089 100,000 1,905,452 1,438,785 466,667 627,726 627,726 527,726 100,000 527,726 100,000 466,635 366,635 100,000 850,000 1,115,226 116,667 733,333 757,934 357,292 (600,000) - - - - 900,000 545,833 354,167 2012 Name Balance at start of the year Granted as compensation Exercised Forfeited Balance at end of the year Vested and exercisable Unvested Directors of QRxPharma Limited Peter C Farrell John W Holaday Gary W Pace Michael A Quinn R Peter Campbell 754,089 1,355,452 552,726 552,726 391,635 - 250,000 - - - Other key management personnel of the Group Edward M Rudnic* Chris J Campbell Richard A Paul M. Janette Dixon - 350,000 765,226 250,000 500,000 200,000 (50,000) 200,000 200,000 - - - - - - - - - - - - - - - - - 754,089 679,089 75,000 1,605,452 1,180,452 425,000 552,726 552,726 391,635 350,000 915,226 450,000 700,000 477,726 477,726 316,635 75,000 75,000 75,000 - 350,000 596,476 318,750 125,000 325,000 379,166 320,834 * Edward M Rudnic was appointed Chief Operating Ofﬁ cer on 13 February 2012. He was previously engaged as a consultant to the company for which he received 235,000 options. Additionally he has received 70,000 options as a member of the Company’s Scientiﬁ c Advisory Board. 60 QRxPharma Annual Report 2013 (iii) Share holdings The numbers of shares in the company held during the ﬁ nancial year by each director of QRxPharma Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 20132013 Name Directors of QRxPharma Limited Ordinary shares Peter C Farrell John W Holaday Gary W Pace Michael A Quinn R Peter Campbell Other key management personnel of the Group Ordinary shares Edward M Rudnic Chris J Campbell Richard A Paul (to 20 January 2013) M. Janette Dixon Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year 1,865,367 7,609,635 3,526,827 8,505,322 183,380 - 94,780 - 70,000 - - - - - - - - - 118,588* - 88,441* (7,896,335)** - - - - (70,000) 1,983,955 7,609,635 3,615,268 608,987 183,380 - 94,780 - - *The change represents the receipt of an in-specie distribution made by Innovation Capital Limited and Innovation Capital LLC (Innovation Capital Fund I) to its underlying shareholders. **The disposal represents an in-specie distribution to underlying shareholders by Innovation Capital Limited and Innovation Capital LLC (Innovation Capital Fund I) of 7,982,775 shares and the receipt of 86,440 shares by Michael Quinn and Rosemary Quinn as part of the above noted in-specie distribution. Name Directors of QRxPharma Limited Ordinary shares Peter C Farrell John W Holaday Gary W Pace Michael A Quinn R Peter Campbell Other key management personnel of the Group Ordinary shares Edward M Rudnic Chris J Campbell Richard A Paul M. Janette Dixon Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year 2012 1,815,540 7,609,635 3,493,833 8,480,662 174,647 - 42,647 - 240,000 - - - - - - 50,000 - - 49,827 - 32,994 24,660 8,733 - 2,133 - (170,000) 1,865,367 7,609,635 3,526,827 8,505,322 183,380 - 94,780 - 70,000 www.qrxpharma.com 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 62 QRxPharma Annual Report 2013 21 KEY MANAGEMENT PERSONNEL DISCLOSURES (continued) (e) Other transactions with key management personnel During the year, the Company directly engaged and contracted the services of certain key management personnel to perform consulting services for the Group. The total amount paid to key management personnel for contracted services rendered during the year amounted to $81,049 (2012: $301,775). 22 REMUNERATION OF AUDITORS (a) Auditor of the Group Audit & other assurance services Deloitte Touche Tohmatsu Australia PricewaterhouseCoopers Australia Total remuneration for audit and other assurance services Taxation services Tax compliance services 20132013 $ 2012 $ 90,000 - - 111,000 90,000 111,000 PricewaterhouseCoopers Australia - 9,270 Tax consulting and advice Deloitte Touche Tohmatsu Australia PricewaterhouseCoopers Australia Total remuneration for taxation services Total remuneration of Deloitte Touche Tohmatsu Australia Total remuneration of PricewaterhouseCoopers Australia (b) Newtwork ﬁ rms of the auditor of the Group Taxation services Tax compliance services PricewaterhouseCoopers International tax consulting and advice PricewaterhouseCoopers Total remuneration of related practices of the auditor of the Group Total auditors remuneration Deloitte Touche Tohmatsu Australia PricewaterhouseCoopers 12,500 - 12,500 - 106,788 116,058 102,500 - - - - - 102,500 - 102,500 227,058 33,974 11,006 44,980 - 272,038 272,038 At the Company’s annual general meeting on 7 November 2012, shareholders approved the appointment of Deloitte Touche Tohmatsu Australia as the new auditors of the Group. It is the Group’s policy to employ the Group’s auditors on assignments in addition to their statutory audit duties where their expertise and experience with the Group are important. These assignments are principally in relation to tax advice. It is the Group’s policy to seek competitive tenders for all major consulting projects. 23 CONTINGENCIES The Group acquired on 26 April 2007 a 100% interest in CNS Co, Inc. and through this acquisition now holds a license agreement with University of Alabama (USA). Under the terms of this license agreement the Group is obligated to meet certain milestone payments as advances against future royalties from the Torsin programme as follows: (i) US $750,000 on commencement by the Group of Phase II clinical trial for any Torsin IP product; (ii) US $1,500,000 on commencement by the Group of Phase III clinical trial for any Torsin IP product; (iii) US $2,000,000 on the date of receipt by the Group of ﬁ rst market approval for each Torsin IP product. The agreement may be terminated by the Group at any time on 6 months’ notice to the University of Alabama and upon payment of all amounts due to University of Alabama to the effective termination date. The agreement will expire on the last expiry date of the patents licensed under the agreement. 24 COMMITMENTS Operating leases The Group leases ofﬁ ce premises in Sydney, Australia and New Jersey, USA. The leases have varying terms, escalation clauses and renewal rights. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than ﬁ ve years 20132013 $’000 139 171 310 2012 $’000 77 205 282 25 RELATED PARTY TRANSACTIONS (a) Subsidiaries Interests in subsidiaries are set out in note 26. (b) Key management personnel Disclosures relating to key management personnel are set out in note 21. (c) Outstanding balances There are no outstanding balances at the reporting date in relation to transactions with related parties. www.qrxpharma.com 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 64 QRxPharma Annual Report 2013 26 SUBSIDIARIES The consolidated ﬁ nancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c): Name of entity Country of incorporation Class of shares Equity holding 20132013 % 2012 % Australia Ordinary Australia USA Ordinary / Preference Ordinary Australia Ordinary 100 100 100 80 100 100 100 80 The Lynx Project Pty Limited Haempatch Pty Limited QRxPharma, Inc. Venomics Pty Limited 27 RECONCILIATION OF LOSS AFTER INCOME TAX TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES Loss for the year Depreciation and amortisation Non-cash employee beneﬁ ts expense – share-based payments Net exchange differences on cash and cash equivalents Loss on disposal of ﬁ xed assets Impairment of Venomics Hong Kong Limited Change in operating assets and liabilities (Increase)/decrease in other receivables and prepayments (Decrease)/increase in trade creditors and accruals Net cash outﬂ ow from operating activities 28 LOSS PER SHARE (a) Basic loss per share Loss from continuing operations attributable to the ordinary equity holders of the company (b) Diluted loss per share Loss from continuing operations attributable to the ordinary equity holders of the company 20132013 $’000 2012 $’000 (10,080) (16,045) 64 1,428 (448) 5 - 65 2,162 (1,892) - 406 1,142 (3,837) (11,726) (1,315) 4,891 (11,728) 20132013 Cents 2012 Cents (7.0) (11.2) (7.0) (11.2) (c) Reconciliations of earnings used in calculating earnings per share 20132013 $’000 2012 $’000 29 PARENT ENTITY FINANCIAL INFORMATION (a) Summary ﬁ nancial information The individual ﬁ nancial statements for the parent entity show the following aggregate amounts: Basic loss per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share Diluted loss per share Loss attributable to the ordinary equity holders of the company used in calculating diluted earnings per share (10,075) (15,949) Balance Sheet (10,075) (15,949) Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities 20132013 $’000 12,087 1,287 13,374 3,575 74 3,649 2012 $’000 22,817 1,496 24,313 6,079 32 6,111 (d) Weighted average number of shares used as the denominator 20132013 Number 2012 Number Shareholder’s equity Issued capital Share based payment reserve 144,433 11,612 144,281 10,183 144,622,479 142,820,519 Accumulated losses (146,320) (136,262) 9,725 18,202 144,622,479 142,820,519 (Loss) for the year Total comprehensive (loss) (10,058) (15,503) (10,058) (15,503) Weighted average number of ordinary shares used as the denominator in calculating basic loss per share Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted loss per share (e) Information concerning the classiﬁ cation of securities Options Options are considered to be potential ordinary shares. The options are not included in the calculation of diluted earnings per share because they are anti-dilutive. These options could potentially dilute basic earnings per share in the future. Details relating to the options are set out in note 30. (b) Guarantees entered into by the parent entity There are no guarantees entered into by the parent entity. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2013 or 30 June 2012. (d) Commitments of the parent entity The parent entity leases ofﬁ ce premises in Sydney, Australia. 2012 $’000 Commitments for minimum lease payments in relation to non- cancellable operating leases are payable as follows: Within one year 20132013 $’000 15 17 www.qrxpharma.com 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 66 QRxPharma Annual Report 2013 29 PARENT ENTITY FINANCIAL INFORMATION (continued) (e) Convertible Note At 30 June 2013, QRxPharma Limited holds 50,500 (2012: 50,500) convertible notes in Venomics Pty Limited at US$4 face value per note. These notes carry an interest rate of 10% per annum (compounding monthly). Each note is convertible at QRxPharma Limited’s request and it also has the ability to require redemption of some or all of the notes under certain conditions. 5,000 notes mature on 1 December 2013 and 45,500 on 20 December 2013. At 30 June 2013, QRxPharma Limited assessed the carrying value of the notes and determined that these notes may not be recoverable. Accordingly, it has fully impaired the value of these notes to $nil at 30 June 2013 (2012: $nil). The convertible notes are carried in Venomics Pty Limited as a liability at amortised cost and the embedded derivative at fair value. 30 SHARE-BASED PAYMENTS (a) QRxPharma Employee Share Option Plan (ESOP) The QRxPharma Limited Employee Share Option Plan (Limited ESOP) was approved by shareholders at the extraordinary general meeting of members held on 24 April 2007. Under the Limited ESOP shares may be issued by the Company to eligible employees at an exercise price as determined by the remuneration committee, being not less than the share price on the grant date of the options. Any person who is employed by, or is a director, ofﬁ cer, executive or consultant of the Company or any related body corporate of the Company and whom the remuneration committee determines is eligible to participate in the option plan are eligible to participate in the plan. Employees may elect not to participate in the scheme. The total number of shares that shall be reserved for issuance under the option plan shall not exceed ten per cent (10%) of the Diluted Ordinary Share Capital in the Company as at the date of issue of the relevant options under the option plan, subject to changes in capitalisation as provided in clause 16.3 of the option plan. The approval of the Company’s shareholders must be obtained for any amendment to the option plan in relation to: (a) increasing the maximum aggregate number of shares that may be issued under the option plan; (b) any change in the class of employees eligible to receive options under the option plan; (c) any change in the shares reserved for issuance under the option plan; and (d) substitution of another entity in place of the Company as the issuer of shares under the option plan. Options will lapse if they are not exercised before the expiration date or if the option holder leaves the employment of the Group. Options granted under the plan carry no dividend or voting rights. The vesting period for each option issued up to 31 December 2008 is 3 years, or as varied by the board, one third vesting 12 months from the date of grant and the balance vesting equally each year over the remaining two year period. Options issued from 1 January 2009 generally vest over 3 years with the initial vesting on the ﬁ rst anniversary of the date of the grant and subsequent vestings in 8 equal tranches on the ﬁ rst day of each calendar quarter over the following 2 years. When exercisable, each option is convertible into one ordinary share and entitles the holder to the same ordinary share rights as set out in note 18. Shares issued under the scheme may be sold at the expiration of any Restriction Agreement between the eligible employee and the Company. Such restrictions may be imposed by the remuneration committee upon the grant of options under the option plan and such restrictions will be contained in the Option Agreement between the eligible employee and the Company. In all other respects the shares rank equally with other fully paid ordinary shares on issue (refer to note 18(c)). (b) Set out below are summaries of options granted under the plans: Grant Date Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Forfeited during the year Balance at end of the year 20132013 Vested and exercisable at end of the year Number Number Number 31 March 2007 31 March 2014 14 April 2007 25 May 2007 25 May 2007 $1.42 $1.00 $1.00 Number 402,726 2,013,630 502,726 14 April 2014 25 May 2014 25 May 2014 $2.00 1,398,450 1 September 2007 1 September 2014 1 October 2007 1 October 2014 9 October 2007 9 October 2014 1 January 2008 1 January 2015 1 April 2008 1 April 2008 1 January 2009 31 August 2009 1 October 2009 1 April 2015 1 April 2015 1 January 2016 31 August 2016 1 October 2016 16 November 2009 16 November 2016 1 January 2010 1 January 2017 17 February 2010 17 February 2017 24 March 2010 24 March 2014 1 July 2010 1 July 2017 24 August 2010 24 August 2017 1 October 2010 1 October 2017 25 October 2010 25 October 2014 8 November 2010 8 November 2017 1 January 2011 1 January 2011 7 July 2011 1 January 2018 1 January 2015 $2.00 7 July 2018 28 September 2011 28 September 2018 18 November 2011 18 November 2018 23 January 2012 23 January 2019 23 January 2012 23 January 2016 1 April 2012 1 April 2019 7 November 2012 7 November 2019 7 November 2012 7 November 2019 7 November 2012 7 November 2016 19 February 2013 19 February 2020 $1.70 $1.45 $1.34 $1.11 $1.04 $1.05 $0.20 $0.65 $0.90 $1.12 $0.78 $0.84 $1.26 $1.15 $0.95 $0.93 $1.24 $1.00 $1.40 $1.70 $1.22 $1.60 $1.50 $2.15 $1.72 $1.00 $0.72 $1.03 $0.94 50,000 75,000 50,000 200,000 75,000 600,000 100,000 334,650 150,000 300,000 100,000 460,834 295,000 225,000 50,000 150,000 25,000 850,000 1,320,000 310,000 150,000 15,000 250,000 1,400,000 300,000 350,000 - - - - - - - - - - - (4,167) (12,500) - - (56,250) (18,750) - - - - - (487,500) (20,000) - - - (530,000) - - - Number 402,726 2,013,630 502,726 1,398,450 50,000 75,000 50,000 200,000 75,000 600,000 60,000 299,583 - 300,000 100,000 404,584 276,250 225,000 50,000 150,000 25,000 850,000 832,500 290,000 150,000 15,000 250,000 870,000 300,000 350,000 450,000 Number 402,726 2,013,630 502,726 1,398,450 50,000 75,000 50,000 200,000 75,000 600,000 60,000 299,583 - 300,000 100,000 404,584 276,250 206,250 45,833 125,000 20,833 708,333 688,750 222,500 87,500 8,750 125,000 362,500 125,000 116,667 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (40,000) (30,900) (137,500) - - - - - - - - - - - - - - - - - - - - - - - - - 450,000 1,215,000 430,000 300,000 (150,000) 1,065,000 50,000 - - 430,000 300,000 - - Total 12,503,016 2,395,000 (208,400) (1,279,167) 13,410,449 9,700,865 Weighted average exercise price $1.31 $0.86 $0.73 $1.34 $1.24 $1.27 www.qrxpharma.com 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 30 SHARE-BASED PAYMENTS (continued) (b) Set out below are summaries of options granted under the plans (continued) Grant Date Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Forfeited during the year Balance at end of the year 20122012 Vested and exercisable at end of the year Number Number Number 25 May 2014 $2.00 1,448,450 (50,000) 1,398,450 31 March 2007 31 March 2014 $1.42 $1.00 $1.00 Number 402,726 2,013,630 502,726 14 April 2014 25 May 2014 14 April 2007 25 May 2007 25 May 2007 1 September 2007 1 September 2014 1 October 2007 1 October 2014 9 October 2007 9 October 2014 1 January 2008 1 January 2015 1 April 2008 1 April 2008 1 October 2008 1 January 2009 31 August 2009 1 October 2009 1 April 2015 1 April 2015 1 October 2015 1 January 2016 31 August 2016 1 October 2016 16 November 2009 16 November 2016 1 January 2010 1 January 2017 17 February 2010 17 February 2017 24 March 2010 24 March 2014 1 July 2010 1 July 2017 24 August 2010 24 August 2017 1 October 2010 1 October 2017 25 October 2010 25 October 2014 8 November 2010 8 November 2017 $1.70 $1.45 $1.34 $1.11 $1.04 $1.05 $0.60 $0.20 $0.65 $0.90 $1.12 $0.78 $0.84 $1.26 $1.15 $0.95 $0.93 $1.24 $1.00 $1.40 50,000 75,000 50,000 200,000 75,000 600,000 50,000 295,000 467,500 150,000 300,000 100,000 565,000 295,000 225,000 50,000 150,000 25,000 850,000 1,330,000 310,000 1 January 2011 1 January 2011 7 July 2011 1 January 2018 1 January 2015 $2.00 7 July 2018 28 September 2011 28 September 2018 18 November 2011 18 November 2018 23 January 2012 23 January 2019 23 January 2012 23 January 2016 1 April 2012 Total 1 April 2019 $1.70 $1.22 $1.60 $1.50 $2.15 $1.72 - - - - - - 150,000 15,000 250,000 1,400,000 300,000 350,000 (116,183) (16,667) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (50,000) (195,000) - - - (104,166) - - - - - - - - - - - - - - Number 402,726 2,013,630 502,726 50,000 75,000 50,000 200,000 75,000 600,000 - 100,000 334,650 150,000 300,000 100,000 460,834 295,000 225,000 50,000 150,000 25,000 850,000 - - - - - - - - - - - - - - - - - - - - - (10,000) 1,320,000 - - - - - - - 310,000 150,000 15,000 250,000 1,400,000 300,000 350,000 Number 402,726 2,013,630 502,726 1,398,450 50,000 75,000 50,000 200,000 75,000 600,000 - 100,000 306,763 137,500 250,000 83,333 345,626 221,250 131,250 29,167 75,000 12,500 425,000 660,000 155,000 - - - - - - 10,580,032 2,465,000 (465,349) (76,667) 12,503,016 8,299,921 Weighted average exercise price $1.21 $1.63 $0.50 $1.63 $1.31 $1.24 The weighted average share price at the date of exercise of options exercised during the year ended 30 June 2013 was $1.07 (2012 – $1.59) The weighted average remaining contractual life of the share options outstanding at the end of the period was 3.13 years. (2012 – 3.88 years) 68 QRxPharma Annual Report 2013 31 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE The Company announced on 28 August 2013 that the United States Food and Drug Administration (FDA) had issued a Complete Response Letter (CRL) regarding the Company’s MOXDUO New Drug Application (NDA) for the treatment of moderate and severe acute pain. The Company conﬁ rmed the issuance of the CRL was to allow time to submit and evaluate further information required for the FDA to fully consider the respiratory safety advantages of MOXDUO from Study 022. With the issue of the CRL, in order to maintain FDA review, the Company is required to resubmit its NDA. The Company plans to complete its reﬁ ling in Q4 2013, inclusive of the additional information and analysis as requested by the FDA. The Company anticipates a new PDUFA (Prescription Drug User Fee Act) date in Q2 2014, preceded by an Advisory Committee meeting. No other signiﬁ cant events have occurred after the balance sheet date which would have a material impact on the ﬁ nancial results of the Group. Fair value of options granted The assessed fair value at grant date of options granted during the year ended 30 June 2013 was $0.53 per option (2012 - $1.11). The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. The model inputs for options granted during the year ended 30 June 2013 included: (a) exercise price: $0.72 to $1.03 (2012 – $1.22 to $2.15) (b) grant date: 7 November 2012, 19 February 2013 (2012 – 7 July 2011, 28 September 2011, 18 November 2011, 23 January 2012, 1 April 2012) (c) expiry date: 7 November 2016, 7 November 2019, 19 February 2020 (2012 – 7 July 2018, 28 September 2018, 18 November 2018, 23 January 2019, 23 January 2016, 1 April 2019) (d) share price at grant date: $0.72 to $0.94 (2012 – $1.22 to $1.85) (e) expected price volatility of the Company’s shares: 80% (2012 – 80%) (f) expected dividend yield: nil% (2012 – nil%) (g) risk free interest rate: 3.08% (2012 – 4.09%) The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. (c) Expenses arising from share based payment transactions Total expenses arising from share based payment transactions recognised during the period as part of employee beneﬁ t expense were as follows: Options issued under employee option plan 20132013 $’000 2012 $’000 1,428 2,162 www.qrxpharma.com 69 In the directors’ opinion: (a) the ﬁ nancial statements and notes set out on pages 31 to 69 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Act 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s ﬁ nancial position as at 30 June 2013 and of their performance for the ﬁ nancial year ended on that date; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and Note 1 (a) conﬁ rms that the ﬁ nancial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the chief executive ofﬁ cer and chief ﬁ nancial ofﬁ cer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Peter C Farrell Director Sydney 19 September 2013 DIRECTORS’ DECLARATION 70 QRxPharma Annual Report 2013 Deloitte Touche Tohmatsu ABN 74 490 121 060 Eclipse Tower Level 19 60 Station Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of QRxPharma Limited Report on the Financial Report We have audited the accompanying financial report of QRxPharma Limited, which comprises the statement of financial position as at 30 June 2013, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 31 to 70. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements , that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the company’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited www.qrxpharma.com 71 Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001 , which has been given to the directors of QRxPharma Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion, the financial report of QRxPharma Limited is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2013 and of its performance for the year ended on that date; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001 . Material Uncertainty Regarding Continuation as a Going Concern Without modifying our opinion, we draw attention to Note 1 in the financial report which indicates that the consolidated entity incurred a net loss of $10.1 million (2012: $16 million) and had net cash outflows from operating activities of $11.7 million (2012: $11.7 million) during the year ended 30 June 2013. These conditions, along with other matters as set forth in Note1, indicate the existence of a material uncertainty that may cast significant doubt about the company’s and consolidated entity’s ability to continue as going concerns and therefore, the company and the consolidated entity may be unable to realise their assets and extinguish their liabilities in the normal course of business. Report on the Remuneration Report We have audited the Remuneration Report included in pages 11 to 19 of the directors’ report for the year ended 30 June 2013. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of QRxPharma Limited for the year ended 30 June 2013, complies with section 300A of the Corporations Act 2001 . DELOITTE TOUCHE TOHMATSU X Delaney Partner Chartered Accountants Parramatta, 19 September 2013 72 QRxPharma Annual Report 2013 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 6 September 2013. A. DISTRIBUTION OF EQUITY SECURITIES Analysis of numbers of equity security holders by size of holding: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Shares 384 684 472 846 127 2,513 Options - - 2 15 23 40 There are 291 holders of less than a marketable parcel of ordinary shares. B. EQUITY SECURITY HOLDERS Twenty largest quoted equity security holders. The names of the twenty largest holders of quoted equity securities are listed below: Name HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited Auckland Trust Company Limited Citicorp Nominees Pty Limited Dr John Holaday National Nominees limited Werft Pty Ltd Uniquest Pty Limited Dr Gary Pace Jigley Holdings Pty Limited UBS Nominees Pty Limited UIIT Pty Limited Merrill Lynch (Australia) Nominees Pty Limited Spring Ridge Ventures I, LP Dr Peter Farrell Tesroff Pty Limited Mrs Dorinda Holaday Mr Ross Eddison ITR Investments Pty Limited HSF 1 Pty Limited ORDINARY SHARES Percentage of issued shares 15.58% 6.51% 5.03% 4.73% 4.57% 4.44% 3.88% 3.32% 2.50% 2.49% 1.86% 1.80% 1.58% 1.47% 1.37% 1.03% 0.69% 0.54% 0.54% 0.51% Number held 22,551,198 9,422,663 7,288,750 6,848,644 6,609,635 6,434,427 5,619,315 4,805,399 3,615,268 3,600,000 2,695,289 2,610,408 2,285,046 2,128,673 1,983,955 1,495,055 1,000,000 788,200 785,151 740,000 93,307,076 64.44% www.qrxpharma.com 73 SHAREHOLDER INFORMATION (CONTINUED) Unquoted equity securities Number on issue Number of holders 13,410,449* 40** Options issued under the QRxPharma Limited Employee Share Option Plan to take up ordinary shares * Number of unissued ordinary shares under the options. ** No person holds 20% or more of these securities. C. SUBSTANTIAL HOLDERS Substantial holders in the company are set out below: Ordinary shares Allen Gray Investment Management Mr LA Walker, Auckland Trust Company, Tesroff Pty Limited and Werft Pty Limited Dr John W Holaday, Dorinda Holaday and Holaday Foundation Number held 18,822,019 14,403,120 Percentage 13.00% 9.95% 7,609,635 5.26% D. VOTING RIGHTS The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights. 74 QRxPharma Annual Report 2013 NOTES www.qrxpharma.com 75 NOTES 76 QRxPharma Annual Report 2013 NOTES www.qrxpharma.com 77 www.qrxpharma.com

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