Faron Pharmaceuticals Ltd

(“Faron” or the “Company”)

Annual Results for the year ended 31 December 2015

TURKU – FINLAND, 10 March 2016 – Faron Pharmaceuticals Ltd (“Faron”) (LON: FARN), a drug discovery and development company, today announces its Annual Results for the year ended 31 December 2015. The Annual Report 2015 and accounts are available on the Company’s website and will be posted to Shareholders in due course.

KEY HIGHLIGHTS

Operational Highlights

Traumakine®

Clevegen®

Financial Highlights

Post-Period End Highlights

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said:

“2015 was a transformational year for Faron as we took three significant steps in our strategic development. Firstly, we successfully financed our operations with €19.3 million equity investments. Secondly, we moved our lead product Traumakine targeting the treatment of ARDS into a pan-European pivotal Phase III INTEREST trial. Thirdly, we continued the pre-clinical development of our novel cancer immunotherapy drug candidate Clevegen, for which we obtained €1.5 million funding from Tekes. We are looking forward to making significant progress with these innovations to develop new treatments for these true unmet medical needs.”

____________
¹ The net assets on 31 December 2014 include the €1.1 million convertible loan that was converted to equity in January 2015.

For more information contact:

Faron Pharmaceuticals Ltd

Katja Wallenlind

Phone +358 (50) 577 4807
E-mail: katja.wallenlind@faronpharmaceuticals.com

Cairn Financial Advisers LLP, Nominated Adviser

Emma Earl, Tony Rawlinson and Rebecca Anderson

Phone: +44 207 148 7900

Whitman Howard Limited, Nominated Broker

Ranald McGregor-Smith, Francis North

Phone: +44 207 659 1234

Hume Brophy, PR

Mary Clark, Eva Haas, Hollie Vile

Phone: +44 207 862 6390

E-mail: faron@humebrophy.com

About Faron Pharmaceuticals Ltd

Faron Pharmaceuticals Ltd is a drug discovery and development company focused on creating novel treatments for medical conditions with significant unmet needs. Faron is based in Turku, Finland. The Company has identified several molecular mechanisms involved in the control of endothelial functions as a source of innovations. Faron currently has a pipeline of products focusing on acute organ traumas, cancer immunotherapy and vascular damage. The Company’s lead candidate Traumakine®, has been developed to treat Acute Respiratory Distress Syndrome (“ARDS”), a rare, severe, life threatening medical condition for which there is currently no approved pharmaceutical treatment. Traumakine® is now in a pan-European pivotal Phase III study (INTEREST). Besides Traumakine®, Faron’s pipeline consists of early stage assets including a pre-clinical anti-Clever-1 antibody named Clevegen®. Clevegen® is focused on converting the immune environment around a tumour from being immune suppressive to immune stimulating representing a novel immuno-oncology approach. Further information is available at www.faronpharmaceuticals.com.

Annual Results Statement

Introduction

Overview of the Company

Faron is a drug discovery and development company focused on creating novel treatments for medical conditions with significant unmet needs. The Company has a pipeline of clinical stage products for the treatment of acute organ traumas, cancer immunotherapy and vascular damage.

Strategy

Faron’s strategy is to maximise the potential of its pipeline of drug candidates and to progress the development of its lead product Traumakine. Faron has identified several new endothelial molecules involved in the maintenance of the endothelial barrier which is a thin layer or membrane of cells that lines blood and lymphatic vessels to separate blood content from tissues. The Company believes that the control of these molecules provides a unique way to treat many life-threatening conditions with high unmet medical needs. Faron collaborates with its strategic partners in research, manufacturing and drug development to bring new pharmaceutical products to market in a timely and cost-effective manner. Faron has formed a core team of leading scientists in capillary biology and diseases arising from vascular leakage. The Company has established links with leading laboratories and clinics based at Turku University in Finland, University College London and other institutions.

To date, Faron has operated on a relatively low cost basis by employing only key members of staff and outsourcing where possible. Typically all development work up to the proof-of-concept stage of drug development is carried out in the innovators’ laboratories.  The Company outsources all of its manufacturing activities in relation to its products to third parties and collaborates with Contract Research Organisations (CROs) to carry out the clinical development programmes. Faron monitors and evaluates potential commercial opportunities for its established drug candidates like Traumakine and Clevegen, as and when they arise, and will consider how best to crystallise as much value as possible for Shareholders, which may include holding rights in main territories for as long as it is feasible, and in certain circumstances up to the marketing stage.

Chairman’s Statement

Faron has made significant progress with its pipeline in the last year. The small but highly experienced management team is passionate about and committed to their work in life saving drug development. The Company has chosen to develop new drugs for true unmet medical needs in two critical areas, Acute Respiratory Distress Syndrome (ARDS) and cancer immunotherapy. These two apparently diverse clinical indications are built on Faron’s thorough scientific knowledge of the endothelial barrier function and control providing a solid basis to successfully execute the Traumakine and Clevegen projects.

Faron’s lead drug candidate Traumakine, now in the pivotal, pan-European Phase III INTEREST trial, is at the heart of the company’s mission. It aims to treat ARDS, an orphan, life-threatening medical condition which currently has no available drug treatment.

ARDS is not common, annually about 370,000 people across Europe and the US are diagnosed, but the condition is serious with about 30 to 45% mortality rate. Data from a Phase I/II study of Traumakine for ARDS, published in the Lancet, was associated with an 81% reduction in the odds of 28 day mortality rate. We believe that Traumakine represents a significant opportunity to help ARDS patients, the hospitals that treat these patients and the patients´ families.

Immunotherapy offers enormous potential for cancer treatment by stimulating the patient’s own natural immune response to combat the disease. Faron’s pre-clinical immunotherapy candidate Clevegen causes conversion of the immune environment around a tumour from immune suppressive to immune stimulating, by reducing the number of tumour-associated macrophages (TAMs). We believe that Clevegen is well 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.

In November 2015, Faron was admitted to trading on the AIM market of the London Stock Exchange. The capital raised is devoted to advancing the Company’s two programmes and provides a positive start for 2016.

With the AIM listing, I would like to welcome new Shareholders on behalf of the new Board, and thank the previous Board, employees and advisors for a successful 2015. At the time of the listing, the previous Chairman, Matti Manner, stepped down and became Vice-Chairman. We are all indebted to him for his previous leadership. A number of new Board members were appointed at the listing: Dr Jonathan Knowles, Mr Leopoldo Zambeletti, Dr Huaizheng Peng and myself, Dr Frank Armstrong as Chairman. It is a privilege to participate in the ongoing success achieved by Faron. The Board is very grateful to the staff of the Company and particularly to Dr Markku Jalkanen (CEO) and Mr Yrjö Wichmann (CFO) for their commitment and leadership. Faron is an ambitious company and this is reflected in the employees and leadership of the Company.

The Board is committed to delivering the strategy described in the IPO Admission Document. Our key focus is to complete the recruitment for the Phase III INTEREST trial during 2016, as we regard this as a major value inflection point for Shareholders. We also believe that the progress on Clevegen by our scientific collaborators will provide exciting news in 2016. We will continue to look for opportunities to deliver and enhance value to our Shareholders as well as patients who will benefit from the new drugs Faron is developing.

Dr Frank M Armstrong – Chairman

Chief Executive Officer’s Review/ Operational Review

2015 has been a transformational year for Faron which saw the Company join AIM in November 2015 and achieve a number of scientific and development milestones. Faron’s business growth prospects continue as outlined in the IPO Admission Document in November 2015. We are very excited to become part of the international, publicly quoted biotech sector, which is a key driver in the generation of new pharmaceutical treatments for unmet medical needs.

The main reason for the IPO was to help us execute the further development of our exciting pipeline projects, Traumakine and Clevegen. The pre-IPO round in May 2015 allowed us to initiate preparation for the pivotal, pan-European Phase III INTEREST trial for Traumakine and the proceeds from the IPO round enabled full execution of all the required agreements to open study sites. We can now fully utilise the €6.0 million EU grant to support this final step of Traumakine development in Europe.

Traumakine Development

Faron’s lead drug Traumakine is currently in Phase III development for the treatment of Acute Respiratory Distress Syndrome (“ARDS”). ARDS is a severe, life-threatening medical condition characterised by widespread capillary leakage and inflammation in the lungs, most often as a result of sepsis, pneumonia or significant trauma. Currently there are no pharmacological treatments for ARDS, an orphan disease with a high, 30 to 45% mortality rate. Traumakine has been granted Orphan Drug Designation in Europe which allows a period of 10 years of market exclusivity following marketing approval by the EMA.

In December 2015, the first patient was recruited into the Traumakine pan-European Phase III INTEREST trial. The recruitment of the first patient, so soon after the Company’s recent IPO is consistent with the anticipated timeline of 12 to 18 months required to complete recruitment for the pivotal Phase III trial for Traumakine. The Phase III INTEREST trial is being led by Professor Geoff Bellingan from University College London Hospital and Professor Marco Ranieri from the University of Rome. Subject to the completion of successful Phase III INTEREST trial and achievement of regulatory approvals, Traumakine could be the first effective, mechanistically-targeted, disease-specific pharmacotherapy for ARDS patients.

To date, Faron has entered into agreements with two pharmaceutical companies to carry out the clinical development and commercialisation of Traumakine in Japan and the Greater China Area. Faron owns the IPR and marketing rights in respect of Traumakine in all other territories.

A&B (HK) Company Limited and CMS Pharma Co. Ltd – In May 2015, Faron entered into a licence and asset transfer agreement with A&B (HK) for the commercialisation of Traumakine in the Greater China Area. It is intended that A&B (HK)’s commercialisation activities of Traumakine will be conducted by a member of the CMS Group, a rapidly growing pharmaceutical group listed on the Hong Kong Stock Exchange. Alongside this agreement, A&B (HK) provided equity funding of €5.1 million in aggregate. CMS Pharma Co. Ltd owns the right to import, register, market, distribute, promote and sell Traumakine in the Greater China Area.

Maruishi Pharmaceutical Co., Ltd – In 2011 Faron licensed to Maruishi, a Japanese pharmaceutical company, the rights to develop and commercialise Traumakine in Japan. In January 2016, Faron announced that Maruishi had obtained positive results from the Phase II Japanese study for Traumakine. Based on these results Maruishi is now planning a pivotal clinical trial to be conducted in Japan.

Clevegen Development

One of Faron’s key areas of focus is to develop a cancer treatment that supports the hosts’ immune defences against tumours, as these are often suppressed in cancer patients. Faron’s second most advanced drug development project, Clevegen, revolves around Clever-1, an endothelial cell surface molecule involved in cancer growth and spread. The active pharmaceutical ingredient of Clevegen is an anti-Clever-1 antibody.

In June 2015, Faron entered into a collaboration agreement with the Turku PET Centre, one of the largest positron emission tomography cents in Europe, for the development of Clevegen. The PET project will assist Faron in optimising the use of Clevegen for cancer treatment, as well as guide diagnosis, pre-clinical and clinical development and measure potentially novel clinical end points to demonstrate efficacy.

In November 2015, the Journal of Immunology, the highly ranked journal of the American Association of Immunology, published data on Clever-1 function related to Faron’s novel cancer immunotherapy antibody Clevegen.

Following this, in December 2015, Faron was granted €1.5 million funding from Tekes, the Finnish Funding Agency for Innovation, to progress the preclinical development of Clevegen. The funding is a government loan (“Loan”), which covers 50% of the budgeted cost of the preclinical development of Clevegen.

Future Outlook

The key aim for Faron over the next 12-14 months is the completion of the Phase III INTEREST trial recruitment. We anticipate that all 55 sites will be open in April 2016 and the observed recruitment is already higher than the anticipated 0.5 patients/site/month. We therefore reiterate that the INTEREST trial results should be available in mid 2017. We also expect our contracted, scientific collaborators to generate exciting new data on Clever-1 function in tumour immune suppression.

Financial Review

Key Performance Indicator

Faron is a late clinical stage drug development company with no recurring sales and thus the primary Key Performance Indicators (KPI) followed by the Board focus on cash balances and other related information. During 2015, the Company generated €10.8 million free cash flow mainly due to the successful fundraising. 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 €0.5 million for the year ended 31 December 2015 (2014: €0.9 million), which comprised of milestone income from license partner Maruishi and sale of excess API (Active Pharmaceutical Ingredient) material. The Company also recorded €0.7million (2014: €0.1 million) of other operational income. This comprised of income recognised from the European Commission FP7 grant in support of the Traumakine programme. There were no new sources of other operating income during the year.

Share-based Compensation

As part of the IPO process, a number of options were awarded to Directors and key personnel. This had no cash impact on the results for the year, however accounting standards require this share based compensation to be recognised in the Consolidated Statement of Comprehensive Income, resulting in a charge of €0.5million (2014: €0.0 million).

Taxation

The Company’s tax credit for the fiscal year 2015 can be recorded only after the Finnish tax authorities have approved the tax report and confirmed the amount of tax-deductible losses for 2015. The total amount of cumulative tax losses carried forward approved by tax authorities on 31 December 2015 was €5.7 million (2014: €3.2 million). These losses can be utilised during the years 2019 to 2024 by offsetting them against profits. In addition, Faron has €2.8 million research and development costs incurred in the financial years 2010 and 2011 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 €6.2 million (2014: €1.4 million). Net loss for the year was €6.2 million (2014: €1.4 million), representing a loss of €0.30 per share (2014: €0.09 per share) (adjusted for the changes in share capital).

Cash Flows

The Company had a net cash inflow of €10.8 million for the year ended 31 December 2015, compared to a net cash inflow of €0.2 million for the previous year. Cash used by operating activities increased from €6.8 million to €7.1 million for the year, compared to €0.4 million for the year ended 31 December 2014. This was driven by an increase in research and development investments, as well as an overall increase in general and administration costs.

Net cash inflow from financing activities increased with €17.3 million to €18.1 million for the year due to the receipt of net proceeds of €18.1 million from an equity placings completed in May-June 2015 and the IPO in November 2015.

Financial Position

As at 31 December 2015, total cash and cash equivalents held were €11.1 million (2014: €0.2 million).

Headcount

Average headcount of the Company for the year was 6 (2014: 5). The increase in headcount is attributable to the commencement of the Phase III INTEREST trial.

Shares and Share Capital

On 24 February 2015, the number of Ordinary Shares was increased to 1,623,791 by the issue of 78,166 new Ordinary Shares at a subscription price of €14.40. 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;

On 19 May 2015, the number of Ordinary Shares was increased to 1,843,356 by the issue of 219,565 new Ordinary Shares at a subscription price of €15.41. 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;

On 9 June 2015, the number of Ordinary Shares was increased to 1,926,555 Ordinary Shares by the issue of 83,199 new Ordinary Shares at a subscription price of €20.03. 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;

By resolution of the Extraordinary General Meeting held on 15 September 2015, the number of Ordinary Shares was increased to 19,265,550 by the issue of 17,338,995 new Ordinary Shares to the Shareholders without payment in proportion to their holdings so that nine Ordinary Shares were issued for each existing Ordinary Share (the “Share Split”);

By resolution of a Board Meeting held on 16 September 2015, the Company issued 151,400 warrants (each warrant representing an entitlement to subscribe for one Ordinary Share) to Whitman Howard (which were subscribed on 16 September 2015). The warrants are divided into two tranches: in the first tranche, 109,800 warrants with a subscription price of €1.55 (“A Warrants”), and in the second tranche, 41,600 warrants with a subscription price of €2.01 (“B Warrants”). Any “A” Warrants shall be exercised during the subscription period commencing on 2 November 2015 and ending on 7 May 2018. Any “B” Warrants shall be exercised during the subscription period commencing on 2 November 2015 and ending on 28 May 2018;

By resolution of the Extraordinary General Meeting held on 15 September 2015, the Company adopted the 2015 Share Option Plan and granted the Options detailed in Directors´ Remuneration Report set out in the Annual Report and Accounts.

By resolution of a Board Meeting held on 11 November 2015, the Company resolved to issue (i) 2,417,113 Ordinary Shares without payment into treasury, in order for such Ordinary Shares to be transferred to Placees pursuant to the Placing on a delivery versus payment basis on Admission, (ii) 44,044 Ordinary Shares and VCT shares and EIS shares pursuant to the placing, and (iii) 1,384,997 Ordinary Shares as subscription shares pursuant to the subscription.

Pre-IPO Financing

In May – June 2015 the Company raised a total of €5,049,972 issuing a total of 302,764 new shares to A&B (HK) Company Limited in two separate tranches with an average subscription price of €16.68. After the Share Split the number of shares increased to 3,027,640 and the average subscription price was €1.67. A&B is a Hong Kong company, which is related to CMS by virtue of both having a common controlling shareholder.

IPO

The Company was admitted to trading on AIM in November 2015 alongside the issue of 3,846,154 new shares with a subscription price of 260 pence, or €1.83, per share raising £10,000,000, or €14,210,967. A total of 16 investors participated in the IPO of which 12 were new investors in the Company. The majority of the funds raised and the new investors were from the UK. At 31 December 2015, the Company had issued a total of 23,111,704 shares. All shares are ordinary shares with equal rights.

Money Raised to Date

To date, the Company has been funded with a total of approximately €32.8 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 revenues of €3.3 million to date through the receipt of milestone payments pursuant to certain of its licensing arrangements and the sale of surplus raw materials.

ANNUAL RESULTS

NOTES TO THE ANNUAL RESULTS

For the year ended 31 December 2015

Note 1         Basis of preparation

The audited financial information set out herein does not constitute statutory accounts as defined in Finnish Accounting Act. The financial information presented here for the year ended 31 December 2015 has been extracted from the Group’s audited financial statements which were approved by the Board of Directors on 9 March 2016 and which are available on the Company’s website.

Faron’s audited financial statements are prepared in accordance with International Financial Reporting Standards (IFRS)) as adopted by the European Union (and as published by the International Accounting Standards Board (IASB) and in force as at 31 December 2015. In the EU IFRS standards and their interpretations are adopted in accordance with the procedure laid down in regulation (EC) No 1606/2002 of the European Parliament and of the Council. Faron has consistently applied these policies to each year presented, unless otherwise stated. The Company has not applied any standard, interpretation or amendment thereto before its effective date.

Faron’s date of transition to IFRS is 1 January 2012. The Company has applied IFRS 1 First-time Adoption of International Financial Reporting Standards in preparing these financial statements. Until 31 December 2011 Faron’s separate financial statements were prepared in accordance with Finnish Accounting Standards (FAS).

The financial statements are prepared under the historical cost convention, except as disclosed in the accounting policies below.

The financial year of Faron is the calendar year ending 31 December. The figures in the financial statements are presented in thousands of euro unless otherwise stated. All figures presented have been rounded, and consequently the sum of individual figures may deviate from the presented aggregate figure.

The Company has not had any other comprehensive income in those years presented in these financial statements.

Faron’s financial statements are prepared on a going concern basis. It is the intention of the Company to continue the development of the products to the point where they can be either licensed at attractive terms to internationally active pharmaceutical companies who have the means to further develop these products, or to develop the products in-house until receipt of marketing approval from the relevant regulatory agencies is obtained. After such approval, Faron would primarily seek to form partnerships with strong global, regional or local pharmaceutical companies that have the necessary marketing and distribution capabilities and resources. In such partnerships, Faron will typically grant geographically limited licenses for products in exchange for contractually agreed payments, license fees and royalties on future product sales. In some cases, one element of such an agreement may include a collaboration in which Faron will also receive funding for R&D services provided at a cost plus basis. In addition to its normal R&D and corporate activities, Faron seeks, as a clinical stage drug discovery and development company, to advance the development of its lead compounds through clinical trials. The Company conducts these clinical trials either together with development partners or by itself, however, in both cases these activities require substantial funding. Faron primarily relies upon financing its activities through equity financing, license agreements, and public R&D loans and grants.

The preparation of financial statements under IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the end of the reporting period as well as the reported amounts of income and expenses during the reporting period. These estimates and assumptions are based on historical experience and other justified assumptions that are believed to be reasonable under the circumstances at the end of the reporting period and the time when they were made. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an on-going basis and when preparing the financial statements. Changes in accounting estimates may be necessary if there are changes in the circumstances on which the estimate was based, or as a result of new information or more experience. Such changes are recognised in the period in which the estimate is revised.

Note 2         Intangible assets

Faron’s intangible assets include patents and internally developed intellectual property (“documentation-related assets”). An intangible asset is recognised only if it is probable that the future economic benefits attributable to the asset will flow to Faron and the cost of the asset can be measured reliably. All other expenditure is expensed as incurred. These intangible assets are initially recognised at cost. Cost comprises the purchase price and all costs directly attributable to bringing the asset ready for its intended use. Subsequently intangible assets are carried at cost less amortisation and any accumulated impairment losses.

Internally generated intangible assets arising from development are recognised if, and only if, all the criteria for recognition are fulfilled:

Intangible assets are amortised over their expected or known useful lives on a straight-line basis beginning from the point they are available for use. The estimated useful life is the lower of the legal duration and the economic useful life. The estimated useful lives of intangible assets are regularly reviewed. The estimated useful life for intangible assets is currently 10 years. The effect of any adjustment to useful lives is recognised prospectively as a change of accounting estimate. Intellectual property-related costs for patents are part of the expenditure for the research and development projects.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each financial year.

Internal research costs are those costs incurred for the purpose of gaining new scientific or technical knowledge and understanding. Such costs are always expensed as incurred. Internal development costs are those costs incurred for the application of research findings or other knowledge to plan and develop new products for commercial production. As the drug product development projects undertaken by Faron are subject to technical feasibility, regulatory approval and other uncertainties, these criteria are considered to be met only after Faron has filed its submission to the regulatory authority for final approval after which all subsequent development costs will be capitalised. Before this trigger point all drug product related development costs are typically expensed as incurred. Faron has not capitalised any drug product related development expenditure as the related criteria have not been met yet. Development costs expensed in prior financial years are not capitalised at a later date.

Note 3         Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument, e.g. a trade receivable, will fluctuate because of changes in foreign exchange rates.

Faron’s functional currency is the euro and Faron is exposed to foreign exchange risk arising from currency exposure, currently mainly with respect to the Japanese Yen and pound sterling. The Company receives payments from its main licence partner Maruishi (based in Japan) in Japanese Yen. However, the impact of the foreign exchange risk arising from the Yen exposure is not considered significant in average.

Due to the commencement of the Phase III clinical trials with a UK based Clinical Research Organisation as main service provider, the Company’s’ pound denominated expenses and trade payables have become significant. The Company converted most of the pound denominated IPO proceeds into euros immediately after the IPO, but held and still holds a sizeable amount of pounds on its pound sterling bank accounts. This forms a natural hedge against Euro-pound sterling exchange rate changes, as the funds held in pounds roughly match with the estimated pound expenses during 2016. As a result of the sizeable pound sterling holdings, the depreciation of pound sterling against Euro had a negative effect on the financial statements. As the exchange rate may move also to other direction during 2016, the management believes that natural hedge strategy best protects the Company from adverse exchange rate changes and this protection overweighs short term currency rate losses.

Other foreign currency denominated trade receivables (and trade payables, if any) are small and short term in nature. The borrowings and other liabilities of Faron are denominated in Euro. As the currency exposure and risk is considered significant, the Company established natural hedging policy to manage the foreign exchange risk against the functional currency of the Company.

Note 4         Other operating income

In the ended 31 December 2012, the pan-European “Traumakine” consortium, for which  Faron Pharmaceuticals is the coordinator, signed a grant agreement in respect of a EUR 5,963 thousand research grant awarded by the European Commission from the seventh framework program (FP7) to support the FP-1201-lyo clinical phase III program (“Traumakine”), focusing to develop a first pharmacological treatment for acute respiratory distress syndrome (ARDS). The first payment to the consortium under the grant, received by Faron in 2013, amounted to EUR 1,693 thousand, of which EUR 660 thousand has been recognised by Faron as other operating income. The second grant payment, EUR 1,018 thousand was received in the end of 2014, of which EUR 110 thousand has been recognised as other operating income. In 2015, 701 thousand was recognised as other operating income.

The Company will defer elements of the grant to the point in which the respective milestones are completed (i.e. the milestones which are set out within the EU Grant agreement). Once these milestones are met the amount due to the Company is recognised as other operating income.

Note 5         Financial income and expenses

Faron has received two government loans for research and development purposes with below-market interest rate from Tekes (The Finnish Funding Agency for Technology and Innovation). Both loans were drawn down before the date to transition to IFRS (i.e. prior to 1 January 2012). Thus, based on the exemption under IFRS 1, Faron has measured the government loans using the previous FAS carrying amount as the carrying amount of the loan. Subsequently, both loans are carried at amortized cost using the effective interest rate.

Other significant financial expense items are the exchange rate losses when transferring GBP to Euro, when issuing the new shares upon Admission to AIM, expenses on loan guarantees, interest on convertible loans and credit limit interest from bank.

Note 6         Income taxes

Withholding taxes paid in 2014 relate to payments of advisory fees to the non-Finnish members of the Clinical trial steering group. Taxes paid in 2015 relate to milestone payment to Maruishi.

¹⁾ Faron has incurred research and development costs in the financial years 2010 and 2011 that have not yet been deducted in its taxation. The amount can be deducted over an indefinite period with amounts that the Company may freely decide.

²⁾ These losses expire over the years 2019 to 2024. The amount presented for the year-end 31 December 2015 does not include the deductible temporary difference arisen from the net loss for the financial year 2015 as the related loss has not yet been approved by tax authorities by the time of preparation of these financial statements.                               

The related deferred tax assets have not been recognised due to the uncertainty as to whether they can be utilised.

Note 7            Equity and reserves                                                       

Note 8            Current receivables

The majority of prepayments relate to the Clinical Service Agreement with the clinical research organisation (CRO) GAEA Clinical, which is the main service provider for the INTEREST study. The other receivables consist mainly of the EU FP7 grant income as described in Note 4.

Note 9         Current financial liabilities and other liabilities

The item “Prepayments” above comprises portions of the awarded EU grant, received in 2013 and 2014. The major item under “Accrued expenses” are personnel related (short-term employee benefits).

Note 10       Transactions with related parties

Related parties of the Company

Faron’s related party comprise the following:

·    Marko Salmi, a private person having significant influence in Faron Pharmaceuticals Oy, following from the shareholding of 17.6%, as at 31 December 2015.

·    A&B (HK) Company Limited, an investment company existing under the laws of Hong Kong having significant influence in Faron Pharmaceuticals Oy, following from the shareholding of 15.2%, as at 31 December 2015.

·    Board of Directors; and the Company’s key management personnel (see below)

Faron had no interests in other entities at the end of the reporting periods presented in these financial statements.

Key management personnel

The Company’s key management personnel consist of the following:                     

·    members of the Board of Directors                                              

·    Management Team comprising CEO Markku Jalkanen, PhD; VP Ilse Piippo, MD, MSc (Pharm); VP Mikael Maksimow PhD and CFO Yrjö Wichmann MSc (Econ)

Remuneration of key management personnel*

Remuneration to the Board of Directors **                                                      

*Presented information for the Management Includes the Executive Directors of the Board 

**Presented information for the Board includes only Non-Executive Directors.                   

Management and Board shareholding

*Presented information for the Management Includes the Executive Directors of the Board 

**Presented information for the Board includes only Non-Executive Directors.                   

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