Faron Pharma Regulatory News (FARN)

Faron Pharmaceuticals Ltd

("Faron" or the "Company")

Final Results for the year ended 31 December 2018

TURKU - FINLAND, 7 May 2019 Faron Pharmaceuticals Ltd ("Faron") (AIM: FARN), the clinical stage biopharmaceutical company, today reports its full year audited results for the year ended 31 December 2018.

HIGHLIGHTS

Operational (including post period-end): 

Traumakine® - in development for the treatment of organ failures

· The Company continued to analyse INTEREST trial data following the finding that Traumakine treatment produced inconsistent interferon-beta (IFN-beta) bioactivity across the treatment group.

o Data showing that concomitant use of corticosteroids and Traumakine appeared to affect both the mortality and biomarker appearance in the INTEREST study was presented at the ESICM (European Society for Intensive Care Medicine) conference.

o Genetic testing identified a subgroup of ARDS patients for Traumakine treatment in the trial showing substantial reduction in mortality among INTEREST trial patients. Approximately 35% of Europeans carry this genetic polymorphism (C/T).

o Interim results from the YODA study indicated that IFN-beta, regardless of the method of solubilisation, produced the expected level of bioactivity suggesting that drug formulation was not affecting the outcome of the INTEREST trial.

o Further YODA results are expected in Q2 2019 to confirm, in vivo, the observed interference of corticosteroids on IFN-beta bioactivity in the INTEREST study and ex vivo in lung samples.

o Top-line data from the Phase III ARDS trial with Japanese partner Maruishi Pharmaceutical Co., Ltd were, as expected, consistent with the INTEREST study results, showing that treatment with Traumakine, in a study group where there was high concomitant glucocorticoid use (77%), did not result in reduced mortality or increased number of ventilator-free survival days when compared to placebo.

· Plans announced in March 2019 for a new global phase III trial of Traumakine in the treatment of ARDS (CALIBER), subject to external funding. The Company is seeking feedback from both the FDA and EMA.

· EMA approved paediatric development plan for Traumakine in paediatric ARDS and updated orphan definition of orphan status in Europe, in which the patient population is now defined according to the Berlin classification of ARDS patients.

· Further recommendations were received from the Independent Data Monitoring Committee (IDMC) to continue the Phase II INFORAAA study for the prevention of Multi-Organ Failure (MOF) and associated mortality of surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA). Advanced interim analysis is expected to take place in Q2 2019.

· Patents to use certain biomarkers to measure the severity and treatment efficacy of ARDS patients were granted in Europe, Japan and Canada. The intravenous (IV) formulation patent of IFN-beta were also approved in Europe and US, and could protect IV use of IFN-beta upto 2035-37 in various territories.

Clevegen®  - wholly-owned novel cancer immunotherapy in development

· Completion of successful preclinical toxicity studies which showed good safety profile and potential of Clevegen to block Clever-1 on circulating monocytes.

· Following Clinical Trial Application (CTA) approval from the Finnish Medicines Agency (FIMEA), the first patient was successfully dosed in the phase I/II MATINS study in December 2018. A subsequent approval from the UK's MHRA saw the trial expand with two further sites opened in the UK.

· Encouraging early observations in the MATINS study on immunity and clinical response indicated potential early clinical benefits in dosed patients together with a switch in their immune profile towards more immune stimulatory function. No safety concerns were seen in the four subjects dosed at 0.3 and 1.0 mg/kg.

· A tumour imaging report from a patient with colorectal cancer indicated significant shrinkage of lung metastasis, classified as a partial response according to the RECIST classification. The same patient also showed a decrease in tumour load marker CEA (carcinoembryonic antigen) and an increase in circulating B-cells which could indicate an antibody-mediated response against the tumour. This patient had previously been treated with six different anti-cancer drugs, which all had failed.

· Colorectal cancer was selected as a first expansion

· Bexmarilimab proposed by WHO as International nonproprietary (INN) name

· New experimental data supporting the immunotherapeutic blockade of Clever-1 as an alternative to, or in combination with, PD-1 checkpoint inhibition to reactivate immunity against immunosuppressive tumours was published in Clinical Cancer Research, a journal of the American Association for Cancer Research.

· Patent granted by the European Patent Office for the use of Clever-1 antibodies, the mechanism behind Clevegen, for the treatment of cancer, extending the existing patent estate for Clevegen until 2030. Further protection for Clevegen epitope itself has been applied that would protect Clevegen use until 2039-40.

· Clever-1 control of B-cell mediated antibody formation in vivo was published by Frontiers in Immunology, re-enforcing the importance of the Company's program investigating the switching of immune suppression to immune activation in conditions beyond immuno-oncology.

FINANCIAL

· On 31 December 2018, the Company held cash balances of €4.1 million (2017: €9.3 million).

· Loss for the period for the financial year ended 31 December 2018 was €20.1 million (2017: €21.1 million loss).

· Net assets on 31 December 2018 were €0.4 million (2017: €4.7 million). The net assets at end March 2019 were €0.7 million.

· Cash preservation program implemented to reduce cash burn and preserve existing resources in order to deliver value to shareholders.

· Raised £15.0 million (net €15.9 million) in February 2018 intended to support preparations for the commercialisation of Traumakine and to advance the clinical development of Clevegen in several indications.

· Post accounting period raised net €2.9 million through placing and subscription in March 2019 by way of new shares at the issue price of 70.2 cents (60 pence) per share. The placing and subscription were supported by the participation of existing and new institutional shareholders. The proceeds will be used to further the clinical development of both Traumakine and Clevegen. The net proceeds of the fundraise are expected to provide the Company with working capital into Q3 2019. The cash position at the end of March 2019 was €4.9 million.

CORPORATE

· Faron now has registered subsidiaries in the United States of America and in Switzerland.

· Dr Jonathan Knowles resigned from the Board to take up a position as Chair of the newly formed Clevegen Scientific Advisory Board and Dr Huaihzeng Peng resigned from the Board but will continue as an invited Board Observer.

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said: "We have made a number of important discoveries whilst analysing the Traumakine INTEREST data during 2018 which have allowed us to not only believe that there is definitely a future for Traumakine in the treatment of ARDS, but also determine the next steps in its development, including the design of the phase III CALIBER study. We were also pleased to start dosing the first patients with Clevegen in the MATINS trial, on schedule, and I am greatly encouraged by the promising early observations and data we have seen. I remain very optimistic about the future of Clevegen and the potential clinical benefit it may provide to late stage cancer patients.

"I believe 2019 will be a pivotal year for Faron during which we will continue to expedite Clevegen's development through clinical trials; seek approval from the FDA and the EMA on the CALIBER trial design for Traumakine whilst also advancing partnering discussions for both product candidates. I would like to thank everyone working at Faron for their dedication and hardwork over the past year and also our shareholders, both new and existing, for their encouragement and continued belief in the pipeline and management team."

The 2018 Annual Report and Accounts will be made available shortly, in digital form and on the Company's website together with the invitation to the Annual General Meeting (AGM).

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014 (MAR).

For more information please contact:

Faron Pharmaceuticals Ltd

Dr Markku Jalkanen, Chief Executive Officer

investor.relations@faron.com 

Consilium Strategic Communications

Mary-Jane Elliott, David Daley, Lindsey Neville

Phone: +44 (0)20 3709 5700

E-mail: faron@consilium-comms.com

Westwicke Partners, IR (US)

Chris Brinzey

Phone: 01 339 970 2843

E-Mail: chris.brinzey@westwicke.com

Panmure Gordon (UK) Limited, Nomad and Broker

Emma Earl, Freddy Crossley (Corporate Finance)

James Stearns (Corporate Broking) 

Phone: +44 207 886 2500

About Faron Pharmaceuticals Ltd

 Faron (AIM:FARN) is a clinical stage biopharmaceutical company developing novel treatments for medical conditions with significant unmet needs. The Company currently has a pipeline focusing on acute organ traumas, vascular damage and cancer immunotherapy. The Company's first candidate Traumakine, to prevent vascular leakage and organ failures, has completed a Phase III clinical trial in Acute Respiratory Distress Syndrome (ARDS). An additional European Phase II Traumakine trial is underway for the Rupture of Abdominal Aorta Aneurysm ("RAAA"). Faron's second candidate Clevegen is a ground breaking early clinical anti-Clever-1 antibody. Clevegen has the ability to switch immune suppression to immune activation in various conditions, with potential across oncology, infectious disease and vaccine development. This novel macrophage-directed immuno-oncology switch called Turn-on-your-Immunity or Turn-It may be used alone or in combination with other immune checkpoint molecules for the treatment of cancer patients. Faron is based in Turku, Finland. Further information is available at www.faron.com

Chairman's statement

2018 was a year of challenge for Faron but also one of significant progress, as the Company executed its strategy to progress the delivery of its novel pipeline. The Company continued to make rapid progress on its Clevegen cancer immunotherapy programme and established a path forward for Traumakine in ARDS after better understanding the disappointing INTEREST trial results.

Faron's wholly-owned novel precision cancer immunotherapy candidate, Clevegen, successfully completed preclinical studies and, in agreement with regulatory authorities and according to an ambitious schedule, advanced into the clinic by year end. This was a significant milestone for the Company and I am delighted that we are making such rapid progress with the development programme.

Immuno-oncology therapies have transformed cancer treatment in recent years. Antibody-based immunotherapies are now well established as effective therapeutic options and Clevegen has a novel mechanism for removing immune suppression from the tumour environment by switching immune-suppressive (M2) macrophages to immune-active (M1) macrophages.

The MATINS clinical study of Clevegen is designed to determine the potential of this novel immunotherapy and we are encouraged by initial data from the study, showing potential early clinical benefits in dosed patients. Clevegen, may ultimately be used as a standalone therapy or in combination with other immunotherapies like PD-1/PD-L1 inhibitors and offers a potential new treatment option for patients with cancer.

We were obviously very disappointed with the surprising results from the Traumakine INTEREST trial in 2018. Throughout the remainder of the year the Company worked hard, alongside the investigators, to undertake further analyses that would help us to better understand the results and determine a path forward.

As a consequence of the INTEREST results, management took swift action, executing a significant savings programme throughout the Company, including management and Board members. This is never easy, and we regret that a number of talented colleagues had to leave the Company. I am proud of how every member of the organisation responded with professionalism and continued commitment to the development of our products and future of our business.

Following a detailed interrogation of INTEREST we have now determined the factors which led to the study's mixed results, including a higher than anticipated placebo response due to high pneumonia cases, interference of corticosteroids on IFN-beta bioactivity and the impact of a subgroup of patients' single nucleotide polymorphism C/T mutation in their interferon alpha and beta receptor gene. Patients with this genetic profile showed the greatest reduction in mortality when treated with Traumakine.

The conclusions from the review of the INTEREST data have allowed us to plan a new phase III trial of Traumakine in ARDS patients - CALIBER - and we are seeking guidance from regulatory authorities in the EU and US in 2019 on its design and preparations for its start.

During the year we continued to benefit from our Board's wealth of experience. As part of the Company's re-focus following INTEREST, Dr Jonathan Knowles resigned from the Board to take up a position as Chair of the newly formed Clevegen Scientific Advisory Board and Dr Huaihzeng Peng resigned from the Board but continues to support Faron as an invited Board Observer. Both Jonathan and Huaizheng have been invaluable to Faron and I would like to recognise them for their time and commitment to the Company. I am pleased that we continue to benefit from their expertise in their current advisory roles.

The Company's key priority for 2019 is to advance, expand and accelerate the clinical development of Clevegen and Traumakine. The Board was pleased to receive the support from new and existing shareholders, employees and Company directors during the successful share placing and subscription in March 2019. This allows us to further the clinical programmes for these two medicines which offer significant potential.

The Company will continue to pursue financing, co-development and future commercialisation models to secure the long-term capabilities of the Company, to give the pipeline its greatest chances of success and to best deliver value to shareholders.

On behalf of the Board I would like to thank the management team and staff for their hard work and resilience in 2018; our partners and steering committee members who have provided support and expertise to our programmes; and the investigators and patients who are part of our clinical studies.

Dr Frank Armstrong - Chairman

May 3, 2019

Chief Executive Officer's Review

Overview

Faron is highly focused on developing novel treatments for life-threatening medical conditions with significant unmet need for both individuals and society. All our development work is based on scientific understanding of those life-threatening conditions at the molecular level, to most effectively influence their underlying causes.

Our focus for 2018 has been two-fold: further analysing and understanding data from the phase III INTEREST trial with Traumakine in ARDS, and also progressing our wholly-owned novel precision cancer immunotherapy candidate, Clevegen, into first in-human trials.

Traumakine Development

Following the announcement in May 2018 that the INTEREST trial did not meet the primary endpoint in ARDS we have been conducting investigations to further understand the outcome and determine a way forward for the treatment's continued development.

Soon after the initial announcement, the Company conducted analysis of certain biomarker indicators which showed that the treatment did not produce the expected interferon-beta (IFN-beta) bioactivity in Traumakine treated patients that was previously seen in Faron's Phase I/II trial. Further detailed analysis carried out by the trial investigators and presented at the ESICM (European Society for Intensive Care Medicine) conference in October 2018, determined that unexpectedly high corticosteroid use in the INTEREST trial may have masked the treatment benefit of Traumakine in ARDS patients, affecting both the mortality and biomarker appearance in the INTEREST study patients.

Results from the phase III Japanese Traumakine study undertaken by our partner Maruishi also supported this finding, showing that in a study group where there was high concomitant glucocorticoid use (77%), treatment with Traumakine did not result in reduced mortality or increased number of ventilator-free survival days when compared to placebo.

The concomitant administration of corticosteroids to ARDS patients is a controversial topic and there is an ongoing debate as to whether corticosteroids have any beneficial role, early, late or for more severe un-resolving cases. These findings from the INTEREST study, in which some patients were also given corticosteroids as part of their treatment, suggest that we should consider controlling or excluding corticosteroids from future clinical research in ARDS patients. They also present wider implications for the medical community and how ARDS patients are currently treated. IFN-beta secretion by our own defence system is a key element to control viral infections such as lung pneumonia and so corticosteroid use could be detrimental in ARDS patients as physicians try to limit viral expansion and organ damage.

To understand still further the reduced biomarker response seen in the INTEREST study, we initiated a new pharmacokinetic/dynamic study, YODA, to examine various formulations of IFN-beta in around 50 healthy volunteers. We announced interim results from the first 30 subjects in December 2018, which indicated that IFN-beta, regardless of the method of solubilisation, produced the expected level of bioactivity, confirming that drug formulation was not a factor in the lowered bioactivity seen during the INTEREST trial. This study remains ongoing and is examining concomitant administration of prednisolone and Traumakine in order to confirm, in vivo, the observed interference of corticosteroids on IFN-beta bioactivity in the INTEREST study and ex vivo lung samples. These YODA results are expected during Q2 2019. However, we already know from ex-vivo human lung studies that, in those settings, cortisone blocks completely INF-beta signalling pathways - an effect also seen in human primary lung endothelial cells.

Further interrogation of the INTEREST data continued through 2018 and in December we announced the results of genetic testing which had identified an optimal subgroup of ARDS patients for Traumakine treatment. The data indicated that patients carrying the single nucleotide polymorphism rs9984273 (C/T) in subunit 2 of the interferon alpha and beta receptor (INFAR2) showed a substantial reduction in mortality during the INTEREST trial, suggesting that this C/T mutation and Traumakine treatment is the most favourable combination for patient outcome and interferon treatment efficacy. Around one third of the Caucasian population carries this single nucleotide polymorphism.

As a result of these analyses, we believe we can now confidently make a number of assumptions:

· The drug product used in the INTEREST study was safe, robust and effective

· Corticosteroids could interfere with IFN-beta action and mask the treatment benefit of Traumakine for ARDS patients

· There is an optimal subgroup of ARDS patients for Traumakine treatment

This increased understanding led us to announce plans for a new phase III trial of Traumakine in the treatment of ARDS. The CALIBER study will allow corticosteroid use within the standard of care (SOC) arm, but not if the ARDS patient is on Traumakine. This double dummy structure will allow physicians to choose their preference while creating a blinded readout between Traumakine and SOC patients. We are seeking guidance from both FDA and EMA on trial design and anticipate receiving feedback during Q3 2019. CALIBER will be a global trial, supported by one of the Company's partnering candidates currently engaged in negotiations.

Phase II INFORAAA

Beyond ARDS, we continue to believe that Traumakine has the potential for application in additional disease areas and, as such, have been conducting the INFORAAA trial with Traumakine for the prevention of multi-organ failure (MOF) and death after the surgical repair of a ruptured abdominal aortic aneurysm (RAAA).

RAAA is a surgical emergency with an overall mortality of 70 to 80% and requires immediate surgery and aortic repair. The main cause of death for these patients is MOF following a post-operative reperfusion injury of ischemic organs including kidneys, liver, brain and intestines. We believe that Traumakine has the potential to offer significantly improved outcomes for patients following surgery for RAAA. We also believe that the clinical data from the INFORAAA trial could provide us with valuable information on the recovery of ischemic single organ injuries and are planning further trials to treat these injuries.

In July 2018, the Company received a second recommendation from the Independent Monitoring Committee (IDMC) to continue the INFORAAA trial and we are taking the study to the advanced interim analysis point expected to take place in Q2 2019.

Clevegen Development

2018 was a year of significant progress for Faron's second product, Clevegen, as it advanced into the clinic. Clevegen is our wholly-owned novel precision cancer immunotherapy candidate, which causes conversion of the immune environment around a tumour from immune-suppressive to immune-stimulating by reducing the number and function of tumour-associated macrophages (TAMs). Recent developments in the exciting field of cancer immunotherapy have been well documented with a number of important indications of clinical success. Clevegen is differentiated from other immunotherapies through its specific targeting of M2 TAMs which facilitate tumour growth, while leaving intact the M1 TAMs that support immune activation against tumours. We believe it has the potential to function as a novel macrophage checkpoint immunotherapy either as a monotherapy or in combination.

In June 2018 we announced successful preclinical toxicity studies which showed, not only a good safety profile, but also the potential of Clevegen to block Clever-1 on circulating monocytes. Based on these data, we filed a Clinical Trial Application (CTA) in September 2018 which was subsequently approved by the Finnish Medicines Agency (FIMEA) to initiate the MATINS (Macrophage Antibody To INhibit immune Suppression) trial, in December 2018.

Progress into the clinic

The MATINS study is a first-in-human open label phase I/II clinical trial to investigate the safety and efficacy of Clevegen in selected metastatic or inoperable solid tumours. In December 2018, we announced that the first patient had been successfully dosed, on schedule with previous guidance, at Helsinki and Oulu University Hospitals in Finland. The trial quickly expanded with two further sites opening in the UK at the Royal Marsden Hospital in London and the Queen Elizabeth Hospital in Birmingham. We were very encouraged by early observations which showed substantial immune activation in patients post Clevegen administration and in February 2019 announced that dosing had moved to the second level with no signs of toxicity. Subsequent tumour imaging of a trial participant with colorectal cancer, indicating a partial response, reaffirmed our belief in the potential clinical benefit Clevegen may provide to late stage cancer patients. This patient had previously been treated with six different anti-cancer drugs, which had all failed.

Based on these early data, in April we announced that late-stage colorectal cancer has been chosen for the first expansion cohort for the second part of the trial, which is expected to begin as soon as the optimal dose has been determined.

We are also continuing to seek pre-IND advice from the FDA to open sites in the US prior to entering the cohort expansion part of the trial.

Due to high interest in the potential for new combination therapies in the immuno-oncology field, we are currently engaged in partnering discussions with several parties and hope for a positive outcome from these negotiations during 2019.

Corporate

In February 2018 I was very proud to host the Company's R&D Day in London to discuss our strategy and pipeline developments, with a particular focus on the potential of Clevegen. Members of the Executive Leadership and senior management teams were joined by external experts including Professor Geoff Bellingan, Medical Director, University College London Hospital, Assistant Professor Maija-Leena Hollmén, Medicity Laboratory, University of Turku and Dr. Shishir Shetty, Honorary Consultant Hepatologist, University of Birmingham. This was an exciting opportunity to profile the company's future potential.

Financial

In March 2019, we successfully raised €3.12 million from new and existing shareholders, employees and Company directors. The proceeds will be used to advance Clevegen through the MATINS trial, further Traumakine development through the design and preparation of the global Phase III CALIBER clinical trial and advance partnering discussions in respect of both Traumakine and Clevegen.

Outlook

Our immediate focus in 2019 will be to submit the body of data for Traumakine to the FDA and EMA in order to gain feedback on the CALIBER trial design and to accelerate Clevegen's clinical development and to explore further funding opportunities to enable the Company to realise the value in its products. The management team and I are optimistic about the year ahead and, with a future development plan now determined for Traumakine and Clevegen studies progressing well, believe we have built a strong investment case for Faron with clear opportunities for success. We look forward to updating the market on our progress throughout the year.

The Board anticipates the following pipeline progress and catalysts during 2019:

Traumakine:

· Approval from the FDA and EMA on CALIBER trial design during H2 2019

· Further results from the YODA study are expected during Q2 2019

· INFORAAA first interim analysis point expected in Q2 2019

Clevegen:

· Further dose escalation data from the MATINS trial expected in Q2 2019

· Enrolment of patients into additional UK cohort sites in the MATINS trial

· File US IND for MATINS trial post pre-IND feedback

· Prepare and execute a plan to include US study sites to MATINS trial latest in part III (cohort escalation)

· Partnering update during 2019

Dr Markku Jalkanen - Chief Executive Officer

May 3, 2019

Financial review

Key Performance Indicator

As a clinical stage drug development company, Faron's primary interconnected KPIs are cash burn and cash position. The Company conducted a successful fundraising in February 2018, nevertheless the Company's net cash flow showed €5.3 million negative due to an increase in R&D spending. The Board will consider the appropriateness of monitoring additional KPIs as the Company's operations advance.

Revenue and Other Operating Income

The Company's revenue was €0.0 million for the year ended 31 December 2018 (2017: €nil).

The Company recorded €0.2 million (2017: €1.5 million) of other operational income. This comprised income recognised from the European Commission FP7 grant in support of the Traumakine programme.

Research and development costs

The R&D costs decreased by €2.6 million from €19.1 million in 2017 to €16.5 million in 2018. The costs of outsourced clinical trial services were reduced by €4.1 million from €9.4 to €5.3 million as a result of rapid cost reduction after the disappointing Traumakine trial results. The Company continued Clevegen development which in turn increased costs of R&D materials and services with €2.6 million from €4.7 million to €7.3 million costs. The part-time lay-offs of the whole R&D -personnel reduced the R&D employee costs by €0.9 million from €2.7 million to €1.8 million despite the increase in R&D personnel employed.

General and administration costs

Administrative expenses increased by EUR 0.7 million from €3.1 million in 2017 to EUR 3.7 million in 2018. The increase was mainly due to the €1.2 million increase in external costs related to the development of internal financial and reporting processes during 1H2018. This was partly counterweighted by a €0.3 million decrease in G&A employee costs and €0.2 million reduction in communication costs.

Taxation

The Company's tax credit for the fiscal year 2018 can be recorded only after the Finnish tax authorities have approved the tax report and confirmed the amount of tax-deductible losses for 2018. The total amount of cumulative tax losses carried forward approved by tax authorities on 31 December 2018 was €11.2 million (2017: €25.9 million). The Company estimates that it can utilise most of these during the years 2020 to 2028 by offsetting them against future profits. In addition, Faron has €49.1 million of R&D costs incurred in the financial years 2010 - 2018 that have not yet been deducted in its taxation. This amount can be deducted over an indefinite period at the Company's discretion.

Losses

Loss before income tax was €20.1 million (2017: €21.1 million). Net loss for the year was €20.1 million (2017: €21.1 million), representing a loss of €0.65 per share (2017: €0.76 per share) (adjusted for the changes in number of issued shares).

Cash Flows

Net cash outflow was €5.3 million negative for the year ended 31 December 2018 (2017: €1.9 million negative). Cash used for operating activities increased by €2.1 million to €20.5 million for the year, compared to €18.4 million for the year ended 31 December 2017. This increase was mostly driven by an increase in R&D investments.

Net cash inflow from financing activities was €15.5 million (2017: €16.6 million) due to the successful equity placing completed in February 2018.

Fundraising

Faron raised £15 million (net €15.9 million) via an oversubscribed financing round in February 2018 by issuing 1,863,350 new ordinary shares at a price of 805 pence per share. The proceeds were used to support preparations for the commercialization of Traumakine and to advance the clinical development of Clevegen in several indications. After this round, at the end of February 2018, the total number of outstanding shares was 31,027,894. Post the period end, Faron also raised net € 2.9 million in March 2019 via a financing round by issuing 864,164 new ordinary shares at a price of 60.0 pence per share and 3,584,461 shares at a price of €70.2 cents per share to support preparations to expedite the Clevegen's clinical program. After this round, at the end of March 2019, the total number of outstanding shares was 35,476,519.

Financial Position

As at 31 December 2018, total cash and cash equivalents held were €4.1 million (2017: €9.3 million). This excludes the funds raised in the financing round announced on 26 March 2019. The cash at end of March 2019 was €4.9 million. The Company continues to exercise tight cost control to keep the cash burn as low as possible for preservation of existing resources.

Going Concern

As part of their going concern review the Directors have followed the Finnish Limited Liability Companies Act, the Finnish Accounting Act and the guidelines published by the Financial Reporting Council entitled "Guidance on the Going Concern Basis of Accounting and Reporting on Solvency Risks - Guidance for directors of companies that do not apply the UK Corporate Governance Code". The Group and Parent Company are subject to a number of risks similar to those of other development stage pharmaceutical companies. These risks include, amongst others, generation of revenues in due course from the development portfolio and risks associated with research, development, testing and obtaining related regulatory approvals of its pipeline products. Ultimately, the attainment of profitable operations is dependent on future uncertain events which include obtaining adequate financing to fulfil the Group's commercial and development activities and generating a level of revenue adequate to support the Group's cost structure.

The Group made a net loss of EUR 20.1 million during the year ended 31 December 2018. It had total equity of EUR 0.4 million including an accumulated deficit of EUR 66.8 million. As at that date, the Group had cash and cash equivalents of EUR 4.1 million. In March 2019, the Company raised net proceeds of approximately EUR 2.9 million through a directed share issue and at 31 March 2019 it had EUR 4.9 million cash and an unaudited equity of EUR 0.7 million.

The Directors have prepared detailed financial forecasts and cash flows looking beyond 12 months from the date of the approval of these financial statements. In developing these forecasts, the Directors have made assumptions based upon their view of the current and future economic conditions that are expected to prevail over the forecast period. The Directors estimate that the cash held by the Group together with known receivables will be sufficient to support the current level of activities into the third quarter of 2019. The Directors are continuing to explore sources of finance available to the Group and they believe they have a reasonable expectation that they will be able to secure sufficient cash inflows for the Group to continue its activities for not less than 12 months from the date of approval of these financial statements; they have therefore prepared the financial statements on a going concern basis.

Because the additional finance is not committed at the date of approval of these financial statements, these circumstances represent an uncertainty as to the Group's ability to continue as a going concern. Should the Group be unable to obtain further finance such that the going concern basis of preparation were no longer appropriate, adjustments would be required including to reduce balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise.

Headcount

Average headcount of the Company for the year was 25 (2017: 18). The increase in headcount is attributable to the expansion of the Traumakine and Clevegen programs.

Shares and Share Capital

Using the share authorities granted at the Annual General Meetings held on 16 May 2017 and on 5 May 2018, the Company issued 1,422,340 new ordinary shares at a subscription price of £3.50 pursuant to a fundraising in February 2017 and in October 2017 issued 1,250,000 new ordinary shares at a price of £8.00 per share pursuant to a further fundraise. On February 2018 the Company issued 1,863,350 new ordinary shares at a subscription price of £805 pence per piece. Post the period end, on February 2019 the Company issued 1,863,350 new ordinary shares of which 864,164 shares at a subscription price of £60.0 pence per piece and 3,584,461 shares at a subscription price of €70.2 cents per piece. The subscription price was credited in full to the Company's reserve for invested unrestricted equity, and the share capital of the Company was not increased.

The Company has no shares in treasury; therefore at the end of 2018 the total number of voting rights was 31,027,894.

Money Raised to Date

To date, the Company has been funded with a total of approximately €64 million, made up of a combination of equity, debt and grant funding, which has been used to develop the Company's products and intellectual property. The Company has also generated cash revenues of €3.8 million to date through the receipt of milestone payments pursuant to certain of its licensing arrangements and the sale of surplus raw materials.

Yrjö E K Wichmann - Chief Financial Officer

May 3, 2019

Statement of comprehensive income

Group Parent

Balance sheet 

As at 31 December

Group Parent

Parent Company Statement of changes in equity

Group Statement of changes in equity

Statement of cash flows

As at 31 December Group Parent

Notes to the financial statements

1. Corporate information

Faron Pharmaceuticals Ltd. (the "Company") is a clinical stage biopharmaceutical company incorporated and domiciled in Finland, with its headquarters at Joukahaisenkatu 6 B, 20520 Turku, Finland. The Company has two major drug development projects focusing on acute trauma, cancer growth and spread and inflammatory diseases. During the first quarter 2018, Faron Pharmaceuticals Ltd registered wholly owned subsidiaries in the United States of America and in Switzerland.

The Company has been listed on the London Stock Exchange's AIM market since 17 November 2015, with a ticker FARN.

The Board of Directors of the Company approved the financial statements on 3 May 2019.

2. Summary of significant accounting policies

2.1. Basis of preparation

The financial statements have been prepared in accordance with the International Financial Reporting Standards of the International Accounting Standards Board (IASB) and as adopted by the European Union (IFRS) and the interpretations of the International Financial Reporting Standards Interpretations Committee (IFRS IC). The financial statements have been prepared on a historical cost basis, unless otherwise stated.

The financial statements have been prepared on the basis of a full retrospective application of IFRS 15, Revenue from Contracts with Customers, with the adoption date as of 1 January 2017.

The principal accounting policies applied in the preparation of these financial statements are set out below. The Company has consistently applied these policies to all the periods presented, unless otherwise stated. The areas of the financial statements involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 2.21.

The Consolidated Financial Statements incorporate the parent company, Faron Pharmaceuticals Ltd, and all subsidiaries in which it holds over 50% of the voting rights. The subsidiaries established during the financial period are consolidated from the date that control was obtained by the Group.

The subsidiaries are consolidated by using the purchase method. All intragroup transactions, receivables, liabilities and unrealized gains are eliminated in the Consolidated Financial Statements. Faron Pharmaceuticals Ltd holds 100% ownership of all its subsidiaries.

The Consolidated Financial Statements are presented in euro which is the functional currency of the parent company. The statements of comprehensive income and statements of cash flows of foreign subsidiaries, whose functional currency is not euro, are translated into euro each month at the average monthly exchange rates, while the statements of financial position of such subsidiaries are translated at the exchange rate prevailing at the reporting date. Translation differences resulting from the translation of profit for the period and other items of comprehensive income in the statement of comprehensive income and statement of financial position are recognized as a separate component in equity and in other comprehensive income. Also, the translation differences arising from the application of the purchase method and from the translation of equity items cumulated subsequent to acquisition are recognized in other comprehensive income.

During the financial year 2018 the impact of subsidiaries is rather moderate and therefore all figures stated in notes are parent company figures if not else stated.

All amounts are presented in thousands of euros, unless otherwise indicated, rounded to the nearest euro thousand.

2.2. Going concern

As part of their going concern review the Directors have followed the Finnish Limited Liability Companies Act, the Finnish Accounting Act and the guidelines published by the Financial Reporting Council entitled "Guidance on the Going cern Basis of Accounting and Reporting on Solvency Risks - Guidance for directors of companies that do not apply the UK Corporate Governance Code".

The Group and Parent Company are subject to a number of risks similar to those of other development stage pharmaceutical companies. These risks include, amongst others, generation of revenues in due course from the development portfolio and risks associated with research, development, testing and obtaining related regulatory approvals of its pipeline products. Ultimately, the attainment of profitable operations is dependent on future uncertain events which include obtaining adequate financing to fulfil the Group's commercial and development activities and generating a level of revenue adequate to support the Group's cost structure.

The Group made a net loss of EUR 20,086 thousand during the year ended 31 December 2018. It had total equity of EUR 369 thousand including an accumulated deficit of EUR 66,786 thousand. As at that date, the Group had cash and cash equivalents of EUR 4,067 thousand. In March 2019, the Company raised net proceeds of approximately EUR 2,900 thousand through a directed share issue and at 31 March 2019 it had EUR 4,877 thousand cash and an unaudited equity of EUR 731 thousand.

The Directors have prepared detailed financial forecasts and cash flows looking beyond 12 months from the date of these financial statements. In developing these forecasts, the Directors have made assumptions based upon their view of the current and future economic conditions that are expected to prevail over the forecast period. The Directors estimate that the cash held by the Group together with known receivables will be sufficient to support the current level of activities into the third quarter of 2019. The Directors are continuing to explore sources of finance available to the Group and they believe they have a reasonable expectation that they will be able to secure sufficient cash inflows for the Group to continue its activities for not less than 12 months from the date of approval of these financial statements; they have therefore prepared the financial statements on a going concern basis.

Because the additional finance is not committed at the date of approval of these financial statements, these circumstances represent material uncertainty that may cast significant doubt on the Company's ability to continue as going concern. Should the Group be unable to obtain further finance such that the going concern basis of preparation were no longer appropriate, adjustments would be required including to reduce balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise. 

2.3. Foreign currency transactions and balances

The financial statements are presented in euro, which is the Company's functional and presentation currency.

Transactions in foreign currencies are translated at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the reporting date. Foreign exchange differences arising on translation are recognised in the statement of comprehensive income, within financial income and expenses. Non-monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.

2.4. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The Chief Executive Officer, reviewing the operating results regularly to make decisions about the allocation of resources and to assess overall performance, is identified as the chief operating decision maker. The Chief Executive Officer manages the Company as one integrated business and hence, the Company has one operating and reportable segment.

2.5. Revenue recognition

The Company adopted IFRS 15 Revenue from Contracts with Customers effective 1 January 2017 and has applied the single, principles based five-step model to all contracts with customers provided by IFRS 15 as follows:

1. Identify the contract with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognise revenue when (or as) the entity satisfies a performance obligation (over time or at a point in time).

Revenue from licensing agreements

According to IFRS 15, performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. Goods and services that are not distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created. A good or service promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

The Company's existing license agreements with Maruishi in Japan, with A&B in Greater China and with Pharmbio in Republic of Korea each include only one performance obligation, which is the grant of the license to use of its intellectual property ("IP"). After the Company has granted the license, it does not have an obligation to participate or provide additional services to its customers. The transaction price for the grant of the license to use the Company's IP comprises of fixed and variable payment streams and the grant of the license is considered to be a right to use IP. Upfront fees earned, are recognised as revenue at a point in time, upon transfer of control over the license to the licensee. Revenue from variable consideration, which are contingent on achievements of future milestones are recognised as revenue when it is highly probable the revenue will not reverse, that is when the underlying contingencies have been resolved. For future royalty payments associated with a license, the Company applies the IFRS 15 exception for sales-based royalties and recognises the revenue only when the subsequent sale occurs.

In addition, there is a potential performance obligation regarding future manufacturing. The Company has tentatively agreed on supply and manufacture of the drug product to its licensees. The terms including quantities and commercial terms for the future supply will be subject to separate negotiations.

For further information on revenue recognition, see notes 2.21 and 3.

2.6. Recognition of government grants

The direct government grants are recognised as other operating income at the same time as the underlying expenditure is incurred, provided that there is reasonable assurance that the Company will receive the grant and complies with the conditions of such grant. Direct grant payments received in advance of the incurrence of the expenditure that the grant is intended to compensate are deferred at the reporting date and presented under advances received on the balance sheet.

The indirect government assistance in the form of below-market interest government loans is recognised as grant income and recorded as other operating income in the same period in which the company recognises the expenses for which the benefit is intended to compensate. Grant income is measured as the difference between the initial fair value of the loan and the proceeds received.

2.7. Research and development expenses

Research and development costs are expensed as incurred and presented under research and development expenses in the statement of comprehensive income. Research and development expenses include costs for outsourced clinical trial services, materials and services, employee benefits and other expenditure directly attributable to the Company's research and development activities. The Company's research and development expenses are directly related to the Company's development projects and may therefore fluctuate strongly from year to year.

Capitalization of expenditure on the development of the Company's products commences from the point at which technical and commercial feasibility of the product can be demonstrated and it is probable that future economic benefits will result from the product once completed. As at 31 December 2018, considering the development stage of the Company's drug candidates, no internally developed assets related to Company's development activities had met these criteria and had therefore not been recognised. The uncertainties inherent in developing pharmaceutical products prohibits the capitalization of internal development expenses as an intangible asset until the marketing approval has been received from the relevant regulatory agencies.

2.8. Employee benefits

The Company's employee benefits consist of short-term employee benefits, post-employment benefits (defined contribution pension plans) and share-based compensation. Short-term employee benefits are charged to the statement of comprehensive income in the year in which the related service is provided. Under defined contribution plans, the Company's contributions are recorded as an expense in the accounting period to which they relate and the Company does not have any further obligations once the contributions have been paid.

2.9. Share-based compensation

The options and warrants granted under share-based incentive programs are measured at fair value at earlier of the grant date or the service commencement date, using the Black-Scholes valuation model. The options, for which the option exercise price is determined later, right before the vesting, an estimate is used to determine the fair value at service commencement date and the estimate is subsequently revised until the options become granted. 

The share-based compensation expense is recognised on a straight-line basis over the vesting period together with a corresponding increase in equity, based on the Company's estimate of equity instruments that will eventually vest. At each reporting date, the Company revises its estimate of the number of equity instruments that are expected to vest and its estimate of the grant date fair value for the options with earlier service commencement date. The exercise price paid by the option or warrant holder to subscribe the Company's shares is recognised in the reserve for invested unrestricted equity.

2.10. Loss per share

Basic loss per share is calculated by dividing the loss for the period with the weighted average number of ordinary shares during the year.

Since the Company has reported losses, inclusion of unexercised options and warrants would decrease the loss per share and therefore not taken into account in diluted loss per share calculation.

2.11. Income tax

Income tax expense for the period consists of current and deferred taxes. Tax is recognised in the statement of comprehensive income, except for the income tax effects of items recognised in other comprehensive income or directly in equity, which is similarly recognised in other comprehensive income or equity.

Deferred taxes are recognised using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred taxes are determined using tax rates enacted or substantively enacted by the balance sheet date in the respective countries and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable income will be available, against which the temporary differences can be utilized.

2.12. Machinery and equipment

The Company's machinery and equipment comprise of office furniture and equipment, which is stated at historical cost less depreciation and any impairment losses. The historical cost includes expenditure that is directly attributable to the acquisition of the machinery and equipment.

Depreciation is calculated using the straight-line method over the asset's estimated useful life of four years. Depreciation is recorded to the costs of the asset function.

2.13. Intangible assets

The Company's intangible assets comprise of capitalized patent costs arising in connection with the preparation, filing and obtaining of patents. Patent cost are amortised on a straight-line basis over the useful lives of the patents of ten years.

2.14. Impairment of non-financial assets

Assets that are subject to depreciation or amortisation are reviewed for impairment whenever there are indications that the carrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. The value in use represents the discounted future net cash flows expected to be derived from the asset.

2.15. Inventories

Inventories are stated at the lower of cost and net realizable value. The cost includes all costs of direct materials and external services associated with the process of manufacturing of the goods sellable upon obtaining the regulatory marketing approval. The cost of inventories is fully written down, with a corresponding charge recognised in research and development expenses until such approval has been obtained. When marketing approval from the relevant regulatory authority is received, the write-down is reversed to net realisable value, which may not exceed the original cost.

2.16. Financial assets

The Company's financial assets comprise of other receivables and cash and cash equivalents, which are all classified to the category "financial assets measured at amortised cost". These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the reporting date, which are classified as non-current assets.

Other receivables consist mainly of the deferred grant income from the European Union for which the grant payment has not been received, carried at the amount expected to be received according to the terms and conditions of the grant.

Cash and cash equivalents comprise cash on hand and at banks.

2.17. Financial liabilities

The Company's financial liabilities comprise of interest bearing borrowings, trade payables, other non-current and current liabilities.

Borrowings are initially recognised at fair value, less any directly attributable transaction costs. Subsequently borrowings are carried at amortised cost using the effective interest method. Borrowings are presented as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Borrowings are not derecognised until the liability has ceased to exist, that is, when the obligation identified in a contract has been fulfilled or cancelled or is no longer effective.

Borrowings comprise of three government loans with a below-market rate of interest from The Finnish Funding Agency for Technology and Innovation ("Tekes", currently "Business Finland"), of which two have been fully drawn down before the Company's date to transition to IFRS. Accordingly, the Company has utilized the IFRS 1 exemption and not accounted for the below-market grant separately for these two loans, which are carried at amortised cost.

The government loan originated after the date of transition to IFRS was initially recognised and measured at fair value and subsequently at amortised cost over the loan period by using the effective interest method. The grant component of the loan, which is the benefit of the below-market interest rate, is measured as the difference between the initial fair value of the loan and the proceeds received.

Trade payables and other liabilities are classified as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period, in which case they are classified as non-current liabilities. The carrying amount of trade payables and other current liabilities are considered to be the same as their fair values, due to their short-term nature. Non-current liabilities are initially measured at fair value and subsequently at amortised cost.

2.18. Equity

The Company's equity comprises of share capital, reserve for invested unrestricted equity and accumulated deficit. The proceeds from issuance of new ordinary shares, less incremental costs directly attributable to the issue, are credited to the reserve for invested unrestricted equity, in accordance with the terms and conditions of the share issue.

The accumulated deficit comprises of the accumulated profits and losses of the Company since the inception.

2.19. Leases

Leases of equipment, where substantially all the risks and rewards of ownership, are classified as finance leases. Assets leased under finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Lease obligations are included in current and non-current financial liabilities based on their maturity, net of finance charges. The interest element of the payments is expensed. An asset recognised under a finance lease is depreciated over its useful life. The Company has no finance leases.

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the lease term.

In January 2016, the IASB published IFRS 16, Leases, its new leasing standard. As a result of the new standard, the Company has reviewed all of the group's leasing arrangements over the last year. The Company applies the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. All lease arrangements are both short-term and low value leases. See note 2.23.

2.20. Provisions and contingent liabilities

Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. The Company does not have provisions at the end of the reporting periods presented in these financial statements.

A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of uncertain future events not wholly within the control of the entity. Such present obligation that probably does not require settlement of a payment obligation and the amount of which cannot be reliably measured is also considered to be a contingent liability. Contingent liabilities are disclosed in the notes to the financial statements.

2.21. Critical accounting estimates and significant management judgements in applying accounting policies

The Company early adopted IFRS 15 on 1 January 2017 with full retrospective application. In determining the amounts to be recognised as revenue, the Company uses its judgement in the following main issues:

· Identifying the performance obligations in the license agreements and determining whether the license provided is distinct - based on the Company's analysis, the license is distinct as the licensee is able to benefit from the license on its own at its current stage and the licensee has the responsibility for the development in that territory. The management has determined that the provision of data and information generated by the Company in connection with its own development activities to facilitate the licensees' territory-specific development efforts is immaterial (perfunctory) to the grant of the license to the IP and does not constitute a separate performance obligation.

· Management has concluded that the license meets the criteria to be classified as a right to use, as the license granted provides at the outset of the contract all necessary documents and knowhow to utilize the license. The contract does not define activities that would significantly affect the intellectual property to which the licensee has rights after the date of granting.

The Company recognises expenses for share-based compensation. For share options and warrants management estimates certain factors used in the option pricing model, including volatility, vesting date of options and number of options and warrants likely to vest. If these estimates vary from actual occurrence, this will impact the value of the share-based compensation. Further details of the Company's estimation of share-based compensation are disclosed in note 18.

Quantification of the accruals related the clinical trials require significant management judgement. The services invoiced by Contract Research Organisations consist of contributions of various independent subcontractors and the actual tasks completed may be reported with significant delays. Also the clinical study sites, which are mainly public sector hospitals, may invoice their costs with long delays. These factors combined result in a complicated task of defining on which period the cost belongs to and requires management to make assumptions when defining the right timing of the delivered services.

2.22. New and amended standards and interpretations adopted by the Company

· In July 2014, the IASB published the final version of IFRS 9, Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9, Financial Instruments. IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Company has applied IFRS 9 retrospectively as required by the standard, but has not restated comparative financial information. Upon adoption on 1 January 2018, IFRS 9, Financial Instruments did not have an impact on the financial statements, as the most significant financial instrument the Company holds is cash and cash equivalents and the standard will not materially impact the classification or measurement of cash and cash equivalents.

· In June 2016, the IASB issued three amendments to IFRS 2, Share-based Payment, in relation to the classification and measurement share-based compensation transactions. The amendments clarify how to account for certain types of share-based payment transactions and provide requirements on the accounting for:

o The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments;

o Share-based payment transactions with a net settlement feature for withholding tax obligations; and

o A modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled

The adaptation of the amendments to IFRS 2, Share-based Payment, had no material impact on the Company's financial statements.

2.23. New standards and interpretations issued not yet effective

· In January 2016, the IASB published IFRS 16, Leases, its new leasing standard, which will replace the current guidance in IAS 17, Leases, and related interpretations IFRIC 4, SIC-15 and SIC-27. The new standard will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The standard applies to annual periods beginning on or after 1 January 2019, with earlier application permitted. As a result of the new standard, the Company has reviewed all of the group's leasing arrangements over the last year. The Company applies the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. All lease arrangements are both short-term and low value leases.

The amendments are effective for accounting periods beginning on or after 1 January 2018. The amendments are required to be applied without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met.

There are no other IFRS or IFRIC interpretations that are not effective that are expected to have a material impact on the Company.

3. Revenue

The Company has entered into exclusive license agreements with Maruishi in Japan, with A&B in Greater China and with Pharmbio in the Republic of Korea for the development, commercialization and supply of Traumakine and is entitled to related milestone payments. The Company retains rights to Traumakine in the rest of the world. The license partners are responsible for all regulatory activities and needed clinical activities necessary for commercialization in respective territories. Under the license agreements, the Company is also entitled to receive royalty payments based on the product sales in territories, but such royalties have not been earned or recognised to revenue during the periods presented.

License agreement and supply agreement with Maruishi

In 2011, the Company entered into a license agreement with Japanese license partner Maruishi. The Company has not recognised revenue for the Maruishi license agreement during the periods presented, but is entitled to receive additional payments upon achievement of certain development or commercial milestones.

In 2014, the Company entered into a separate supply agreement with Maruishi for the delivery of investigational medicinal products to be used in territory-specific clinical studies. In 2018 the Company recognised EUR 19 thousand revenue from deliveries based on this agreement.

License agreement with Pharmbio

In 2016, the Company entered into license agreement with Korean license partner Pharmbio and met the upfront at signing. In this connection the Company satisfied the performance obligation for the grant of the license and use of its IP and recognised revenue in the amount of EUR 750 thousand. The Company is entitled to receive additional milestone payments from Pharmbio only if certain development or commercial milestones are achieved.

4. Segment reporting

The Company is a late clinical stage drug discovery and development company. Its operations have been focused on the development of its main drug candidates Traumakine and Clevegen. The Company's chief operating decision maker has been identified as the Chief Executive Officer (CEO).

The CEO manages the Company as one integrated business and hence the Company has one operating and reportable segment.

The Company had EUR 19 thousand revenue in 2018 (nil in 2017).

All of the Company's non-current assets are located in Finland.

5. Other operating income

Grants from the European Union comprise of direct funding from the European Commission under the Seventh Framework Programme (FP7) for Research and Technological Development to support the Traumakine clinical program. The grant component of government loans comprises of indirect financial benefit from the below-market interest of a loan from the Finnish Funding Agency for Technology and Innovation ("Tekes", currently "Business Finland"), which has been granted to finance the Clevegen clinical development program. The project funded with the FP7 -funding ended in 2H2018.

6. Breakdown of expenses by function

Research and development expenses

General and administration expenses

7. Employee benefits

The average number of personnel in 2018 was 25 (2017: 18). Share-based compensation information is included in note 18 and management remuneration information in note 23.

8. Depreciation and amortisation

9. Financial income and expenses

Interest expenses consist of paid and accrued interest expenses. The accrued interest expense relates mainly to the government loans, see note 19.

The foreign exchange losses relate to euro value changes of cash balances nominated in Pound Sterling.

Unrealised foreign exchange loss is EUR 36 thousand and gain is EUR 290 thousand for the years ended 31 December 2018 and 2017, respectively.

10. Tax expense

Income tax consists of foreign corporation tax.

The difference between income taxes at the statutory tax rate in Finland (20%) and income taxes recognised in the statement of comprehensive income is reconciled as follows:

Tax losses and deductible temporary differences for which no deferred assets have been recognised, are as follows:

1) The Company has incurred research and development costs, that have not yet been deducted in its taxation. The amount deferred for tax purposes can be deducted over an indefinite period.

2) Tax losses carried forward expire over the period of 10 years. The tax losses will expire as follows:

The related deferred tax assets have not been recognised in the balance sheet due to the uncertainty as to whether they can be utilized. The Company has a loss history, which is considered a significant factor in the consideration of not recognising deferred tax assets. The total tax value of unrecognised deferred tax assets is EUR 12,043 thousand (2017: EUR 8,877 thousand).

The Company does not have any other deductible or taxable temporary differences. Therefore, no deferred tax assets or liabilities have been recognised in the balance sheet and thus the itemisation of deferred taxes is not provided.

11. Loss per share

Loss per share is calculated by dividing the net loss by the weighted average number of ordinary shares in issue during the year.

As of 31 December 2018, the Company had only share options outstanding as the warrants were exercised during 2017. Number of potentially dilutive instruments currently outstanding totalled 1,540,900 as of 31 December 2018 (31 December 2017: 1,540,900). Since the Company has reported a net loss, the share options and warrants would have an anti-dilutive effect and are therefore not taken into account in diluted loss per share -calculation. As such, there is no difference between basic and diluted loss per share.

12. Intangible assets and machinery and equipment

13. Non-current prepayments and other receivables

Prepayments for API consist of payments remitted to manufacturer for API to be consumed in the Company's development activities. Other receivables consist of restricted cash in the form of security deposits for rental agreements.

14. Inventories

Inventories purchased prior to regulatory marketing approval are recognised as inventory but are subject to full write-down. Write-downs of inventories to net realisable value amounted to EUR 1,231 thousand (2017 EUR 893 thousand). These were recognised as research and development expenses. The Company has not reversed any previous inventory write-downs.

15. Current prepayments and other receivables

The majority of prepayments consist of the Clinical Service Agreements with Contract Research Organisations, which are or were current service providers in different clinical trials. The grant receivables were nil at 31 December 2018 as the FP7 -project ended during 2H2018.

16. Cash and cash equivalents

17. Shareholders' equity

Movements in number of shares, share capital and reserve for invested unrestricted equity were as follows.

On 1 March 2017, the number of shares was increased to 27,734,044 following the issue of 1,422,340 new shares. On 27 April 2017, the number of shares was increased to 27,787,034 following the issue of 52,990 new shares due to exercise of warrants. On 31 May 2017, the number of shares was increased to 27,914,544 following the issue of 127,510 new shares due to exercise of warrants and options and on 11 October 2017, the number of shares was increased to 29,164,544 following the issue of 1,250,000 new shares. On 19 February 2018, the number of shares was increased to 29,336,744 following the issue of 172,200 new shares, on 21 February 2018, the number of shares was increased to 30,094,744 following the issue of 758,000 new shares and on 26 February the number of shares was increased to 31,027,894 following the issue of 933,150 new shares.

The Company has one class of ordinary shares. The shares have no par value. Each share entitles the holder to one vote at the Annual General Meeting and equal dividend. All shares are fully paid.

The subscription price for the shares is recorded to the share capital, unless the Board has made a resolution to record the subscription price in the reserve for invested unrestricted equity. If the shares of a Finnish limited liability company have no par value according to its articles of association, the Finnish Limited Liability Companies Act allows companies the recognition of the proceeds from share issuance to the reserve for invested unrestricted equity. In such situations the board of a company can choose on a subscription by subscription basis, how much of the issue, if anything, is recorded in share capital and how much to the reserve for invested unrestricted equity that is distributable. During 2017 and 2018, the Board recognised all relevant transactions in the invested unrestricted equity reserve.

18. Share options and warrants

Option Plan 2015

The Option Plan 2015 was approved at the Company's extraordinary shareholders' meeting on 15 September 2015 as part of the Company's incentive scheme determined by the Board of Directors. The share options are granted to the members of the Board of Directors and the management team and other management and employees for no consideration. The annual general meeting on 10 May 2017 resolved to amend, due to the increase in the number of employees in the Company and the increase in the number of members of the Board of Directors, the Option Plan so that a maximum total of 500,000 C options and a maximum total of 500,000 D options may be offered under initial Option Plan terms and conditions. The share options have a service condition and are forfeited in case the employee leaves the Company before the share options vest, unless the Board of Directors approves otherwise. After the beginning of the share subscription period, the vested options may be freely transferred or exercised. The fair value of the options has been determined using the Black & Scholes option valuation model and expensed over the vesting period. Grant dates for the share options may vary depending on the date when the Company and the employees agree to the key terms and conditions of the Option Plan. The maximum number of share options that can be awarded under the Option Plan is 1.800.000 in four different tranches designated as A options, B options, C options and D options. Each share option entitles the holder of the option to subscribe for one ordinary share in the Company.

The exercise price for ordinary shares based on A options is euro equivalent of the Company's share subscription price in the Company's initial public offering on the AIM market place of the London Stock Exchange on 17 November 2015. The exercise price for ordinary shares based on B options, C options and D options is euro equivalent of the exercise price determined based on the Company's average share price on the AIM market place during 1 July - 30 September 2016, 2017 and 2018, respectively.

Key characteristics and terms of the option plan are listed in the table below.

The estimated date of the allocation of D -options to the employees and key management will be 30 June 2019, which has been used in the option calculations.

(*) Expected volatility was determined as the average volatility of a peer group consisting of ten comparable biotechnology companies listed on London Stock Exchange AIM list.

(**) Effect of share options granted on earnings is calculated based on earlier of the grant date or the service commencement date.

The share-based compensation expense for the Option Plan 2015, turned positive of EUR 176 thousand in 2018 (negative EUR 1,189 thousand in 2017).

Warrants

As of 31 December 2018 there were no warrants as all of the warrants the Company had issued in 2015, were exercised during 2017.

19. Financial assets and liabilities

*Prepayments are excluded as they are not considered to be financial instruments.

Due to the short-term nature of the other receivables, their carrying amount is considered to equal their fair values.

Borrowings in the form of Tekes R&D loans

Fair value for the Tekes R&D loans is calculated by discounting estimated future cash flows for the loans using appropriate interest rates at the reporting date. The discount rate considers the risk-free interest rate and estimated margin for the Company's own credit risk. Discounted future cash flows are derived from the terms containing the repayment amounts and repayment dates for the principal and the cash payments for interest. Given that some of the inputs to the valuation technique rely on unobservable market data, loan fair values are classified in Level 3.

The fair value of all the Tekes loans was EUR 1,792 thousand (2017 EUR 2,139 thousand).

Tekes R&D loans are granted to a defined product development project and cover a contractually defined portion of the underlying development projects' R&D expenses. The below-market interest rate for these loans is the base rate set by the Ministry of Finance minus three (3) percentage points, subject to a minimum rate of 1%. Repayment of these loans shall be initiated after 5 years, thereafter loan principals shall be paid back in equal instalments over a 5-year period, unless otherwise agreed with Tekes. For more information on contractual maturities of the Tekes R&D loans and interests is provided in the note 19. The accrued interest on Tekes R&D loans amounted to EUR 79 thousand (2017 EUR 65 thousand). Grant payments received in advance of the incurrence of the costs the grant is intended to compensate are deferred at the reporting date and presented under advances received on the balance sheet.

This section sets out an analysis of net debt and the movements in net debt (calculated as cash and cash equivalents less borrowings) for each of the periods presented.

20. Financial risk management

The operations of the Company expose it to financial risks. The main risk that the Company is exposed to is liquidity risk, with capital management being another important area given the nature of the Company's operations and its financing structure. The Company's risk management principles focus on obtaining funding and managing capital taking into consideration the unpredictability of the financial markets with the aim at minimizing any undesired impacts on the Company's financial performance and position. The Board of Directors define the general risk management principles and approve operational guidelines concerning specific areas including but not limited to liquidity risk, foreign exchange risk, interest rate risk, credit risk, the use of any derivatives and investment of the Company's liquid assets.

(a) Capital management and liquidity risks 

The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern (refer to notes 2.2 and 16). 

Significant financial resources are required to advance the drug development programs into commercialized pharmaceutical products. The Company relies on its ability to fund the operations of the Company through three major sources of financing - equity financing, research and development grants and loans and licensing agreements. 

The Company has been able to fund its operations with equity and R&D loans. While equity financing has been available in the past (the last such financing was a EUR 15.8 million share issue in February 2018), there can be no assurance that sufficient funds can be secured in order to permit the Company to carry out its planned activities. In general, capital market conditions are volatile. The prevailing financial market situation and the overall investor's sentiment dictate whether the Company is able to secure additional financing in the future, which can be considered a risk. To partly manage this risk, the Company and its management is in constant dialogue with financial investors, investment banks, debt providers and other market participants.

The Company also relies on different sources of research and development grants and loans. These funds, which are provided through regional, national or EU level institutions, have been historically available to the Company. The Company strictly complies with all rules and legal obligations pertaining to these funding programs and is in regular contact with the funding agencies providing these. Availability of such funds in the future cannot be guaranteed and thus this poses a potential risk to the Company's funding in the future.

Finally entering into commercialization, collaboration and licensing agreements with larger pharmaceutical companies entitles the Company to receive up-front and milestone payments related to agreed regulatory or commercial points, as well as royalty payments once commercialization has been successful. Activities in the area of business development are targeted at securing such agreements. Consideration of these activities is part of the management's duties and is monitored by the Board of Directors, which ultimately decides on entering into such agreements.

There can be no assurance that sufficient financing can be secured in order to permit the Company to carry out its planned activities. To protect the continuity of the Company's operations, sufficient liquidity and capital has to be maintained. The Company aims to have funds to finance its operations for the foreseeable future. The Company can influence the amount of capital by adapting its cost basis considering available financing. Management monitors liquidity on the basis of the amount of funds. These are reported to the Board of Directors on a monthly basis. 

The Company's Board of Directors approves the operational plans and budget and monitors the implementation of these plans and the financial status of the Company on a monthly basis. 

As at 31 December 2018, the contractual maturity of loans and interests was as follows:

As at 31 December 2017, the contractual maturity of loans and interests was as follows:

(b) Market risk 

i. Foreign exchange risk 

The Company operates internationally but is mainly exposed to translation risk in respect of Pound Sterling ("GBP") denominated cash and cash equivalents balances The Company's policy is not to hedge translation risk. As of 31 December 2018, the Company had cash and cash equivalents of EUR 4,058 thousand and GBP 0 thousand (2017: EUR 359 thousand and GBP 7,941 thousand) and the foreign exchange gains and losses recorded arise mainly from the GBP cash balances. The Company is not exposed to significant transaction risk, as the Company mainly operates in its functional currency, the EUR.

ii. Interest rate risk 

The Company's interest rate risk arises from Tekes R&D loans, which interest is the base rate defined by the Finnish Ministry of Finance minus three (3) percentage points, subject to minimum rate of 1%. During the periods presented, the interest has been below the minimum level and the Company has paid the minimum interest of 1% on the loans. During the periods presented, the Company has not been exposed to variable interest rate risk and accordingly the Company has not entered into derivative contracts

(c) Credit and counterparty risk 

The Company works with partners and financial institutions with good credit ratings. Management monitors credit ratings of the financial institutions that hold the Company's bank deposits regularly. Further, the Company currently derives its revenue from restricted number of reputable licence partners in specific territories. This risk of concentration of creditors is partly mitigated by the fact that these partners are financially solid. These licence agreements are governed by contractual relationships that typically address and describe remedies for situations in which interests of the Company and the partner are no longer aligned.

21. Trade payables and other current liabilities

Advances received comprise mainly received grant payments from European Union for which the related grant income has not yet been recognised and which have not been forwarded to the other participants of the grant consortium. For further information about grant income (note 5). Other liabilities comprise mainly of unpaid prepayment to FP7 -grant consortium members.

22. Contingencies and commitments

Operating lease - Faron as a lessee

The future aggregate minimum lease payments under non-cancellable operating leases are as follows