Redx Pharma Plc
Annual Report 2016

Plain-text annual report

ANNUAL REPORT & ACCOUNTS 2015-16 DRUG DISCOVERY AND INNOVATION ACROSS CANCER, INFECTION & AUTOIMMUNE DISEASE REDX PHARMA PLC 2016 ANNUAL REPORT CONTENTS Chairman’s Statement Strategic Report Operational Review Principal Risks and Uncertainties Porcupine Program BTK Program Governance Board of Directors Directors’ Report Corporate Governance Report Directors’ Remuneration Report Statement of Directors’ Responsibilities Independent Auditor’s Report Financial Statements Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Company Statement of Financial Position Notes to the Individual Financial Statements Company Information 01 02 06 08 10 14 16 17 19 22 23 24 25 26 27 28 50 51 60 REDX PHARMA PLC 2016 ANNUAL REPORT C H A I R M A N ’ S S T A T E M E N T CHAIRMAN’S STATEMENT Outlook We look forward with confidence to further developments of the business in 2017, which the Board expects will be a transformational year for Redx as it transitions from a pre-clinical to a clinical stage Company. As we make that change, our investment focus will be on driving our high-value, clinical development programs. We will continue to support the right level of pre-clinical projects to maintain the breadth of our pipeline and provide the next generation of clinical programs for the Company, however the implementation of this restructuring will mean a reduction in the current headcount of Redx. Although, unfortunately, this will have a major impact on many valued employees of the Group, the Board has agreed that this is the right thing to do to enable Redx to progress its emerging clinical pipeline. The business will make every effort to support and assist those affected. We also aim to seek further opportunities to develop the business, including potential new commercial partnerships. On a personal note, after careful consideration I have decided not to offer myself for re- election at the next Annual General Meeting. I am pleased to have been a part of Redx, guiding the Company through the transition from private to public markets. Redx has made substantial progress with the portfolio since the IPO in 2015 and I look forward to monitoring the Company’s continued progress as it makes this critical transition to clinical development and wish the management, staff and shareholders every success for the future. Dr Frank Armstrong FRCPE, FFPM Non-Executive Chairman 20 March 2017 compounds which are being progressed into further research studies. One of the key developments for the anti- infective team was the identification of novel antibiotic compounds against drug resistant In vivo testing Gram-negative bacteria. confirmed that these compounds are highly effective and they have the potential to provide a new class of antibiotic agents in the fight against Anti-microbial Resistance (AMR) which is an area of medical concern. In developing new therapies, all our research teams will continue to focus on targets which are both commercially attractive and scientifically validated. Our objective is to create valuable, novel drug candidates that we can progress into development ourselves or in partnership with large pharmaceutical companies or well-financed emerging companies. Our Team We have established an outstanding senior executive team, with breadth and depth of scientific and commercial experience. The success we have achieved so far reflects the talent and ambition within the business as a whole and on behalf of the Board, I would like to thank everyone at Redx for their continued hard work and commitment over the year. During the year, we were delighted to further strengthen our Board of Directors with the appointments of Bernd Kirschbaum and David Lawrence as Non-Executive Directors. Bernd has over 25 years’ experience in the industry having held research leadership positions in Merck/Merck Serono, Sanofi-Aventis, Aventis and Hoechst Marion Roussel and brings expert knowledge in drug research across a range of therapeutic areas. David also has over 25 years’ experience in the biotech and pharmaceutical industries including companies such as Chiron, Acambis and GlaxoSmithKline. He has a strong track record in strategy, business development and commercial management, including working with a number of investors, biotech start-ups and SMEs. At the end of September 2016 our CFO Phil Tottey left the Company and Andrew Booth, formerly Financial Controller, has been acting as Interim Finance Director pending a permanent appointment. 01 It has been another important year for Redx and I am pleased to report the Company’s second set of annual results as a publicly listed company. Redx’s £10m (gross) share placing at the end of March 2016 allowed the Company to aggressively continue to progress its pipeline. Redx has made significant progress with its proprietary research programs over the year. We identified two drug development candidates in oncology, in our Porcupine (RXC005) (RXC004) and reversible BTK programs. BTK was announced after financial year end in October 2016. During the year, we demonstrated that our Porcupine inhibitor could have a crucial role in improving immune system response of some the cancer patients when used in combination with an existing immunotherapy, anti- programmed cell death-1 (anti-PD-1). We also achieved our seventh pre-clinical proof of concept, with our reversible BTK program in oncology. The newly established immunology research team at Redx made good progress during 2016. One of the key disease areas for the team is fibrotic diseases of the lung, kidney and liver. There remains a huge unmet medical need in this area, and we believe we already have a range of potent and novel REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T OPERATIONAL REVIEW The Directors present their Strategic Report on pages 2 to 7 for the year ended 30 September 2016. The Operational Review, Key Performance Indicators and Principal Risks and Uncertainties sections form part of the Strategic Report. We currently have two programs, reversible BTK and Porcupine, which we are progressing into first-in-human clinical studies. The successful share placing (£10m gross) in March 2016 established the financial foundations for Redx to progress its pipeline during the year. The progress of our two leading programs, Porcupine (RXC004) and BTK (RXC005), has been rapid and, as these programs transition into the clinic, the Company will need to focus and balance its resources on the clinical development of these key assets in addition to continuing to maintain a steady flow of projects through the research pipeline. Pipeline Progress The Redx pipeline has continued to advance significantly over the last year. During the period, we achieved in vivo proof of concept for the reversible BTK program, taking the total to seven. Oncology During the financial year, our oncology research team nominated a development candidate in our Porcupine program (RXC004). This compound is now in formal development studies in preparation for progress into first-in-human clinical studies and RXC004 is expected to enter clinic in the next few months. We also secured proof of concept in our reversible BTK program and aim to initially develop this compound for Chronic Lymphocytic Leukaemia (CLL). Post financial year-end, we nominated a clinical candidate in this BTK program (RXC005). RXC005 is now in formal development studies and is targeted to be ready for the clinic by the end of 2017. 02 REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T Reversible Bruton’s Tyrosine Kinase program Bruton’s Tyrosine Kinase (BTK) is a key biological enzyme target which has been validated by the approval of the drug ibrutinib (Imbruvica™) in the treatment of a range of blood cancers, such as chronic lymphocytic leukaemia (please see p.11 for a more comprehensive overview). Redx’s reversible BTK inhibitor RXC005 has shown potent inhibitory activity towards wild-type (normal) BTK as well as mutant BTK (C481S), the latter of which is refractory to ibrutinib inhibition. Porcupine program Porcupine is a key enzyme in the oncogenic Wnt signalling pathway. This pathway is implicated in a range of hard-to-treat cancers with poor prognosis such as pancreatic, biliary and gastric cancers. Our Porcupine inhibitor, RXC004, is a potent inhibitor of this enzyme and pathway, leading to strong tumour growth inhibitory effects in a variety of cancer models. We have also shown that RXC004, when administered together with an immune checkpoint inhibitor (anti-PD-1) has a synergistic immune system modifying effect. Our initial clinical studies with RXC004 will be as a monotherapy but we have included the option for a combination therapy expansion arm together with a checkpoint inhibitor in our clinical study design. Pan-Raf program Raf kinases have been implicated in a multitude of cancers. Although there are already several Raf inhibitors approved there is scope for improving the characteristics of these drugs. Redx is developing novel small molecule therapeutics with activity against several Raf isoforms. These novel compounds target mechanisms of resistance associated with first generation Raf inhibitors. Currently these compounds are in lead-optimisation phase. Year End Cash Held £5.8m 9.4 5.8 Other Operating Income £2.4m 6.2 2.9 2.4 2.6 2016 2015 2014 2016 2015 2014 In February and March 2017 the Group raised a further £12m (gross) by way of a share placing and open offer. See note 26. Reflecting the continuation of RGF5 funding, 2014 included milestone payments on the MRSA program. Cash Flows - Net Outflow £3.7m 6.5 Immunology The immunology group is focussing on BTK and Porcupine targets for a variety of immunology indications, with an emphasis on fibrotic diseases such as Idiopathic Pulmonary Fibrosis (IPF), Diabetic Nephropathy and Non-alcoholic Steatohepatitis (NASH) and autoimmune conditions. This is supplemented by work on Rho- associated protein kinase 2 (ROCK2), a target that is also implicated in fibrotic disease. Reflecting the increased R&D spend as Immunology research was undertaken for a full year. See note 5. Further funding was received as a result of the successful share issue noted above, see note 26. 1.9 2016 2015 2014 Anti-infectives The group made significant progress in its infection portfolio during the period, particularly in its Gram negative antibacterial program which shows great promise. Whilst Redx’s antibacterial assets continue to offer the prospect of value, future research and development activities will be conducted under external collaboration arrangements in order that we can focus our efforts on priority programs in oncology and immunology. Key Performance Indicators The Group’s key performance indicators include a range of financial and non-financial measures. Details about the progress of our research programs (non-financial measures) are included elsewhere in this Operational Review, and below are the other indicators (financial) considered pertinent to the business. 3.7 Net Outflow Net Inflow Research & Development Expenditure (excluding staff costs) £8.1m £5.1m £4m 2016 2015 2014 The Group’s continuing focus is to maximise to amount of operating expenditure spent on research and development activities. 03 REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T OPERATIONAL REVIEW CONT. Industry Overview The pharmaceutical industry continues to struggle with drug pricing which was a key topic in the US Presidential election. It remains to be seen how the new Trump administration will interact with the industry but there are clear signs that pricing will remain on the agenda. There are early indications that his may be off-set by a more liberal regulatory approach that could make it easier for companies to get new therapies approved. Following the surge in new drug approvals in the US over the last 5 years which alleviated concerns over the industry’s R&D productivity, approvals in 2016 dropped to lows not seen since 2007 with only 19 new drugs sanctioned during the year. Collaborations and Partnerships Redx continues to build on the partnerships that have been secured to date. In particular, our collaboration with AstraZeneca focused on an undisclosed oncology target has made good progress. Our pipeline assets have been carefully chosen as programs that not only match the demand for new therapies that will improve patient outcomes but which are attractive to potential commercialisation partners. Looking forward, we continue to have encouraging discussions for out- and in-licensing programs with a number of parties regarding future commercial collaborations across our pipeline. Deal-making activity continued apace in the year although the move back to a preference for clinical-stage assets was further confirmed. In addition to continued attention on immuno-oncology assets and, particularly, combination therapies, one key trend that emerged during the year was the increased focus on fibrotic disease. Novel agents for conditions such as diabetic nephropathy (affecting the kidneys), non-alcoholic steatohepatitis (NASH – affecting the liver) and idiopathic pulmonary fibrosis (IPF – affecting the lungs) are sought after as the industry turns its attention to a slate of chronic life-threatening conditions that are inadequately served by current therapies. When we established our immunology group in 2015, fibrotic disease was one of the key pillars that our research portfolio was built around. All of this reinforces Redx’s strategy to focus on cancer and immunology taking our lead programs into clinic so increasing their value and lining up the potential for higher value deals once clinical proof of concept is secured. Filings and Approvals 2000 - 2016 60 50 40 30 20 10 0 04 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 BLA Approvals NDA Approvals Filings Source – FDA Strategy Redx is entering a pivotal period in its growth. Over the last few years, we have created a world-class capability in small molecule drug discovery. The Company’s discovery engine has created an innovative pipeline that has delivered two development assets – the Porcupine inhibitor RXC004 and the BTK inhibitor RXC005. As we take these assets toward first-in-man clinical studies, the Company needs to concentrate its resources on ensuring that we secure the best return possible from our portfolio. To this end, Redx will focus its business on its key assets in oncology and immunology. Whilst we continue to see value in our infectious disease portfolio, we will seek to continue to progress these assets under collaborative arrangements with external partners. Redx remains committed to discovery research in order to ensure that we maintain an effective, high-value pipeline but the balance of resource allocation will shift to support a greater degree of development activity as we move forward into clinic in 2017. As detailed in note 26 one result of this rebalancing will be a reduction in fixed costs as we decrease the number of research staff during the year. Senior Management Team At the beginning of the financial year, we were delighted to announce the appointment of Nicholas Adams as Chief Business Officer and at the end of the financial year Karl Hård joined as Head of Investor Relations and Corporate Communications. These key appointments have significantly strengthened the senior management team. REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T Financial Review Other operating income The Group generated other operating income of £2.4 million during the year ended 30 September 2016 (2015: £2.6 million). This principally comprised £2.2 million in respect of Regional Growth fund grants for immunology research administered by the Department of Business, Energy and Industrial Strategy. There were no new sources of other operating income during the year. Share-based compensation During the year a Save as You Earn scheme was launched for all staff, resulting in the granting of 1.1m new options, this together with other new and existing options resulted in a charge of £0.2m being recognised in the Consolidated Statement of Comprehensive Income (2015: £0.6m). Non recurring relocation costs During late summer 2016 the Group relocated its oncology research facilities from Liverpool to Alderley Park in Cheshire, consolidating the Redx Pharma group on a single site. For clarity, the employment, removal and other costs associated with the move have been disclosed separately in the consolidated Statement of Comprehensive Income, and amounted to £0.56m. It is not expected that there will be any further costs incurred in relation to the relocation. Taxation This year the financial statements record a tax charge of £0.1m (2015: credit of £0.7m), As part of its continued discussions with HMRC regarding the impact of RGF funding on the recoverability of R&D tax credits, the group took the decision not to include any provision for R&D tax credits until the position has been clarified, leading to a reduction in the provision for amounts receivable for prior years of £0.75m. Amounts due under Research and Development Expenditure credit are unaffected. Losses The loss before taxation was £15.4 million (2015: £8.8million). The net loss for the year was £15.5 million (2015: £8.2 million) representing a loss of 19.8 pence per share (2015: 14.1 pence per share). Cash Flows The Group had a net cash outflow of £3.7 million for the year ended 30 September 2016 as compared to a net cash inflow of £6.5 million for the previous year. Cash used by operating activities increased by £6.6 million to £13.3 million for the year compared to £6.7 million in the previous year. This was driven by increased research activity in immunology (its first full year), increased staff costs, and the progress of programs to more expensive pre-clinical stages. Tax credits received in the year increased by £0.65 million to £0.75 million. Cash inflow from financing activities was £9.3 million, being the net proceeds of the equity placing in April 2016 (see note 19). (2015: £13.4 million). Financial Position As at 30 September 2016, total cash and cash equivalents held were £5.8 million (2015: £9.4 million). Headcount Average headcount of the Group for the year was 199 (2015: 145). The increase in headcount is attributable to the further strengthening of the management team, together with a first full year of immunology research. Share Capital On 4 April, 14 April and 15 April 2016 respectively, the Company issued 6,180,197, 285,714, and 22,105,518 Ordinary shares at £0.35 each pursuant to a placing and admission to trading on AIM. The gross proceeds of the issue were £10m. Outlook We anticipate that 2017 will be an important year for Redx as our first programs are being prepared for entry to first-in-human clinical studies. The £12m (gross) fundraising in early 2017 leaves the Group well placed to implement it’s strategy. While the planned restructuring will be a time of uncertainty for some, we firmly believe that this is the correct course of action to allow us to focus on our core high value assets whilst maintaining sufficient research capability in-house in oncology and immunology and progressing our Anti-infectives research through collaborations. Dr Frank Armstrong is stepping down as Chairman of the Group, and together with Peter McPartland, will not seek re-election at the Annual General Meeting Dr Peter Jackson, Non-Executive Director, co-founder of Redx and Executive Chairman up to August 2014, will be stepping down from the Board on 31 March 2017. The appointment of a new Chairman will be announced in due course. A number of commercial discussions are underway across our pipeline assets and the Board is confident that we will secure further partnerships. We are also exploring options to broaden Redx’s capability and asset base as we seek to further increase the growth capacity for the business. The Board remains confident that Redx will continue to adapt its strategy to ensure optimal shareholder returns in the medium to long-term. 05 REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T PRINCIPAL RISKS AND UNCERTAINTIES Redx is a biopharmaceutical company and, in common with other companies operating in this field, is subject to a number of risks and uncertainties. The principal risks and uncertainties identified by Redx for the year ended 30 September 2016 are below. Research and Development The Group is at a relatively early stage of development and may not be successful in its efforts to use and to build a pipeline of product candidates and develop approved or marketable products. Technical risk is present at each stage of the discovery and development process with challenges in both chemistry (including the ability to synthesise novel molecules) and biology (including the ability to produce candidate drugs with appropriate safety, efficacy and usability characteristics). Additionally, drug development is a highly regulated environment which itself presents technical risk through the need for study designs and data to be accepted by regulatory agencies. Furthermore, there can be no guarantee that the Group will be able to, or that it will be commercially advantageous for the Group to, develop its intellectual property through entering into licensing deals with emerging, midsize and large pharmaceutical companies. Commercial industries are very The biotechnology and pharmaceutical competitive. The Group’s competitors include major multinational pharmaceutical companies, biotechnology companies and research institutions. Many of its competitors have substantially greater financial, technical and other resources, such as larger research and development staff. The Group’s competitors may succeed in developing, acquiring or licensing drug product candidates that are more effective or less costly than any product candidate which the Group is currently developing or which it may develop and may have a material adverse impact on the Group. Clinical Trials We do not know whether any future clinical trials with any of our product candidates will be completed on schedule, or at all, or whether our ongoing or planned clinical trials will begin or progress to the time schedule we anticipate. The commencement of future clinical trials could be substantially delayed or prevented by several factors, including: – delays or failures to raise additional funding; – results of future meetings with the MHRA, EMA, FDA and/or other regulatory bodies; – a limited number of, and competition for, suitable patients with particular types of cancer for enrolment in our clinical trials; – delays or failures in obtaining regulatory approval to commence a clinical trial; – delays or failures in obtaining sufficient clinical materials; – delays or failures independent institutional review boards to conduct a clinical trial at prospective sites; or in obtaining approval from – delays or failures in reaching acceptable clinical trial agreement terms or clinical trial protocols with prospective sites. The completion of our clinical trials could be substantially delayed or prevented by several factors, including: – delays or failures to raise additional funding; – slower than expected rates of patient recruitment and enrolment; – failure of patients to complete the clinical trial; – delays or failures in reaching the number of events pre-specified in the trial design; – the need to expand the clinical trial; – delays or failures in obtaining sufficient clinical materials; – unforeseen safety issues; – lack of efficacy during clinical trials; – inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols; and – inability to monitor patients adequately during or after treatment. Additionally, our clinical trials may be suspended or terminated at any time by the MHRA, other regulatory authorities, or ourselves. Any failure to complete or significant delay in completing clinical trials for our product candidates could harm our financial results and the commercial prospects for our product candidates. Regulatory The Group’s operations are subject to laws, regulatory approvals and certain governmental directives, recommendations and guidelines relating to, amongst other things, product health claims, occupational safety, laboratory practice, the use and handling of hazardous materials, prevention of illness and injury, environmental protection and human clinical studies. There can be no assurance that future legislation will not impose further government regulation, which may adversely affect the business or financial condition of the Group. Intellectual Property (IP) The Group’s success depends in large part on its ability to obtain and maintain patent protection for its proprietary technology and products in the United States, Europe and other countries. If the Group is unable to obtain or maintain patent protection for its technology and products, or if the scope of the patent protection is not sufficiently broad, competitors could develop and commercialise similar technology and products which would materially affect the Group’s ability to successfully commercialise its technology and products. The Group is exposed to additional IP risks, including infringement of intellectual property rights, involvement in lawsuits and the inability to protect the confidentiality of its trade secrets which could have an adverse effect on the success of the Group. Financial The Group has a limited operating history, has incurred significant losses since its inception and does not have any approved or revenue-generating products. The Group expects to incur losses for the foreseeable future, and there is no certainty that the business will generate a profit. The Group may not be able to raise additional funds that will be needed to support its product development programs 06 REDX PHARMA PLC 2016 ANNUAL REPORT S T R A T E G I C R E P O R T or commercialisation efforts, and any additional funds that are raised could cause dilution to existing investors. Operational The Group’s future development and prospects depend to a significant degree on the experience, performance and continued service of its senior management team including the Directors. The Group has invested in its management team at all levels. The Directors also believe that the senior management team is appropriately structured for the Group’s size and is not overly dependent upon any particular individual. The Group has entered into contractual arrangements with these individuals with the aim of securing the services of each of them. Retention of these services or the identification of suitable replacements, however, cannot be guaranteed. The loss of the services of any of the Directors or other members of the senior management team and the costs of recruiting replacements may have a material adverse effect on the Group and its commercial and financial performance and reduce the value of an investment in the Ordinary Shares. This report was approved by the Board on 20 March 2017 and signed on its behalf. Dr Neil D. Murray Chief Executive Officer 07 MRSA PROJECT PORCUPINE Redx Pharma is developing a porcupine (PORCN) inhibitor drug candidate – RXC004. Our scientists have been able to demonstrate the potential for RXC004 as a cancer treatment using in vivo models of pancreatic and gastric cancer. Importantly, an acceptable therapeutic window has been achieved in pre-clinical models. Since its nomination as a drug candidate in December 2015, RXC004 has successfully completed pre-clinical development activities and Redx remains on track to initiate a first-in-human clinical trial by mid-2017. REDX PHARMA PLC 2016 ANNUAL REPORT P O R C U P I N E The Wnt pathway is implicated in cancer initiation, its progression and the maintenance of cancer stem cells (CSCs). CSCs are a tiny population of cells that chemotherapy leaves behind which allow the cancer to come back at a later date. Similar to normal stem cells, CSCs undergo a process of self-renewal and are therefore associated with tumorigenesis, metastasis, recurrence and resistance in cancer. Emerging research also shows that the Wnt pathway plays a critical role in the development of fibrotic disease in different human organs, many of which currently lack satisfactory therapies. Despite the importance of Wnt biology in cancer and other diseases, there are currently no approved drugs which target this pathway and there are only two other porcupine inhibitors in clinical trials. A key challenge in developing drugs which target important pathways in humans is safety. Scientists have struggled to identify components of the Wnt pathway that can be targeted to provide a therapeutic effect in cancer patients without causing toxicity associated with interfering with the target in healthy cells. Much research has focused on different targets in the Wnt pathway but has been hindered due to the failure to demonstrate a suitable therapeutic window – the gap between the dose needed to see the desired effect and the dose at which toxicity is observed. Consequently, for a time it was felt that this critical pathway would be unsuitable for drug therapy. Redx Pharma is developing a porcupine (PORCN) inhibitor drug candidate – RXC004. Scientists from Redx have been able to demonstrate the potential for RXC004 as a cancer treatment using in vivo models of pancreatic and gastric cancer. Importantly, an acceptable therapeutic window for targeting this key Wnt pathway component with RXC004 has been achieved in pre-clinical models. Since its nomination as a drug candidate in December 2015, RXC004 has successfully completed pre-clinical development activities and Redx remains on track to initiate a first-in-human clinical trial in mid 2017. During this time Redx scientists have continued their research into the potential uses of RXC004 in cancer therapy and have: – Identified specific patient sub-groups likely to respond to RXC004. Molecular alterations in gastric, pancreatic and biliary cancers have been identified which will facilitate the identification of patients likely to benefit from treatment. – Demonstrated the ability of RXC004 to enhance the immune system response to cancer in pre-clinical models. The data suggests RXC004 in combination with checkpoint inhibitors (such as anti- PD1 antibodies) may enhance the already impressive results observed for this exciting class of therapies by increasing the response rates and the duration of response. Phase 1 Trial of RXC004 The trial will be conducted in patients with advanced cancer and the modular approach will allow Redx to: – Investigate additional responsive patient populations from the all-comers Phase 1a cohort. – Evaluate combination therapies which have the potential to broaden the patient populations likely to benefit from therapy. Module 1 Part a To assess the safety and tolerability of RXC004 in an all-comers cohort of advanced cancer patients. Module 1 Part b To assess the efficacy of RXC004 in biomarker selected gastric and pancreatic cancer patient cohorts as well as a biliary cancer cohort. Module 2 To assess the safety tolerability and efficacy of RXC004 in combination with standard of care therapies including checkpoint inhibitors. “ I am delighted that Redx Pharma has chosen the University of Manchester / The Christie NHS Foundation Trust as the lead site for the first-in-man trial of their porcupine inhibitor RXC004 in 2017. We look forward to working with Redx to advance this compound towards clinical studies in some of the hardest to treat cancers such as pancreatic (as a partner in the Precision-Panc initiative), gastric and biliary cancer.” Juan Valle, Professor and Honorary Consultant in Medical Oncology, The Christie NHS Foundation Trust Fibrotic Disease Redx Pharma is also developing a second, distinct chemical series of PORCN inhibitors for development in the area of fibrotic disease. To fully understand the emerging potential for PORCN inhibitors in this area the scientific team are currently evaluating their effects in a range of in vivo models of fibrotic disease. 09 BTK The impressive clinical efficacy observed with first generation Bruton’s tyrosine kinase (BTK) inhibitors such as ibrutinib (Imbruvica®) highlights the importance of BTK as a clinically-validated drug target across a range of haematological malignancies. REDX PHARMA PLC 2016 ANNUAL REPORT B T K The potency of first generation irreversible BTK inhibitors such as ibrutinib, and second generation inhibitor Acalabrutinib and others rely on the formation of a covalent bond with cysteine 481 (C481) at the BTK active site, which leads to an irreversible inhibition of the kinase activity. As such, any mutation of this cysteine amino acid to a different residue will interfere with the drug binding mode, and thus reduce the effectiveness of irreversible BTK inhibitors. Importantly, C481 mutations in BTK have been reported in patients. These mutations have been linked to cases of resistance that have emerged in patients with chronic lymphocytic leukaemia (CLL) progression following treatment with ibrutinib. The latest studies presented in 2016 estimate that approximately 60% of these resistance patients have a mutation in C481. Redx’s scientists have taken on this challenge by developing RXC005, which is a novel, potent and highly selective, reversible inhibitor of BTK, which is equally as effective at inhibiting non-mutated BTK (wild-type BTK) and C481-mutated BTK. As such, RXC005 aims to overcome the resistance mechanisms to first and second generation inhibitors, whilst retaining activity where irreversible inhibitors such as ibrutinib are active. RXC005 was successfully nominated as a drug candidate in October 2016 and the pre-clinical data supporting this decision were presented at the 58th American Society of Hematology (ASH) Annual Meeting in December 2016 where Redx scientists revealed the impressive efficacy of RXC005 in a relevant pre-clinical xenograft model. Additionally, our team at Redx have been working in collaboration with Prof. Jennifer Woyach at Ohio State University, and have demonstrated inhibition of BTK with our compound in CLL patient samples, which we also reported at the ASH meeting in December. “Many patients with progressive CLL following ibrutinib treatment have mutations in BTK at the time of clinical relapse. RXC005, a reversible BTK inhibitor, therefore represents an opportunity for future clinical trials to target this emerging resistance mechanism. We look forward to advancing this compound towards clinical studies in CLL patients with Redx Pharma.” Dr Jennifer Brown, MD, PhD, Director, Chronic Lymphocytic Leukemia Center, Institute Physician, Associate Professor of Medicine, Harvard Medical School, Dana Farber Cancer Institute BTK inhibitors Irreversible have dramatically changed the management of CLL but we are beginning to see a subset of high risk patients who are relapsing,” said Dr Jennifer Woyach, M.D., of The Ohio State University College of inhibitors Medicine. “Reversible BTK represent an exciting option for future clinical trials as they do not rely upon the C481 mutation site. We are delighted to be working with RXC005, Redx’s proprietary BTK reversible inhibitor and look forward to its progress towards first-in-man studies.” RXC005 has the potential to become a potent therapy for Chronic Lymphocytic Leukaemia (CCL) patients by tackling the growing resistance to ibrutinib treatment. We aim to initiate first-in- human clinical studies in late 2017. ALDERLEY PARK BLOCK 33 All Redx activities are now housed here at Alderley Park in Cheshire. We are seeing significant benefits from all R&D and management staff being together in one world- class facility. ALDERLEY PARK BLOCK 33 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E BOARD OF DIRECTORS Dr Frank Armstrong Non-Executive Chairman Dr Neil Murray CEO Dr Peter Jackson Non-Executive Director Mr Norman Molyneux Non-Executive Director Frank joined the Company on 1 September 2014. Frank has previously led Medical Science and Innovation (MSI) in R&D at Merck Serono, Worldwide Development at Bayer and the Worldwide Medical Organisa- tion at Zeneca. He has also been the CEO of a number of life sciences companies and has extensive experience of medical and prod- uct development, leading suc- cessful product approvals in the US and EU. Frank has been the CEO of five biotechnology companies (public and private) and was CEO of Fulcrum Pharma, before it was sold to private equity. In 2007, he led the sale of 454 Life Sciences for CuraGen to Roche for a con- sideration of $154 million. Frank has experience acting as Chairman and Non-Execu- tive Director in the UK and USA with both private companies and a NASDAQ listed company as well as being chairman of a charitable institution. Frank has been Non-Executive Chairman of AIM listed Summit Plc (LSE: SUMM) since June 2013 and is also a Non-Executive Director of Mereo BioPharma Plc. Neil co-founded the Company in 2010 and has over 25 years’ ex- perience in the pharmaceutical industry with experience of drug development, business growth and general management. He has held a variety of senior operational, commercial and R&D positions including as Global Director for Sales and Marketing with Solutia’s Phar- maceutical Services business. Prior to joining Solutia he was Director of Chemical Develop- ment at Vernalis (formerly Van- guard Medica) with additional responsibility for management of the company’s research portfolio. Neil was also European Busi- ness Development Director for SigmaAldrich before which he was External Projects Director at GlaxoWellcome with responsi- bility for the company’s external development science. He has extensive experience of drug discovery and develop- ment and commercialisation in large and small companies across a wide range of therapeu- tic areas. Peter is a co-founder of the Company and previously served as Executive Chairman before becoming a Non-Executive Di- rector in September 2014. In 2007, Peter founded the Company’s predecessor compa- ny Bradford Pharma. From 2005 until 2010, Peter was founder and CEO of Reaxa, exploiting chemical catalyst technology for the production of drugs with lower impurities to meet stricter quality standards. levels of He is founder and Non-Exec- utive Director of two other bio- pharma ventures, ADC Biotech- nology focused on production of new antibody-based cancer therapeutics, and Yprotech Ltd (formally Yorkshire Process Tech- nology), focused on develop- ment of new chemical processes for pharmaceuticals and agro- chemicals. Peter has over 25 years’ expe- rience in the sector, holding sen- ior executive roles as commercial Director then head of Avecia’s Pharmaceutical Products busi- ness unit, following senior com- mercial and R&D positions at Zeneca and ICI. Norman was previously the CFO of the Company before becom- ing a Non-Executive Director in September 2014. Norman is a qualified Char- tered Management Accountant and has 15 years’ experience in arranging early stage business angel and venture capital fund- ing. Following training in ac- countancy with GKN, he joined PriceWaterhouseCoopers, work- ing on many consultancy assign- ments with both SME and multi- national companies. Following this, he returned to industry with Director roles in the paper manufacturing and food manufacturing sectors in the UK. In 2000, Norman founded Acceleris Capital Limited, an FCA regulated fund management and corporate finance firm specialis- ing in EIS-led investment trans- actions. Norman holds numer- ous Directorships fulfilling both executive and non-executive positions. 14 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E Mr Peter McPartland Non-Executive Director Dr Bernhard Kirschbaum Non-Executive Director Mr David Lawrence Non-Executive Director Peter has been a Non-Executive Director of the Company since October 2010. A graduate pharmacologist, he worked for six years as an in- vestment analyst before joining Schroder Ventures (now Permira) in 1988. In 1994 Peter became a co-founder and general partner of SV Life Sciences (SVLS). From 1998 he began to develop his own personal interests while maintaining a part-time role at SVLS, leaving that firm in 2007 to become an independent venture capital consultant. During his spell at SV/SVLS he was a Director of a number of leading companies in the field, including Shire Pharmaceuticals, Chiroscience and Triangle Phar- maceuticals. David joined the Board in May 2016 and has over 25 years’ ex- perience in the biotech and pharmaceutical industries with a strong track record in strategy, business development and com- mercial management, including working with a number of in- vestors, biotech start-ups and SMEs. David is currently a Non-Ex- ecutive Director at Synpromics Ltd, a synthetic biology company that he co-founded. In 2014-2015 he was CEO of Sentintext Ther- apeutics, a biotech focused on the development of vaccines for enterviruses. He was also a Di- rector of QSpine Limited, which designs, manufactures and dis- tributes surgical spine medical devices. David has been Chairman of Ambicare Health Limited, CEO of Tayside Flow Technologies Ltd and formerly worked at Chiron Vaccines (now part of Novartis), Acambis Plc (now part of Sanofi), and GlaxoSmithKline. Bernd joined the Board in Janu- ary 2016. Bernd has over 25 years’ experience in pharmaceutical research and drug develop- leadership ment, having held roles at Merck/Merck Serono, Sanofi-Aventis, Aventis and Hoechst Marion Roussel. He has expertise in a broad range of dis- ease areas including oncology, immuno-oncology, immunology, neurological disorders and cardi- ometabolic diseases. In the eight years to 2013, he worked at Merck/Merck Ser- ono, becoming a member of the Board and Executive Vice-Pres- ident, Global Research & Early Development. He was responsi- ble for a budget of 1 billion euros and a global team of over 2,500 associates. In his last three years at Merck Serono, he led the suc- cessful growth of the company’s R&D portfolio, with over 70 pro- grams, doubling the number of phase II assets in this period. Dr Kirschbaum is currently a board member of BioMedX, Protagen Diagnostics, OMEICOS Therapeutics and KAHR Thera- peutics. 15 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E DIRECTORS’ REPORT The Directors present their annual report on the affairs of the Group, together with the financial statements and auditor’s report for the year ended 30 September 2016. Information given to the Auditor Each of the persons who is a Director at the date of approval of this annual report confirms that: – So far as the Director is aware, there is no relevant audit information of which the Group’s auditor is unaware, and – the Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the auditor is aware of that information.. Independent auditors RSM UK Audit LLP have expressed their willingness to continue in office as auditors for the year. A resolution to reappoint them will be proposed at the forthcoming AGM. Annual General Meeting The Annual General Meeting of the Company will be held at 9.30am on 20 April 2017 at Redx Pharma Plc, Mereside, Alderley Park, Macclesfield SK10 4TG. Approved by the Board of Directors and signed on behalf of the Board. Dr Neil D. Murray Chief Executive Officer 20 March 2017 Redx Pharma Plc c/o Acceleris Capital Ltd Floor 9, Lowry House, 17 Marble Street Manchester M2 3AW Company registration number: 7368089 DIRECTORS The Directors who were in office during the year and up to the date of signing the financial statements, unless stated, were: Executive Dr Neil Murray Dr Derek Lindsay – Resigned 6 May 2016 Philip Tottey – Resigned 30 September 2016 Non-Executive Dr Frank Armstrong Dr Peter Jackson Norman Molyneux Peter McPartland Dr Bernhard Kirschbaum – Appointed 1 January 2016 David Lawrence – Appointed 6 May 2016 The Company maintained Directors’ and officers’ liability insurance cover throughout the year. Principal activities of the Group Details of current and future trading as well as the principal risks and uncertainties are included in the Strategic Report. Business review The review of the business and future developments are covered in the Strategic Report. Financial results and dividend The Group’s loss for the year was £15.521m (2015 loss £8.175m). The Directors do not recommend the payment of a dividend. (2015 £nil). Directors’ interest in share options Details of the Directors interests, share options and service contracts are shown in the Directors’ Remuneration report. Research and development The Group is continuing to research products within its chosen area of therapeutic focus. Employee involvement Employee involvement in the overall performance of the Group is encouraged through both formal and informal meetings which deal with a whole range of issues from the Group’s financial performance and future developments to health and safety issues. Copies of both the Annual Report and Interim Report are made available to all employees. 16 REDX P HARM A PLC 2016 ANNUAL REPORT G O V E R N A N C E CORPORATE GOVERNANCE REPORT The Board believes in the importance of corporate governance and is aware of their responsibility for overall corporate governance, and for supervising the general affairs and business of the Company and its subsidiaries. The Company is listed on the Alternative Investment Market (‘AIM’) of the London Stock Exchange and is subject to the continuing requirements of the AIM Rules. Although Redx is not required to comply with the UK Corporate Governance Code by virtue of being an AIM-listed company, the Board seeks to apply the QCA Corporate Governance Code (as devised by the QCA in consultation with a number of significant institutional small company investors) to the extent appropriate and practical for a Company of its nature and size. This section provides general information on the Group’s adoption of the QCA Corporate Governance Code. The Board At 30 September 2016, the Board comprised six Non-Executive Directors, and one Executive Director. Directors’ biographies are on pages 14 and 15. The Board is responsible to the shareholders for the proper management of the Group and meets regularly to set the overall direction and strategy of the Group, to review scientific, operational and financial performance, and to advise on management appointments. The Board has also convened by telephone conference during the year to review the strategy and activities of the business. All key operational and investment decisions are subject to Board approval. The Company Secretary is responsible for ensuring that Board procedures are followed and applicable rules and regulations are complied with. There is a clear separation of the roles of Chief Executive Officer and Non-Executive Chairman. The Chairman is responsible for overseeing the running of the Board, ensuring that no individual or group dominates the Board’s decision-making and ensuring the Non-Executive Directors are properly briefed on matters. The Chief Executive Officer has the responsibility for implementing the strategy of the Board and managing the day to day business activities of the Group. The Board considers there to be sufficient independence on the Board and, that all the Non-Executive Directors are of sufficient competence and calibre to add strength and objectivity to the Board, and bring considerable experience in scientific, operational and financial development of biopharmaceutical products and companies. Performance Evaluation The Board has a process for evaluation of its own performance, that of its committees and individual Directors, including the Chairman. These evaluations are carried out at least annually. Board Committees The Company has established audit, nomination and remuneration committees of the Board with formally delegated duties and responsibilities. Audit Committee The members of the Audit Committee are Mr Norman Molyneux, Mr Peter McPartland and Mr David Lawrence. Mr Norman Molyneux is the chair of the Audit Committee. The responsibilities of the committee include the following: – Monitoring the integrity of the financial statements of the Group. – Reviewing accounting policies, accounting treatment and disclosures in the financial reports. – Reviewing the Group’s internal financial controls and risk management systems. – Overseeing the Group’s relationship with external auditors, including making recommendations to the Board as to the appointment or re-appointment of the external auditors, reviewing their terms of engagement, and monitoring the external auditors’ independence, objectivity and effectiveness. Remuneration Committee The members of the Remuneration Committee are Mr Peter McPartland, Dr Frank Armstrong and Mr Norman Molyneux. Mr Peter McPartland is the chair of the Remuneration Committee. The responsibilities of the committee include the following: – Determining and agreeing with the Board on the remuneration policy for all Directors. – Within the terms of the agreed policy, determining the total individual remuneration package for Executive Directors. – Overseeing the evaluation of executive officers. – Determining bonuses payable under the Group’s cash bonus scheme. – Determining the vesting of awards under the Group’s long-term incentive plans and exercise of share options. The Directors’ Remuneration Report is presented on pages 19 to 21. Nominations and Corporate Governance Committee The members of the Nominations and Corporate Governance Committee are Dr Frank Armstrong, Mr Peter McPartland and Mr Norman Molyneux. Dr Frank Armstrong is the Chair of the Nominations and Corporate Governance Committee. The responsibilities of the committee include the following: All of the Directors are subject to election by shareholders at the first Annual General Meeting (‘AGM’) after their appointment to the Board. Executive Directors will continue to seek re-election at least once every three years. – Identifying individuals qualified to become members of the Board of Directors. – Recommending Directors to be appointed to the Committees. – Overseeing the annual evaluation of the Board and its Committees. 17 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E CORPORATE GOVERNANCE REPORT CONT. Our website, RedxPharma.com, has a section dedicated to investor matters and provides useful information for the Company’s owners. The Board as a whole is responsible for ensuring that a satisfactory dialogue with shareholders takes place, while the Chairman and Chief Executive Officer ensure that the views of the shareholders are communicated to the Board as a whole. The Board ensures that the Group’s strategic plans have been carefully reviewed in terms of their ability to deliver long-term shareholder value. Fully audited Annual Reports are published, and Interim Results statements notified via Regulatory Information Service announcements. All financial reports and statements are available on the Company’s website. Shareholders are welcome to attend the Group’s AGM, where they have the opportunity to meet the Board. All shareholders will have at least 21 days’ notice of the AGM at which the Directors will be available to discuss aspects of the Group’s performance and question management in more detail. – Reviewing and making recommendations to the Board on Board leadership structure. – Reviewing and making recommendations to the Board on management succession planning. – Developing and recommending to the Board appropriate corporate governance principles. Attendance at Board meetings The Directors attended the following Board meetings during the year: Dr Frank Armstrong Dr Neil Murray Dr Derek Lindsay Mr Philip Tottey Dr Peter Jackson Mr Norman Molyneux Mr Peter McPartland Dr Bernd Kirschbaum Mr David Lawrence 14/15 15/15 9/11 (resigned 6 May 2016) 13/15 (resigned 30 September 2016) 8/15 12/15 12/15 11/12 (appointed 1 January 2016) 3/4 (appointed 6 May 2016) Risk Management and Internal Control The Board is responsible for the systems of internal control and for reviewing their effectiveness. The internal controls are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. The Board reviews the effectiveness of these systems annually by considering the risks potentially affecting the Group. The Group does not consider it necessary to have an internal audit function due to the small size of the administrative function. Instead there is a detailed monthly review and authorisation of transactions by the Chief Financial Officer and Chief Executive Officer. A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, compared with the budget, are reported to the Board on a monthly basis and discussed in detail. The Group maintains appropriate insurance cover in respect of actions taken against the Directors because of their roles, as well as against material loss or claims against the Group. The insured values and type of cover are comprehensively reviewed on a periodic basis Corporate Social Responsibility The Board recognises the growing awareness of social, environmental and ethical matters and it endeavours to take into account the interest of the Group’s stakeholders, including its investors, employees, suppliers and business partners, when operating the business. Employment The Board recognises legal responsibility to ensure the well-being, safety and welfare of its employees and maintain a safe and healthy working environment for them and for its visitors. its Relations with shareholders The Board recognises the importance of communication with its shareholders to ensure that its strategy and performance is understood and that it remains accountable to shareholders. 18 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E DIRECTORS’ REMUNERATION REPORT Date of Contract Notice period Dr Neil Murray 26 March 2015 12 months Non-Executive Directors’ service contracts and remuneration The remuneration of the Non-Executive Directors is determined by the Remuneration Committee, with regard to market comparatives, and independent advice is sought to ensure parity is maintained with similar businesses. The Non-Executive Directors do not receive any pension, or bonus or benefits from the Company. The contracts of the Non-Executive Directors are reviewed by the Board annually. Current contracts are summarised below: Date of Contract Initial term Frank Armstrong Peter Jackson Norman Molyneux Peter McPartland 26 March 2015 26 March 2015 26 March 2015 26 March 2015 1 Year 1 Year 1 Year 1 Year Directors’ shareholdings The Directors who served during the year, together with their beneficial interest in the shares of the Company are as follows: Ordinary shares of 1p each At 30 September 2016 At 1 October 2015 Executive N Murray D Lindsay P Tottey Non-Executive F Armstrong P Jackson N Molyneux P McPartland 1,293,671 2,016,711 - 46,586 3,345,428 283,436 80,782 1,265,085 2,002,425 - 11,765 3,268,374 248,615 77,925 This report sets out the remuneration policy operated by Redx in respect of the Executive and Non-Executive Directors. The remuneration policy is the responsibility of the Remuneration Committee, a sub-committee of the Board. No Director is involved in discussions relating to their own remuneration. Remuneration policy for Executive Directors The Remuneration Committee sets a remuneration policy that aims to align Executive Directors remuneration with shareholders’ interests and attract and retain the best talent for the benefit of the Group. The remuneration of the Executive Directors during the year 2015/16 is set out below: Basic salary Basic salaries are reviewed annually. The review process is managed by the Remuneration Committee with reference to market salary data, and the Executives’ performance and contribution to the Company during the year. Bonuses Annual bonuses are based on achievement of Group strategic and financial targets, and personal performance objectives. The Non-Executive Directors believe that bonuses are an incentive to achieve the targets and objectives, and represent an important element of the total compensation awards to the Executive Directors. Longer term incentives In order to further incentivise the Executive Directors and employees, and align their interests with shareholders, the Company granted new share options during the year. The share options will vest at various future dates as described in the table on page 21. Pension The Group operates a defined contribution pension scheme which is available to all employees. The assets of the scheme are held separately from those of the Company in independently administered funds. Executive Directors service contracts and termination provisions The service contracts of Executive Directors are approved by the Board. The service contract may be terminated by either party giving six months’ notice to the other. The details of the Directors’ contracts are summarised as follows: 19 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E DIRECTORS’ REMUNERATION REPORT CONT. Directors’ remuneration The Directors received the following remuneration during the year: Executive Dr N Murray Dr D Lindsay P Tottey Non-Executive F Armstrong P Jackson N Molyneux P McPartland Dr B Kirschbaum D Lawrence Salaries, bonuses and fees £ Compensation for loss of office £ Pension contributions £ 165,625 59,599 149,132 - - 30,000 9,271 9,285 7,762 66,000 38,000 46,000 46,000 34,500 15,297 - - - - - - - - - - - - Total 2015/16 £ 174,896 68,884 186,894 66,000 38,000 46,000 46,000 34,500 15,297 Salaries, bonuses and fees £ 318,368 151,731 77,858 14,558 33,000 33,000 17,596 - - Pension contributions £ Total 2014/15 £ 8,199 19,093 2,250 326,567 170,824 80,108 - - - - - - 14,558 33,000 33,000 17,596 - - 620,153 30,000 26,318 676,471 646,111 29,542 675,653 Dr D Lindsay resigned as a director on 6 May 2016. P Tottey resigned as a director on 30 September 2016. Dr B Kirschbaum was appointed as a director on 1 January 2016. D Lawrence was appointed as a director on 6 May 2016. In addition to N. Molyneux’s remuneration in 2014/15 and 2015/16 disclosed above, amounts were paid to Norman Molyneux Consulting Ltd and Acceleris Capital Ltd both related parties as detailed in note 23. In addition to P. Jackson’s remuneration in 2014/15 disclosed above, fees were paid to Intelia Consulting Ltd, a related party as detailed in note 23. No amounts were paid in 2015/16. In addition to Frank Armstrong’s remuneration in 2014/15 and 2015/16 disclosed above, fees were paid to Dr Frank M. Armstrong Consulting Ltd, a related party as detailed in note 23. No compensation for loss of office was paid in the year ended 30 Septemeber 2015. 20 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E Directors’ share options Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire Ordinary Shares in the Company granted to or held by the Directors. Details of these options are as follows: At 1 October 2015 Granted during the period/ (exerc’d) At 30 September 2016 Date of grant Price per share (p) Date from which exercisable Expiry date Director N Murray F Armstrong 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 P Jackson 26-March-15 26-March-15 26-March-15 N Molyneux 26-March-15 26-March-15 26-March-15 P Tottey 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 26-March-15 01-April-16 25,050 24,975 24,975 75,000 78,875 78,875 78,875 78,875 78,875 78,875 473,250 551,325 24,975 24,975 601,275 200,475 24,975 24,975 250,425 36,675 36,675 36,675 8,325 8,325 8,325 - - - - - - - - - - - - - - - - - - - - - - - - - (8,325) 35,294 25,050 24,975 24,975 75,000 78,875 78,875 78,875 78,875 78,875 78,875 473,250 551,325 24,975 24,975 601,275 200,475 24,975 24,975 250,425 36,675 36,675 36,675 8,325 8,325 - 35,294 135,000 26,969 161,969 85.0 85.0 85.0 56.0 56.0 56.0 85.0 85.0 85.0 85.0 85.0 85.0 85.0 85.0 85.0 50.0 50.0 50.0 85.0 85.0 85.0 42.5 27-March 15 27-March-16 27-March-17 26-March-25 26-March-25 26-March-25 27-March-15 1-Sept-15 1-Sept-16 27-March-15 27-March-16 27-March-17 26-March-25 26-March-25 26-March-25 26-March-25 26-March-25 26-March-25 27-March-15 27-March-16 27-March-17 26-March-25 26-March-25 26-March-25 27-March-15 27-March-16 27-March-17 26-March-25 26-March-25 26-March-25 27-March-15 17-June-16 17-June-17 27-March-15 27-March-16 27-March-17 01-April-16 26-March-25 26-March-25 26-March-25 26-March-25 26-March-25 26-March-25 26-March-25 21 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Strategic report, the Directors’ report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Company and the Group for that period. In preparing these financial statements the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgments and accounting estimates that are reasonable and prudent; – state whether the Group financial statements have been prepared in accordance with IFRSs as adopted by the European Union; – state, with regard to the parent company financial statements, whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; – prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company and the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Redx Pharma Plc website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions. 22 REDX PHARMA PLC 2016 ANNUAL REPORT G O V E R N A N C E INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REDX PHARMA PLC – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent company financial statements are not in agreement with the accounting records and returns; or – certain disclosures of directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Respective responsibilities of directors and auditor As more fully explained in the Directors’ Responsibilities Statement set out on page 22, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Graham Bond FCA (Senior Statutory Auditor) For and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants 3 Hardman Street Manchester M3 3HF 20 March 2017 We have audited the Group and parent company financial statements (“the financial statements”) on pages 24 to 59. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. In our opinion: – the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 30 September 2016 and of the Group’s loss for the year then ended; – the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditscopeukprivate Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: 23 REDX PHARMA PLC 2016 ANNUAL REPORT F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2016 CONTINUING OPERATIONS Operating expenses Non recurring relocation costs Share based compensation Other operating income Loss from operations Gain on disposal of subsidiary undertaking Finance costs Finance income Loss before taxation Income tax Total comprehensive loss for the year attributable to owners of Redx Pharma Plc LOSS PER SHARE (PENCE) FROM CONTINUING OPERATIONS Basic & diluted Year ended 30 September 2016 £’000 Year ended 30 September 2015 £’000 Notes 5 5 2 3 1 4 4 6 7 (16,527) (556) (245) 2,380 (14,948) - (526) 67 (15,407) (114) (11,471) - (608) 2,648 (9,431) 895 (348) 59 (8,825) 650 (15,521) (8,175) (19.8) (14.1) 24 REDX PHARMA PLC 2016 ANNUAL REPORT F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 2016 Company No. 7368089 ASSETS Non-current assets Property, plant and equipment Intangible assets Other receivables Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Current tax Total current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Total current liabilities Non-current liabilities Non-current borrowings Total liabilities Net assets EQUITY Share capital Share premium Share-based compensation Capital redemption reserve Retained deficit Equity attributable to shareholders Notes 9 10 12 13 14 15 16 16 19 20 2016 £’000 533 309 605 1,447 1,553 5,758 637 7,948 2015 £’000 353 309 750 1,412 1,407 9,436 1,501 12,344 9,395 13,756 5,675 2,000 7,675 - 7,675 1,720 936 22,526 867 1 (22,610) 1,720 4,056 - 4,056 2,000 6,056 7,700 650 13,516 622 1 (7,089) 7,700 The financial statements were approved and authorised for issue by the Board on 20 March 2017 and were signed on its behalf by Dr Neil D. Murray, Chief Executive Officer. 25 REDX PHARMA PLC 2016 ANNUAL REPORT F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2016 Share Capital £’000 Share Premium £’000 Share-based payment £’000 Capital Redemption Reserve £’000 Retained Deficit £’000 Total Equity £’000 AT 1 OCTOBER 2014 7 12,313 Share issue Exercise of share options Share issue costs Cancellation of share premium Creation of capital redemption reserve Bonus issue 177 - - - (1) 467 14,823 14 (1,567) (11,600) - (467) 152 - (138) - - - - Transactions with owners in their capacity as owners Loss and total comprehensive income for the period Share-based compensation Movement in year AT 30 SEPTEMBER 2015 Share issue Share issue costs Transactions with owners in their capacity as owners Loss and total comprehensive income for the year Share-based compensation Movement in year AT 30 SEPTEMBER 2016 26 643 1,203 (138) - - 643 650 286 - - - 1,203 13,516 9,714 (704) 286 9,010 - - 286 936 - - 9,010 22,526 - 608 470 622 - - - - 245 245 867 - - - - - 1 - 1 - - 1 1 - - - - - - 1 (10,652) 1,820 - 138 - 11,600 - - 15,000 14 (1,567) - - - 11,738 13,447 (8,175) (8,175) - 608 3,563 5,880 (7,089) 7,700 - - - 10,000 (704) 9,296 (15,521) (15,521) - 245 (15,521) (5,980) (22,610) 1,720 REDX PHARMA PLC 2016 ANNUAL REPORT F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 2016 NET CASH FLOWS FROM OPERATING ACTIVITIES Loss for the year Adjustments for: Income tax Finance costs (net) Gain on disposal of subsidiary undertaking Depreciation and amortisation Share-based compensation Movements in working capital (Increase)/Decrease in trade and other receivables Increase in trade and other payables Decrease in items held for sale CASH USED IN OPERATIONS Tax credit received Interest received Year ended 30 September 2016 £’000 Year ended 30 September 2015 £’000 Notes (15,521) (8,175) 114 459 - 262 245 (124) 1,272 - (13,293) 750 36 (650) 289 (895) 139 608 1,194 815 21 (6,654) 97 19 NET CASH USED IN OPERATIONS (12,507) (6,538) CASH FLOWS FROM INVESTING ACTIVITIES Sale of property, plant and equipment Purchase of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issue less costs Share issue costs Interest paid Loan granted 2 (444) (442) 10,000 (704) - (25) - (362) (362) 15,014 (1,567) (3) - NET CASH FROM FINANCING ACTIVITIES 9,271 13,444 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of the year (3,678) 9,436 CASH AND CASH EQUIVALENTS AT END OF THE YEAR 14 5,758 6,544 2,892 9,436 27 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S NOTES TO THE FINANCIAL STATEMENTS ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The classification depends on the entity’s business model and the contractual cash flow characteristics of the instrument. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. Effective date (for annual periods beginning on or after) 1 January 2018 BASIS OF PREPARATION Redx Pharma plc (‘‘Redx” or “the Company”) is a public limited company incorporated in the UK as Redx Pharma Ltd on 7 September 2010, and domiciled in the UK. Its shares are listed on AIM, a market operated by The London Stock Exchange. The principal activity of the Group is drug discovery, pre-clinical development and licensing. The Group financial statements are presented in pounds Sterling, which is the Group’s presentational currency, and all values are rounded to the nearest thousand (£000) except where indicated otherwise. They have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) and with those parts of the Companies Acts 2006 applicable to entities reporting under IFRS. New standards, amendments and interpretations adopted during the year ended 30 September 2016 The IASB and IFRIC have issued the following standards and interpretations which have been adopted during the year. The adoption of these standards and interpretations has not had a material impact on the Group. Annual IFRS Improvements Process (2014) The 2014 annual improvements cycle covered amendments to IFRS 5: Non-current assets held for sale and discontinued operations, IFRS 7: Financial Instruments: Disclosures, IAS 19: Employee benefits and IAS 34: Interim Financial Reporting. New standards, amendments and interpretations issued but not effective for the financial year beginning 1 October 2015 and not early adopted. The IASB and IFRIC have issued the following standards and interpretations with effective dates as noted below: IFRS 9, Financial Instruments The standard is the first standard issued as part of a wider project to replace IAS 39. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 IFRS 15, Revenue from Contracts with Customers The standard specifies how and when a company will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based, five-step model to be applied to all contracts with customers. Effective date (for annual periods beginning on or after) 1 January 2018 IFRS 16, Leases The standard requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17. At the commencement date of a lease, a lessee will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right of use asset. Effective date (for annual periods beginning on or after) 1 January 2019 There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved when the Company has the power over the investee; is exposed, or has rights, to variable return from its involvement with the investee; and, has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of 28 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation. Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that: – deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 ‘Income Taxes’ and IAS 19 ‘Employee Benefits’ respectively; and – assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Going concern As part of their going concern review the Directors have followed the guidelines published by the Financial Reporting Council entitled ‘‘Guidance on Risk Management and Internal Control and Related Financial and Business Reporting’’. The Group incurred a net loss of £15.5m during the year; however, the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient working capital is available to meet the Group’s needs as they fall due for the foreseeable future and at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the Group’s annual budget, prepared and approved by the Board, which reflects a number of key assumptions in respect of costs and revenue forecasts, underpinned by the current pipeline. The Board have also taken into consideration the effects of the successful post year end fundraise of £12m (gross), and the cost savings expected from the restructuring explained elsewhere in the Financial Statements. Sensitivity analysis has been performed on both cost and revenue forecasts to reflect a variety of opportunities, risks and mitigating actions, both in timing and quantum. These projections are reviewed by the Board on a regular basis. Within the revenue forecasts, and as discussed in the Principal Risks and Uncertainties section of the Strategic Report, there are inherent judgements regarding the commercial and technical risk of programs. Whilst acknowledging the uncertainties in the operating environment and their resultant impact on revenues, the Directors have identified a number of further opportunities to manage working capital, to mitigate against any deteriorations and uncertainties in trading conditions. On the basis of the above review, the Directors are confident that the Group has sufficient working capital to honour all of its obligations to creditors as and when they fall due. Accordingly, the Directors continue to adopt the going concern basis in preparing the Financial Statements. Segmental information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The Board of Directors and the Chief Financial Officer are together considered the chief operating decision-maker and as such are responsible for allocating resources and assessing performance of operating segments. The Directors consider that there are no identifiable business segments that are subject to risks and returns different to the core business. The information reported to the Directors, for the purposes of resource allocation and assessment of performance is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS8. Currencies (a) Functional and presentational currency Items included in the Financial Information are measured using the currency of the primary economic environment in which the Group operates (“the functional currency”) which is UK sterling (£). The Financial Information is presented in UK sterling. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or at an average rate for a period if the rates do not fluctuate significantly. 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. 29 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S of comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Revenue Income received as a contribution to on-going costs, together with grant income, is treated as Other operating income within the Income Statement. Government grants are recognised as Other operating income on a systematic basis over the periods in which the associated expenses are recognised. Grants that are receivable as compensation for expenses or losses previously incurred or for the purpose of giving immediate financial support with no future related costs are recognised in the period in which they become receivable. Current and deferred tax The tax expense or credit represents the sum of the tax currently payable or recoverable and the movement in deferred tax assets and liabilities. (a) Current tax Current tax is based on taxable income for the period and any adjustment to tax from previous periods. Taxable income differs from net income in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other periods or that are never taxable or deductible. The calculation uses the latest tax rates for the period that have been enacted by the reporting date. (b) Deferred tax Deferred tax is calculated at the latest tax rates that have been substantially enacted by the reporting date that are expected to apply when settled. It is charged or credited in the statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case it is also dealt with in equity. date the carrying value of Goodwill in accordance with IAS 36. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Directors estimate the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Property, plant and equipment Property, plant and equipment and leasehold improvements are stated at cost less accumulated depreciation and any impairment losses. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Such assets acquired in a business combination are initially recognised at their fair value at acquisition date. Depreciation is charged so as to write off the costs of assets over their estimated useful lives, on a straight-line basis starting from the month they are first used, as follows: – Laboratory Equipment - 2 or 3 years – Computer Equipment - 2 or 3 years – Leasehold improvements – over the term of the lease Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax bases used in the computation of taxable income, and is accounted for using the liability method. It is not discounted. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable income will be available against which the asset can be utilised. Such assets are reduced to the extent that it is no longer probable that the asset can be utilised. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Statement of Comprehensive Income. Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals payable under operating leases (net of any incentives received from the lessor) are charged to the Statement of Comprehensive Income on a straight-line basis over the term of the relevant lease. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets and liabilities are offset when there is a right to offset current tax assets and liabilities and when the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Impairment of non-current assets At each reporting date, the Directors review the carrying amounts of property, plant and equipment assets and goodwill to determine whether there is any indication that those assets have suffered an impairment loss. Furthermore the Director’s review at each reporting The minimum term of the lease is estimated if it is not clear. Intangible assets Expenditure on research activities is recognised as an expense in the period in which it is incurred. All on-going development expenditure is currently expensed in the period in which it is incurred. Due to the regulatory and other uncertainties inherent in the development of the Group’s programs, the criteria for development costs to be recognised as an asset, as prescribed by IAS 38, ‘Intangible assets’, are not met until the product has been submitted for regulatory approval, such approval has been received and it is probable that future economic benefits will flow to the Group. The Group does not currently have any such internal development costs that qualify for capitalisation as intangible assets. 30 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S Development costs are capitalised when the related products meet the recognition criteria of an internally generated intangible asset, the key criteria being as follows: – Technical feasibility of the completed intangible asset has been established; – It can be demonstrated that the asset will generate probable future economic benefits; – Adequate technical, financial and other resources are available to complete the development; – The expenditure attributable to the intangible asset can be reliably measured; and – The Group has the ability and intention to use or sell the asset. Expenses for research and development include associated wages and salaries, material costs, depreciation on non-current assets and directly attributable overheads. All research and development costs, whether funded by third parties under licence and development agreements or not, are included within operating expenses and classified as such. The cost of a purchased intangible asset is the purchase price plus any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended. Payroll expense and related contributions Wages, salaries, payroll tax, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the period in which the associated services are rendered. Pension costs The Group operates a defined contribution pension scheme for the benefit of its employees. The Group pays contributions into an independently administered fund via a salary sacrifice arrangement. The costs of providing these benefits are recognised in the statement of comprehensive income and consist of the contributions payable to the scheme in respect of the period. Share-based compensation The Group issues share-based payments to certain employees and Directors. Equity-settled share-based payments are measured at fair value at the date of grant and if material are expensed immediately or on a straight-line basis over any vesting period, along with a corresponding increase in equity. At each reporting date, the Directors revise their estimate of the number of equity instruments expected to vest as a result of the effect of non- market-based vesting conditions. The impact of any revision is recognised in the statement of comprehensive income, with a corresponding adjustment to equity reserves. The fair value of share options is determined using a Black-Scholes model, taking into consideration the best estimate of the expected life of the option and the estimated number of shares that will eventually vest. The cost of each option is spread evenly over the period from grant to expected vesting. When options expire or are cancelled, a corresponding credit is recognised. Financial instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognised when the obligation specified in the contract is discharged, cancelled or expired. (a) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. (b) Cash and cash equivalents Cash and cash equivalents consist of cash on hand, demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. (c) Trade and other payables Trade and other payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the “effective interest rate” to the carrying amount of the liability. Critical accounting estimates and judgements Details of significant accounting judgements and critical accounting estimates are set out in this Financial Information and include: (a) Share based compensation The Group has issued a number of share options to certain employees. The Black-Scholes model was used to calculate the appropriate charge for the period of issue and subsequent periods. The use of this model to calculate a charge involves using a number of estimates and judgements to establish the appropriate inputs to be entered into the model, covering areas such as the use of an appropriate interest rate and dividend rate, exercise restrictions and behavioural considerations. A significant element of judgement is therefore involved in the calculation of the charge. The total charge recognised and further information on share options can be found in Notes 2 and 21. (b) Government grant accrued income The recognition of grant income (and hence the related accrued income balances) requires the Directors to make assumptions in relation to the allocation of resources to date and the likelihood of a successful claim. A potential contingent liability exists with regard to the repayment of certain grant income, which is discussed in detail in note 25. 31 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S (c) Capitalisation of research and development expenditure The decision on whether to capitalise any expenditure relating to research and development in accordance with IAS 38 requires the Directors to make judgements as to whether certain key criteria have been met. 32 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 1. GAIN ON DISPOSAL OF SUBSIDIARY UNDERTAKING AND ASSETS HELD FOR SALE The sale of the subsidiary Redx Crop Protection Ltd to Redag Ltd, a related party by virtue of common Directors, completed on 9 October 2014, on which date control passed to the acquirer. The gain on the disposal of subsidiary represents cash consideration of £1 and a loan of £714,000 received for the disposal of net liabilities of £181,000. 2. SHARE-BASED COMPENSATION Share options have been issued to certain Directors and staff during the period, and the charge arising is shown below. The fair value of the options granted has been calculated using a Black Scholes model. Options granted and vested in period Options cancelled in period Options granted and vesting in future periods 2016 NUMBER 35,294 (226,282) 1,362,997 2015 NUMBER 1,581,075 (90,800) 1,244,700 1,172,009 2,734,975 Charge to Statement of Comprehensive Income in period £’000 245 Assumptions used were an option life of 5 years, a risk free rate of 2% and no dividend yield. Other inputs were as follows: Volatility Assumed share price at grant date Exercise price Fair value of each option 40% £ 0.415 to 0.85 0.33 to 0.85 0.161 to 0.472 The assumptions used in the previous period reflect a 74 for 1 bonus issue in March 2015. £’000 608 40% £ 0.85 0.70 0.38 33 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 3. OTHER OPERATING INCOME Reimbursement of costs Government grants receivable 4. FINANCE EXPENSE AND FINANCE INCOME Finance expense Loan interest Fair value adjustment Other interest and similar charges Finance income Bank and other short term deposits Loan interest 2016 £’000 162 2,218 2,380 2016 £’000 346 180 - 526 32 35 67 2015 £’000 1,390 1,258 2,648 2015 £’000 345 - 3 348 23 36 59 34 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 5. LOSS BEFORE TAXATION The following items have been included in arriving at loss before taxation Research and development Staff costs – Note 8 (excluding share based compensation & relocation costs) Establishment and general: Depreciation of owned property, plant and equipment Operating leases on land and buildings Operating leases – other Amounts payable to RSM UK Audit LLP and their associates by the Company and its subsidiaries amounted to:- Audit of subsidiaries Audit of parent Company and consolidation Tax compliance Tax consultancy Other services – interim review 2016 £’000 8,067 7,120 262 824 212 15 17 - - 10 2015 £’000 5,086 5,394 139 715 101 12 15 - - 9 In 2015 RSM corporate finance LLP charged fees of £96k in relation to the IPO. During the year, the group relocated certain aspects of its operations from Liverpool to Alderley Park. The total non recurring costs (which included staff benefit packages and site removal costs) associated with this were £556,000, (2015: £Nil). 16,527 11,471 6. INCOME TAX Current income tax UK corporation tax (R&D tax credits) Research and Development Expenditure credit Prior year adjustment Income tax credit per the income statement 2016 £’000 - (637) 751 114 2015 £’000 (507) (307) 164 (650) The Group is in continuing discussions with HMRC regarding the impact of RGF funding on the recoverability of R&D tax credits. Whilst the directors remain confident that such credits are recoverable, they consider it prudent not to provide on such a basis at the present time. Amounts due under Research and Development Expenditure credit are unaffected. The difference between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the loss before tax is as follows: 35 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 6. INCOME TAX CONT. Loss before tax Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 20% (2015: 20.5%) Effects of: Income not chargeable for tax purposes R&D expenditure credits Expenses not deductible for tax purposes Group relief surrendered/(claimed) R&D enhanced tax credit Adjustment in respect of previous periods Losses surrendered for R&D tax credits RDEC recognised in tax account R&D tax credit recoverable Deferred tax not recognised Total taxation 2016 £’000 (15,407) (3,081) - 159 94 - - 751 - (637) - 2,828 114 2015 £’000 (8,825) (1,809) (183) 79 129 (12) (402) 164 717 (307) (507) 1,481 (650) The taxation credit arises on the enhanced research and development tax credits and research and development expenditure credits accrued to the respective periods. 7. LOSS PER SHARE Basic loss per share is calculated by dividing the net income for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. In the case of diluted amounts, the denominator also includes ordinary shares that would be issued if any dilutive potential ordinary shares were issued following conversion of loans or exercise of share options. The basic and diluted calculations are based on the following: Loss for the period attributable to the owners of the Company Weighted average number of shares – basic and diluted Loss per share - basic and diluted 2016 £’000 (15,521) NUMBER 78,360,552 PENCE (19.8) 2015 £’000 (8,175) NUMBER 58,021,962 PENCE (14.1) The loss and the weighted average number of shares used for calculating the diluted loss per share are identical to those for the basic loss per share. This is because the outstanding share options would have the effect of reducing the loss per share and would therefore not be dilutive under IAS 33 Earnings per Share. 36 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 8. EMPLOYEES AND KEY MANAGEMENT Staff costs (including Directors) comprise Wages and salaries Social security costs Pension costs Non-Executive Director fees Share-based payments Number of employees Average number of employees (including Directors) Management & Admin R&D – Chemistry R&D – Biology R&D – Analytical Directors & Key management Short term remuneration Compensation for loss of office Social security costs Pension costs Share-based payments 2016 £’000 6,591 641 296 - 245 7,773 2016 NUMBER 29 85 52 33 199 2016 £’000 1,069 30 128 53 166 1,446 2015 £’000 4,618 461 217 98 608 6,002 2015 NUMBER 20 67 37 21 145 2015 £’000 799 - 99 30 504 1,432 Key management are considered to be the Directors and other members of the Executive Management Team. Payments to Directors consist of basic salaries, fees and pension. The amounts in respect of the highest paid Director are as follows: Short term employment benefits Compensation for loss of office Pension contributions 2016 £’000 149 30 8 187 2015 £’000 318 - 8 326 37 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 9. PROPERTY, PLANT AND EQUIPMENT Leasehold Improvements £’000 Laboratory Equipment £’000 Computer Equipment £’000 - - - - 114 - 114 - - - - 2 - 2 112 - - 552 327 879 879 199 (6) 1,072 451 111 562 562 228 (4) 786 286 317 101 144 35 179 179 131 - 310 115 28 143 143 32 - 175 135 36 29 COST At 1 October 2014 Additions At 30 September 2015 At 1 October 2015 Additions Disposals At 30 September 2016 DEPRECIATION At 1 October 2014 Charge for the year At 30 September 2015 At 1 October 2015 Charge for the year Disposals At 30 September 2016 Net book value At 30 September 2016 At 30 September 2015 At 1 October 2014 38 Total £’000 696 362 1,058 1,058 444 (6) 1,496 566 139 705 705 262 (4) 963 533 353 130 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 10. INTANGIBLE ASSETS (GOODWILL) Cost At 1 October and 30 September Accumulated Impairment At 1 October and 30 September Net carrying value at 30 September 2016 £’000 309 - 309 2015 £’000 309 - 309 The goodwill arose on the original purchase of the business and assets of Bradford Pharma. The Board considers the goodwill to be intrinsic to the whole Group’s on-going business, and as such the calculations have been made based on forecasts and predictions relating to the Group as a single entity. The Directors undertook a detailed review by preparing a discounted cash flow model, using the agreed budgets and forecasts for the coming years. The key variables that were used included: A terminal growth rate thereafter of 2%. A pre-tax discount rate of 11.5%, which the Directors believe to be prudent. Based on the results of the above detailed testing, the Board do not believe that any impairment under IAS 36 is required. 11. SUBSIDIARIES A list of the significant investments in subsidiaries, including the name, country of incorporation, proportion of ownership interest is given in note 4 to the Company’s separate financial statements. 12. OTHER NON-CURRENT RECEIVABLES Loan 2016 £’000 605 605 2015 £’000 750 750 The loan of £714k was granted to Redag Crop Protection Ltd as part of the sale of the former subsidiary. It bears interest at 5% repayable with the principal sum. The loan is unsecured, and is repayable on the sale, listing, or change of control of Redag Crop Protection ltd. 39 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 12. OTHER NON-CURRENT RECEIVABLES CONT. The Directors expectation is that the loan will be fully recovered, but that none of the repayment terms are likely to be fulfilled in the short term, and that it is therefore appropriate to classify the loan as a non-current receivable. A discount rate of 12% has been applied in calculating the carrying value. The Directors believe that the carrying value represents the fair value of the asset. An impairment review has been undertaken by the Directors, which did not indicate that any impairment was required. 13. TRADE AND OTHER RECEIVABLES VAT recoverable Other receivables Accrued income Prepayments 2016 £’000 132 151 469 801 2015 £’000 133 117 452 705 1,553 1,407 The Directors believe that the carrying value of trade and other receivables represents their fair value. Details of the Group’s credit risk management policies are shown in note 17. The Group does not hold any collateral as security for its trade and other receivables. 14. CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits 2016 £’000 5,758 - 5,758 2015 £’000 3,436 6,000 9,436 No interest is earned on immediately available cash balances. Short-term deposits are made for varying periods of up to 90 days, and earn interest at the respective short-term deposit rates. The Directors consider that the carrying value of cash and cash equivalents approximates to their fair value. 40 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 15. TRADE AND OTHER PAYABLES Trade payables Employee taxes and social security Other payables Accruals 2016 £’000 1,632 235 180 3,628 5,675 2015 £’000 1,601 131 117 2,207 4,056 Trade and other payables principally consist of amounts outstanding for trade purchases and on-going costs. They are non-interest bearing and are normally settled on 30 to 45 day terms. The Directors consider that the carrying value of trade and other payables approximates to their fair value. 16. FINANCIAL LIABILITIES - BORROWINGS Current Convertible loan due within one year Non-current Convertible loan due between two and five years Total 2016 £’000 2,000 2,000 - - 2,000 2015 £’000 - - 2,000 2,000 2,000 A convertible loan facility of £2m was agreed with Liverpool City Council in June 2012. The maturity date of the loan is 31 March 2017. Interest is charged at 12% per annum and is payable upon repayment of the loan. The lender has an option to convert into ordinary shares. The loan is secured by a fixed and floating charge over the assets of the business and is denominated in sterling. 41 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 17. FINANCIAL INSTRUMENTS The Group’s financial instruments comprise borrowings, cash and cash equivalents and various items such as other receivables and trade and other payables arising directly from the Group’s operations. The main purpose of these financial instruments is to finance the Group’s operations. Classes and fair values of financial instruments are as follows: Loans and receivables Loan Other receivables Cash and cash equivalents Financial liabilities measured at amortised cost Non-current borrowings Current borrowings Trade payables Other payables Carrying value 2016 £’000 Carrying value 2015 £’000 605 620 5,758 6,983 - 2,000 1,632 180 3,812 750 569 9,436 10,755 2,000 - 1,601 117 3,718 The Group compared fair value to carrying value for each class of financial asset and liability. No difference was identified. The principal financial risks faced by the Group are: Currency risk The Group’s exposure to foreign currency risk is limited; most of its invoicing and payments are in sterling. Accordingly no sensitivity analysis is presented in this area as it is immaterial. Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. In the year, both these risks are considered to have been minimal. Credit risk The Group gives careful consideration to which organisations it uses for banking in order to minimise credit risk. The Group holds cash with one large bank in the UK, an institution with an A credit rating (long term, as assessed by Moody’s). The amounts of cash held with that bank at the reporting date can be seen in the financial assets table above. All of the cash and cash equivalents held with the bank were denominated in sterling. Liquidity risk and capital management Liquidity risk The Directors manage liquidity risk by regularly reviewing the Group’s cash requirements by reference to short term cashflow forecasts and medium term working capital projections. Capital management The Group considers capital to be its non-current liabilities and equity. The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern. The Group is currently meeting this objective. In order to maintain or adjust the capital structure the Group may issue new shares or sell assets to reduce debt. 42 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S Financial risk factors Accounts receivable and accounts payable, arising from normal trade transactions, are expected to be settled within normal credit terms. The contractual maturity of the Group’s financial liabilities is as follows: Loans £’000 Trade payables £’000 Other payables £’000 2,000 - 2,000 - 2,000 2,000 1,632 - 1,632 1,601 - 1,601 180 - 180 117 - 117 Total £’000 3,812 - 3,812 1,718 2,000 3,718 Timing of cash flows Within one year Between two and five years At 30 September 2016 Timing of cash flows Within one year Between two and five years At 30 September 2015 18. DEFERRED TAX Accelerated capital allowances £’000 Other £’000 Total £’000 Liabilities At 30 September 2015 and 2016 - - - Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17% (2015:20%). Deferred tax assets carried forward of £6.1m, (2015: £3.4m) have not been recognised on the grounds that there is insufficient evidence of sufficient taxable trading profits arising in the future to allow recovery. 43 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 19. SHARE CAPITAL Number of shares in issue Ordinary Shares of £0.01 Share Capital at par, fully paid Ordinary Shares of £0.01 Movement in year Ordinary shares of £0.01 Ordinary B shares of £0.01 Total movement in year 2016 NUMBERS 2015 NUMBERS 93,552,638 64,981,209 2016 £’000 936 286 - 286 2015 £’000 650 644 (1) 643 Share issues On 4 April, 14 April and 15 April 2016 respectively, the Company issued 6,180,197 , 285,714 , and 22,105,518 Ordinary shares at £0.35 each pursuant to a placing and admission to trading on AIM. The gross proceeds of the issue were £10m. 44 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 20. SHARE PREMIUM Brought forward Bonus issue Share issue Share issue costs Exercise of share options Reduction of share premium 2016 £’000 13,516 - 9,714 (704) - - 22,526 2015 £’000 12,313 (467) 14,823 (1,567) 14 (11,600) 13,516 Description of other reserves: Share premium Amount subscribed for share capital in excess of nominal value. Share-based payment Capital redemption reserve Retained deficit The share based payment reserve arises as the expense of issuing share-based payments is recognised over time (share option grants). A statutory, non-distributable reserve into which amounts are transferred following the redemption or purchase of a company’s own shares. The retained deficit records the accumulated profits and losses less any subsequent elimination of losses, of the Group since inception. 45 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 21. SHARE-BASED PAYMENTS Movements on share options during the period were as follows: Exercise price per share 30 September 2015 Granted Exercised Lapsed/ Cancelled 30 September 2016 Date from which exercisable Expiry date 50p 50p 50p 50p 50p 50p 50p 56p 56p 56p 85p 85p 85p 33.2p 42.5p 42.5p 42.5p 42.5p 42.5p 36,675 36,675 36,675 221,650 221,650 221,650 110,025 78,875 78,875 78,875 1,239,950 187,100 187,100 - - - - - - - - - - - - - - - - - - - 1,145,350 66,666 66,667 66,667 35,294 17,647 Total 2,735,775 1,398,291 During the prior year: - - - - - - - - - - - - - - - - - - - - - - - (30,000) (60,000) (60,000) - - - - - - (8,325) (50,310) - - - - (17,647) 36,675 36,675 36,675 191,650 161,650 161,650 110,025 78,875 78,875 78,875 1,239,950 187,100 178,775 1,095,040 66,666 66,667 66,667 35,294 - (226,282) 3,907,784 27.03.2015 17.06.2015 17.06.2016 26.03.2016 26.03.2017 26.03.2018 26.03.2015 27.03.2015 01.09.2015 01.09.2016 27.03.2015 27.03.2016 27.03.2017 01.05.2019 01.04.2017 01.04.2018 01.04.2019 01.04.2016 01.04.2017 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.02.2026 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 Exercise price per share 1 October 2014 Granted Exercised Lapsed/ Cancelled 30 September 2015 Date from which exercisable Expiry date 1p 3750p 50p 50p 50p 50p 50p 50p 50p 56p 56p 56p 85p 85p 85p Total 20,516 800 - - - - - - - - - - - - - - - 36,675 36,675 36,675 251,650 251,650 251,650 110,025 78,875 78,875 78,875 1,239,950 187,100 187,100 (20,516) - - - - - - - - - - - - - - - (800) - - - (30,000) (30,000) (30,000) - - - - - - - - - 36,675 36,675 36,675 221,650 221,650 221,650 110,025 78,875 78,875 78,875 1,239,950 187,100 187,100 21,316 2,825,775 (20,516) (90,800) 2,735,775 20.12.2012 04.02.2014 27.03.2015 17.06.2015 17.06.2016 26.03.2016 26.03.2017 26.03.2018 26.03.2015 27.03.2015 01.09.2015 01.09.2016 27.03.2015 27.03.2016 27.03.2017 04.02.2024 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 26.03.2025 The Group has accounted for the charge arising from the issue of share options as below: The total charge recognised in the year to 30 September 2016 is £245,000 (2015: £608,000). The fair values of the options granted have been calculated using a Black-Scholes model. 46 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S Assumptions used were an option life of 5 years, a risk free rate of 2 per cent, a volatility of 40 per cent and no dividend yield. Other inputs are shown in note 2. The share options are exercisable with no further conditions to be met. 22. OPERATING LEASE ARRANGEMENTS – MINIMUM LEASE PAYMENTS Outstanding commitments for future minimum lease payments under non- cancellable operating leases expiring: Within one year In the second to fifth years In greater than five years PROPERTY PLANT & EQUIPMENT 2016 £’000 2015 £’000 2016 £’000 2015 £’000 1,000 5,512 5,413 11,925 505 2,647 - 3,152 160 - - 160 90 10 - 100 Operating lease commitments relate to buildings and to plant and equipment. 23. RELATED PARTIES Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and other related parties are disclosed below: Trading transactions The Group has purchased services in the normal course of business from the following companies related to individuals who are or were Directors of the Group: Intelia Consulting Ltd – owned by P. Jackson Acceleris Capital Ltd – of which N. Molyneux is a Director Norman Molyneux Consultancy Ltd – owned by N. Molyneux Dr Frank M Armstrong Consulting Ltd – owned by F. Armstrong The Group has purchased arms length administration services from Mrs J. Murray, who is the wife of N. Murray. The Group has purchased other services, and has paid deal fees and commissions, in connection with external fundraising from Acceleris Capital Ltd. These are also set out below, and were charged to the share premium account. The Group has provided services in the normal course of business to the following companies related to individuals who are or were Directors of the Group: Redag Crop Protection Ltd – of which N. Molyneux is a Director. A loan has also been granted as part of the sale of this company. The amounts outstanding are unsecured. 47 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 23. RELATED PARTIES CONT. As detailed in note 12 the Group has a loan of £605,000 due from Redag Crop Protection Ltd. N. Molyneux, N. Murray, D. Lindsay, P. Jackson and P. McPartland are all shareholders in Redag Crop Protection Ltd. On 10 June 2016, a short term, interest free loan of £25,000 was made to AMR Centre Ltd, of which P. Jackson is a Director. Purchases from/(charges to) related parties Intelia Consulting Ltd Redag Crop Protection Ltd Acceleris Capital Ltd Acceleris Capital Ltd (fundraising items) Norman Molyneux Consultancy Ltd Dr Frank M Armstrong Consulting Ltd (fees) Dr Frank M Armstrong Consulting Ltd (expenses) Mrs J Murray Amounts owed to/(by) related parties Intelia Consulting Ltd Redag Crop Protection Ltd Redag Crop Protection Ltd - loan Acceleris Capital Ltd AMR Centre Ltd – short term loan Norman Molyneux Consultancy Ltd Dr Frank M Armstrong Consulting Ltd Mrs J Murray 2016 £’000 - (163) 88 309 10 - 5 24 273 2016 £’000 - (33) (605) 18 (25) - 1 2 (642) 2015 £’000 84 (91) 59 295 18 32 - 18 415 2015 £’000 25 (21) (750) 3 - 6 9 - (728) Amounts owed to/by related parties are disclosed in other receivables (note 13), other non current receivables (note 12), and within trade payables (note 15). 24. CAPITAL COMMITMENTS At 30 September 2016 the Group had no capital commitments (30 September 2015: nil). 48 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 25. CONTINGENT LIABILITIES The Group has continued to receive Regional Growth Fund grants administered by the Department of Business, Energy and Industrial Strat- egy of the UK Government in support of its research programs around early stage proprietary small molecule therapeutics. At the end of the year the Group had received total grants carried forward as follows: RGF 2 RGF 3 RGF 5 2016 £’000 5,920 4,700 2,630 13,250 2015 £’000 5,920 4,700 470 11,090 Receipt of these grant monies is subject to various performance criteria, the most significant of which are the obligation to defray specific operational expenditure in relation to the research programs before the claims were made (considered to be the funded expenditure); and the requirement to confirm the reasonable belief that funded expenditure will lead to the creation or safeguarding of a specific average number of jobs connected with those programs to the end of the monitoring periods which are for RGF2 31 March 2017, for RGF3 17 April 2019 and 31 March 2020 for RGF5 (considered to be the long term results). If the Group fails to create or safeguard an average number of jobs connected with the research programs through to the end of the monitoring periods, which are 160 for RGF2, 99 for RGF3 and 70 for RGF5, it may be required to repay £37,000, £47,475 and £58,756 in relation to RGF2, RGF3 and RGF5 respectively for each job not created or safeguarded. The Group has never been asked to make any such repayment in the past and believes it has satisfied the Monitoring Officer appointed by the Department of Business, Energy and Industrial Strategy The Group has therefore made no provision for such repayment. There were no other contingent liabilities at the year end. 26. EVENTS AFTER THE REPORTING PERIOD On 11 October 2016, pursuant to the exercise of options, 145,319 Ordinary shares were issued (110,025 at £0.50 each and 35,294 at £0.425 each). On 15 February 2017, the Company issued 5,999,999 Ordinary shares at £0.375 each pursuant to a placing and admission to trading on AIM. On 1 March 2017 the Company issued a further 26,779,958 Ordinary shares pursuant to a placing and open offer, and admission to trading on AIM. The gross amount raised being £12m. As part of this transaction, and Pursuant to a Subscription Agreement with the Company, Lanstead Capital agreed to subscribe for 11,500,000 Subscription Shares at the Issue Price representing gross proceeds of £4,312,500. £646,875 of the Subscription proceeds (being 15 per cent. of the gross proceeds of the Subscription) were retained by the Company and £3,665,625 (being 85 per cent. of the gross proceeds of the Subscription) were pledged to Lanstead under a Sharing Agreement pursuant to which Lanstead will make monthly settlements (subject to adjustment upwards or downwards, as measured against a Benchmark Price of 50 pence per Ordinary Share) to the Company over 18 months. As a result of entering into the Sharing Agreement the aggregate amount received by the Company under the Subscription and the related Sharing Agreement may be more or less than £4,312,500. On 20 March 2017 the Board of directors agreed a proposal to undertake a restructuring of the Group, which is likely to lead to a significant reduction in headcount across all areas of operation. In line with the proposed strategic refocus, we envisage making an estimated fixed cost saving of £4.2m, which is of course subject to consultation. The Group proposes to continue it’s Anti-Infectives research under external collaborations. The Board has also received notification from two directors, Dr Frank Armstrong, and Peter McPartland that they will not be seeking re-election at the forthcoming Annual General Meeting. Dr Peter Jackson, Non-Executive Director, co-founder of Redx and Executive Chairman up to August 2014, will be stepping down from the Board on 31 March 2017. 49 REDX PHARMA PLC 2016 ANNUAL REPORT F I N A N C I A L S TAT E M E N T S COMPANY STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 2016 Company registration number 7368089 FIXED ASSETS Intangible assets Tangible assets Investments CURRENT ASSETS Debtors Cash at bank and in hand TOTAL CURRENT ASSETS Creditors: amounts falling due within one year NET CURRENT ASSETS NET ASSETS CAPITAL AND RESERVES Share capital Share premium Capital redemption reserve Share-based payments reserve Profit and loss account SHAREHOLDERS’ FUNDS Notes 2 3 4 5 6 7 8 8 9 2016 £’000 217 207 206 630 30,388 5,472 35,860 (6,197) 29,663 30,293 936 22,526 1 867 5,963 30,293 2015 £’000 232 3 118 353 18,700 7,706 26,406 (5,827) 20,579 20,932 650 13,516 1 622 6,143 20,932 The financial statements were approved and authorised for issue by the Board and signed on its behalf by: Dr Neil D. Murray Director 20 March 2017 50 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S NOTES TO THE INDIVIDUAL FINANCIAL STATEMENTS OF REDX PHARMA PLC 1. ACCOUNTING POLICIES (i) Basis of preparation The Company’s financial statements have been prepared in accordance with Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” and the Companies Act 2006. The financial statements have been prepared under the historical cost convention. Financial reporting standard 102 - reduced disclosure exemptions The company has taken advantage of the following disclosure exemptions in preparing these financial statements, as permitted by FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”: – the requirements of Section 7 Statement of Cash Flows; – the requirement of Section 3 Financial Statement Presentation paragraph 3.17(d); – the requirements of Section 11 Financial Instruments paragraphs 11.39 to 11.48A; – the requirements of Section 26 Share-based Payment paragraphs 26.18(b), 26.19 to 26.21 and 26.23; – the requirement of Section 33 Related Party Disclosures paragraph 33.7. (ii) Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where trans- actions or events that result in an obligation to pay more, or a right to pay less tax in the future have occurred at the balance sheet date. Deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profit from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantially enacted at the balance sheet date. (iii) Going concern As part of their going concern review the Directors have followed the guidelines published by the Financial Reporting Council entitled ‘‘Guidance on Risk Management and Internal Control and Related Financial and Business Reporting’’. The Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient working capital is available to meet the Company’s needs as they fall due for the foreseeable future and at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the Company’s annual budget, prepared and approved by the Board, which reflects a number of key assumptions in respect of cost and revenue forecasts, underpinned by the current pipeline. The Board have also taken into consideration the effects of the successful post year end fundraise of £12m (gross), and the cost savings expected from the restructuring explained elsewhere in the Financial Statements. Sensitivity analysis has been performed on both cost and revenue forecasts to reflect a variety of opportunities, risks and mitigating actions, both in timing and quantum. These projections are reviewed by the Board on a regular basis. Within the revenue forecasts, and as discussed in the Principal Risks and Uncertainties section of the Strategic Report, there are inherent judgements regarding the commercial and technical risk of programs. Whilst acknowledging the uncertainties in the operating environment and their resultant impact on revenues, the Directors have identified a number of opportunities to manage working capital, to mitigate against any deteriorations and uncertainties in trading conditions. On the basis of the above review, the Directors are confident that the Group has sufficient working capital to honour all of its obligations to creditors as and when they fall due. Accordingly, the Directors continue to adopt the going concern basis in preparing the Financial Statements. 51 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 1. ACCOUNTING POLICIES CONT. (iv) Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals payable under operating leases (net of any incentives received from the lessor) are charged to the Statement of Comprehensive Income on a straight-line basis over the term of the relevant lease. The minimum term of the lease is estimated if it is not clear. (v) (vi) Goodwill Goodwill, being the amount paid in connection with the acquisition of a business in 2010, is being amortised evenly over its estimated useful life of twenty years. Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the assets to its working condition for its intended use. Finance costs are not included. Depreciation is calculated on the straight-line method to write off the cost of assets to their residual values over their estimated useful lives as follows. – Laboratory equipment: – Computer equipment: – Leasehold improvements: 2 or 3 years 2 or 3 years Over the term of the lease Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. Repairs and maintenance are charged to the profit and loss account during the financial period in which they are incurred. (vii) Financial instruments Financial assets and financial liabilities are recognised in the Company’s statement of financial position when the company becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognised when the obligation specified in the contract is discharged, cancelled or expired. (a) Trade and other receivables and Group debtors Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. (b) Cash and cash equivalents Cash and cash equivalents consist of cash on hand, demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. (c) Trade and other payables and Group creditors Trade and other payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the “effective interest rate” to the carrying amount of the liability. (viii) Profit and loss account The Company has taken advantage of s408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The Company’s result for the year was a loss of £180,000 (2015: £Nil). (ix) Investments Investments in subsidiaries are stated at cost less provision for impairment in value, and are detailed in note 4. 52 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S (x) Share-based compensation The Company issues share-based payments to certain employees and Directors. Equity-settled share-based payments are measured at fair value at the date of grant and if material are expensed immediately or on a straight-line basis over any vesting period, along with a corresponding increase in equity. Where such payments are made to employees of subsidiary undertakings, but relate to the shares of the parent, they are recognised as additional capital contributions to the subsidiary, along with a corresponding increase in equity. At each reporting date, the Directors revise their estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of any revision is recognised in statement of comprehensive income, with a corresponding adjustment to equity reserves. The fair value of share options is determined using a Black-Scholes model, taking into consideration the best estimate of the expected life of the option and the estimated number of shares that will eventually vest. The cost of each option is spread evenly over the period from grant to expected vesting. When options expire or are cancelled, a corresponding credit is recognised. Critical accounting estimates and judgements Details of significant accounting judgements and critical accounting estimates are set out in this Financial Information and include: (a) Share-based compensation The Company has issued a number of share options to certain employees. The Black-Scholes model was used to calculate the appropriate charge for the period of issue and subsequent periods. The use of this model to calculate a charge involves using a number of estimates and judgements to establish the appropriate inputs to be entered into the model, covering areas such as the use of an appropriate interest rate and dividend rate, exercise restrictions and behavioural considerations. A significant element of judgement is therefore involved in the calculation of the charge. The total charge recognised and further information on share options can be found in Notes 2 and 21 to the Consolidated Financial Statements. 53 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S Goodwill £’000 Total £’000 309 309 77 15 92 217 232 Laboratory Equipment £’000 Computer Equipment £’000 Leasehold Improvements £’000 66 13 79 66 - 66 13 - 11 84 95 8 5 13 82 3 - 114 114 - 2 2 112 - 309 309 77 15 92 217 232 Total £’000 77 211 288 74 7 81 207 3 2. INTANGIBLE FIXED ASSETS Cost At 30 September 2015 At 30 September 2016 Amortisation At 30 September 2015 Charge for the year At 30 September 2016 Net book value at 30 September 2016 Net book value at 30 September 2015 3. TANGIBLE FIXED ASSETS Cost At 30 September 2015 Additions At 30 September 2016 Depreciation At 30 September 2015 Charge for the year At 30 September 2016 Net book value At 30 September 2016 Net book value at 30 September 2015 54 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 4. INVESTMENTS IN SUBSIDIARIES During the year the Company made additional capital contributions to subsidiary undertakings by way of share-based compensation to employees of those companies. At 1 October Additional capital contribution – Redx Oncology Ltd Additional capital contribution – Redx Anti-Infectives Ltd Additional capital contribution – Redx Immunology Ltd At 30 September At 30 September 2016 the Company held share capital in the following subsidiaries: 2016 £’000 118 20 50 18 206 2015 £’000 - 70 48 - 118 Name Country of incorporation Percentage held Nature of business Direct/Indirect holding Redx Oncology Limited England & Wales 100% Redx Anti-Infectives Limited England & Wales 100% Redx Immunology Limited England & Wales 100% Pre clinical drug development licensing Pre clinical drug development licensing Pre clinical drug development licensing Direct Direct Direct Redx MRSA Limited England & Wales 100% Dormant Indirect 55 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 5. DEBTORS Amounts falling due within one year: VAT recoverable Amounts due from Group undertakings Other debtors Prepayments Amounts falling due after more than one year Other Debtor - Loan Total 2016 £’000 22 29,509 147 105 29,783 605 30,388 2015 £’000 12 17,759 109 70 17,950 750 18,700 The loan of £714k was granted to Redag Crop Protection Limited as part of the sale of the former subsidiary. It bears interest at 5% repayable with the principal sum. The loan is unsecured, and is repayable on the sale, listing, or change of control of Redag Crop Protection Limited. The Directors expectation is that the loan will be fully recovered, but that none of the repayment terms are likely to be fulfilled in the short term, and that it is therefore appropriate to classify the loan as a non-current receivable. A discount rate of 12% has been applied in calculating the carrying value. The Directors believe that the carrying value represents the fair value of the asset. An impairment review has been undertaken by the Directors, which did not indicate that any impairment was required. 6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 2016 £’000 394 84 5,226 151 342 6,197 2015 £’000 137 25 5,226 101 338 5,827 Trade creditors Social security and other taxes Amounts owed to Group undertakings Other creditors Accruals 56 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 7. SHARE CAPITAL Number of shares in issue Ordinary Shares of £0.01 Share Capital at par, fully paid Ordinary Shares of £0.01 Movement in year Ordinary shares of £0.01 Ordinary B shares of £0.01 Total movement in year 2016 NUMBERS 2015 NUMBERS 93,552,638 64,981,209 2016 £’000 936 286 - 286 2015 £’000 650 644 (1) 643 Share issues On 4 April, 14 April and 15 April 2016 respectively, the Company issued 6,180,197 , 285,714 , and 22,105,518. Ordinary shares at £0.35 each pursuant to a placing and admission to trading on AIM. The gross proceeds of the issue were £10m. 57 REDX PHARMA PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 8. RESERVES Share premium £’000 Profit & loss account £’000 Share-based payments reserve £’000 Capital redemption reserve £’000 As at 1 October 2015 Loss for the year On issue of shares Share-based compensation As at 30 September 2016 13,516 - 9,010 - 22,526 6,143 (180) - - 5,963 622 - - 245 867 1 - - - 1 9. RECONCILIATION IN MOVEMENT IN EQUITY SHAREHOLDERS’ FUNDS Opening shareholders’ funds Loss for the year On issue of shares Exercise of share options Share-based payments Closing shareholders’ funds 2016 £’000 20,932 (180) 9,296 - 245 30,293 Total £’000 20,282 (180) 9,010 245 29,357 2015 £’000 6,725 - 13,433 14 760 20,932 10. OPERATING LEASE ARRANGEMENTS – MINIMUM LEASE PAYMENTS Outstanding commitments for future minimum lease payments under non-cancellable operating leases expiring: Within one year In the second to fifth years In greater than five years Property Plant and equipment 2016 £’000 2015 £’000 2016 £’000 2015 £’000 - 4,480 5,413 9,983 - - - - 38 - - 38 38 - - 38 58 REDX P HARM A PLC 2016 ANNUAL REPORT N O T E S T O T H E F I N A N C I A L S TAT E M E N T S 11. POST BALANCE SHEET EVENTS On 11 October 2016, pursuant to the exercise of options, 145,319 Ordinary shares were issued (110,025 at £0.50 each and 35,294 at £0.425 each). On 15 February 2017, the Company issued 5,999,999 Ordinary shares at £0.375 each pursuant to a placing and admission to trading on AIM. On 1 March 2017 the Company issued a further 26,779,958 Ordinary shares pursuant to a placing and open offer, and admission to trading on AIM. The gross amount raised being £12m. As part of this transaction, and Pursuant to a Subscription Agreement with the Company, Lanstead Capital agreed to subscribe for 11,500,000 Subscription Shares at the Issue Price representing gross proceeds of £4,312,500. £646,875 of the Subscription proceeds (being 15 per cent. of the gross proceeds of the Subscription) were retained by the Company and £3,665,625 (being 85 per cent. of the gross proceeds of the Subscription) were pledged to Lanstead under a Sharing Agreement pursuant to which Lanstead will make monthly settlements (subject to adjustment upwards or downwards, as measured against a Benchmark Price of 50 pence per Ordinary Share) to the Company over 18 months. As a result of entering into the Sharing Agreement the aggregate amount received by the Company under the Subscription and the related Sharing Agreement may be more or less than £4,312,500. On 20 March 2017 the Board of directors agreed a proposal to undertake a restructuring of the Group, which is likely to lead to a significant reduction in headcount across all areas of operation. In line with the proposed strategic refocus, we envisage making an estimated fixed cost saving of £4.2m, which is of course subject to consultation. The Group proposes to continue it’s Anti-Infectives research under external collaborations. The Board has also received notification from two directors, Dr Frank Armstrong, and Peter McPartland that they will not be seeking re-election at the forthcoming Annual General Meeting. Dr Peter Jackson, Non-Executive Director, co-founder of Redx and Executive Chairman up to August 2014, will be stepping down from the Board on 31 March 2017. 12. CAPITAL COMMITMENTS At 30 September 2016 the Company had no capital commitments (30 September 2015: nil). 13. CONTINGENT LIABILITIES The Company had no contingent liabilities at 30 September 2016 (30 September 2015: nil). 14. ULTIMATE CONTROLLING PARTY There is no ultimate controlling party. 15. FIRST YEAR ADOPTION This is the first year in which the financial statements have been prepared under FRS102. The Directors have concluded that there are no measurement differences between old UK GAAP and FRS102 and accordingly no balances have been restated. The Directors continue to believe that the 20 year amortisation policy for goodwill is appropriate. 59 REDX PHARMA PLC 2016 ANNUAL REPORT C O M P A N Y I N F O R M A T I O N COMPANY INFORMATION Directors Dr Frank Armstrong FRCPE, FFPM (Non-Executive Chairman) Dr Neil Murray (Chief Executive) Dr Peter Jackson (Non-Executive Director) Norman Molyneux (Non-Executive Director) Peter McPartland (Non-Executive Director) Dr Bernhard Kirschbaum (Non-Executive Director) David Lawrence (Non-Executive Director) Secretary Simon Thorn Company number 7368089 Registered office c/o Acceleris Capital Ltd, Floor 9, Lowry House 17 Marble Street Manchester M2 3AW Principal place of business Auditor Block 33 Mereside Alderley Park Macclesfield SK10 4TG RSM UK Audit LLP 3 Hardman Street Manchester M3 3HF Annual General Meeting The Annual General Meeting of the Company will be held at 9.30am at Redx Pharma Plc, Mereside, Alderley Park, Macclesfield SK10 4TG on 20 April 2017. 60 01 REDXPHARMA.COM 

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