Announcement PDF RECCE PHARMACEUTICALS LTD Appendix 4D Current Reporting Period: 31 December 2019 Previous Reporting Period: 31 December 2018 Results for Announcement to the Market Percentage Change $ Revenue from ordinary activities - 0.00% to - Loss from ordinary activities after tax attributable to members up 25.02% to (1,331,787) Net loss for the period attributable to members up 25.02% to (1,331,787) Brief explanation of Results Operational Report During the reporting period, significant advances were made in support of the development of the Company’s broad-spectrum synthetic antibiotic program. Highlights for the half year to 31 December 2019 included: •Successful placement of $6.78m in fully paid ordinary shares at $0.26/share • Receipt of a $1,071,727 million Research and Development incentive refund from the Australian Government - 43.5% rebate on approximately 71% of total annual expenditure •Expansion of wholly owned patent estate – Patent Family 2 Grants in Europe & Japan • Positive US Food & Drug Administration (FDA) response to a chemistry manufacturing data-pack submission at a 5-fold scaled increase • Therapeutic Goods Administration (TGA) clearance to explore requests for use under the Special Access Scheme • Positive efficacy data from independent topical skin infection study against Methicillin-resistant Staphylococcus aureus (MRSA) superbug in rats- statistically significant (and control superior) efficacy in burn wound skin-infection and healing capabilities. • Ongoing market awareness programs – Opening Address at World Superbug Congress and presentation to the World Anti-Microbial Resistance Summit Singapore. Appendix 4D •Broadened clinical trial opportunities and related protocol programs. Clinical progress The Company is greatly encouraged by these advances, which have been pivotal in the delivery of further intravenous infusion study safety data in small animals, indicating a wide therapeutic dose window. Positive kidney and urinary tract infection efficacy data indicates the potential use of RECCE® 327 across the full therapeutic approach to the treatment of patients with sepsis. With a compelling data package, the business is on track to formalise a clinical trial agreement to start a first-in-human Phase I trial and, submit an application to start a topical Phase I/II trial. We look forward to providing updates as these programs advance. Strong financial position The Company’s cash position of $4.6 million at 31 December 2019 combined with significant accrued research and development rebate credits means Recce Pharmaceuticals is sufficiently funded to execute its development milestones through the 2020 financial year. The Company’s vision is to help address the urgent global health problem of antibiotic resistant bacteria and the team at Recce will continue to embark on programs that bring that vision to reality. Financial Report The half-year operating loss for the period was $1,331,787 (2018: loss of $1,065,299). The increase was a result of increased R&D related costs and share based payment expenses. The loss per share for the period was 1.12 cents (2018: 1.19 cents). Dividends Amount per Security Nil Nil N/A N/A Final Dividend Interim Dividend Date the Dividend is Payable: Record Date for determining entitlements to the Dividends: Percentage Franked N/A N/A N/A N/A The Company did not declare a dividend during the financial period and has not declared a dividend since the end of the financial period. Net Tangible Assets per Security As at 31 December 2019 (cents) As at 31 December 2018 (cents) 3.52 -0.41 The half report is based on accounts that have been subject to an audit review and there is no dispute or qualification with the auditors in relation to these accounts. RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 INTERIM REPORT FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 DIRECTORS' REPORT FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 The Directors present their report together with the interim consolidated financial report of Recce Pharmaceuticals Ltd (the "Company") and controlled entities (the "Group") for the half-year ended 31 December 2019. Directors The following persons held office as Directors of the Company during the half-year and up to the date of this report: Dr John Prendergast Dr Graham Melrose Ms Michele Dilizia Mr James Graham Dr Justin Ward Non-Executive Chairman (appointed 9 July 2019) Executive Director Executive Director Executive Director Executive Director (appointed 9 July 2019) Principal Activity The Group is a drug discovery and development business commercialising a new class of synthetic antibiotics with broad spectrum activity designed to address the global health challenge of antibiotic resistant superbugs. Its patented lead candidate known as RECCE® 327 has been developed for the treatment of blood infections and sepsis derived from E. coli and S. aureus bacteria - including their superbug forms. Review of Operations On 9 July 2019, the Company announced that Dr John Prendergast had been appointed to Independent Chair with founder Dr Graham Melrose stepping back from the role of Executive Chair to Executive Director and Chief Research Officer. In addition, the Company’s Principle Chemist, Dr Justin Ward, was appointed to the Board as Executive Director. On 30 July 2019, the Company announced a further R&D advance from Radium Capital in the amount of $262,462. On 1 August 2019, the Company announced that it was to deliver the Opening R&D Address at the World Anti-Microbial Resistance (AMR) Congress in Washington D.C., held on 7-8 November 2019. On 8 August 2019, the Company announced that the European Patent Office had granted its patent applications for wholly owned RECCE® antibiotics, including lead compound RECCE® 327 furthering marketing/manufacturing monopolies and expanding clinical indications. The patent family titled ‘Copolymer for use in a method of treatment of a parenteral infection’, is a second family of 15 claims, all of which were granted by the European Patent Office. 1 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 DIRECTORS' REPORT FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 On 26 August 2019, the Company announced advances in scaled manufacture and drug quality following positive Food and Drug Administration (FDA) feedback to its Chemistry, Manufacturing and Controls (CMC) data pack. Recce’s manufacture of its lead antibiotic compound RECCE® 327 has achieved a 500% increase in production and robust operational outputs. On 30 August 2019, the Company announced a successful grant application as 1 of 5 Industrial Partners in collaboration with 16 University and Public Health Organisations, to establish a National Anti-Microbial Resistant (AMR) Research Hub (the Hub) in Sydney, Australia to combat antimicrobial resistance. The Australian Research Council (ARC) has awarded almost $5 million to the Hub. Recce and other leading industry partner organisations will engage with Australia’s key researchers and wider stakeholders to address the urgent challenge of antimicrobial resistance. On 11 September 2019, the Company announced that it had secured $500,000 of additional funding to provide short term working capital via the issue of 750,000 shares at $0.20 per share and short term loans of $350,000. On 18 September 2019, the Company announced the receipt of its annual R&D rebate totalling $1,071,727 and after the settlement of all loans netted $163,672. On 20 September 2019, the Company announced that the Japan Patent Office had granted a second patent for wholly owned RECCE® antibiotics, including lead compound RECCE® 327, furthering marketing/manufacturing monopolies and expanding clinical indications. This second patent family, titled ‘Copolymer for use in a method of treatment of a parenteral infection’, contains 13 claims and relates to methods of manufacture, administration and application to treat a broad range of common human infections, providing Recce intellectual property protection to November 2035. On 10 October 2019, the Company announced that it had raised $6,768,444 (before costs) in a placement to institutional, professional and sophisticated investors that resulted in 26,032,478 fully paid ordinary shares being issued at $0.26 per share. On 23 October 2019, the Company published a white paper providing pre-clinical and experimental data on its new synthetic antibiotics and outlining the market need, its anticipated market positioning and development strategy . The paper titled “How Synthetic Antibiotic Development Can Change the Antibiotic Treatment Model" was distributed ahead of the World Anti-Microbial Resistance Congress. On 27 November 2019, the Company announced positive data in a rat topical burns model from an assessment of its lead compound RECCE® 327 in addressing the unmet medical needs of burns treatment and associated difficulties in wound closure. 2 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 DIRECTORS' REPORT FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 Results of Operations The half-year operating loss for the period was $1,331,787 (2018: loss of $1,065,299). The increase was as a result of increased R&D related costs. The Group's current focus is on progressing RECCE® 327 into human clinical trials. Events Subsequent to Reporting Period 1,250,000 Corporate Advisor Options were exercised at $0.312 resulting in the receipt of $390,000. Other than the above, no matters or circumstances have arisen since the end of the financial period, which significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or state of affairs of the Group in future financial periods. Rounding of amounts In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, the amounts in the Directors' Report have been rounded to the nearest dollar, unless otherwise Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 4. This report is made in accordance with a resolution of the Board of Directors. Dr John Prendergast Non-Executive Chairman 3 Tel: +61 8 6382 4600 Fax: +61 8 6382 4601 www.bdo.com.au 38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia DECLARATION OF INDEPENDENCE BY NEIL SMITH TO THE DIRECTORS OF RECCE PHARMACUTICALS LTD As lead auditor for the review of Recce Pharmaceuticals Ltd for the half-year ended 31 December 2019, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and 2. No contraventions of any applicable code of professional conduct in relation to the review. This declaration is in respect of Recce Pharmaceuticals Ltd and the entities it controlled during the period. Neil Smith Director BDO Audit (WA) Pty Ltd Perth, 27 February 2020 4 BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE HALF-YEAR ENDED 31 DECEMBER 2019 Note 2019 $ 2018 $ Revenue Other income Research and Development ("R&D") tax incentive Interest income Expenses Laboratory expenses Employee benefits expenses Depreciation and amortisation expenses Share based payments expense Travel expenses Patent related costs Rental outgoing expenses Finance costs Other expenses Amortisation: Leases Interest expenses: Leases 17 Loss before income tax - - 1,071,727 9,267 1,080,994 679,624 1,904 681,528 (725,834) (677,119) (25,341) (32,999) (166,487) (43,631) (32,097) (44,961) (582,670) (75,054) (6,589) (2,412,781) (323,123) (678,585) (26,681) (117,397) (43,117) (71,815) (38,702) (447,407) (1,746,827) (1,331,787) (1,065,299) - - (1,331,787) (1,065,299) - - (1,331,787) (1,065,299) Cents Cents Income tax expense Loss for the period after income tax Other comprehensive income Total comprehensive loss for the period Loss per share: Basic loss per share for the period Diluted loss per share for the period 6 6 (1.12) (1.12) (1.19) (1.19) Dividends per share for the period 7 - - The accompanying condensed notes form part of these consolidated financial statements. 5 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019 Note ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables Other current assets TOTAL CURRENT ASSETS 8 31 December 2019 $ 30 June 2019 $ 4,665,084 39,093 106,293 4,810,470 403,384 36,517 13,200 453,101 449,569 155,441 605,010 469,083 469,083 5,415,480 922,184 239,475 234,179 127,513 601,167 320,522 737,408 215,410 1,273,340 NON-CURRENT LIABILITIES Provisions for employee benefits Lease liabilities TOTAL NON-CURRENT LIABILITIES 66,846 30,728 97,574 54,448 54,448 TOTAL LIABILITIES 698,741 1,327,788 4,716,739 (405,604) 17,672,275 2,017,706 (14,973,242) 11,573,369 1,662,549 (13,641,522) 4,716,739 (405,604) 9 NON-CURRENT ASSETS Plant and equipment Right of Use Asset TOTAL NON-CURRENT ASSETS 10 11 TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and Other Payables Financial liabilities Provisions for employee benefits Lease liabilities TOTAL CURRENT LIABILITIES 12 13 NET (LIABILITIES)/ ASSETS EQUITY Share capital Reserves Accumulated losses 14 15 TOTAL EQUITY The accompanying condensed notes form part of these consolidated financial statements. 6 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE HALF-YEAR ENDED 31 DECEMBER 2019 Total $ Accumulated Losses $ 10,031,509 1,515,731 (10,852,325) 694,915 - - (2,789,197) (2,789,197) (2,789,197) (2,789,197) 1,688,678 (146,818) 1,541,860 146,818 146,818 - 1,688,678 1,688,678 BALANCE AT 30 JUNE 2019 11,573,369 1,662,549 (13,641,522) (405,604) BALANCE AT 1 JULY 2019 11,573,369 1,662,549 (13,641,522) (405,604) - - (1,331,787) (1,331,787) (1,331,787) (1,331,787) 6,421,064 (426,407) 32,999 71,250 6,098,906 426,407 (71,250) 355,157 - 6,421,064 32,999 6,454,063 17,672,275 2,017,706 (14,973,309) 4,716,672 BALANCE AT 1 JULY 2018 COMPREHENSIVE INCOME: Loss for the period Other comprehensive income TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS: Issuance of shares Conversion of convertible notes Options cost expense on placement Conversion of convertible notes Share based payments COMPREHENSIVE INCOME: Loss for the period Other comprehensive income TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS: Issuance of shares Conversion of convertible notes Options cost expense on placement Conversion of convertible notes Share based payments Transfers from reserves to share capital BALANCE AT 31 DECEMBER 2019 Share Capital $ Reserves $ The accompanying condensed notes form part of these consolidated financial statements. 7 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE HALF-YEAR ENDED 31 DECEMBER 2019 2019 $ 2018 $ CASH FLOWS FROM OPERATING ACTIVITIES Receipts from Australian Taxation Office Payments to suppliers and employees Interest received Interest and other costs of finance paid NET CASH USED IN OPERATING ACTIVITIES 1,071,727 (2,452,162) 9,267 (44,961) (1,416,129) 679,624 (1,656,444) 1,904 (38,702) (1,013,618) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of plant and equipment NET CASH USED IN INVESTING ACTIVITIES (5,827) (5,827) (83,958) (83,958) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans Repayments of loans Proceeds from issue of shares NET CASH PROVIDED BY FINANCING ACTIVITIES (737,408) 6,421,064 5,683,656 456,000 (2,859) 453,141 Net increase/(decrease) in cash and cash equivalents held 4,261,700 (644,435) Cash and cash equivalent at the beginning of the period 403,384 679,719 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 4,665,084 35,284 The accompanying condensed notes form part of these consolidated financial statements. 8 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 NOTE 1: GENERAL INFORMATION The consolidated financial report of Recce Pharmaceuticals Ltd (the "Company") and its controlled entities (the "Group") for the half year ended 31 December 2019 was authorised for issue in accordance with a resolution of the Directors on 27 February 2020. The Company is a company limited by shares incorporated and domiciled in Australia whose shares are publicly trade on the Australian Securities Exchange ("ASX"). NOTE 2: ACCOUNTING POLICIES (a) Basis of preparation of the consolidated financial report These financial statements are general purpose financial statements for the half year ended 31 December 2019 have been prepared in accordance with Australian Accounting Standards 134 Interim Financial Reporting and the Corporations Act 2001. The half year consolidated financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the Company as the full financial report. Accordingly, the half-year consolidated financial report should be read in conjunction with the annual report for the year ended 30 June 2019 and considered together with any public announcements made by the Company during the half year ended 31 December 2019 in accordance with the continuous disclosure obligations of the ASX Listing Rules and the Corporations Act 2001. The accounting policies applied in these half year consolidated financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 30 June 2019, with the exception of the groups adoption of IFRS 16: Leases during the period. Historical Cost Convention The consolidated financial statements have been prepared on an accrual basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. (b) Adoption of new and revised standards The Group has reviewed all of the new and revised standards and interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current half-year. The Group has also reviewed all standards and interpretations that have been issued but are not yet effective for the half-year ended 31 December 2019. As a result of this review, the Directors have determined that there is no material impact on the Group and, therefore no material change is necessary to Group accounting policies. 9 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 NOTE 2: ACCOUNTING POLICIES (CONTINUED) (b) Rounding of amounts to nearest dollar In accordance with ASIC Corporations (Rounding of Financial/Directors' Reports) Instrument 2016/191, the amounts in the consolidated financial report have been rounded to the nearest dollar. (c) New and revised accounting standards effective at 1 July 2019 The Group has applied all new and revised Australian Accounting Standards that apply to annual reporting periods beginning on or after 1 July 2019, including AASB 16 Leases. Being effective this period, AASB 16 replaced AASB 117: Leases and introduced a single lessee accounting model that required a lessee to recognise right-of-use assets and lease liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Right-of-use assets are initially measured at their cost and lease liabilities are initially measured on a present value basis. Subsequent to initial recognition: (a) right-of-use assets are accounted for on a similar basis to non-financial assets, whereby the right-ofuse asset is accounted for in accordance with a cost model unless the underlying asset is accounted for on a revaluation basis, in which case if the underlying asset is: i. investment property, the lessee applies the fair value model in AASB 140: Investment Property to the right-of-use asset; or ii. property, plant or equipment, the lessee can elect to apply the revaluation model in AASB 116: Property, Plant and Equipment to all of the right-of-use assets that relate to that class of property, plant and equipment; and (b) lease liabilities are accounted for on a similar basis as other financial liabilities, whereby interest expense is recognised in respect of the liability and the carrying amount of the liability is reduced to reflect lease payments made. AASB 16 substantially carries forward the lessor accounting requirements of the predecessor standard, AASB 117. Accordingly, under AASB 16 a lessor continues to classify its leases as operating leases or finance leases subject to whether the lease transfers to the lessee substantially all of the risks and rewards incidental to ownership of the underlying asset, and accounts for each type of lease in a manner consistent with the current approach under AASB 117. In accordance with the transition requirements of AASB 16, the Group has elected to apply AASB 16 using the modified retrospective approach to those contracts that were previously identified as leases under the predecessor standard, with the cumulative effect, if any, of initially applying the new standard recognised as an adjustment to opening retained earnings at the date of initial application (i.e., at 1 July 2019). Accordingly, comparative information has not been restated. 10 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 NOTE 2: ACCOUNTING POLICIES (CONTINUED) (c) New and revised accounting standards effective at 1 July 2019 (Continued) The Group has also elected to apply the following practical expedients to the measurement of right-ofuse assets and lease liabilities in relation to those leases previously classified as operating leases under the predecessor standard: – to recognise each right-of-use asset at the date of initial application at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application; The application of AASB 16 resulted in the recognition of right-of-use assets with an aggregate carrying amount of $155,441 (referred to in these financial statements as “lease assets”) and corresponding lease liabilities with an aggregate carrying amount of $158,241. The weighted average incremental borrowing rate applied in the calculation of the initial carrying amount of lease liabilities was 7.03%. The following is a reconciliation of non-cancellable operating lease commitments disclosed at the end of the prior reporting period (i.e., at 30 June 2019) to the aggregate carrying amount of lease liabilities recognised at the date of the initial application (i.e., at 1 July 2019): $ Aggregate non-cancellable operating lease commitments at 30 June 2019 Less: impact of discounting lease payments to their present value at 1 July 2019 Carrying amount of lease liabilities recognised at 1 July 2019 243,198 (12,703) 230,495 Further details of the Group’s accounting policy for leases, for the half-year period ended 31 December 2019, is as follows: At the commencement date of a lease (other than leases of 12-months or less and leases of low value assets), the Group recognises a lease asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. 11 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 NOTE 2: ACCOUNTING POLICIES (CONTINUED) (c) New and revised accounting standards effective at 1 July 2019 (Continued) Lease assets Lease assets are initially recognised at cost, comprising the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date of the lease, less any lease incentives received, any initial direct costs incurred by the Group, and an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. Subsequent to initial recognition, lease assets are measured at cost (adjusted for any remeasurement of the associated lease liability), less accumulated depreciation and any accumulated impairment loss. Lease assets are depreciated over the shorter of the lease term and the estimated useful life of the underlying asset, consistent with the estimated consumption of the economic benefits embodied in the underlying asset. Lease liabilities Lease liabilities are initially recognised at the present value of the future lease payments (i.e., the lease payments that are unpaid at the commencement date of the lease). These lease payments are discounted using the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using the Group’s incremental borrowing rate. Subsequent to initial recognition, lease liabilities are measured at the present value of the remaining lease payments (i.e., the lease payments that are unpaid at the reporting date). Interest expense on lease liabilities is recognised in profit or loss (presented as a component of finance costs). Lease liabilities are remeasured to reflect changes to lease terms, changes to lease payments and any lease modifications not accounted for as separate leases. Variable lease payments not included in the measurement of lease liabilities are recognised as an expense when incurred. Leases of 12-months or less and leases of low value assets Lease payments made in relation to leases of 12-months or less and leases of low value assets (for which a lease asset and a lease liability has not been recognised) are recognised as an expense on a straightline basis over the lease term. NOTE 3: CRITICAL ACCOUNTING JUDGEMENTS AND SOURCES OF ESTIMATION UNCERTAINTY The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. 12 RECCE PHARMACEUTICALS LTD ABN 73 124 849 065 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE HALF YEAR ENDED 31 DECEMEBER 2019 NOTE 3: CRITICAL ACCOUNTING JUDGEMENTS AND SOURCES OF ESTIMATION UNCERTAINTY (Continued) Performance Shares The Company had previously issued 8,754,425 performance shares which will convert into ordinary shares upon achievement of certain milestones. The likelihood of achieving these milestones was assumed to be nil probability as at 31 December 2019 and as a result no share-based payment expense has been recognised. This assessment will be required to be carried out at each reporting period. Should the milestones vest or the probability of achievement be very likely than a share-based payment expense will be recognised. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. At 31 December 2019, no deferred tax assets on temporary differences and carry forward losses were recognised. NOTE 4: GOING CONCERN For the period ended 31 December 2019, the Company recorded a loss of $1,331,787 (2018: $1,065,299) and had net cash outflows from operating activities of $1,416,129 (2018: $1,013,618). The ability of the Company to continue as a going concern and being able to continue to fund its operating activities is dependent on securing additional funding through share placements to new or existing investors and financial support through short term loans, together with continuous receipt of the R&D tax rebate. These conditions indicate a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. The Directors believe there are sufficient funds to meet the Company’s working capital requirements as at the date of this report.