Notes to Unaudited Interim Condensed Consolidated Financial Statements

Section 1— Corporate information

1.1         Organization

Forward Pharma A/S (the “Company”) 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 (“FP USA”), Forward Pharma FA ApS (“FA”) and Forward Pharma Operations ApS (“Operations”), respectively. The Company and its subsidiaries are collectively referred to as the “Group.”

The unaudited interim condensed consolidated financial statements included herein do not include risk factors or other important information about the Group that can be found in the Company’s 2020 Annual Report on Form 20-F (“Annual Report”) filed with the United States Securities and Exchange Commission on April 14, 2021. Readers of the interim condensed consolidated financial statements included herein should read the Annual Report.

The Company's board of directors authorized the issuance of the interim condensed consolidated financial statements included herein on October 11, 2021.

1.2         Intellectual Property Proceedings and the Settlement and License Agreement

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”). The License Agreement provided Biogen with a co-exclusive license in the United States, and an exclusive license outside the United States to defined intellectual property of the Company. In accordance with the License Agreement, Biogen paid the Company a non-refundable fee of $1.25 billion (“Non-refundable Fee”) in February 2017.

See the Annual Report for additional information.

Opposition Proceeding Update

The Company’s European patent EP2801355 (“355 patent”) has been the subject of an opposition proceeding (“Opposition Proceeding”) brought by several opponents including Biogen. While Biogen has an exclusive license to the Company’s intellectual property outside the United States, including the 355 patent, the License Agreement did not resolve the Opposition Proceeding. The License Agreement allowed for the Opposition Division, the Technical Board of Appeal (the “TBA”) and the Enlarged Board of Appeal of the European Patent Office (the “EPO”), as applicable, to make the final determination as to the validity of the 355 patent and whether such patent should remain enforceable. As discussed in more detail in the Annual Report, the final determinations in the Opposition Proceeding would determine whether future royalties are due to the Company in accordance with the License Agreement.

On January 29, 2018, the Opposition Division of the EPO concluded the oral proceeding concerning the 355 patent and issued an initial decision in the Opposition Proceeding. The Opposition Division revoked the 355 patent 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. On July 8, 2019, the Company received notice from the EPO that the appeal would be heard by the TBA of the EPO on June 18, 2020 (the “2020 Hearing”).

The 2020 Hearing was postponed twice as the result of the ongoing novel coronavirus 2019 pandemic and was finally heard by the TBA on September 6, 2021. At the conclusion of the appeal hearing, the TBA dismissed the Company’s appeal of the previous decision of the Opposition Division to revoke the 355 patent. The TBA made its decision after considering the Company’s appeal against the decision of the Opposition Division and third-party submissions from several opponents. The TBA will issue detailed reasons for the decision in written form in due course, and following receipt and review of these, management will decide future plans for the Group. Such plan may involve a petition for review at the Enlarged Board of Appeal of the EPO in an effort to overturn the unfavorable outcome, but the likelihood of a petition for review being successful is low. The denial of a petition for review would end the Opposition Proceeding in favor of the opponents. For all practical purposes, such denial or the absence of a petition for review would represent an unsuccessful outcome of the Opposition Proceeding, resulting in no royalties being due to the Company from Biogen based on Biogen’s future net sales outside the United States, as defined in the License Agreement.

Section 2—Basis of Preparation

2.1         Accounting policies and basis of preparation

The unaudited interim condensed consolidated financial statements as of June 30, 2021 and for the six-month periods ended June 30, 2021 and 2020 have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report. In the opinion of management, the interim condensed consolidated financial statements as of June 30, 2021 and for the six-month periods ended June 30, 2021 and 2020 include all adjustments considered necessary for a fair presentation of the results of the interim periods presented. The statement of financial position as of December 31, 2020 included herein was derived from the audited consolidated financial statements included in the Annual Report but does not include all disclosures required by International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”). The accounting policies disclosed in the Company’s audited consolidated financial statements included in the Annual Report are consistent with those used to prepare the accompanying interim condensed consolidated financial statements. The results of operations for the six-month period ended June 30, 2021 are not necessarily indicative of the results expected for the full year.

Unless otherwise stated, all amounts disclosed herein are in United States Dollars (“USD”) and are rounded to the nearest thousand (`000).

There have been no significant changes to the critical accounting policies as disclosed in the Annual Report.

The Group’s condensed consolidated financial statements included herein are presented in USD, which is not the functional currency of the Company. The Group’s financial statements are presented in USD as the result of the Company publicly listing American Depositary Shares (“ADSs”) in the United States. The Company, Operations and FA’s functional currency is the Danish Kroner (“DKK”), FP GmbH’s functional currency is the Euro (“EUR”), and FP USA’s functional currency is the USD.

2.2        New and amendments to accounting standards

Standards effective in 2021:

The IASB issued a number of amendments to standards that became effective in 2021 (“2021 Amendments”). None of the 2021 Amendments 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, 2022 (collectively “New Standards”). None of the New Standards are currently expected to be relevant to or have a material effect on the Group’s consolidated financial statements.

Section 3—Results for the Year

3.1         Share-based payment

Share-based compensation expense included within operating results for each of the six-month periods ended June 30, 2021 and 2020 is as follows:

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See Note 5.1 for information regarding warrant exercises during April 2021.

3.2         Income tax

Income tax audits in Germany and Denmark

The Danish and German tax authorities were conducting a joint tax audit of the Group’s Danish and German income tax returns covering multiple years through the year ended December 31, 2017. The joint tax audit focused primarily on one intercompany transaction that occurred in 2017 between the Company and FP GmbH (the “Transaction”) to ensure the Transaction was conducted at arm’s length. The Danish and German tax authorities have been unable to reach agreement whether the Transaction was conducted at arm’s length and have terminated the joint audit as the result of the impasse.

Tax audit in Germany

On May 21, 2021, the German tax authorities issued a preliminary audit assessment (the “Preliminary Assessment”) that proposes an increase to FP GmbH’s 2017 taxable income of 265.0 million EUR to 312.1 million EUR ($314.9 million and $370.9 million, respectively, based on the June 30, 2021 exchange rate) The Preliminary Assessment alleges that the Transaction was not conducted at arm’s length. The Company and FP GmbH disagree with the positions taken by the German tax authorities and intend to vigorously defend that the Transaction was conducted at arm’s length and no additional income taxes are due in Germany. FP GmbH has submitted a formal response to the Preliminary Assessment arguing that the Transaction was conducted at arm’s length and why the Preliminary Assessment is incorrect. Management expects the German tax authorities will issue a final assessment, with few or no changes to the Preliminary Assessment, and levy a tax assessment against FP GmbH that is expected to be material to FP GmbH and the Group. Assuming FP GmbH’s taxable income is increased by 265.0 million EUR and offset by FP GmbH’s available net tax loss carryforwards of 11.9 million EUR ($14.1 million based on the June 30, 2021 exchange rate), using the German effective tax rate of 31.9%, and before any applicable interest and/or penalties, this would result in a tax levy of approximate 81 million EUR ($96 million based on the June 30, 2021 exchange rate.)

Management continues to believe that it is probable (i.e., more likely than not) that FP GmbH will not be required to pay additional income taxes to the German tax authorities upon the conclusion of a Mutual Agreement Procedure (“MAP”) and/or litigation against the German tax authorities; however, such determination is inherently subjective and, if it is incorrect, then FP GmbH may be subject to significant additional tax levies that would have a material negative effect on FP GmbH and the Company’s consolidated financial position, operating results and cash holdings.

In the event of a negative outcome in the tax audit and subject to the Group’s ability to get relief from double taxation, an increase in FP GmbH’s taxable income would be taxed at the German effective tax rate of 31.9% while reducing the taxable income in Denmark that was taxed at 22.0%. FP GmbH has available tax loss carryforwards of 11.9 million EUR that could be used to mitigate an increase in FP GmbH’s taxable income. Therefore, an increase in FP GmbH’s taxable income, that is not covered by FP GmbH’s tax loss carryforwards and not subject to minimum taxation rules in Germany, would result in a net increase in the Group’s income tax expense at a rate of approximately 10 percentage points. Assuming FP GmbH’s taxable income is increased by 265.0 million EUR, as set out in the Preliminary Assessment, and offset by FP GmbH’s available tax loss carryforwards of 11.9 million EUR, subject to the Group’s ability to obtain relief from double taxation in Denmark of 58 million EUR ($69 million based on the June 30, 2021 exchange rate), it is estimated that the net increase in the Group’s income tax expense, will be approximately 23 million EUR ($27 million based on the June 30, 2021 exchange rate) before applicable interest and/or penalties.

Section 4—Operating Assets and Liabilities

4.1          Prepaid expenses

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4.2          Other receivables

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4.3         Cash and cash equivalents

As of June 30, 2021 and December 31, 2020, the cash and cash equivalents of the Group are held primarily at two banks that currently have Moody’s long-term deposit ratings of Aa2 and Aa3, respectively.

4.4         Accrued liabilities

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Section 5—Capital Structure and Related Items

5.1         Share capital

In April 2021, the Company issued 1.8 million ordinary shares in connection with the exercise of an equal number of warrants. Proceeds to the Company from the warrant exercises totaled $3,000.

As of June 30, 2021, there are 98.3 million ordinary shares outstanding.

Section 6—Other Disclosures

6.1         Related party disclosures

The Company is controlled by NB FP Investment K/S and its affiliates (collectively, “NB”). The ultimate controlling party of the Company is Mr. Florian Schönharting who controls NB.

A director of the Company is a partner at the law firm that provides Danish legal services to the Group. Remuneration paid to the law firm is referred to below as “Danish Legal Services.” The director serves on the Company’s board of directors in his individual capacity and not as a representative of the law firm.

On October 10, 2016, a member of the Company’s board of directors entered into a four-year consulting agreement with the Company. The consulting agreement provided for the granting of 121,000 deferred shares (“Deferred Shares”) as the director’s full compensation for the performance of services as defined in the consulting agreement. The Deferred Shares vested in equal increments annually over a four-year period that ended on October 10, 2020. Share-based remuneration recognized in the accompanying consolidated financial statements in connection with the Deferred Shares is referred to in the table below as “Consulting Services.”