Section 1— Corporate information

1.1         Organization

Forward Pharma A/S (the “Company” or “Parent”) is a limited liability company incorporated and domiciled in Denmark. The registered office is located in Copenhagen, Denmark. The consolidated financial statements include the Company’s directly, and indirectly, owned German, United States and two Danish subsidiaries, identified as follows: Forward Pharma GmbH (“FP GmbH”), Forward Pharma USA, LLC, Forward Pharma FA ApS and Forward Pharma Operations ApS (“Operations”), respectively (also see Restructuring below). The Company and its subsidiaries are collectively referred to as the “Group”. The Company’s board of directors authorized the issuance of the financial statements included herein on April 2, 2019.

As discussed in more detail in Note 1.2, effective as of February 1, 2017, the Company entered into a Settlement and License Agreement (the “License Agreement”) with two wholly owned subsidiaries of Biogen Inc. (collectively “Biogen”). Prior to entering into the License Agreement, the Company was actively developing FP187 ®, a proprietary formulation of dimethyl fumarate (“DMF”), for the treatment of multiple sclerosis (“MS”) patients. The Company announced on March 1, 2017 plans to complete the remaining research and development efforts of FP187 ® and pursue an organizational realignment to reduce personnel and operating expenses by mid-year 2017. The organizational realignment was substantially completed by September 30, 2017.  As discussed in Note 1.2, the Company has permanently discontinued the development of DMF formulations, including FP187 ®.

Under the terms of the License Agreement, the Parent restructured its operations (the “Restructuring”) on June 30, 2017 whereby the Parent transferred to Operations (a newly created wholly owned Danish limited liability company) certain assets and liabilities, including the legal and beneficial rights, title and interest to defined intellectual property (the “IP”), and Operations transferred the IP to FWP IP ApS (“FWP IP”) (a newly created wholly owned Danish limited liability company). The final step in the Restructuring was completed on November 22, 2017 when the capital stock of FWP IP was sold (the “Sale”) to a newly formed Danish limited liability company (FWP HoldCo ApS, referred to as “HoldCo”) owned and controlled by a newly formed independent Danish foundation (FWP Fonden, referred to as the “Foundation”). In consideration for the capital stock of FWP IP, HoldCo paid Operations 336,000 Danish Kroner (“DKK”) ($54,000 based on the December 31, 2017 exchange rate).

The Foundation’s three-member board includes one independent director and one director appointed by each of the Parent and Biogen. Accordingly, the Parent does not control, nor does it have exposure or rights to variable returns from the Foundation, HoldCo or FWP IP. During November 2017, the Group contributed 5 million DKK ($805,000 based on the December 31, 2017 exchange rate) as the initial capitalization (the “Initial Capitalization”) of the Foundation and is obligated to pay 100,000 DKK ($15,000 based on the December 31, 2018 exchange rate) annually (the “Annual Funding”) to FWP IP in exchange for FWP IP agreeing to hold, prosecute and maintain the IP in accordance with certain agreements. In the future, the Group is only obligated to remit the Annual Funding through the last to expire, or invalidation of, the licensed patents underlying the IP; however, the Company’s obligation to remit the Annual Funding would be discontinued earlier if certain events, as defined in the License Agreement, occur.

On August 2, 2017, the Company’s shareholders approved a 10 for 1 share split (the “Share Split”). Except if disclosed otherwise, all share and per share information contained in the accompanying financial statements has been adjusted to reflect the Share Split as if it had occurred at the beginning of the earliest period presented. Subsequent to the Share Split, the nominal value of an ordinary share of the Parent is 0.01 DKK. See Note 3.5 for additional information regarding share and per share information.

On August 2, 2017, the Company’s shareholders approved a capital reduction with a corresponding shareholder distribution of 917.7 million EUR ($1.1 billion) (the “Capital Reduction”). The funds for the Capital Reduction were distributed to shareholders during September 2017. The Capital Reduction was executed through the annulment of 80% of the ordinary shares outstanding post Share Split. Currently there are no plans to distribute funds to shareholders in the future.

1.2          Intellectual Property Proceedings and the Settlement and License Agreement

On February 1, 2017, the License Agreement with Biogen and certain additional parties became effective. The License Agreement provided Biogen with a co-exclusive license in the United States, and an exclusive license outside the United States, to the IP, effective as of February 9, 2017. In accordance with the License Agreement, Biogen paid the Company a non‑refundable fee of $1.25 billion (“Non‑refundable Fee”) in February 2017.

Background

On April 13, 2015, an administrative patent judge at the United States Patent Trial and Appeal Board ("PTAB") declared Patent Interference No. 106,023 (the "Interference Proceeding") between the Company's United States Patent Application No. 11/567,871 and United States Patent No. 8,399,514B2 held by a subsidiary of Biogen Inc. The License Agreement did not resolve the Interference Proceeding between the Company and Biogen or the pending opposition proceeding against the Company's European patent EP2801355 (the "Opposition Proceeding"). The License Agreement contemplated that the PTAB and the United States Court of Appeals for the Federal Circuit (the "Federal Circuit"), as applicable, and the Opposition Division, the Technical Board of Appeal and the Enlarged Board of Appeal of the European Patent Office (the “EPO”), as applicable, to make final determinations in the proceedings before them. As discussed further below, the final determinations in the proceedings would determine whether future royalties are due the Company in accordance with the License Agreement. An unsuccessful outcome in the Interference Proceeding would result in the Company not being entitled to royalties based on Biogen’s future net sales in the United States, as defined in the License Agreement, and an unsuccessful outcome in the Opposition Proceeding would result in the Company not being entitled to royalties on Biogen’s future net sales outside the United States, as defined in the License Agreement.

Interference Proceeding        

On March 31, 2017, the PTAB issued a decision in the Interference Proceeding in favour of Biogen. The PTAB ruled that the claims of the Company’s United States Patent Application No. 11/567,871 are not patentable due to a lack of adequate written description. On May 30, 2017, the Company filed a notice of appeal with the Federal Circuit seeking to have the PTAB’s decision overturned and the Interference Proceeding reinstated. On October 24, 2018, the Federal Circuit affirmed the PTAB’s decision.  On November 21, 2018, the Company filed a petition for rehearing of the Federal Circuit’s decision. The rehearing request was denied on January 2, 2019 and the Federal Circuit’s decision became final on January 9, 2019. The Federal Circuit’s final decision ends the Interference Proceeding in favour of Biogen.  As a result of the unsuccessful outcome of the Interference Proceeding, the Company will not receive royalties from Biogen based on Biogen’s future net sales in the United States as defined in the License Agreement.

On March 25, 2019, the Company received notice from Biogen of their exercise of the option to purchase the intellectual property in the United States associated with the Company pursuant to the License Agreement. The Company and Biogen have consummated the assignment of the United States intellectual property to Biogen upon the execution of assignment agreements and the payment of a nominal amount by Biogen to FWP IP ApS, and Biogen has assumed ownership and responsibility for the assigned United States intellectual property. In addition, the Company will not be able to develop or commercialize any therapy for the treatment of any human disease or condition using DMF, including FP187®.

As a result of entering into the License Agreement, combined with the recently announced unsuccessful outcome in the Interference Proceeding and Biogen’s purchase of the intellectual property in the United States associated with the Company, the Company has permanently discontinued the development of DMF formulations, including FP187®. Therefore, sources of revenue derived from customers in the United States, including product sales of a DMF formulation, are not expected.

Opposition Proceeding

If the Company is successful in the Opposition Proceeding (i.e., the Company obtains, as a result of the Opposition Proceeding, and any appeals therefrom, a patent with a claim covering oral treatment of MS with 480 mg/day of DMF), it would be eligible beginning on January 1, 2021 to collect a 10% royalty (increasing to 20% from January 1, 2029) until the earlier of the expiration or invalidation of the patents defined in the License Agreement, on a country-by-country basis on Biogen's net sales outside the United States of DMF-containing products indicated for treating MS that, but for the license granted under the License Agreement, would infringe a Company patent, provided that other conditions of the License Agreement are satisfied. Among the conditions that need to be satisfied for any royalty to be payable by Biogen to the Company is the absence of generic entry in a particular geography having a particular impact as defined in the License Agreement. If the Company is unsuccessful in the Opposition Proceeding and any appeals therefrom, the Company would not be entitled to future royalties on Biogen's net sales outside the United States.

On January 29, 2018, the Opposition Division of the EPO concluded the oral proceeding concerning patent EP2801355 and issued an initial decision in the Opposition Proceeding. The Opposition Division revoked patent EP2801355 after considering third-party oppositions from several opponents. On March 22, 2018, the Opposition Division issued its written decision with detailed reasons for the decision, on May 7, 2018, the Company submitted its notice of appeal, and on August 1, 2018, the Company submitted the detailed grounds for the appeal. If the Company prevails in such appeal, it is expected that the Technical Board of Appeal will remand the case to the Opposition Division, in order for the Opposition Division to resolve the remaining elements of the original opposition. The duration of the appeal process is estimated to be approximately three years; however, delays can occur that would extend the estimated duration of the appeal process.

Aditech Pharma AG

The receipt of the Non‑refundable Fee in February 2017 triggered a $25 million obligation payable to Aditech Pharma AG in accordance with the addendum to the patent transfer agreement between the Company and Aditech Pharma AG. See Note 6.2.

1.3          Public listing of American Depositary Shares representing Ordinary Shares

During the fourth quarter of 2014, the Company completed the initial public offering (“IPO”) of American Depositary Shares (“ADS”) representing ordinary shares of the Company with a nominal value of 0.10 DKK each in the United States and issued 11.2 million ADSs at a price per ADS of $21.00 to investors. The IPO proceeds totaled $235.2 million before deducting the underwriters’ commission (7% of gross proceeds) and other direct and incremental costs associated with the IPO. Subsequent to the Share Split and the Capital Reduction, each ADS represents two ordinary shares with a nominal value of 0.01 DKK each. Holders of ADSs are not entitled to vote while holders of ordinary shares are entitled to one vote per share.

1.4         Going Concern

The Group currently estimates that there will be adequate liquidity to continue as a going concern beyond the next twelve months; however, if the Company fails to prevail in the Opposition Proceeding, including all appeals, future revenues are unlikely, the Company’s ability to continue as a going concern long-term would be uncertain and management would consider, amongst other things, an orderly wind-down of operations.

Section 2—Basis of Preparation

2.1          Accounting policies

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements have been prepared on a historical cost basis, except for available-for-sale financial assets that were measured at fair value as discussed further below. The consolidated financial statements are presented in United States Dollars (“USD”), and all values are rounded to the nearest thousand (USD ‘000), except when otherwise indicated. 

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016.

FP GmbH, Forward Pharma USA, LLC and Forward Pharma FA ApS have been consolidated for all periods presented herein. Operations has been consolidated since its inception on June 30, 2017. FWP IP was consolidated from its inception on June 30, 2017 through November 22, 2017 when the capital stock of FWP IP was sold to HoldCo.

The Parent’s consolidation of each subsidiary will continue until the date the Company no longer controls the subsidiary. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All intra-group balances and transactions are eliminated in consolidation. 

Translation from functional currencies to presentation currency

The Parent’s consolidated financial statements are presented in USD which is not the functional currency of the Parent. The Group has elected USD as the presentation currency due to the fact that the Parent has listed ADSs on the Nasdaq Global Select Exchange in the United States, under the ticker symbol “FWP”. The Parent, Operations, FWP IP and Forward Pharma FA ApS’s functional currency is the DKK, FP GmbH’s functional currency is the Euro (“EUR”) and Forward Pharma USA, LLC’s functional currency is the USD.

Except for the specific income and expense transactions noted below, the translation to the presentation currency for entities with a functional currency different from the USD, their assets and liabilities are translated to USD using the closing rate as of the date of the statements of financial position while income and expense items for each statement presenting profit or loss and other comprehensive income are translated into USD at an average exchange rate for the period. Exchange differences arising from such translation are recognized directly in other comprehensive (loss) income and presented in a separate reserve in equity.

As a result of the magnitude of the Non-refundable Fee, the amounts due per the Amendment (as defined in Note 3.3), and the amount due Aditech Pharma AG (see Note 6.2) combined with the weakening of the USD compared to the DKK during the year ended December 31, 2017, the Parent used the spot rate to translate such transactions to the presentation currency (USD.) The spot rate was used to avoid the distortion of operating results that would have been caused had the average exchange rate been used. In addition, for the same reason, the average exchange rate for the three-month period ended March 31, 2017 was used to translate the income tax provision to the presentation currency. 

Foreign currencies transactions and balances

The Company and each of its subsidiaries determine their respective functional currency based on facts and circumstances and the technical requirements of IFRS. Items included in the financial statements of each entity are measured using the functional currency. Transactions in foreign currencies are initially recorded by the Group entities in their respective functional currency using the spot rate at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at each reporting date. Differences arising on settlement or translation of monetary items denominated in foreign currency are recognized in the statement of profit or loss. For each of the years ended December 31, 2018, 2017 and 2016, the amounts reflected as “Exchange rate gain (loss), net,” within the consolidated statement of profit and loss include gross exchange (losses) gains totaling ($227,000),  $9.0 million and ($1.9) million respectively. 

Revenue recognition

The Group recognized the Non-refundable Fee in accordance with IFRS 15 Revenue from Contracts with Customers (“IFRS 15”).  IFRS 15 addresses the accounting and disclosure requirements for revenue contracts with customers. The mandatory effective date for adopting IFRS 15 was January 1, 2018; however, the Group elected to adopt IFRS 15 early on January 1, 2017. In accordance with IFRS 15, the Group recognizes revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration that the Group expects to receive in exchange for such goods or services.

Prior to entering to the License Agreement, the Group did not have revenue from contracts with customers that were within the scope of IFRS 15 and therefore the adoption of IFRS 15 had no effect on previously reported financial statements nor was an adjustment made to the Group’s accumulated deficit at January 1, 2017.

The only contract that the Group is party to that is within the scope of IFRS 15 is the License Agreement. In concluding when the Non-refundable Fee should be recognized as revenue, various judgments were made, including the identification of the Company’s performance obligations within the License Agreement and whether these performance obligations are distinct.  Management concluded that the performance obligations in the License Agreement were related to the right granted to Biogen to use the licensed IP both in the United States as well as in the rest of the world and concluded that these performance obligations were met at the time the License Agreement was consummated, as Biogen was granted full use of the licensed IP whether under a co-exclusive license or an exclusive license. At the time the License Agreement became effective, the Company was required (i) to fund the cost to file, prosecute and maintain the licensed IP as defined in the License Agreement, (ii) to participate in an intellectual property advisory committee and (iii) to provide the Annual Funding (collectively “Defense Costs” or “Defend the IP”). The period the Company is obligated to fund the Defense Costs is defined in the License Agreement and could include the period from the effective date of the License Agreement through the last to expire, or invalidation of, the licensed patents; however, the Company’s obligation to fund Defense Costs would be discontinued earlier if certain events, as defined in the License Agreement, occur. Management concluded that the Company’s obligation to Defend the IP does not represent a separate performance obligation as such activities are deemed to be costs to protect the value of the license granted to Biogen. Since Biogen received full unrestricted use of the licensed IP at the time the License Agreement was consummated and since the Company currently has no plans to nor is it obligated to further develop the underlying licensed IP, the License Agreement is deemed to provide Biogen with a right to use the licensed IP upon the consummation of the License Agreement. Based on the facts and circumstance discussed herein, the Non-refundable Fee was recognized as revenue when the performance obligations were satisfied.

Effective upon Biogen obtaining ownership of the United States IP, as discussed in Note 1.2, the Company is no longer required to fund Defense Costs associated with the United States IP.

The License Agreement provides for Biogen to remit to the Company royalties (as defined in Note 1.2) only if the Company is successful in the in the Interference Proceedings and/or Opposition Proceeding, including all appeals, and provided that other conditions of the License Agreement are satisfied. Should the Company be entitled to receive royalties from Biogen in the future, such amounts will be recognized as revenue in the period the underlying sales occur. As described above, the Federal Circuit’s final decision has ended the Interference Proceeding in favour of Biogen and as a result the Company will not receive royalties from Biogen based on Biogen’s future net sales in the United States. If the Company is unsuccessful in the Opposition Proceeding and any appeals therefrom, the Company would not be entitled to future royalties on Biogen’s net sales outside the United States. 

Share‑based payments

Employees, board members and consultants (who provide services similar to employees) of the Group receive remuneration in the form of equity settled awards whereby services are rendered as consideration for equity awards (warrants, deferred shares or options). The fair value of these equity‑settled awards is determined at the date of grant resulting in a fixed fair value at grant date that is not adjusted for future changes in the fair value of the equity awards that may occur over the service period. Fair value of warrants and options is determined using the Black Scholes model while fair value of deferred shares is determined as the fair value of the underlying shares less the present value of expected dividends.

Non‑employee consultants of the Group have received equity settled awards in the form of share options as remuneration for services. The fair value of these equity‑settled awards is measured at the time services are rendered using the Black Scholes model. Under this method, the fair value is determined each quarter over the service period until the award vests.

The Company has never granted cash settled awards. Generally, equity awards have a term of six years with none exceeding ten years from the date of grant. Equity awards generally vest over a three to five-year service period and certain equity awards vest contingently on the occurrence of defined events.

The cost of share‑based payments is recognized as an expense together with a corresponding increase in equity over the period in which the performance and/or service conditions are fulfilled. For equity instruments that are modified or replaced, the incremental value, if any, that results from the modification or replacement is recognized as an expense over the period in which performance and/or service conditions are fulfilled or immediately if there are no performance and/or service conditions to be fulfilled.

The fair value of equity‑settled awards is reported as compensation expense pro rata over the service period to the extent such awards are estimated to vest. No cost is recognized for awards that do not ultimately vest.

As discussed in more detail in Note 3.3, in order to mitigate the dilution to holders of warrants, deferred shares or options caused by the Capital Reduction, the Parent’s shareholders and board of directors approved adjustments to the terms and conditions governing certain warrants, deferred shares or options. The adjustments resulted in a combination of cash payments to the holders of the equity awards, reductions in the exercise prices of equity awards and a decrease in the total number of ordinary shares that may be subscribed for or purchased pursuant to outstanding equity awards. 

Employee benefits

Employee benefits are primarily made up of salaries, share‑based payments, Group-provided health insurance and Group contributions to a defined contribution retirement plan. The cost of these benefits is recognized as expenses as services are delivered. The Group’s contributions to the employee defined contribution retirement plan have not been material. 

Operating Expenses in the Statement of Profit or Loss

Research and development costs

Research and development costs primarily comprise salary and related expenses, including share‑based payment expense, license, patent and other intellectual property‑related costs incurred in connection with patent claims and other intellectual property rights conducted at the patent registry offices (for example the United States Patent and Trademark Office (“USPTO”), the EPO or other country‑specific patent registry offices), manufacturing costs of pre‑commercial product used in research, clinical costs, and depreciation of equipment, to the extent that such costs are related to the Group’s research and development activities.

If expenses incurred are associated with the Group’s intellectual property-related activities carried out in the courts to protect, defend and enforce granted patent rights against third parties (excluding activities and proceedings conducted within the USPTO, EPO or other country-specific patent registry offices) (“Court Expenses”) they are classified within general and administrative expenses. Court Expenses incurred for the years ended December 31, 2018, 2017 and 2016 totaled $453,000, $1.2 million and $315,000 respectively.

Capitalized patent and development costs

The Group’s research and development activities have concentrated on the development of unique formulations of DMF for the treatment of immune disorders and include all patent office‑related activities regarding the Company’s patent estate development (e.g., interference proceeding, oppositions and new patent development). For all periods presented herein, the Group did not capitalize patent costs or FP187® development costs and consequently expensed such costs as incurred given the inherent uncertainty in drug development and commercialization.

General and administrative costs

General and administrative costs relate to the administration of the Group and comprise salaries and related expenses, including share‑based payment expense, investor relations, legal and accounting fees, other costs associated with our public listing of ADSs in the United States and depreciation of equipment, to the extent such expenses are related to the Group’s administrative functions as well as Court Expenses. For the year ended December 31, 2017, general and administrative costs include the expenses associated with the Restructuring.

Government grants

Income from government grants is recognized when there is reasonable assurance that the grant will be received, all contractual conditions have been complied with and where contingent repayment obligations remain, avoidance of such obligations are within the control of the Group and not probable to occur. When the grant is intended to subsidize costs incurred by the Group, it is recognized as a deduction in reporting the related expense on a systematic basis over the periods to which the costs relate. When the grant subsidizes a capital asset, it is recognized as income in equal amounts over the expected useful life of the related asset. For more information regarding government grants, see Note 6.2. 

Current and deferred income taxes

Current income tax

Tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities within one year from the date of the statement of financial position. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates.

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation or “uncertainty” and establishes provisions where appropriate. To date, there have been no provisions established for uncertain tax positions. The IASB issued IFRIC 23 Uncertainty over Income Tax Treatments (“IFRIC 23”) in May 2017. IFRIC 23 is effective on January 1, 2019 and clarifies the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The future application of IFRIC 23 is not expected to have an effect on the Company’s consolidated financial statements.

Deferred tax

Deferred tax is provided based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized, or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available in the future against which the deductible temporary differences, unused tax credits and unused tax losses can be utilized. Deferred tax assets and deferred tax liabilities of the same tax jurisdiction are offset if a legally enforceable right exists to set off.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re‑assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. See Note 3.4.

Deferred tax relating to items recognized outside the profit or loss are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.

During the period from January 19, 2013 to December 31, 2015, the Company was part of a Danish joint taxation group with Tech Growth Invest ApS (see Note 3.4) and entities under Tech Growth Invest ApS’s control (collectively “Tech Growth”). Under the joint taxation, the Company received a refund equal to the tax benefit realized by Tech Growth from Tech Growth’s partial utilization of the Company’s tax losses at the applicable corporate tax rate to the extent that the tax losses reduced the taxable income of Tech Growth. An entity that was part of Tech Growth experienced a change in ownership on December 31, 2015. As a result of the change in ownership, the year ended December 31, 2015 was the final year in which the Company received a refund equal to the tax benefit realized by Tech Growth from Tech Growth’s partial utilization of the Company’s tax losses.

On January 1, 2016, the Parent became part of a new Danish joint taxation group (“2016 Tax Group”) with NB FP Investment General Partner ApS and Forward Pharma FA ApS. For the year ended December 31, 2017, Operations became member of the 2016 Tax Group on June 30, 2017 (inception) and FWP IP became a member of the 2016 Tax Group on June 30, 2017 (inception) through the date of the Sale (November 22, 2017.) For the year ended December 31, 2018, the Parent, Operations and Forward Pharma FA ApS were part of the 2016 Tax Group. 

Equipment

Historically equipment included computers, office equipment, furniture and manufacturing equipment. Equipment is reflected in the accompanying financial statements at cost net of accumulated depreciation. Manufacturing equipment owned by the Group was placed in service for the use of Group vendors that provided contract manufacturing services to the Group.

Depreciation is calculated on a straight‑line basis over the expected useful lives of the underlying assets of two to eight years. The residual values of equipment are not material. Except as discussed in Note 4.1, there have been no impairment losses recognized by the Group since the inception of the Company.

The useful life of and method of depreciation of equipment are reviewed by management at least each annually or more often based on changes in facts or circumstances that may result and are adjusted prospectively as changes in accounting estimates. For all periods presented herein, the effect of changes in accounting estimates for equipment were immaterial. 

Financial Instruments and the adoption of IFRS 9 Financial Instruments

Effective January 1, 2018, the Group adopted IFRS 9 Financial Instruments (“IFRS 9”) retrospectively; however, IFRS 9 does not require restatement of prior periods but allows for the cumulative effect of adopting IFRS 9 to be reflected as an adjustment to the Group’s accumulated deficit at January 1, 2018. At the adoption date, and subsequent thereto, the Group did not hold financial instruments where the accounting for such financial instruments changed as the result of adopting IFRS 9. Accordingly, the adoption of IFRS 9 had no effect on the accompanying consolidated financial statements nor was an adjustment made to the Group’s accumulated deficit at January 1, 2018.

For all periods presented herein, the Group did not hold derivative financial instruments nor has there been a change in classification of a financial asset after initial recognition and measurements. Financial instruments are not acquired for trading or speculative purposes.

The basis of presentation of financial assets prior to the adoption of IFRS 9 on January 1, 2018

Initial recognition and measurement

The Group’s financial assets were recognized initially at fair value plus transaction costs that were attributable to the acquisition of the financial asset, if any. Transaction costs were applicable only to the Company’s available-for-sale financial assets.

Subsequent measurement

The Group held financial assets within the following measurement categories:

Loans and receivables were measured at amortised cost using the effective interest rate method. Available-for-sale financial assets were carried at fair value with changes in fair value from period to period recognized in other comprehensive income. Interest income was reported using the effective interest rate method with foreign exchange gains or losses recognized in the consolidated statement of profit and loss within foreign exchange rate gain (loss). Subsequent to October 15, 2017, the Group did not hold available-for-sale financial assets.

Financial asset impairment

The Group assessed at the end of each reporting period whether there had been objective evidence that a financial asset or group of financial assets was impaired. Impairment losses would have been incurred if there was objective evidence of impairment and the evidence indicated that estimated future cash flows would be negatively impacted. For each of the years ended December 31, 2017 and 2016, the Group did not experience an impairment of a financial asset.

The basis of presentation of financial assets subsequent to the adoption of IFRS 9 on January 1, 2018

Initial recognition and measurement

The Group’s financial assets will be recognized initially at fair value. For financial assets acquired that will not be measured at fair value through profit and loss, the initial measure of fair value will include transaction costs.

Subsequent measurement

Financial assets will be classified as either financial assets measured at amortized cost, measured at fair value through profit or loss or measured at fair value through other comprehensive income. The classification will depend on the facts and circumstances at the measurement date and the technical requirements of IFRS 9.

As of and for the year ended December 31, 2018, the only financial assets held by the Group were cash, cash equivalents and receivables. Cash and cash equivalents represent funds available on demand that are measured at cost. Historically, the Group’s receivables are due within a short period of time and Group holds its receivables to collect contractual cash flows, accordingly, the fair value of receivables are based on the undiscounted amount due.

Financial asset impairment

IFRS 9 requires the use of the expected credit loss model (the “Model”) to determine the amount of credit losses. Under the Model, the Group calculates the allowance for losses on a discounted basis based on different default scenarios probability weighted. For the year ended December 31, 2018, credit losses incurred by the Group were insignificant. 

Financial Liabilities

The Group's financial liabilities for all periods presented herein include only trade payables. Trade payables relate to the Group’s purchase of products and services from various vendors in the normal course of business with payment terms generally not exceeding 30 days. Trade payables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method in the event a vendor has provided extended payment terms to the Group. Historically none of the Group’s vendors have provided extended payment terms and therefore the effective interest method has not been used. The adoption of IFRS 9 had no effect on the Group’s accounting for financial liabilities. 

Consolidated statement of cash flow

The consolidated statement of cash flows is presented using the indirect method. The consolidated statement of cash flows shows cash flows resulting from operating activities, investing activities and financing activities, and the Group’s cash and cash equivalents at the beginning and end of the year.

Cash flows used in operating activities primarily comprise the operating results, before tax, for the year adjusted for non-cash items, such as share-based compensation, foreign exchange gains and losses, depreciation, changes in working capital and cash flows for interest and taxes.

Cash flows from investing activities are comprised primarily of payments relating to equipment purchases and the maturity of available-for-sale financial assets.

Cash flows from financing activities are comprised of proceeds from the repurchase of equity awards, share issuances and the Capital Reduction see Notes 3.3 and 5.1.

2.2          Significant accounting judgments, estimates and assumptions

The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of income, expenses, assets and liabilities, as well as the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

Judgments made in applying accounting policies

In the process of applying the Group’s accounting policies, management has made the following judgment that has the most significant effect on the amounts recognized in the consolidated financial statements:

 

 

There is a significant risk that the judgments used by management to prepare the accompanying consolidated financial statements could differ from actual results causing a material adjustment to the carrying amounts of assets and liabilities in future years. The Group based its judgments on information available when the consolidated financial statements were prepared.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are listed below. The Group based its assumptions and estimates on information available when the consolidated financial statements were prepared.

Management has determined that the following items are subject to a high degree of estimation uncertainty and are significant to the financial statements:

 

 

2.3          New and Amendments to Accounting Standards

Standards effective in 2018:

Excluding IFRS 9 and 15, which are discussed above, the IASB issued new standards and amendments to standards and interpretations that were effective in 2018 (collectively “2018 New Standards”). None of the 2018 New Standards had an impact on the Group’s financial statements.

Standards issued but not yet effective:

The IASB issued new standards, amendments to standards and interpretations that become effective on or after January 1, 2019 (collectively “New Standards”). None of the New Standards are currently expected to have a material effect on the Group’s financial statements; including, as discussed below, the future adoption of IFRS 16 Leases (“IFRS 16”).

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 has an effective date of January 1, 2019. The Group does not have long-term leases that are material and therefore the future adoption of IFRS 16 will not have a material effect on the Group’s consolidated financial statements.

Section 3—Results for the Year

3.1         Segment information

For management purposes, the Group is managed and operated as one business unit, which is reflected in the organizational structure and internal reporting. No separate lines of business or separate business entities have been identified with respect to any product candidate or geographical market and no segment information is currently disclosed in the Group’s internal reporting. Accordingly, it has been concluded that it is not relevant to include segment disclosures in the financial statements as the Group’s business activities are not organized into business units, products or geographical areas.

3.2          Staff costs

 

 

See Note 6.1 for compensation paid to the members of the board of directors.

3.3          Share‑based payment

Unless otherwise stated, all amounts disclosed in this Note, including the quoted share prices, have been revised to reflect the Share Split as if it had occurred at the beginning of the earliest period presented. In addition, per share amounts in DKK have been updated as the result of changes in exchange rates. Accordingly, the information reported herein may differ from the amounts previously reported.

The Group has entered into various share‑based payment arrangements through the granting of equity awards in the form of warrants, options or deferred shares (collectively “equity awards”) to employees, consultants (who provide services similar to employees), non‑employee consultants and members of the board of directors. Equity awards have been granted under either the Company’s 2014 Omnibus Equity Incentive Compensation Plan (the “Equity Plan”) or outside the Equity Plan. Outstanding warrants and options have exercise prices stated in DKK or USD. Equity awards that have exercise prices in DKK have been translated to USD.

Prior to the Share Split, each ADS represented one ordinary share. At the time of the Share Split and after the subsequent Capital Reduction, each ADS represented ten ordinary shares and two ordinary shares respectively. The per share amounts disclosed herein are based on one ordinary share.

The terms of the Equity Plan provide for the board of directors, or a committee appointed by the board of directors, to grant equity awards to employees, consultants and directors of the Group. Subsequent to the Share Split and the Capital Reduction, the Equity Plan currently provides for the granting of an aggregate of 9.9 million ordinary shares. Awards can be in the form of ordinary shares, deferred shares, restricted shares or share options with terms and vesting conditions determined by the board of directors. The Equity Plan contains antidilution provisions in the event of a stock split or certain other corporate transactions. As of December 31, 2018, 3.1 million shares were available for future grant under the Equity Plan.  In addition, at December 31, 2018, under Danish Corporate Law, the board of directors has available for the future grant 2.1 million warrants and 17 million deferred shares (inclusive of the shares available for future grant under the Equity Plan.)

During September 2018, 7,200 options (the “2018 Option”) were granted to one employee at an exercise price per share price of $1.40. The 2018 Option vests in increments as defined through September 1, 2021; however, the 2018 Option contains a provision whereby the holder cannot exercise prior to a defined date. Vesting and the exercise period are accelerated in the event there is a change in control, as defined in the award agreement. The terms of the 2018 Option include antidilution protection to the holder in the event there is a distribution to the shareholders as defined in the underlying award agreement. The 2018 Option expires on August 31, 2024. At the date of grant, the aggregate fair value of the 2018 Option was not material.

During the second half of 2018, the Company’s board of directors allowed two former employees to continue to hold 105,000 vested options (collectively the “2018 Vested Options”) that would have otherwise been forfeited shortly after each former employee’s termination date if not exercised. The exercise prices of the 2018 Vested Options ranging from 0.01 DKK to $3.77 and the expiration dates, as stated in the underlying awards agreements, do not exceed June 19, 2023. For financial reporting purposes, allowing the former employees to hold the 2018 Vested Options to their stated expiration dates was accounted for as a modification. The financial statement impact of allowing the former employees to hold the 2018 Vested Options to their stated expiration date was not material.

During the year ended December 31, 2018, a total of 706,000 warrants were exercised yielding proceeds to the Company of $1,000. The quoted fair values of an ordinary share of the Company on the dates of exercise were $1.36 with respect to 334,000 warrants and $1.49 for the remaining warrants.

During March 2017, the Company granted 60,000 options (600,000 after the Share Split) to the Company’s Chief Executive Officer with an exercise price of $27.49  ($2.75 after the Share Split.) Vesting is monthly over 48 months commencing on March 1, 2017; however, each award contains a provision whereby the Chief Executive Officer cannot exercise prior to a defined date. Vesting and exercise periods are accelerated in the event there is a change in control, as defined in the option award agreement. Stock options expire six years from the date of grant. At the date of grant, the aggregate fair value of options granted in March 2017 totaled $913,000.

During June 2017, the Company granted 825,000 options (8.3 million after the Share Split) (the “June 2017 Options”), including 300,000  (3 million after the Share Split) that were granted to the Company’s Chief Executive Officer and 75,000  (750,000 after the Share Split) that were granted to members of the Company’s Board of Directors, that have an exercise price of $20.35  ($2.04 after the Share Split.) Vesting is monthly over 36 months commencing on June 1, 2017; however, each award contains a provision whereby the option holder cannot exercise prior to a defined date. Vesting and/or exercise periods are accelerated under certain defined situations, including a change in control. The terms of the June 2017 Options include antidilution protection to the holders in the event there is a distribution to the shareholders as defined in the underlying award agreements. As a result of the Capital Reduction and the antidilution protection, the exercise price of the June 2017 Options has been decreased to the nominal value of an ordinary share, the number of shares that may be subscribed for pursuant to the June 2017 Options has been reduced by 80%  (6.6  million options after the Share Split) (referred to as the "June 2017 Award Adjustment") and the holders could be due a total cash payment of 1.9 million EUR ($2.2 million based on the December 31, 2017 exchange rate) if all of the June 2017 Options vest. For the year ended December 31, 2018, 650,000 EUR ($761,000) was paid to the holders of the June 2017 Options in connection with June 2017 Options that vested during the year and the corresponding amount for the year ended December 31, 2017, was 361,000 EUR ($430,000 based on the December 31, 2017 exchange rate.) As of December 31, 2018, the remaining cash payment due the holders of the June 2017 Options, if vesting occurs in full, is 844,000 EUR ($967,000 based on the December 31, 2018 exchange rate.) Such amount is payable semi-annually on a pro rata basis over the remaining vesting period that ends on May 31, 2020. Since the June 2017 Option award agreements contain antidilution terms, payments made to the holders as the result of such terms were treated as a reduction to shareholder equity. The June 2017 Options expire six years from the date of grant. At the date of grant, the aggregate fair value of options granted in June 2017 Options totaled $8.9 million.

During June 2017, the Company granted 90,000 deferred shares (900,000 after the Share Split) (the “June 2017 Deferred Shares”), including 45,000  (450,000 after the Share Split) granted to the Company’s Chief Executive Officer. Subject to meeting defined employment provisions, 50,000 of the June 2017 Deferred Shares (500,000 after the Share Split), including 25,000  (250,000 after the Share Split) held by the Company’s Chief Executive Officer, vest in the event there would have been a successful outcome of the Interference Proceeding, as defined in the award agreements, and, subject to meeting defined employment provisions, the balance vest in the event there is a successful outcome of the Opposition Proceeding as defined in the award agreements. The deferred shares that vest in the event there is a successful outcome to the Interference Proceeding expire five years from the date of grant, or earlier, in the event of an unsuccessful outcome in the Interference Proceeding, while the remaining deferred shares expire five years from date of grant, or earlier, in the event of an unsuccessful outcome of the Opposition Proceeding. At the date of grant, the aggregate fair value of the deferred shares totaled $1.8 million. The fair value of the June 2017 Deferred Shares will be recognized as an expense within the statement of profit and loss only if such deferred shares vest. In addition, the award agreements underlying the June 2017 Deferred Shares contain provisions similar to the antidilution provisions included in the June 2017 Options. Accordingly, the number of shares that may be subscribed for pursuant to the June 2017 Deferred Shares awards agreements has been reduced by 80% (720,000 deferred shares after the Share Split) (referred to as the “Deferred Share Adjustment”) and the antidilution provisions would have obligated the Company to remit an aggregate of 1.7 million EUR ($2.0 million based on the December 31, 2018 exchange rate) to the holders, payable upon vesting, if all the June 2017 Deferred Shares had vested. Subsequent to the Deferred Share Adjustment, there were 180,000 deferred shares outstanding of which 100,000 would have vested upon a successful outcome of the Interference Proceeding and the balance vest in the event there is a successful outcome of the Opposition Proceeding as defined in the award agreements. As a result of the unsuccessful outcome of the Interference Proceeding, as discussed in Note 1.2, 100,000 deferred shares expired on January 9, 2019 when the Federal Circuit’s decision became final. The potential antidilution payment due the holders of the June 2017 Deferred Shares should the Company be successful in the Opposition Proceeding, as defined, totals 777,000 EUR ($890,000 based on the December 31, 2018 exchange rate.) 

During the year ended December 31, 2017, a number of employees, including the Company’s former Chief Executive and Operating Officer, Chief Financial Officer, and two board members terminated roles with the Company (collectively “Former Employees”). At the time of termination, unvested equity awards held by the Former Employees were forfeited resulting in the reversal of previously recognized share-based compensation of $7.6 million. The equity awards forfeited included 284,000 deferred shares (2.8 million after the Share Split) and 564,000 options or warrants (5.6 million after the Share Split.) The Company’s board of directors allowed ("Allowance") the Former Employees to continue to hold 1.1 million vested options or warrants (11.1 million after the Share Split) that would have otherwise been forfeited shortly after each Former Employee’s termination date if not exercised. As the result of the Allowance, the Company, during the year ended December 31, 2017, recognized share-based compensation of $2.7 million.

In November 2017, the shareholders of the Company approved an amendment to the Company’s articles of association. The amendment modified the terms of certain outstanding options and warrants granted by the Company before June 2017 to mitigate the dilution to such awards caused by the Capital Reduction. In November 2017, a similar amendment was approved by the board of directors of the Company in respect of certain deferred share awards granted by the Company before June 2017 (the amended options, warrants and deferred shares are collectively referred to as the “Awards” and the amendments of the Awards are collectively referred to as the “Amendment”). For financial reporting purposes, the Amendment was accounted for as a modification whereby any increase in the fair value of an Award resulting from the Amendment is deemed to be additional compensation to the Award holder and accounted for as discussed below. The Amendment was designed to apply a set of principles (the “Principles”) consistently across all Awards; however, since the Awards affected by the Amendment had a wide range of different terms, the Amendment’s effect on individual Awards varied resulting in certain Awards increasing in fair value while others decreased in fair value. The Principles employed were modelled off the Capital Reduction including, but not limited to, the per share cash distributed to shareholders and the 80% annulment of shares (see Note 5.1.) The overall effect of the Amendment provided for cash payments to Award holders of 36.2 million EUR ($43.4 million based on the December 31, 2017 exchange rate) and a reduction in the number of outstanding Awards of 28.8 million. In situations where the Amendment favourably affected the fair value of an Award, such effect was deemed to be additional compensation to the Award holder that will be expensed over the remaining vesting period for unvested Awards and expensed immediately in connection with vested Awards. In situations where the fair value of an Award was negatively affected by the Amendment, no expense will be recognized. Cash payments made to Award holders were deemed to be a partial repurchase of the Award and accounted for as a reduction to shareholder equity except in situations where the cash payment to an Award holder increased the fair value of an Award. In situations where the cash payment to an Award holder increased the fair value of an Award, such increase was deemed to be additional compensation and expensed, as discussed above, based on the Award’s vesting status. As a result of the Amendment, the Group recognized compensation of $11.7 million and a reduction to shareholder equity of $32.2 million. Subsequent to the Amendment, the exercise prices of options and warrants range from 0.01 DKK (or $0.0015 based on the December 31, 2018 exchange rate) to $14.13 per share and the holders of deferred shares need to remit 0.01 DKK (or $0.0015 based on the December 31, 2018 exchange rate) per share upon the issuance.

During March 2017, 40,000 warrants (401,000 after the Share Split) were exercised yielding proceeds to the Company of $49,000. The quoted fair value of an ordinary share of the Company on the date of exercise was $27.95  ($2.80 after the Share Split.)

During the year ended December 31, 2016, 664,000 stock options (6.6 million after the Share Split) were granted, including 178,000  (1.8 million after the Share Split) that were granted to members of the Company’s Board of Directors. The option exercise prices per share range from $12.75 to $21.95 ($1.28 to $2.20 after the Share Split.) Vesting terms are pro rata over either a three or four-year term, however, each award contains a provision whereby the option holder cannot exercise prior to a defined date. Vesting and exercise periods are accelerated in the event there is a change in control, as defined in the option award agreements. Stock options expire six years from the date of grant. At the date of grant, the aggregate fair value of options granted in 2016 totaled $8.2 million.

In June 2016, 89,000 warrants  (891,000 after the Share Split) (“June 2016 Warrants”) were granted to a consultant. The June 2016 Warrants replaced an equal number of expiring warrants. The exercise price of the June 2016 Warrants is the same as the expiring warrants, or $0.56 ($0.06 after the Share Split.) The June 2016 Warrants were fully vested upon grant and had an expiration date of July 1, 2018. For financial reporting purposes, the June 2016 Warrants were accounted for as a modification of the expiring warrants to extend the expiration date. The financial statement impact of the modification of the June 2016 Warrants was not material.

During May 2016, 130,000 warrants (1.3 million after the Share Split) were exercised yielding proceeds to the Company of $112,000. The quoted fair value of an ordinary share of the Company on the date of exercise was $18.60 ($1.86 after the Share Split.)

During October 2016, the Company entered into a four-year consulting agreement with a member of the board of directors. The consulting agreement provides for the granting of 12,500 deferred shares (125,000 after the Share Split) shares as full compensation for services to be rendered. The deferred shares vest in equal increments annually over four years. Unvested deferred shares vest immediately in the event there is a change in control as defined in the award agreement. At the date of grant, the aggregate fair value of the deferred shares totaled $275,000.

During the year ended December 31, 2015 a total of 500,000 stock options (5 million after the Share Split) were granted to non‑employee consultants of the Group (“Consultant Options”). 250,000  Consultant Options (2.5 million after the Share Split)  have an exercise price of $28.26 ($2.83 after the Share Split) and the balance have an exercise price of $141.30 ($14.13 after the Share Split.) The Consultant Options expire on May 15, 2020 and vesting is over five years; however, the Consultant Options can only be exercised during the period from April 2, 2020 to May 15, 2020. Vesting and exercise are accelerated in the event there is a change in control as defined in the option award agreements. The Company’s board of directors holds a unilateral right to terminate the Consultant Options for any reason at any time prior to vesting. The fair value of the Consultant Options is measured using the Black Scholes model with inputs not materially different from those discussed below. The fair value of the Consultant Options is determined as services are rendered. As of December 31, 2018 (after the Share Split), 3 million of the Consultant Options have vested including 1.5 million with an exercise price of $2.83 (after the Share Split.) The fair value of the Consultant Options was computed using the Black Scholes method and not based on the value of the services received. In reaching the decision to use the value of the Consultant Options and not the value of the services, management considered the variability in the nature, timing and extent of services to be provided by the non‑employee consultants that will be significantly affected by actions taken by parties who are not under the control of the Group. Accordingly, the value and timing of the services to be received over the service period cannot be estimated reliably and therefore the value of the Consultant Options was deemed to be a more accurate measure of the consideration paid to the non‑employee consultants for services rendered. The weighted average fair value per Consultant Options applied for recognition of an expense during each of the years ended December 31, 2018, 2017 and 2016 was $0.16,  $0.63 and $0.60 (after the Share Split) respectively. The total expense recognized during each of the years ended December 31, 2018, 2017 and 2016 was $96,000,  $615,000 and $892,000  respectively.

In order to provide the Company’s former Chief Executive Officer with the ability to forgo exercising 89,000 warrants (891,000 million after the Share Split) warrants that were set to expire on January 1, 2016 (“Expiring Awards”), the board of directors, during the year ended December 31, 2015, granting of 89,000 warrants (891,000  million after the Share Split) (“Replacement Awards”) to replace the Expiring Awards.  The Replacement Awards have substantially similar terms as the Expiring Awards, except the expiration date was extended to March 31, 2021. The financial statement impact of the Extended Awards was not material.

The table below summarizes the activity for each of the years ended December 31, 2018, 2017 and 2016 for equity awards in the form of options and warrants and the weighted average exercise price (“WAEP”):

 

(*)Includes current and former senior management and current and former members of the board of directors.

 

The weighted average remaining contractual life of equity awards in the form of options and warrants outstanding as of December 31, 2018, 2017 and 2016 was 2.4 years, 3.2 years and 4.3 years respectively.

The table below summarizes the range of exercise prices, after converting, where applicable, exercise prices that are stated in DKK to USD, for outstanding equity awards in the form of options and warrants as of December 31, 2018, 2017 and 2016.

 

 

The tables below summarize the inputs to the model used to value equity awards, including modifications of equity awards, as well as the average fair value per option or warrant awarded or modified for each of the years ended December 31, 2018, 2017 and 2016:

 

 

 

 

The table below summarizes the deferred share activity for each of the years ended December 31, 2017 and 2016 (there were no deferred shares granted, issued or forfeited during the year ended December 31, 2018):

 

(*)Includes current and former senior management and current and former members of the board of directors.

Share‑based compensation expense included within operating results for each of the years ended December 31, 2018, 2017 and 2016 is as follows:

 

 

Significant estimation uncertainty regarding share-based payments

Determining the fair value, whether at grant date, modification date or the date of the Amendment, and the subsequent accounting for equity awards requires significant judgment regarding expected life and volatility of an equity award; however, as a public listed company there is objective evidence of the fair value of an ordinary share on the date an equity award is granted or modified. The expected life of an equity award is based on the assumption that the holder will not exercise until after the equity award is fully vested and all restrictions on the holders’ ability to dispose of the underlying ordinary shares expire. Actual exercise patterns may differ from the assumption used herein. The volatility rate used to value equity awards has been based on either peer group volatility, where the expected life of an equity award exceeds the Company’s historical trading data, or the Company’s volatility rate where historical trading activity of the Company equals or exceeds the expected life of an equity award. Using historical volatility rates to project future trends is a highly subjective estimate that may not necessarily be the actual outcome. The peer group consists of listed companies that management believes are similar to the Company in respect to industry and stage of development. Even with objective evidence of the fair value of an ordinary share, small changes in any other individual assumption or in combination with other assumptions could have yielded significantly different results.

3.4          Income tax

The major components of income tax benefit (expense) reported in the consolidated statement of profit and loss for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

 

The tax benefit recognized during the year ended December 31, 2018 of $204,000 is primarily due to a change in estimate relating to the prior year of $161,000 and the balance relates to changes in deferred tax balances during the period.

The current income tax expense for the year ended December 31, 2016 primarily relates to a change in estimate of the benefit obtained by Tech Growth’s utilization of the Company’s tax loss. The deferred income tax benefit recognized in 2016 was the result of management concluding at December 31, 2016 that it was probable the Group would have taxable profits in 2017, thereby enabling the Group to recognize certain deferred tax assets that historically did not meet the criteria for recognition. In reaching the conclusion to recognize deferred tax assets at December 31, 2016, numerous judgments were made including the close proximity of the date the License Agreement was executed to December 31, 2016 and the magnitude of the Non-refundable Fee compared to the projected total expenses for 2017. The deferred tax benefit recognized during the year ended December 31, 2016 was primarily related to net operating loss carryforwards (“NOLs”).

Taxable profits are not assured beyond the year ended December 31, 2017; therefore, temporary differences that will be available to offset taxable profits after December 31, 2017 do not meet the criteria for financial statement recognition and therefore the related deferred tax assets have not been recognized.

The income tax benefit (expense) recorded for the years ended December 31, 2018, 2017 and 2016 is reconciled as follows:

 

 

 

For Danish and United States tax purposes, the Company’s United States subsidiary does not conduct a trade or business and is therefore deemed to be a disregarded entity (“Disregarded Entity”). Accordingly, the United States subsidiary is not subject to income taxes in the United States. Recently enacted tax legislation in the United States had no impact on the Group.

 

Deferred tax

The unrecognized deferred tax assets at December 31, 2018 and 2017 are as follows:

 

 

The Group has the following unrecognized deductible temporary differences as of December 31, 2018, 2017 and 2016 respectively:

 

 

The Danish and German tax loss carry forwards have no expiry date. For Danish tax purposes, the Company’s ability to use tax loss carry forwards in any one year is limited to 100% of the first 8.2 million DKK ($1.3 million based on the December 31, 2018 exchange rate) of taxable income plus 60% of taxable income above 8.2 million DKK. For German tax purposes, the ability for FP GmbH to use tax loss carry forwards in any one year is also limited based on a formula not materially different from the limit used in Denmark. Other deductible temporary differences are not subject to any restrictions.

 

During each of the years ended December 31, 2017 and 2016, the Company recognized tax benefits within the consolidated statement of changes in shareholders’ equity of $6.3 million and $2.8 million respectively. The tax benefits were related to equity awards where the Company’s tax filing provided a benefit in excess of the corresponding share-based compensation recognized within reported operating results.

Joint Taxation Groups

During the period from January 19, 2013 to December 31, 2015, the Company was part of the Tech Growth joint tax group. Under applicable provisions of the Danish taxation law, the Company was entitled to obtain refunds at the prevailing tax rate from other entities within the Tech Growth joint taxation group who utilized tax losses of the Company. A subsidiary of Tech Growth Invest ApS experienced a change in ownership on December 31, 2015. The effect of the change in ownership resulted in the year ended December 31, 2015 being the final year in which the Company received a refund equal to the tax benefit realized by Tech Growth Invest ApS and other entities within the joint taxation group who utilized the Company’s tax losses. On January 1, 2016, the joint taxation group with Tech Growth ceased and the Company became part of the 2016 Tax Group. The Company remains jointly and severally liable with other entities in the Tech Growth joint taxation group for Tech Growth’s Danish tax liabilities during each of the years ended December 31, 2015, 2014 and 2013. The Company is jointly and severally liable under the 2016 Tax Group for Danish tax liabilities incurred by members of the 2016 Tax Group while being a member of the 2016 Tax Group.

Significant accounting judgments, estimates and assumptions

The Group recognizes deferred tax assets, including the tax base of tax loss carry‑forwards, if management assesses that these tax assets can be offset against future positive taxable income. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. This judgment is made periodically after considering current facts, circumstances, budgets and business plans as well as the risks and uncertainty associated with the operations of the Group. As facts and circumstances change, adjustments to previously made estimates will be made that could result in volatility in reported operating results and the occurrence of unforeseen events could have a material favorable or unfavorable effect on the financial statements of the Group.

The Group determined that previously unrecognized deferred tax assets should be recognized at December 31, 2016 as it was probable at that time that the Group would have sufficient taxable income in the year ending December 31, 2017 to utilize deferred tax assets recognized at December 31, 2016. Accordingly, this change in estimate had a material favorable effect on the consolidated financial statements as of and for the year ended December 31, 2016.

Tax uncertainties

The Group exercises judgment when determining the Group’s tax position. As discussed in more detail below, significant judgments were made when determining the tax treatment of Forward Pharma USA, LLC, transfer pricing and in determining tax deductibility of certain transactions. 

The Company’s Danish, German and United States tax returns are subject to periodic audit by the local tax authorities. Such audits could result in the tax authorities disagreeing with the tax filing positions taken by the Group which would expose the Group to additional taxes being assessed, including interest and penalties, that could be material. There are numerous transactions between the Company, Operations, FWP IP, FP GmbH and Forward Pharma USA, LLC where the tax authorities could challenge whether pricing of such transactions were at arm’s length. Management believes that appropriate tax filing provisions have been taken by the Company and its subsidiaries; however, there is always a risk that the tax authorities could disagree with the tax filing positions taken resulting in additional taxes, interest and penalty becoming due and such amount could be material.

The Company has taken the position that since Forward Pharma USA, LLC is deemed to be a Disregarded Entity, it is not subject to U.S. federal or state income tax. In reaching this conclusion, significant judgment was used in evaluating the nature of the operations in the U.S., the interpretation of the U.S. and Danish tax laws, and the income tax treaty between the U.S. and Denmark. Management believes that the tax filing provisions taken in the U.S. and Denmark regarding Forward Pharma USA, LLC are correct; however, there is always a risk that the U.S. or Danish tax authorities could disagree with the tax filing positions taken resulting in additional taxes, interest and penalty becoming due and such amount could be material.

As a result of the receipt of the Non-refundable Fee and the resulting taxable income in 2017, the Danish and German tax authorities have commenced tax audits of the Group’s Danish and German tax returns covering the five-year period ending December 31, 2017. The tax audits are expected to focus on the intercompany recognition of revenue and expense to ensure that such transactions were conducted at arm's length. There is a risk that the tax authorities could impose additional taxable income or disallow the deductibility of expenses on intercompany cross-border transactions resulting in higher tax obligations in one or more tax jurisdictions. Management's experience has been that the taxing authorities can be aggressive in taking positions that would increase taxable income and/or disallow deductible expenses reported. If the tax authorities are successful in increasing taxable income and/or disallowing deductible expenses in one or more jurisdictions, it would result in the Group experiencing a higher effective tax rate that could be material. Management believes that the tax positions taken with regards to intercompany transactions are in accordance with tax regulations and that appropriate tax provisions have been made in the accompanying financial statements; however, there is always a risk that the Danish and/or the German tax authorities could disagree with the tax filing positions taken resulting in additional taxes, interest and penalty becoming due and such amount could be material. The Danish and German tax authorities are conducting a joint tax audit of the Group's Danish and German tax returns. Conducting a joint tax audit is expected to reduce the burden and cost to the Group of undergoing two audits that address similar transactions and to accelerate the resolution of disagreements through the mutual agreement procedure ("MAP") by early involvement of Competent Authorities, if necessary. The timing of the tax authorities completing the joint audit is unknown and there is no assurance that the joint audit will achieve expected benefits.

During the year ended December 31, 2017, the Company made certain cash payments (the "Deduction") to equity award holders in accordance with amendments to the Company’s article of association that were approved by the Company’s shareholders and board of directors (see Note 3.3). The Company believes the Deduction, that totalled 36.2 million EUR  ($43.4 million based on the December 31, 2017 exchange rate), represents, for tax reporting purposes, compensation for services rendered to the Company and is tax deductible for Danish tax purposes for the year ended December 31, 2017. Management believes that the tax positions taken with regards to the Deduction is in accordance with tax regulations and that appropriate tax provisions have been made in the accompanying financial statements; however, there is always a risk that the Danish authorities could disagree with the tax filing positions taken resulting in additional taxes, interest and penalty becoming due and such amount could be material. There were similar cash payments made to equity award holders during the year ended December 31, 2018 that totalled 650,000 EUR ($761,000); however, such amounts are reflected herein as unrecognized deductible temporary differences at December 31, 2018 and disclosed above as unused tax losses in Denmark.

As of December 31, 2018, the tax years that remain open for audit by the Danish, German, and United States tax authorities include 2013 through 2018.

3.5         Net (loss) income per share

Basis for preparing per share amounts

The amounts disclosed below have been prepared to reflect the Share Split as if it had occurred at the beginning of the earliest period presented. In addition, the Capital Reduction was effected by the annulment of 80% of the ordinary shares outstanding and was deemed, for IFRS purposes, to have been at a 15% premium (the “15% Premium”) based on the trading price of an ADS immediately before the Capital Reduction was executed. The 15% Premium, as per IAS 33 Earnings per Share, is accounted for in a manner similar to the Share Split (as the outflow of resources was greater than the reduction in the number of shares outstanding) and reflected in the below amounts as if it had occurred at the beginning of the earliest period presented. The combined effect of the Share Split and the 15% Premium is as if a 11.5 for 1 share split had occurred at the beginning of the earliest period presented.

Net (loss) income per share

The following reflects the net (loss) income attributable to ordinary shareholders and share data used in the basic and diluted net (loss) income per share computations for each of the years ended December 31, 2018, 2017 and 2016:

 

 

Amounts within the table above are in thousands except per share amounts

Basic  (loss) income per share amounts are calculated by dividing the net (loss) income for the year attributable to ordinary shareholders of the Parent by the weighted average number of ordinary shares outstanding during the year. The diluted per share amounts are calculated by dividing the net income for the year attributable to ordinary shareholders of the Parent by the weighted average number of ordinary shares outstanding during the period increased by the dilutive effect of the assumed issuance of deferred shares and exercise of outstanding options and warrants. As the result of the Group incurring losses for each of the years ended December 31, 2018 and 2016, the potential shares issuable related to outstanding deferred shares, options and warrants have been excluded from the calculation of diluted per share amounts as the effect of such shares is anti-dilutive. As of December 31, 2018, 2017 and 2016, options, warrants and deferred shares that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted amounts per share because they are anti-dilutive, were 13.7 million, 8.2 million and 50.4 million respectively. See Note 3.3.