7015 College Blvd, Level 6
Overland Park, Kansas 66211
Tel: 913-274-2100

(Name, Telephone, E-mail and/or facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2016, 18,145,760 ordinary shares, no par value, were issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No x

The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Except for the historical information contained in this annual report on Form 20-F, the statements contained in this annual report are “forward-looking statements” which reflect our current view with respect to future events and financial results.

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. Forward-looking statements represent management’s present judgment regarding future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks include, but are not limited to, risks and uncertainties regarding our research and development activities, our ability to conduct clinical trials of our product candidates and the results of such trials, as well as risks and uncertainties relating to litigation, government regulation, economic conditions, markets, products, competition, intellectual property, services and prices, key employees, future capital needs, dependence on third parties and other factors. Please also see the discussion of risks and uncertainties under “Risk Factors” contained in Item 3.D. of this Annual Report.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this annual report might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document.

The following summary consolidated financial data for the years ended December 31, 2016 and 2015, six-months ended December 31, 2014, and years ended June 30, 2014 and 2013 are derived from the audited consolidated financial statements of Parnell Pharmaceuticals Holdings Ltd prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (“IFRS”) included elsewhere in this annual report on Form 20-F. The summary consolidated financial data for the year ended December 31, 2014 and six-months ended December 31, 2013 are derived from the unaudited consolidated financial information of Parnell Pharmaceuticals Holdings Ltd which is not included in this annual report on Form 20-F.

Our historical results are not necessarily indicative of the results that may be expected for any other future period. Unless otherwise specified, all amounts are presented in Australian Dollars (AUD).

You should read the selected consolidated financial data set forth below in conjunction with Item 5, “Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this annual report.

The following table shows, for the years and dates indicated, certain information concerning the rate of exchange of U.S. dollars per Australian dollars based on using the Reserve Bank of Australia rate (the “RBA rate”). The exchange rate in effect on March 29, 2017, as per the RBA was AUD 1.00 = $0.7644.

Our business faces significant risks. You should carefully consider the risks described below, as well as the other information contained in this annual report, including our financial statements and related notes. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently think are immaterial, occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our ordinary shares could decline, and you may lose part or all of your investment.

We have incurred a loss for the fiscal years ended June 30, 2014, the six-month period ended December 31, 2014, the fiscal years ended December 31, 2015 and December 31, 2016. If we do not increase our revenues and/or reduce our costs, we will continue to incur losses and may be reliant upon external capital in order to continue to fund our operations. Failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

In order to access global revenue opportunities and fund the investment in our product candidate pipeline, we divested certain legacy products and in part used the proceeds therefrom, along with debt financing and private placements, to expand our operating footprint, including the construction of our U.S. Food and Drug Administration, or FDA, inspected sterile manufacturing facility in Sydney, Australia. In addition, we have invested in the establishment of a U.S. sales and marketing presence and we have increased our research and development investment in our pipeline products. As a result of the divestiture and our investments in major growth assets, our revenues increased, our expenses increased and we have incurred losses. In order to become profitable, we will need to either reduce our costs and/or increase our revenues, including our reproductive hormones products and companion products in the U.S. and other markets. If we do not sufficiently reduce our costs and/or increase our revenues, then we will continue to incur losses and may need to seek additional funds through public or private equity or debt financings or other sources, such as strategic collaborations. Such financings may result in dilution to shareholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to access additional capital as required, we may be required to delay, limit, reduce or terminate our operations, research and development activities and commercialization efforts.

Sales of our existing reproductive hormones and osteoarthritis, or OA, products may decline as a result of increased competition and other market factors.

At least in the near term, we are depending on sales of our reproductive hormone products, our osteoarthritis products, and contract manufacturing for revenues and profits. All three product portfolios can be susceptible to pricing and competitive pressures.

In the Middle East, which accounted for approximately 31%, 9% and 6% of our revenues for the six-months ended December 31, 2014 and fiscal years 2015 and 2016, respectively, and in Canada, which accounted for approximately 0%, 6% and 0% of our revenues for six-months ended December 31, 2014, and fiscal years 2015, and 2016 respectively, we are dependent upon distribution partners to market and sell our reproductive hormone products. In the Middle East, Canada, Australia and New Zealand, we have a relatively mature product offering in relatively mature markets. In those markets where we have no direct sales presence (Middle East and Canada), we have a limited ability to directly grow the market for our products. As a result of these competitive market pressures, we may see a decline in market share and, as a result, a decline in our revenue.

The market for our OA products is highly competitive. We currently sell Zydax in Australia and Glyde in Australia and the U.S., but both of these markets have multiple competitive offerings, especially in the nutraceutical segment in which Glyde operates. Because the nutraceutical segment is less regulated than pharmaceuticals, competitors can advertise various claims to sell their products which can cause confusion in the market about individual product comparisons. Although all products which claim to treat or cure a disease or condition (including nutraceuticals) are required to be registered with the Australian Pesticides and Veterinary Medicines Authority, or APVMA, in practice there are a number of products which are not, especially in the U.S. where nutraceuticals are not specifically regulated by the FDA. As such, some competitors may make unjustified claims that to the untrained recipient or consumer seem believable. Thus competition in this product category in particular manifests as both other technologies/drugs but also a multitude of other competitive offerings that may not have to act to the same standard as we do. As OA is seen as a lucrative market, there is a strong attraction for new competitors to enter that market. While we have been able to grow our sales for our OA products in most years, we may not be able to continue to do so and we may see our existing revenues of Zydax and Glyde decline in future years due to increased competition.

Zydax, our most advanced product candidate, may take longer to, or may never, receive regulatory approval in the U.S., Europe or in any other significant market.

Our business model calls for growth, at least in part from the approval of our product candidates, including Zydax for the treatment of OA in dogs. In order to obtain approval of Zydax for the treatment of OA in dogs, we are required to submit to the FDA’s Center for Veterinary Medicine, or CVM, three of the major sections of our dossier including Safety, Efficacy, and Chemistry and Manufacturing Controls, or CMC. We have requested a waiver for the Environmental Assessment. The Safety section has been completed, submitted and approved by the CVM. We must now fulfill the requirements of the two remaining sections. In particular we must successfully complete a pivotal efficacy study and submit a Drug Master File, or DMF, (among other components). Both of these undertakings bear risk of not being successful or may take longer than we currently anticipate and/or cost more than projected. It may also be that the FDA or the European Medicines Agency, or EMA, or both will fail to grant approval.

We will require partners to distribute and market our products in those markets where we do not have or do not expect to have a direct presence.

We currently have the capability to market companion animal and production animal drugs in those markets where we have an existing presence, but we are reliant on partner organizations to distribute and market our products, including Zydax for dogs, in those markets where we do not currently have a presence or we do not expect to establish a presence. Prior to obtaining approval of Zydax for dogs in the EU, we would need to identify a distribution strategy including potentially appointing a partner in those markets where we are unrepresented. While we are aware of a large number of organizations that could likely be effective in distributing and marketing our products, we have not appointed a specific partner. Failure to negotiate a marketing agreement with a partner organization may result in a delay in the launch of Zydax upon approval.

The loss of products or delays in product availability from our manufacturing facility could substantially harm our business.

We currently manufacture all of our products in our manufacturing facility located in Sydney, Australia. This facility currently has approximately 64% available capacity, is approved by multiple regulators, and has been inspected by the FDA. Despite the current operations of this facility being compliant and meeting our forecasted demands for several years to come, there can be no assurance that our manufacturing facility will be able to meet our supply obligations when needed. We face the following risks:

We have no timely ability to replace our current manufacturing capabilities.

If our manufacturing facility suffers any type of prolonged interruption, whether caused by regulator action, equipment failure, critical facility services (such as water purification, clean steam generation or building management and monitoring system), fire, natural disaster or any other event that causes the cessation of manufacturing activities, we would be exposed to long-term loss of sales and profits. There are limited facilities which are capable of contract manufacturing some of our products and product candidates. For example, our estroPLAN product contains a highly potent active ingredient and hence requires specific containment capabilities. In addition, if we were able to find a contract manufacturer capable of supplying our needs, it takes considerable time to launch the manufacture of any product and is costly. Replacement of our current manufacturing capabilities will have a material adverse effect on our business and financial condition.

The Active Pharmaceutical Ingredient, or API, for all our products and product candidates is supplied by contract manufacturers. If these third party suppliers discontinue our supply relationship or are unable to supply our needs on a timely basis or on terms and conditions acceptable to us, we may experience disruption to the continuation of our sales.

We do not manufacture any of the API for any of our products or product candidates and we are therefore entirely dependent upon contract manufacturers to supply us with our API requirements. Our third party suppliers may become unable to supply us with stock that meets our specifications or within our required delivery timelines. We may also be subject to capacity constraints of our suppliers which may disrupt our ability to efficiently manufacture our products. If these or any other such risks occur, our ability to timely and efficiently manufacture our products will be delayed, or our costs may increase, including with respect to additional expenses resulting from mitigation such as rush charges and air freight, and our business, financial condition and results of operations may be materially adversely affected.

Some of our product candidates require our contract manufacturers to develop manufacturing processes for development of our API. These processes may result in manufacturing delays and increased costs.

For some of our product candidates there is likely to be no current supplier of the API needed given the proprietary nature of their chemical structure and formulation. This will therefore require us to engage the services of a contract API supplier. These suppliers may be difficult to identify and they may not have the requisite experience to specifically synthesize our APIs or the ability to develop a robust and reliable manufacturing process that is scalable for commercial purposes. The costs associated with this process could be higher than we expect and we may be required to expend funds at our risk and with no certainty of success. Due to some of our pipeline projects being early stage, we also have no specific indication of what the cost will be to supply the API at commercial scale and as a result our expected cost of goods may be higher than we anticipate which may decrease our potential profits. In addition to unforeseen cost increases of development and supply, we may experience delays in gaining approval as a result of the API development process which could delay the time to which we could potentially derive revenues from our pipeline product candidates.

We have supply agreements in place for the API contained in our estroPLAN® and GONAbreed® products. If these contractual arrangements terminate or are otherwise not renewed, our ability to timely acquire the necessary API will be impaired and may result in a material adverse effect on our business and financial condition.

We have signed long-term supply agreements for the API contained in our estroPLAN and GONAbreed products. The estroPLAN API is supplied by Piramal Healthcare (UK) Ltd. under a supply agreement that has one year remaining on the current renewal term, and GONAbreed is supplied by Bachem A.G. in Switzerland under an agreement that has about two years remaining of the initial term. We have previously renewed supply contracts with both these parties but in the event that these arrangements are not renewed or otherwise terminated, it may take us considerable time to identify a new supplier and have the FDA, or other regulatory bodies, approve such a supplier. As a result, we may be precluded from selling our reproductive hormone products in some or all of our currently approved or future markets until such a time that an approved manufacturer is able to supply us with API. Due to estroPLAN and GONAbreed currently being the source of the majority of our revenues, representing AUD$3.0 million for the six months ended December 31, 2014, AUD $11.1 million in fiscal year ended December 31, 2015 and AUD $13.8 million in fiscal year ended December 31, 2016, until such time as we have additional products approved, any delay in the supply of the API for these products would have a significant impact on our business, financial condition and results of operations.

We currently utilize third party providers to undertake certain aspects of our R&D operations. If there is an interruption in such service or if our third party researchers are unable to adequately fulfill our research needs, we may experience delays in advancing our pipeline of product candidates.

For some aspects of our product development we utilize third party service providers. In particular for primary research, including formulation development we have partnered with various academic institutions. These facilities also undertake certain studies for us into the mode of action of some of our product candidates. We also utilize contract research organizations, or CROs, to undertake our target animal safety studies and other aspects of the safety dossier including pharmacokinetics studies and concomitant use safety studies. All of these service providers are selected based on capability and resources but there is no guarantee or certainty that they can perform to the level they purport. If we experience an interruption in these relationships or if our CROs are unable to deliver the outcomes they asserted they could, we may suffer delays to our development projects and/or increased expenditures.

We utilize marketing partners in many of our markets and as a result our sales performance is largely dependent on the performance of these local partners.

We currently sell our companion animal and production animal drugs in 11 countries. We use local marketing partners to sell our reproductive hormones in Canada, United Arab Emirates, Saudi Arabia, Turkey, Israel and Kenya. In all situations we are entirely dependent on the capabilities and business practices of our partners to successfully market and sell our drugs. We typically have a certain level of engagement with our partners and do offer promotional and clinical science capabilities to our partners but for daily operations we are still reliant on them to conduct business on our behalf. If these partners do not perform we have a limited ability to rectify the issue as in some cases a local company must hold the registration and it can be difficult to take back the marketing rights given local laws can heavily favor and protect local businesses such as in the Middle East. Similarly, if we do elect to take back our products and either market them in our own right or appoint new marketing and distribution partners, the incumbent may seek to undertake punitive actions and we would have limited ability to stop them. Even if we took legal action, in many countries the court systems can be highly complex and inefficient which may cause us to expend resources and funds on rectifying the situation and in some cases the resolution was not necessarily our desired outcome.

Our operating results may fluctuate due to factors outside of management’s control.

Our operating results may significantly fluctuate, and you should not rely on them as an indication of our future results. Our future net sales and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management’s control. The most important of these factors include, but are not limited to:

We may be unable to reduce operating expenses quickly enough to offset any unexpected shortfall in net sales. If we have a shortfall in net sales without a corresponding reduction to our expenses, operating results may suffer. Our operating results for any particular period may not be indicative of future operating results.

Our market is highly competitive, and failure to compete successfully could have a material adverse effect on our business, financial condition and results of operations.

The sale and distribution of animal health products is highly competitive, continually evolving and subject to technological change. We compete directly with both geographically diverse and regional animal health product manufacturers, as well as companies that promote over-the-counter drugs directly to animal owners and veterinarians. Additionally, certain drug product manufacturers currently compete through the direct marketing of products, and other manufacturers may decide to do so in the future. We compete with numerous manufacturers and distributors based on customer relationships, service and delivery, product selection, price and e-commerce capabilities. In the U.S., we currently utilize two primary third-party distributors, MWI Veterinary Supply, Inc and Animal Health International, Inc. to provide logistics services. These two companies currently provide logistics services to the majority of ship-to livestock producer and large animal veterinary clinic locations. As a result of recent mergers and acquisitions, these two companies may exert market influence across a large cross-section of livestock producers and veterinary clinics. They may be able to use this influence to position our competitors’ products rather than our products. Some of our competitors have greater financial and other resources than we do. Many of our competitors have comparable product lines or distribution strategies that directly compete with ours. Our potential competitors include large animal health companies, such as Zoetis, Inc.; Merck Animal Health, the animal health division of Merck & Co., Inc.; Elanco, the animal health division of Eli Lilly and Company; Bayer Animal Health, the animal health division of Bayer AG; Boehringer Ingelheim Animal Health, the animal health division of Boehringer Ingelheim GmbH; Virbac Group; Ceva Animal Health; Vetoquinol and Dechra Pharmaceuticals PLC. We are also aware of several smaller early stage companies that are developing products for use in the animal health market. If we do not compete successfully against these organizations, it could have a material adverse effect on our business, financial condition and results of operations.

Our pipeline products, other than Zydax in the U.S. and EU, are all early stage development projects and there is no clinical data to support their likelihood of success.

A significant component of our future sales growth is dependent upon the successful approval and commercialization of our pipeline product candidates to achieve substantial revenue and profit uplift. All of our pipeline opportunities including PAR121, PAR122, are early stage compounds in pilot stage. None of them have substantive clinical efficacy or safety data in our targeted animal species and these compounds have not had a definitive formulation developed. The clinical studies completed to date for PAR121 and PAR122 may not be indicative of efficacy when studied under more rigorous and robust experimental conditions. As a result, we may not be able to transform the product concept into a feasible drug product that can be administered in-vivo or manufactured at scale to produce a stable product. If all of our pipeline opportunities fail, we will be dependent on our currently approved drugs to deliver revenue and profit growth and/or we will need to identify additional projects to commence. Accordingly, we may need to raise more capital to undertake additional projects.

Multiple other companies are developing new product offerings to treat OA in dogs.

The OA market for dogs is a large and attractive market for drug companies and a multitude of companies producing alternative therapies including nutraceuticals and over-the-counter products. There are already many competitive offerings in the OA market. Potential new drug products include offerings from companies such as Aratana Therapeutics and Nexvet. There is also likely to be other potential product offerings that we are not yet aware of. There may also be technologies in development that are superior to, or obviate, the need for a disease modifying treatment such as Zydax. If such technologies came to market, we may experience a decline in sales.

The demand for production animal health products is heavily dependent upon consumer demand for beef and dairy products. The food industry in general is subject to changes in consumer demand, trends and preferences. Trends within the food industry change often and our failure to anticipate, identify or react to changes could lead to, among other things, reduced product demand and subsequent price reductions for our animal health products, which could have materially adverse effects on our business.

Consolidation in the animal health industry may decrease our net sales and profitability.

Consolidation in the animal health industry could result in existing competitors increasing their market share, which could give them greater pricing power and portfolio bundling opportunities and the ability to block market access into large livestock producers and veterinary clinics thereby leading to a decrease in our net sales and profitability and increasing the competition for our customers. Furthermore, as our current customers consolidate, they may make changes in purchase practices and potentially result in the loss of our existing business or lower prices for our products.

Changes in distribution channels for our products could negatively impact our market share, margins and distribution of our products.

Historically, animal owners (companion animals and production animals) have purchased animal health pharmaceuticals through their veterinarians. This has changed substantially in recent years with large producers now buying directly from distributors or from pharmaceutical companies themselves. Similarly for companion animal owners, there have been changes in regulations in many countries that have allowed non-veterinary outlets to supply pharmaceuticals directly to the public on the prescription of a veterinarian. This can have the effect of reducing the revenues for veterinary clinics that correspondingly aim to improve their profitability by exerting pressure on pharmaceutical companies to offer them lower prices as a means to compete against large retailers and online distributors. Legislation may come into effect in our markets that compels a veterinarian to disclose to their clients that they can fill prescriptions through a third party. The American Veterinary Medical Association, or AVMA, has a policy to encourage this practice.

The trend to purchase medications from non-veterinarian channels could negatively impact our sales and marketing channel through veterinarians. Historically, we have relied upon our veterinarian sales channel to diagnose new patients and to disseminate information about our company and products. If there is an increasing shift away from this practice, then our ability to supply information and attract new customers could require us to undertake direct to consumer marketing activities as an alternative selling and promotional strategy which could be expensive and potentially less effective. Any such alternatives may have a materially adverse effect upon our financial condition and results of operations.

Consolidation of our customers could negatively affect the pricing of our products.

We rely on veterinarians as a primary point of distribution for our products. In many countries, the typical suburban veterinary practice is owned by a veterinarian who is approaching retirement age. This has led to the emergence of veterinary practice consolidators such as Greencross in Australia, VCA Antech in the U.S., and also the emergence of branded, corporate style clinics such as Banfield. In addition, we have seen the emergence of large, buying groups of multiple veterinary practices pooling their purchasing power. These large, aggregated veterinary practice groups of various descriptions typically seek to improve their margins by causing suppliers, including pharmaceutical companies, to offer lower prices, rebates or other forms of discounts. As a small company, we have limited ability to resist such pricing pressure which may in turn reduce our margins and profitability or we may lose sales altogether if we cannot compete on price.

Our current indebtedness could adversely affect our financial condition and ability to fulfill our debt obligations and otherwise adversely impact our business and growth prospects.

As of December 31, 2016, we had outstanding indebtedness of approximately AUD$29.8 million. Such remaining or any future indebtedness could have important consequences to you. For example, it could:

Our ability to make payments on and refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. We cannot assure you that our business will generate sufficient cash flow or that future borrowings will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs. If we do not generate sufficient cash flow, additional borrowings or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.

In addition, the agreements governing our indebtedness include certain covenants that, among other things, restrict our ability to incur additional indebtedness, make certain payments, sell assets, enter into certain transactions with affiliates and create liens. Moreover, certain of these agreements require us to achieve specified EBITDA targets and maintain specified cash balances over the life of the loan. These and other covenants in our current and future agreements may restrict our ability to fully pursue our business strategies and adversely affect our growth prospects. Our ability to comply with such covenants may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events beyond our control. The breach of any of these covenants could result in a default under our indebtedness, which could cause those and other obligations to become due and payable.

We may be subject to product liability and other claims in the ordinary course of business.

We distribute products that are manufactured exclusively by us. As a result, we face the risk of product liability and other claims in the ordinary course of business, including complaints regarding marketing materials and promotional claims that we make about our products. We maintain product liability insurance policies; however, our ability to recover under the policies is subject to the terms of such arrangements and the financial viability of the insurers. We do not, however, maintain policies specifically insuring against clinical trial liability. We cannot assure you that our insurance coverage will be available or sufficient in any future cases brought against us.

Our products may cause injury or death to an animal or human and expose us to significant compensation claims.

Our products are designed and intended to be both efficacious and safe for the animals in which treatments are targeted. We cannot have any degree of certainty as to how our products will affect all animals. Our drugs may be used off-label and without our knowledge. In either case, an animal may suffer minor, major or catastrophic side-effects from our drugs. As a result of such events, we may be exposed to product liability claims from animal owners and potentially from veterinarians. Some of our products may be potentially dangerous to human beings. For example, estroPLAN (as with all prostaglandin F _2α, or PG, drugs) is known to cause abortive effects on pregnant women, potential respiratory effects in humans, and is easily and rapidly absorbed through the skin. Because estroPLAN is administered in a field setting, the potential for product container breakage and inadvertent human contact may occur. Likewise, our personnel who manufacture estroPLAN or who utilize it in a clinical trial setting may be exposed to the risks of estroPLAN and its active ingredients. While we label our products and take precautionary steps during the manufacturing process including educating our staff to the potentially harmful effects, we cannot prevent all possible situations that may cause human exposure to estroPLAN. We currently do not know the user-safety profile of our pipeline drugs and do not know what the animal safety profile will be. Even if we undertake animal safety and user safety studies, we may not know the full safety profile of a drug for many years after gaining approval. As a result, we may be exposed to both patent and latent compensation claims for many years to come, the costs of which could be significant.

Some of our products are hormones, and their use may be seen as controversial.

Our reproductive hormones are exact replicas of naturally occurring peptides or analogues of naturally occurring prostaglandins and maybe commonly referred to as hormones. There is an increased public sensitivity around the use of growth promoting hormones in production animals and increasingly foods may be labelled as “hormone free.” While our products are not growth promoting, have an extremely short half-life and have been shown to have no residue in meat or milk, the public may nevertheless react to the use of our products and other products in the same class of drugs and apply market pressure to diminish or reduce the use of our products in dairy or beef cows. This could have a significant and long term impact on the market size for our products and we would likely be impacted along with all participants in the market. This would reduce our revenues and profits.

We are currently dependent to a significant degree upon the ability and experience of our President and Chief Executive Officer Robert Joseph and Chief Financial Officer Brad McCarthy. We currently have employment agreements with these executives that contain non-competition restrictions following termination of employment. These senior executive officers collectively hold 11.4% of our ordinary shares all of which is fully vested and unrestricted. As a result, our senior staff may not have an adequate incentive to remain employed with us or continue to meaningfully grow the business. If these senior executives were to leave, equity holders might see a devaluation of their ordinary shares because the loss of any of their experience and knowledge which could adversely affect our ability to conduct our operations or to achieve growth through acquisitions. See “Management.”

Many of our staff are located in Australia which has a rigorous industrial relations statutory framework that may expose us to industrial action and governmental sanctions.

Australia has a complex industrial relations environment that is prone to significant litigation and protections for employees both under the Australia Fair Work Act and other legislative provisions. This industrial relations framework may expose us to industrial or strike action by our staff, and they may seek to take action under the Fair Work Australia commission seeking to claim certain or additional entitlements. Currently we expect that our employment contracts are compliant with all legislative provisions and provide all statutory entitlements. However, we have experienced events in the past where current or former employees have sought to take action under various employment law provisions which has caused us to incur significant legal fees and may have exposed us to fines and governmental sanctions. We have no certainty that such actions may not occur in the future which would cause unexpected expenditure and consume internal resources potentially disrupting other parts of our business.

We presently report our earnings in Australian dollars, yet the majority of revenues are derived in U.S. dollars and to a lesser extent in Canadian and New Zealand dollars. A significant appreciation of the Australian dollar would decrease our revenues and profits.

We are exposed to foreign currency fluctuations and do not maintain structured hedging positions to protect us from currency movements. We typically utilize forward exchange contracts to convert future, known or expected sales in U.S. dollars into Australian dollars at predetermined rates. These activities can provide some level of certainty as to the actual exchange rate we will receive but do not ensure that we are able to convert foreign currencies into Australian dollars at the rate that we may have expected or budgeted for. As a result we may be deleteriously impacted by significant movements in the value of the Australian dollar. From time to time this will reduce our Australian dollar denominated corporate earnings and may reduce the value of dividends paid in Australian dollars to investors located outside Australia.

We have limited redundancy built into our Information Technology, or IT, systems.

The continuing daily operation of our business is heavily dependent on our IT systems. In particular we operate an Enterprise Resource Planning, or ERP, software platform (Navision®) and we maintain a typical hardware and network architecture across our two operating premises in Sydney and Kansas City as well as connecting our remote staff across Australia, New Zealand and the U.S. We utilize our ERP system on a daily basis to maintain our financial systems and we also utilize it for manufacturing purposes. An interruption to the provision of this service would substantially reduce our ability to transact sales and make payments and would interrupt our ability to manufacture and release product. We operate a typical IT infrastructure protection and back-up system and our data can typically be reinstated rapidly; however, we currently have limited built-in hardware redundancy capabilities and until such time as we implement a more robust system the availability of our systems could be compromised for several weeks. Similarly, we currently have systems to prevent malicious infiltration of our hardware and data systems but we cannot be certain of their effectiveness. Because we maintain private information about our customers including financial information such as credit card details and their animal health records, such infiltration may expose our customers to misuse of their personal information which could in turn expose us to legal proceedings instituted by our customers for failing to adequately protect their information. Proceedings or investigations may also be instituted by various government bodies that are responsible for privacy and/or data protection in certain jurisdictions which could also lead to significant fines or civil penalties.

We have limited patent protection for our products. While we have applied for and intend to continue applying for patents, our patent applications may never be granted or, if granted, may be reduced beyond our current expectations, which could result in no, or reduced intellectual property protections which could expose us to increased competition and materially impact our business, financial condition and results of operations.

We currently have limited patent protection for all of our pipeline product candidates. We have, or our licensing partners have, made various applications which may never result in effective patent coverage. For most of our product candidates, there is already an existing array of prior art that may preclude us from filing or succeeding at patent examination due to lack of inventiveness which would mean that any patents we seek may never be granted. Once we file our patent applications it typically takes several years before our applications are granted and in that time the patent landscape can alter significantly. The actual process of preparing patents is expensive and time consuming and prone to a significant reliance on the skill of the patent writer. In most cases we engage legal counsel and other service providers to write our patents and we are therefore exposed to their individual skill levels and mistake or errors or omissions that they make will potentially render our patent position useless. Patent examiners are also prone to variability and subjectivity and the cost and time for us to prosecute our filings is typically substantial running into many hundreds of thousands of dollars with no significant ability to predict the outcome. Even when our patents are granted we remain exposed to other companies or individuals filing objections or challenging our patent positions through court proceedings which would cost us a significant amount of money and internal resources to defend or to prosecute others if we believe they are infringing our patents.

Patent applications we have filed in our major markets may not result in issued patents and/or the patent may be challenged based on prior art.

We have filed patent applications that cover various aspects of Zydax, including composition of matter patent and method of manufacture. Various patents have been issued in Australia and New Zealand and a number of other countries. Additional applications are pending in multiple jurisdictions. There is a risk that our patent applications in other jurisdictions may not be granted. In addition, competitors may seek to challenge our issued patents and may be successful. This may lead to competitor generic copies of Zydax entering the market and we may experience a reduction in sales and profits.

If third parties claim that we infringe upon their intellectual property rights, our operating profits could be adversely affected.

We face the risk of claims that we have infringed third parties’ intellectual property rights, including trademarks, trade dress, and patents. Third parties may claim that our company name and logos, or the names and logos of our proprietary branded products infringe their trademarks and/or trade dress and/or that our products infringe such third parties’ patented animal health products.

The complexities of the technology involved in patents and associated litigation as well as for trademarks increase the risk of business assets and management’s attention being diverted to intellectual property litigation. Any claims of patent or other intellectual property infringement, even those without merit, could:

We cannot assure you that our company name or any of our current or future product candidates will not infringe existing or future patents or trademarks. Because we have not conducted a formal freedom to operate analysis for patents related to our products, we may not be aware of patents that have already issued that a third party might assert are infringed by one of our current or future product candidates. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Because patent applications can take years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we would infringe.

Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, stop the sale of certain products, or change the name of our company or certain products, any of which could have a negative impact on our operating profits and harm our future prospects.

In addition to infringement claims against us, if third parties have prepared and filed patent applications in the U.S. that also claim technology to which we have rights, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office, or PTO to determine the priority of invention. Third parties may also attempt to initiate re-examination, post grant review or inter partes review of our patents in the U.S. PTO. We may also become involved in similar opposition proceedings in the European Patent Office or similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates throughout the world is very expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Our intellectual property rights may be inadequate to protect our business.

We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.

We rely on our trademarks, trade names and brand names to distinguish our proprietary branded products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our proprietary branded products and services, which could result in loss of brand recognition, and could require us to devote resources to advertise and market new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.

The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure you that competitors will not infringe upon our patent, or that we will have adequate resources to enforce our patent.

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are essential to our business.

We are party to license agreements for our product candidates that are essential to our business. These license agreements impose various payment and performance obligations on us. If we fail to develop PAR121 and PAR122 in accordance with the license agreement, CIMTECH Pty Ltd, or CIMTECH, may have the right to terminate the license agreement, in which event we would no longer have the right to develop or commercialize PAR121 and PAR122. If we lose such license rights, our business, results of operations, financial condition and prospects may be adversely affected.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology, pharmaceutical or animal health companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Our manufacturing facility is regulated by multiple governmental bodies including the FDA, the APVMA and Health Canada, among others. Some or all of these regulators may suspend or revoke their approval of this facility which could substantially harm our business.

We operate a manufacturing facility that produces both sterile and non-sterile drugs. We are currently approved to manufacture by the APVMA (which also enables us to export products to multiple other jurisdictions including in Asia, Africa and the Middle East), the ACVM (New Zealand), Health Canada, EC-MRA (Europe) and the FDA. Recently, some jurisdictions have changed their previous position of recognizing other health agencies/regulatory bodies. For example, in Saudi Arabia, the newly appointed Saudi Food and Drug Authority, or SFDA, now requires specific approval under their jurisdiction and no longer recognize the authority of the APVMA or FDA. Compliance with the various standards of multiple jurisdictions is time consuming and expensive. Our established quality management system is currently compliant with all of the various authorities who have jurisdiction over our product sales, however there can be no assurances that we will remain in compliance with current standards or that standards will not be revised. If we fail to comply with regulatory standards, we may receive various actions or sanctions against us, including warning letters, fines, suspensions of operations, the recall of our products, refusal to permit our products’ entry into foreign markets or cancellation of our manufacturing licenses and approvals. The FDA in particular has been very active in the sterile manufacturing sector and has recently caused multiple facilities to be either shut down or to have to undertake very expensive and time consuming recertification, which has resulted in substantial or total inability to supply products to the market. If this were to occur, we would suffer a significant reduction in sales and profits which would adversely affect the company’s business.

Failure to obtain regulatory approvals in foreign jurisdictions for our product candidates would prevent us from marketing our products internationally.

In order to market any product outside of the U.S., including in the EU and many other foreign jurisdictions, separate regulatory approvals are required. More specifically, in the EU, pet therapeutics can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting the MA, the EMA or the competent national authorities of the member states of the EU make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

The approval procedures vary among countries and can involve additional studies and testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Animal studies conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory approvals, or to do so on a timely basis and even if we do file them, we may not receive necessary approvals to commercialize our products in any market.

If approved, any of our current or future products may cause or contribute to adverse medical events that we are required to report to the FDA and regulatory authorities in other countries and, if we fail to do so, we could be subject to sanctions that would materially harm our business.

If we are successful in commercializing any of our current or future products, regulations of the FDA and of the regulatory authorities in other countries require that we report certain information about adverse medical events if those products may not have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA and regulatory authorities in other countries could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.

If we fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.

The animal health industry is subject to changing political and regulatory influences. Both state and federal government agencies regulate the importation, manufacture, distribution and sale of animal health products. We are subject to regulation, either directly or indirectly, by numerous governmental authorities, including the FDA and its analogous U.S. state and other, non-U.S. regulatory counterparts. Some of the potentially applicable regulatory regimes include animal drug regulations, environmental regulations, transportation regulations, labor regulations and occupational health and safety regulations. Our contract manufacturers are independently subject to similar legal regimes. Changes in enforcement policy or the interpretation of such regulatory programs by their relevant agencies can materially affect our business.

We strive to maintain compliance with these laws and regulations. If we are unable to maintain or achieve compliance with these laws and regulations, we could be subject to substantial fines or other restrictions on our ability to provide competitive distribution services, which could have an adverse impact on our financial condition.

We cannot assure you that existing laws and regulations will not be revised or that new, more restrictive laws will not be adopted or become applicable to us or the products that we distribute. We cannot assure you that our business and financial condition will not be materially and adversely affected by future changes in applicable laws and regulations.

Our customers may rely on government-funded programs whose discontinuance or modification could erode the market for our products.

Some of our customers may rely, in part, on farm and agricultural subsidy programs. These programs may provide funds used to support the purchase of the company’s products. Changes initiated by governmental authorities in the application or terms of these programs may adversely affect our customers’ abilities to finance our products, which could lead to an erosion of the company’s market and decreased revenues.

Our business will be materially affected if products in development are denied necessary governmental approval

We must seek, obtain and maintain approval to market our animal health products. In the U.S., this typically requires the filing of a New Animal Drug Application, or NADA, or an Abbreviated New Animal Drug Application, or ANADA. The FDA’s approval of these applications requires the agency to assess the quality and quantity of evidence submitted by the company to demonstrate its products’ safety and efficacy. The FDA is under no obligation to approve a product even if, during discussions with us, the agency agrees to a product development plan successfully followed by us. The FDA, for example, may determine that one of our products lacks sufficient evidence of safety or sufficient evidence of efficacy and deny approval. In the case of a denial of approval, we can expect the value of our development efforts to be greatly reduced or, in the worst case, lost. In addition, our revenue projections will be adversely affected by the inability to market our product.

Our business may be materially affected by governmental action or inaction in approving the company’s products

While the FDA operates under specified reviewing timeframes for animal drug applications, the agency may not adhere to those timeframes. Consequently, we can be exposed to delays in moving our products out of the pipeline and into the market. Delays can occur for a variety of reasons, many of which are beyond our control. For example, the FDA may lack adequate resources to review our submissions in a timely manner. As a further example, a study conducted by us may unexpectedly yield data raising new questions of safety or efficacy which then must be addressed before the product can be finally reviewed. Due to any such delay, we may experience loss of anticipated revenues and significant increases in pre-market development costs materially affecting our business.

Development of animal health products involves an expensive and lengthy process with an uncertain outcome, and results of earlier studies may not be predictive of future study results.

Development of animal health products is expensive and can take many years to complete, and its outcome is inherently uncertain. To gain approval to market an animal health product for a particular species, we must provide the FDA or foreign regulatory authorities, as applicable, with data from animal safety and effectiveness studies that adequately demonstrate the safety and efficacy of that product in the target animal for the intended indication applied for in the NADA, product license or other regulatory filing. Failure can occur at any time during the development process. Success in prior target animal studies or in the treatment of human beings with a product candidate does not ensure that our target animal studies will be successful, and the results of development efforts by other parties may not be indicative of the results of our target animal studies and other development efforts. Product candidates in our studies may fail to show the desired safety and efficacy despite showing such results in initial data or previous human or animal studies conducted by other parties. Even if our studies and other development efforts are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

Once our target animal studies commence, we may experience delays in such studies and other development efforts. In addition, we do not know whether planned studies will begin on time, need to be redesigned or be completed on schedule, if at all. Pet therapeutics studies can be delayed or discontinued for a variety of reasons, including delay or failure to:

If we experience delays in the completion or termination of any development efforts for our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or eliminated. In addition, any delays in completing our development efforts will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of our development efforts may also ultimately lead to the denial of regulatory approval of our product candidates.

Our products may become the target of malicious tampering or our products may be deemed to be adulterated due to a breakdown in the quality management system resulting in a requirement to undertake a broad product recall.

We maintain a quality management system which is designed to assure the purity, strength and safety of our products and that they will meet the approved specifications and as such not be deemed to be adulterated under FDA regulations and relevant legislation in other jurisdictions. However, we may experience a breakdown in this system that may result in either an inadvertent product contamination or adulteration or alternatively a malicious act by our own personnel or outside individuals. As a result we may undertake voluntarily or be compelled to undertake a broad product recall which may be required to the level of distribution or potentially to the end-user. We have a validated system in place to undertake such a product recall but the cost of undertaking such a procedure can be significant and may include making payments to maintain good will such as full refunds or product replacement or we may have to pay restitution or be subject to litigation which may result in punitive damages being ordered, especially if the adulteration results in the death or disablement of an animal or person. We maintain insurance coverage for such events but our insurers may deny our claims or the claims may exceed the limitations of our coverage which would result in significant costs to the company. We also maintain specified levels of business continuity insurance including for loss of profits but such insurance may not be sufficient or adequate to protect us from all foreseeable and unforeseen losses. Despite potential financial protections we have in place, a major product adulteration incident may cause our customers to lose confidence in our products and we may suffer irreparable harm to our corporate or product reputation and not be able to recover from such an event.

We are subject to environmental regulation and environmental compliance expenditures.

We are subject to environmental, health and safety laws and regulations concerning, among other things, air and wastewater discharges, the generation, handling, storage, transportation and disposal of hazardous waste and toxic substances. Pursuant to some of these laws and regulations, we are required to obtain permits from governmental authorities for certain operations. We incur costs to comply with such laws, regulations and permits, and we cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be responsible for costs incurred relating to contamination at our third party waste disposal sites or relating to damages incurred as a result of human exposure to such substances or other environmental damage caused by our operations or our disposal of waste.

Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. We monitor our ongoing costs associated with these laws and regulations. We believe that in the ordinary course of business, changes in these laws and regulations would be brought to our attention. However, we cannot assure you that environmental, health and safety laws will not change materially, that we would be able to effectively identify such changes or that our costs and liabilities relating to these current and future laws will not adversely affect our business or profitability.

We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition.

Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business. We and our commercial partners operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. Previously, we had not implemented a comprehensive anti-corruption policy. As a result of the recent and expected future growth of our business, particularly with respect to our international sales, we plan to establish an anti-corruption policy designed to prevent violation of applicable anti-corruption laws.

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

We are subject to export control laws, customs laws, sanctions laws and other laws governing our operations, including economic and trade sanctions administered and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition.

We are subject to laws and regulations governing our international operations, including laws and regulations administered by the governments of the U.S. and Australia and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, and customs requirements, collectively referred to as the Trade Control laws.

If our U.S. subsidiaries sell to distributors that we know are reselling products to the targeted foreign countries, entities and individuals identified by OFAC, we could be subject to enforcement actions. Previously, we had not implemented a comprehensive Trade Control policy.

If we are not in compliance with the Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Trade Control law by U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Legislative or regulatory reforms with respect to pet therapeutics may make it more difficult and costly for us to obtain regulatory clearance or approval of any of our current or future product candidates and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions governing the testing, regulatory clearance or approval, manufacture, and marketing of regulated products. In addition, the FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Similar changes in laws or regulations can occur in other countries. Any new regulations or revisions or reinterpretations of existing regulations in the U.S. or in other countries may impose additional costs or lengthen review times of any of our current or future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

Each of these would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition and results of operations.

As a public reporting company, we are required, among other obligations, to maintain effective internal control over financial reporting suitable to prepare our publicly reported financial statements in a timely and accurate manner.

The Sarbanes-Oxley Act requires, among other things, that public companies maintain effective internal controls for financial reporting and disclosure controls and procedures. We are required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment is required to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, during the year ended December 31, 2016 we remained an emerging growth company as defined in the JOBS Act, as such we took advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.

Any failure to maintain internal control over our financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our ordinary shares could decline, and we could be subject to sanctions or investigations by regulatory authorities . Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We receive R&D tax incentives from the Australia Taxation Office (ATO). Changes in our eligibility for this program or tax reform in Australia could affect the amount of funding received from the ATO.

We receive tax credits from the ATO related to cash spent on development and research and development expenditures. The amounts received or recognized as receivable for the year ended December 31, 2016, December 31, 2015, the six-month period ended December 31, 2014, and the year ended June 30, 2014 were approximately $3.3 million, $3.8 million, $2.6 million and $0.9 million, respectively. If we fail to meet certain eligibility requirements under these incentives or the ATO discontinues these incentives, we may not receive such funding in the future.

Risks Related to the Ordinary Shares, the Offering and Our Capital Structure

Our ordinary shares are currently quoted only on the OTC Pink® Open Market marketplace, which may have an unfavorable impact on our stock price and liquidity.

Parnell lost its “foreign private issuer,” status as of December 31, 2016 and on December 21, 2016, the Company filed a Form 25, Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act, with the Securities and Exchange Commission and NASDAQ on December 21, 2016. The NASDAQ delisting became effective on December 31, 2016 and trading on the NASDAQ Global market continued up until this date. The Company also filed a Form 15, Notice of Termination of Registration or Suspension of Duty to File, with the Securities and Exchange Commission to terminate its reporting obligations under the Exchange Act. After delisting from the NASDAQ, the Company ordinary shares began being quoted on the OTC Pink® Open Market, a centralized electronic quotation service for over-the-counter securities, which is a significantly more limited market than the New York Stock Exchange or the NASDAQ Stock Market. The quotation of our ordinary shares on the OTC Pink® Open Market may result in a less liquid market available for existing and potential stockholders to trade our ordinary shares which in turn could depress the trading price of our ordinary shares and could reduce the available to raise capital in the future.

In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. Moreover, we are no longer required to file periodic reports and financial statements with the SEC. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. As a result of this classification there may be less publicly available information concerning us than there is for U.S. public companies.

Our directors and certain significant shareholders exercise significant control over us.

Our directors and significant shareholders, including Alan Bell, Robert Joseph and Brad McCarthy, collectively control approximately 40.2% of our outstanding ordinary shares. As a result, these shareholders are able to influence our management and affairs and all matters requiring shareholder approval in ways that may not align with your interest as a shareholder, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of us even if beneficial to you as a shareholder and might affect the market price of our ordinary shares.

We may require additional capital in the future, which may not be available to us. Issuances of our equity securities to provide this capital may dilute your ownership in us.

We may need to raise additional funds through public or private debt or equity financings in order to:

Any additional capital raised through the issuance of our equity securities may dilute your percentage ownership interest in us. Furthermore, any additional financing we may need may not be available on terms favorable to us or at all. The unavailability of needed financing could adversely affect our ability to execute our growth strategy.

It is unlikely that we will pay dividends, and therefore you may not receive any return on your investment without selling your shares.

We currently intend to retain any future earnings for funding the growth of our business and therefore we do not currently anticipate declaring or paying cash dividends on our ordinary shares. In addition, our current credit agreement restricts us from paying such dividends. As a result, a return on your investment will only occur if our ordinary share price appreciates.

Australian takeover law may discourage takeover offers being made for us or may discourage the acquisition of a significant position in our ordinary shares.

We are incorporated in Australia and are subject to the takeover laws of Australia. Among other things, we are subject to the Australian Corporations Act. Subject to a range of exceptions, the Corporations Act prohibits the acquisition of a direct or indirect interest in our issued voting shares if the acquisition of that interest will lead to a person’s voting power in us increasing to more than 20%, or increasing from a starting point that is above 20%, though below 90%. Australian takeover laws may discourage takeover offers being made for us or may discourage the acquisition of a significant position in our ordinary shares. This may have the ancillary effect of entrenching our Board of Directors and may deprive or limit our shareholders’ opportunity to sell their ordinary shares and may further restrict the ability of our shareholders to obtain a premium from such transactions. See “Description of Share Capital - Change of Control.”

Our Constitution and Australian laws and regulations applicable to us may adversely affect our ability to take actions that could be beneficial to our shareholders.

As an Australian company we are subject to different corporate requirements than a corporation organized under the laws of the U.S. Our Constitution, as well as the Australian Corporations Act, set forth various rights and obligations that are unique to us as an Australian company. These requirements may operate differently than those of many U.S. companies. You should carefully review the summary of these matters set forth under the section entitled, “Description of Share Capital” as well as our Constitution, which is included as an exhibit to this annual report.

The original Parnell company was founded by a veterinarian (Richard Boon) in Australia in the early 1960’s. In 1986 he sold the assets of that business to Dr Alan Bell a practising equine veterinarian. Over the next twenty years, we developed over 30 generic veterinary products and registered them in over twenty countries. In 2006, Robert Joseph, our Chief Executive Officer joined Alan Bell to undertake a global expansion of our company focusing on developing proprietary drug products such as Zydax. As part of this process, we sold our legacy generic drug product assets to fund the development of new chemical entities and to fund in part the construction of our current FDA approved sterile manufacturing facility. Funding for this growth also came from various term loan facilities as well as investments by Robert Joseph and Brad McCarthy, our Chief Financial Officer and their associates.

Over the last decade, we have significantly enhanced our core competencies across the entire pharmaceutical value chain. A key strength of our business is our R&D, clinical trial and regulatory development experience. We have conducted over 35 clinical trials across six countries in 70 trial sites during the last ten years. Our products have been approved by regulators in the U.S., Europe, Canada, Australia, New Zealand and multiple other jurisdictions throughout Latin America, Asia, the Middle East and Africa. Our clinical science expertise is augmented by a strong network of academic institutions, private research organizations and veterinary clinics across multiple countries around the world.

We have constructed a sterile manufacturing facility located in Sydney, Australia which was FDA inspected in September 2012 and deemed acceptable in January 2013 and we were successfully inspected by the Australian Therapeutic Goods Administration under mutual recognition procedures with the European Medicines Agency, or EMA in April 2015. We believe this facility provides us with a low-cost and reliable supply of our products and has approximately 64% available capacity above our current manufacturing demand, creating significant contract manufacturing and pipeline expansion opportunities. We intend to leverage our manufacturing facility to expand contract manufacturing business segment.

We have expanded our business operations in the last five years to focus on the U.S. market, relocating all drug development and drug commercialization functions to Overland Park, Kansas. This shift in focus has enabled us to establish a U.S. sales and marketing presence in the production animal market with the launch in 2013 of our reproductive hormones; Estroplan and Gonabreed and the recent launch of mySYNCH, our digital application for use by dairy producers and veterinarians and since 2015, to establish a presence in the companion animal segment with the launch of Glyde for dogs and FETCH, our digital application intended for use by veterinarians and pet parents. We believe this unique commercialization model will enable us to be well positioned for future potential approvals of our product candidates including Zydax.

The address of our Australia office is Unit 4 Century Estate, 476 Gardeners Road, Alexandria, NSW, 2015, Australia and the telephone number is +612 9667 4411 and in the U.S. it is 7015 College Blvd, Level 6, Overland Park, Kansas 66211, and the telephone number is +1 913-274-2100

We are a fully integrated, veterinary pharmaceutical company focused on developing, manufacturing and commercializing innovative animal health solutions. We currently manufacture and market five products for companion animals and production animals in 14 countries and augment our pharmaceutical products with proprietary software platforms – FETCH™ and mySYNCH®. These innovative technology solutions are designed to enhance the quality of life and/or performance of animals and are provided to animal owners who use our drug products as a value added service offering to differentiate us from our competitors. We also have a pipeline of 4 drug products; Zydax®, PAR121 and PAR122 and Luminous™ covering large therapeutic areas in orthopedics, dermatology and nutraceuticals.

Our reproductive hormone products, estroPLAN® and GONAbreed®, are designed to safely and effectively improve cattle breeding performance and are currently marketed in 12 countries. We were the first company to achieve FDA approval for the indication of estrous synchronization in lactating dairy and beef cows. We market our reproductive hormone products in conjunction with our proprietary software platform, mySYNCH, in order to deliver superior breeding outcomes. Since launching in the U.S. in mid-2013, we have steadily acquired market share

Our disease-modifying product, Zydax®, for the treatment of osteoarthritis, or OA, in dogs and horses, both stimulates the growth of new cartilage and inhibits cartilage breakdown. OA is a slowly progressive and often severely debilitating degenerative joint disease, or DJD. We estimate that the market for OA in animals in the U.S. and the EU is over $410 million in annual sales of prescription drugs and the global market for alternative treatments such as nutraceutical products is at least another $500 million in annual sales. The most common treatments for OA are anti-inflammatory drugs, which ease symptoms but do not address the underlying disease process. By contrast, Zydax is designed to enable veterinarians and animal owners to safely and effectively address the underlying causes of OA. Zydax has an excellent efficacy and safety profile, with one million doses sold, and has led to improved quality of life for dogs and improved performance of sport horses.

We have marketed Zydax in Australia, New Zealand, Hong Kong, Singapore and the United Arab Emirates and we are seeking approval from the FDA for marketing in the U.S. and from the European Medicines Agency, or EMA, for marketing in the European Union, or EU. Assuming regulatory approval, we plan to launch Zydax for dogs in these markets at the end of 2017 or early in 2018. In addition to Zydax we also have a nutraceutical product, Glyde®, which is a combination of glycoaminoglycans, a building block for cartilage (derived from chondroitin sulfate and glucosamine) and a potent natural anti-inflammatory, ecoisatetranoic acid (derived from New Zealand green-lipped mussels). Glyde is currently marketed in Australia where we also market Zydax. We launched Glyde in the U.S. in September 2015 through the establishment of our own sales and marketing team, providing us with an established presence in the U.S. companion animal market in advance of a potential approval of Zydax. We have also recently launched Reviderm, a patented anti-microbial liquid (spray-on) bandage for use in companion animals. We in-licensed Reviderm from Chesson Laboratories who manufacture Reviderm for us and we are seeking the rights to distribute Reviderm in Australia. We also expect to soon launch Glyde for cats as well as Luminous, a nutraceutical product that we expect will help maintain healthy skin and coat and may be useful for dogs suffering from common dermatological conditions.

We believe our products are differentiated through our complementary digital technologies designed to assist animal owners in maximizing the performance and application of our products. Fetch , for companion animal customers, and mySYNCH , for production animal customers, provide a personalized software solution which is currently provided as a free service offering to our customers. Our digital technologies provide mobile and interactive education and diagnostics, data analytics and customer management capabilities. Fetch and mySYNCH also provide us with direct interaction with animal owners to manage and personalize their brand experience with our products. Our technology offerings enable us to identify and win potential new customers, increase customer interaction, provide brand recognition and overall customer satisfaction and in the future may also provide an additional revenue stream opportunity through charging for the provision of premium services in our digital technologies.

In the last decade, we have significantly enhanced our core competencies across the entire pharmaceutical value chain. A key strength of our business is our R&D, clinical trial and regulatory development experience. We have conducted over 35 clinical trials across six countries in 70 trial sites during the last ten years. Our products have been approved by regulators in the U.S., Europe, Canada, Australia, New Zealand and multiple other jurisdictions throughout Latin America, Asia, the Middle East and Africa. Our clinical science expertise is augmented by a strong network of academic institutions, private research organizations and veterinary clinics across multiple countries. We intend to leverage these core competencies to bring our pipeline products to market over the coming years, and to further expand our pipeline through targeted development and in-licensing opportunities.

We have constructed a sterile manufacturing facility located in Sydney, Australia which has been inspected by the FDA, and other regulatory agencies enabling us to manufacture products for sale in the European Union, Australia, New Zealand, Canada as well as other jurisdictions under mutual recognition procedures. We believe this new facility provides us with a low-cost and reliable supply of our products and has approximately 64% available capacity above our current manufacturing demand which in turn provides significant contract manufacturing and pipeline expansion opportunities. In 2016 we signed our first contract manufacturing opportunity which is a multi-million dollar opportunity over seven years. We are also in active contract manufacturing negotiations with various pharmaceutical companies and believe we can sign multiple contract manufacturing agreements in the future thereby establishing our contract manufacturing business segment as a profitable contributor to our corporate operations.

Our current revenues are derived from operations in 14 countries, with a direct marketing presence in Australia, New Zealand and the U.S. We utilize a range of multi-national and local marketing partners in other markets including Canada, the Middle East and Africa and will continue to seek additional marketing partners who can assist us in bringing our products to market in those geographies where we do not expect to establish a direct presence such as Europe, Asia and Latin America. By establishing our drug development and commercialization operations in the U.S. we are well positioned to potentially increase our revenues from current products and future potential approvals, including Zydax. It has also enabled us to explore a variety of licensing opportunities arising from the large U.S. animal health and biotechnology industries.

We believe that our fully-integrated, pharmaceutical value chain positions us to effectively and efficiently leverage our current product portfolios, expand and scale our pipeline of product candidates and elicit attractive in-licensing or acquisition opportunities. We believe that the combination of these capabilities and opportunities positions us to become a leading innovator in animal health products.

In addition to our currently marketed products, we are developing a pipeline of clinical drug candidates that seek to deliver solutions to unmet needs in companion animal health. Currently, we have four product candidates in our pipeline and we also continue to leverage our established in-house developmental capabilities to investigate additional in-house and in-licensed pipeline opportunities.

In addition to developing therapeutics that deliver real solutions to unmet animal health needs, we believe some of our product candidates, including Zydax, PAR121 and PAR122, may have the potential to be applied to human health. Assuming successful development of each of these product candidates for the animal health market, we would seek to partner with organizations that can assist in assessing the feasibility and, if warranted, potential development of these product candidates for human applications.

Our objective is to become a leading provider of animal health solutions that enhance the quality of life or performance of animals and enhance operational efficiency and profitability for veterinarians and farmers. We seek to differentiate ourselves from other animal health companies through leadership in clinical science in our chosen therapeutic areas and integration of our digital technologies with our animal health products.

We plan to focus on long-term therapies for conditions with a high prevalence rate and high propensity for treatment by animal owners in the burgeoning companion animal and production animal markets. We believe there are many segments of the market with a significant unmet need and that we can be competitive in accessing these large opportunities by leveraging our established drug development infrastructure and our innovative drug commercialization capabilities that harness our digital technologies.

We have three core areas of focus for the immediate future to drive the value of our company:

Fetch is our digital application that is available for use by dog owners that aims to integrate with veterinary practice management software to identify dogs that are at-risk of developing OA, proactively communicate with the dog owner to help them diagnose the risk factors of OA in their do and thereby commence a proactive joint management program including the use of our products Glyde and Zydax. Fetch is also designed to enable ongoing communication with dog owners to substantially increase compliance and to enable Parnell to sell directly to the dog owner on an ongoing business and thereby increase our revenues and profit margins and simultaneously offering a veterinary clinics that we partner with a lucrative additional revenue stream that is typically being lost to online retailers who are rapidly encroaching on veterinary clinic sales.

We have significant plans to continue the development of Fetch for both the Australian and U.S. markets to become a fully integrated franchise management technology. We have already developed capability for Fetch to integrate with veterinary clinics practice management software which provides a seamless patient identification and capture mechanism through a self-diagnostic tool that is used by dog owners in the veterinary clinic or on their mobile devices or computer at home. We have also developed a consumer application (App) that is used by dog owners at home to continue monitoring the progress of their pet whilst being treated with our products. Fetch enables us to interact with dog owners in a unique way that enhances an ongoing direct relationship with our customers in a highly effective, differentiated and very efficient manner and creates an immersive brand experience. In addition to creating an effective “customer capture” platform, Fetch also acts as a “customer retention” tool. We are able to communicate directly with pet parents through Fetch and for example, remind them about the need to repurchase our products, we can also offer them incentives to do so and we offer a “subscription plan” whereby a pet parent signs up to automatic delivery for a discounted price. This module of Fetch enables us to capture a much higher percentage of the retail price whereas the traditional animal pharmaceutical company model is entirely dependent on the veterinarian to a) initiate treatment (Fetch does this for the veterinarian more effectively and b) relies on the pet parent to remain compliant with treatment (Fetch can drive much higher compliance rates by reminding the pet parent to repurchase and giving them a simple mechanism to do so (through their mobile device with home delivery) instead of having to always go back to the veterinary clinic. In return we are able to generate a higher margin than what is typically generated by other companies who sell to the veterinary clinic directly. We do however pay the veterinarian a rebate as part of this transaction given we are offering them a business partnership model. Therefore the pet parent is able to provide optimal health care in a more timely manner and more conveniently, the veterinarian makes a passive income that they would most likely otherwise not participate in at all (repurchase rates from veterinarians are typically very low) and we are able to create a more valuable and sustainable commercialization model.

mySYNCH is a digital tool that integrates with the most commonly used existing dairy management computer system (Dairy Comp 305®) to enable veterinarians and producers to optimize reproduction and maximize economic gains. It combines in-field training in both English and Spanish languages, however the most valuable offering mySYNCH provides is that it acts as a business intelligence tool over and above that provided by Dairy Comp 305. This software is used on dairy farms representing approximately 60% of dairy cows in the US. It is a powerful data management tool but it is reported by dairy farmers to be cumbersome and difficult to discern real time insights. It is also most typically used as a desk top application. mySYNCH integrates with Dairy Comp 305 and provides data integrity reports. In approximately 80% of dairy farms, my SYNCH is able to identify data integrity issues that can affect the breeding metrics that dairy farmers are relying upon. We then provide a database analysis service to the dairy farmer to correct the “business rules” being used in Dairy Comp or to identify errant data sets. After this initial service, mySYNCH is able to provide headline breeding metrics to all employees on a dairy farm, on their mobile device, in real time. It also has a proprietary reporting feature whereby it can show differences in breeding outcomes based on cohorts of cows. For example if a new breeding program is introduced, such as our patent pending PROCEPT breeding program, mySYNCH can show the dairy farmer the gains that have been made as compared to their previous program in a simple and seamless manner. By providing dairy farmers with mySYNCH, we are able to demonstrate a business partnership model which we believe enables us to move away from simply competing on price as most other animal pharmaceutical companies do. Over 400,000 dairy cows are enrolled in mySYNCH and we expect this number to continue to grow substantially in 2017 and beyond.

We are focusing on obtaining the regulatory approval from the FDA and EMA for Zydax in dogs at the end of 2017 or early 2018. We initially filed the two remaining major technical sections of the regulatory dossier for Zydax; the Target Animal Efficacy and Chemistry and Manufacturing Controls sections, with the FDA in the fourth quarter of 2015. In April 2016, we received a response with questions on both sections from the FDA. We have spent the time since compiling data and preparing our responses for both technical sections. We expect to refile these sections in the first half of 2017. The FDA typically takes 180 days to respond to such filings which could lead to these sections being deemed complete toward the end of 2017.

For our European filings, we converted our FDA filed dossier to the format and content that is required by the EMA and filed a complete dossier, in February 2016 we received what is known as the “Day 120” questions from the EMA in the middle of 2016 and in conjunction with our preparations for refiling with the FDA, we have been preparing responses to the EMA questions. We anticipate refiling in approximately April, 2017 which could lead to a potential approval at the end of 2017.

We anticipate there are opportunities to seek approval for Zydax in other jurisdictions including Canada, Asia, and Latin America. We expect to file such applications in 2017. For Canada, we expect a potential approval in the first half of 2018.]

We have also commenced pilot studies for the use of Zydax in cats. In 2016 we undertook a successful pilot safety study that showed Zydax is well tolerated in cats and we undertook a pilot efficacy study to elucidate effective measurement instruments for assessing changes in the clinical signs of osteoarthritis in cats. We believe the market for osteoarthritis treatments in cats is a significant opportunity given that it has been reported in the literature that up to 90% of cats suffer from degenerative joint disease yet there are very few available treatments. In particular in the US, there are no drugs approved by the FDA for the long term management of the clinical signs of osteoarthritis in cats. As such, we believe Zydax has a significant opportunity in this therapeutic segment if it were approved. We expect to continue this development in 2017, and if successful may lead to a potential approval in late 2018.

We believe that we can potentially seek a “disease modifying” label claim for Zydax. Such a label claim is estimated to be a very lucrative opportunity. To obtain such a label claim we anticipate completing studies showing the disease modification effects of Zydax and we expect that we may complete one such study in the middle of 2017.

In 2015, Parnell acquired the rights to the only known supply of Xylan which is a starting material for the manufacture of the Active Pharmaceutical Ingredient, or API, in Zydax along with other sulfated oligosaccharides including drugs approved for use in humans. Parnell had previously purchased this material from a German company, as did all other companies using European Beechwood Xylan for various purposes. After being acquired, the new parent company made the decision to cease manufacture of Xylan. Being the only known available source of European Beechwood Xylan, Parnell acquired the rights to the manufacturing process, associated know-how and limited equipment and transferred this to a new manufacturing partner in Germany. As a result of this acquisition, we believe we now control the global supply of European Beechwood Xylan that is available to companies seeking to develop certain generic human drugs as well as new drug candidates. Therefore in addition to securing the supply of Xylan for use in the manufacture of Zydax, we believe we have a valuable opportunity to partner with a human pharmaceutical company to develop a generic equivalent of Elmiron® that is distributed by Johnson and Johnson and we believe that such a partnership may also lead to the development of additional indications for Zydax for human use and could be a lucrative partnership. We intend to pursue such a partnership in 2017.

We believe that our commercialization model is able to be leveraged across multiple therapeutic categories. For example, our business partnership model based on our digital technologies that we offer to companion animal veterinary clinics is not exclusive to osteoarthritis just in dogs. As a result we have developed a formulation of Glyde that can be used by cat owners to treat osteoarthritis which is highly prevalent in cats. We expect to launch Glyde for cats in early Q2, 2017 and we expect in the future that we can leverage the Fetch platform to assist in customer capture and retention just as we have done with dog owners. We also expect to launch a dermatology based nutraceutical called Luminous in early Q2, 2017. Luminous is a unique formulation based on the same polyunsaturated fatty acid compound; ecoisatetranoic acid, that is uniquely found in New Zealand Green Lipped Mussels. It also contains a combination of other compounds known for their beneficial effect on skin and coat condition. Just as Fetch is used in osteoarthritis, we also believe it can act in the same way in the dermatology segment; to integrate with veterinary practice management software to identify “at risk” dogs and to communicate directly with them about the benefits of Luminous and to capture new customers and then retain them more effectively.

We also launched a unique, anti-microbial, spray-on (liquid) bandage called Reviderm. We in-licensed this product from Chesson Laboratories who market a similar product for human use in a number of countries. Since launch, we have identified a number of therapeutic categories where we believe Reviderm can be effectively used including replacing adhesive bandages used on common wounds, including surgical incisions but also in common dermatological conditions such as “hot-spots” which cause the dog to lick and aggravate irritated skin. Reviderm forms a protective, water-proof, anti-microbial barrier that enables natural skin healing to occur more effectively. In many cases, this obviates the need for the use of the “cone of shame”; a lampshade type device affixed around the dog’s neck to stop it from licking or biting at a wound. We now expect we may be able to launch Reviderm in Australia in Q2, 2017.

We have constructed and commissioned our manufacturing facility in Sydney which was classified as acceptable by the FDA in January 2013. We currently have approximately 64% available capacity at this facility, which we are now leveraging for contract manufacturing opportunities. Typically, sterile manufacturing projects, especially those for FDA-approved products, attract high margins relative to other contract manufacturing sectors. We also have the capability to produce pilot or research and development, or R&D, batches for biotechnology companies for use in clinical trial materials and due to our highly efficient and flexible operation we believe we can undertake these projects at a lower cost than other industry participants. We commenced our contract manufacturing operations in 2016 with the commencement of a multi-year, multi-million dollar deal with a major animal pharmaceutical company and we are currently in active negotiations with several multi-national pharmaceutical companies, for both animal and human products, to be appointed as a contract manufacturer of sterile injectable products and we hope to announce the commencement of one or more contracts in 2017.

We also expect to commission new manufacturing equipment that will enable us to manufacture pharmaceutical and nutraceutical products in a “chew” dosage form for dogs and cats. Administration of medicinal products to dogs and cats by oral form can be difficult yet giving a “Chew” has an association with giving a “treat” to your pet. This is not only preferred by the animal but is preferred by the pet parent as well. We currently sell Glyde, and will sell Luminous as, a Chew and hence this new manufacturing capability will enable us to create a reliable, high quality and low cost supply of our own products. We also believe that there is a dearth of FDA and EMA standard manufacturers in this segment and with the increasing popularity of Chews as a dosage form, we believe that this new capability will add additional contract manufacturing opportunities. We believe the combination of both our sterile manufacturing and soon, our “Chew” manufacturing capabilities could substantially increase the revenue generated by our contract manufacturing business segment, this in turn would not only entirely cover the fixed cost of operating our manufacturing facility but would generate high-margin revenues contributing to our core objective of becoming profitable.

In addition to our core strategic objectives we anticipate additional opportunities to grow revenues and to enhance the value of our company over the coming years.

We plan to progress our current pipeline of product candidates through proof-of-concept stage and into animal studies in 2017 and 2018. We seek to adopt for each of our product candidates a well-defined, milestone driven development path that enables us to determine the most expeditious path to market. We plan to continue our collaboration with development partners including leading academic institutions to ensure each product has a robust data set to support approval and commercialization.

We expect to work toward the following milestones for our pipeline product candidates:

PAR 121 (canine and equine orthopedics): PAR121 is derived from a known botanical extract native to the Cook Islands that had shown promise in rapidly regenerating bone. Based on pre-clinical studies we believe PAR121 has significant applications in orthopedics. We plan to isolate and identify the specific active components of the botanical extracts and commence development of a semi-synthetic or synthetic manufacturing process. In parallel we will continue in vitro and in vivo studies of bone growth with the aim of more precisely elucidating the mechanism of action and to demonstrate further clinical evidence of efficacy in the target species. Based on the studies we undertook in 2016, we plan on moving from rodent and in-vitro models into larger species including dog bone-regeneration models. If successful, we believe these studies will show effective bone regeneration, superior to natural healing and will also show “normal” bone growth. We also undertook fractionation and identification studies in 2016 and we may seek to utilise sub-fractions of the botanical extracts in studies to potentially identify an active sub-component. Alternatively, we believe we can continue to develop a botanical extract under the published FDA guidance for such products. We anticipate that if the next round of mode-of-action and pilot efficacy studies are successful, we will progress to safety studies in target species in 2017.

PAR 122 (canine and feline dermatology): we have been studying PAR122 to assess the effect of topical application on skin healing and based on 2016 studies we completed, we have shown that PAR122 can cause epidermal thickening which in turn we believe should help treat animals affected with various dermatological and skin conditions. We may seek to isolate and identify the specific active components of the botanical extracts or we may continue to develop PAR122 as a botanical extract and potentially seek a cosmeceutical claim set which would not require regulatory approval and thus would be a rapid and inexpensive path to market. However, if additional studies continue to show success, we may alternatively, or in addition, seek a traditional “drug approval” with specified claims. We have also completed pilot safety studies to investigate the irritant effect of topical application of PAR122 and it was shown to be very safe in this regard. We therefore plan on undertaking additional mode-of-action and pilot efficacy studies in dogs to elucidate the effectiveness at skin healing in dermatological conditions in 2017.

Our goal is to bring a new product to market each year through a combination of in-house drug development and potential in-licensing activities. We continue to assess a number of new in-licensed opportunities and based on resource availability and likelihood of success, we may commence development on additional projects in 2017 and beyond. However, we remain heavily focused on our core strategic objectives, which collectively are aimed at becoming profitable and hence additional development opportunities will need to be consistent with our core objective.

We have invested in market investigations and partnering discussions in China and Europe over the last several years, and we intend to focus on multiple growth opportunities in these regions. We believe the Chinese dairy industry is undergoing structural changes to industrialize. We believe this situation is suited to our innovative solutions that combine high quality medicines with our mySYNCH proprietary technology in order to help dairy producers breed cows more effectively and as a result positions us to develop a strong foothold in this rapidly growing industrialized Chinese dairy market.

Our reproductive hormone products, estroPLAN (cloprostenol sodium; a prostaglandin F2α, or PG, drug) and GONAbreed (gonadorelin acetate; a Gonadotropin Releasing Hormone, or GnRH, drug), are used in breeding programs which are aimed at increasing pregnancy rates in dairy and beef cows. PG and GnRH drugs are given as a sequence of three injections over nine days to cause a cow to ovulate which allows artificial insemination, or AI, to be used. These breeding protocols are typically called Ovsynch programs.

We believe we have conducted more cattle breeding program trials over the last ten years than any other animal health company. We have also developed a proprietary software platform, mySYNCH , to complement the use estroPLAN and GONAbreed. We believe this model of combining our high quality drug products with our proprietary software platform improves profitability for producers allowing us to gain market share from much larger animal health companies. Our approach also enhances the partnership between veterinarians and our producers by allowing the veterinarian to become a consultant in the improvement of reproductive efficiency.

There are 9.2 million dairy cows in the U.S. and we estimate up to 100 million dairy cows globally are milked in industrialized countries, including 20 million in Europe and six million in Australia and New Zealand. In addition to the prolific use of timed AI breeding programs in the dairy industry, the beef market is increasingly using AI to increase the genetic worth of their herds and thus have increased their use of reproductive hormones. We estimate that the beef segment currently uses artificial insemination programs in less than 10% of cows and thus has the potential to grow rapidly.

The reproductive hormone market consists of two classes of drugs, GnRH and PG. In the U.S., approximately 50 million doses of GnRH and PG are sold annually for approximately $80 million. All manufacturers of reproductive hormones market generic equivalents of GnRH and PG. The current manufacturers include Zoetis (marketing Factrel - GnRH and Lutalyse - PG), Merck (marketing Fertagyl - GnRH and Estrumate - PG), Bayer (marketing Ovacyst - GnRH and Prostamate - PG) and Merial (marketing Cystorelin - GnRH). In non-U.S. markets, these same competitors typically exist along with generic offerings from smaller local pharmaceutical companies. We estimate the global reproductive hormone market is more than $200 million.

Historically, PG-based programs were the most commonly used breeding programs. Prostaglandins cause a cow to commence a new ovulatory cycle that leads to the release of an ovum (or egg). After injecting PG, a farmer must observe the cows for signs that the cow is ready to be artificially inseminated (called heat display). In the last decade, the combination of PG products with GnRH products to synchronize ovulation has led to more accurate breeding programs that allow for fixed-time artificial insemination that obviate the need for observing cows for heat display thus improving farm labor efficiency and also increasing pregnancy rates.

We currently have two FDA-approved hormone products, estroPLAN (a PG product) and GONAbreed (a GnRH product). We have marketed estroPLAN and GONAbreed in other markets for many years. In January 2013, GONAbreed was approved by the FDA for use in conjunction with cloprostenol sodium in cattle breeding programs.

We currently provide our proprietary mySYNCH technology, which was developed to complement the use of estroPLAN and GONAbreed, to our production animal customers for free. mySYNCH provides these customers with mobile education, data analytics and reporting to help maximize pregnancy rates in their cows when using estroPLAN and GONAbreed. We believe we can further penetrate the U.S. market by leveraging our proprietary mySYNCH software platform which helps our production animal customers manage reproduction activities on the farm and enhances the implementation of our reproductive hormones. As a result of this proprietary software and our product portfolio, we have been able to successfully improve reproductive performance for our dairy customers. For example, a large dairy farm in North America switched from a competitor’s product to our breeding program, which resulted in a 25% increase in pregnancy outcomes. We will continue to leverage the advocacy from our early adopters to grow our customer base across the U.S.

Zydax is a sulfated oligosaccharide with disease-modifying characteristics for the treatment of OA in dogs and horses. Zydax targets the core deficit of OA by impacting both the anabolic and catabolic pathways of articular cartilage metabolism. Zydax is approved in Australia and New Zealand for the treatment of OA in dogs and marketed in Asia and the Middle East for the treatment of OA in horses. Specifically, Zydax stimulates proteoglycan synthesis, leading to the growth of new cartilage, and inhibits the actions of the aggrecanase 1 enzyme, which degrades and breaks down cartilage. Being a sulfated oligosaccharide, Zydax also has some common properties with heparin in that it reduces micro blood clots at the joint and thus improves blood flow leading to the enhancement of regenerative processes. We are presently seeking marketing approval from the FDA and the EMA for Zydax for the treatment of OA in dogs and horses. Under current market conditions, if approved, we believe Zydax will be the only product with demonstrable disease modifying characteristics. We believe Zydax can be a safe, long-term therapy for OA in dogs and horses.

Zydax has been safely used in one million doses in dogs for ten years without the harmful side-effects common to many non-steroidal anti-inflammatory drugs, or NSAIDs. The safety aspects of the registration dossier for the use of Zydax in dogs have been deemed complete by the FDA including for safe combination use with NSAIDs. Zydax has the flexibility of being used as an adjunctive and a first-line therapy. As a result veterinarians do not have to replace their favored incumbent therapies but rather could use NSAIDs to alleviate the short-term symptoms of pain and inflammation while commencing a long-term course of treatment with Zydax to seek to modify the underlying disease process of OA.

In October 2008, we applied for various patent protections for GXS, the API in Zydax, including composition of matter and method of manufacture. These patents have been granted in six countries and are under review in a further four countries plus the European Union. Our current patent array would not expire until at least October 2028.

The safety section of the registration dossier for Zydax in dogs has been deemed complete by the FDA and we have completed several large-scale efficacy studies in dogs which we believe on a weight of evidence basis provides substantial evidence which may lead to approval by the FDA in late 2017 or early 2018 and by the EMA at a similar time.

We also expect to complete safety and efficacy studies in cats and horses under FDA protocol concurrences.

The market for Zydax in cats could be as large as the market for use in dogs given there are not as many cats (in the U.S. there are 72 million dogs and over 50 million cats) but OA is believed to be as prevalent or more so in cats and there are very few products approved for treating OA in cats (there are many available for treating OA in dogs). We also believe we could seek an approval for treating the relatively common condition of interstitial cystitis in cats which is pain and inflammation of the bladder and urethra which causes frequent urination by the cat.

The market for Zydax for horses is significant, especially in those countries where horse racing is popular such as Australia, New Zealand, Hong Kong, Singapore, Dubai, United Kingdom and France. To date, Zydax has been sold in Australia, Hong Kong, Singapore, New Zealand and Dubai . We are engaged in an FDA and EMA approval process to market Zydax for horses in the U.S. and Europe. We also plan to target the Chinese and Japanese markets where horse racing is also popular.

Osteoarthritis in animals is a large and growing global market. We estimate the market for OA prescription drugs in the U.S. and the EU to be over $410 million in annual sales, and the global market for alternative treatments to be at least another $500 million in annual sales. This large market is driven by increasing pet ownership and the fact that up to 90% of dogs will develop osteoarthritis in their lifetime with an estimated 20% of dogs suffering from OA at any one point in time. However in our experience selling Zydax, it is quite common for only a small fraction of the estimated 20% of dogs that have OA to be under active treatment. We expect that one reason for that may be that there are few safe, long-term therapies available and as a result OA treatment may be delayed by the veterinarian until the later stages of the disease. We therefore believe that there may be a significant opportunity for the market to expand considerably in markets like the U.S. and EU once safe, long-term, effective, non-NSAID therapies such as Zydax are available. Additionally, a large percentage of sport horses develop some form of DJD and most will regularly receive joint treatments.

Researchers have postulated that the sulfate-ester classes of compounds, including pentosan polysulfate a related polymer to that used in Zydax, may have applicability to various human disease states including OA. Historically, these polymers have proven difficult to develop and there has not been a successful approval for human use in treating OA. We believe that the development path of Zydax may have overcome many of the challenges of these compounds and thus we envision investigating the applicability of Zydax for treating OA in humans in years to come.

There is currently no cure for OA in animals. Most animals receive treatment after the clinical signs of pain and inflammation becomes apparent, which is typically very late in the disease progression. Lifestyle management options include rest and, if applicable, weight loss and physical therapy. Current drug treatments can only alleviate the pain and inflammation associated with OA, but do not treat the cause of the disease which typically includes a breakdown of cartilage. There are no current disease-modifying OA drugs that have been proven to control clinical signs of OA, limit disease progression and reverse and modify existing joint pathology.

The most popular treatments for OA are symptom-modifying drugs such as non-steroidal anti-inflammatory drugs (NSAIDs), which target pain and inflammation. All NSAIDs, including recently launched products have been reported to cause one or more significant adverse effects including liver and kidney toxicity and gastro-intestinal bleeding and gastric ulceration in both dogs and horses. High doses and/or long term use increases the likelihood of such effects, limiting the utility of NSAID treatment for OA that requires prolonged courses of therapy. In addition, although unrelated to adverse drug effects, there are restrictions on the use of NSAIDs in performance animals, including race horses.

Despite the limitations of NSAIDs, in the U.S. NSAID treatment remains the primary option for OA in dogs, representing an estimated $220 million market and we estimate the market in the U.S. and the EU may be over $410 million. Zoetis’ Rimadyl® (carprofen) was the first in this class to be approved and remains the market leader despite the availability of several generic carprofen products and alternative NSAIDs including meloxicam (Metacam® and its generics) and newer NSAIDs which are reported to be safer such as deracoxib (Deramax®) and firocoxib (Previcox®).

There are NSAIDs approved for use in horses, with the older NSAID phenylbutazone being the main treatment of choice in that species. Flunixin, and firocoxib are additionally approved for use in horses. The mainstay of therapy in horses with OA is short term treatment with NSAIDs and rest.

In some countries there is a class of drug called Pentosan Polysulfate Sodium, or PPS, which is used to treat the clinical signs of OA in dogs and horses. PPS was developed in Australia for veterinary use and is a popular product with disease modifying properties. Zydax was developed to be a significant improvement of PPS that sought to overcome the known weaknesses of the class of drugs, including an unpredictable and inconsistent efficacy profile. PPS is widely used in Australia, the United Kingdom, France and certain Scandinavian countries for use in dogs and is reportedly used off-label in horses. PPS products are available for use in horses in countries where the horse racing industry is popular, such as Asia and the Middle East. Polysulfated Glycoaminoglycan, or PSGAG, is a highly sulfated chondroitin sulfate product and is marketed under the brand name Adequan® for use in dogs and horses. Although available in the U.S., Adequan has not necessarily demonstrated substantial proof of safety and efficacy under the standards that are required by the FDA today. The PPS and PSGAG market are much smaller than the NSAID market, in part due to the lack of available drugs that have robust data to support their efficacy and hence we estimate that the global market is less than $50 million in annual sales.

In addition to drugs, there are supplements, also known as nutraceuticals that are commonly used to aid in the control of the clinical signs of OA. There is evidence to demonstrate that glucosamine and chondroitin sulphate can impact the OA disease process in humans and animals and as such their use has become very common. There are other bioactive compounds that are also popular including various marine extracts such as fish oils and also green-lipped mussel powder. Products containing these various nutraceutical ingredients are available in a large variety of products and brands in most countries and are not regulated as stringently as drugs. As a result the amount of active ingredients in many products may be too little to be therapeutic. There are some brands that are more effective including Cosequin® which is available in many markets. The global nutraceutical market is vast and is estimated to be in excess of $500 million in annual sales.

We developed Zydax to be a superior product offering to the PPS class of drugs which had been available in Australia for many years. The variability of efficacy in PPS products is postulated to be due to the fact that PPS is a polymer made up of various sub-fractions with differing characteristics, most notably degree of sulfation and molecular weight. We proposed that the degree of sulfation of PPS was likely to impact pharmacological activity, as would the consistency of molecular weight and amount of undesirable impurities such as divalent cations. In vitro head-to-head testing has proven that the patented characteristics of Zydax can inhibit the activity of aggrecanase 1 enzyme which is responsible for the degradation of articular cartilage, which ultimately leads to the pain and inflammation associated with OA.

The safety section for Zydax was deemed complete by the CVM in October 2013 in dogs. We completed long term safety studies in laboratory dogs, according to VICH - Guideline 43 (Veterinary International Conference on Harmonization; Target Animal Safety for Veterinary Pharmaceutical Products). Zydax demonstrated an excellent safety profile even at five times the recommended dose over a prolonged treatment period (six times the normal duration), with the only significant effect observed being a short term increase in a standard test for blood clotting (i.e., activated partial thromboplastin time). Such an effect was anticipated given the relationship of GXS to the anticoagulant heparin and does not impede the clinical utility of Zydax in veterinary practice.

We also conducted a concomitant-use safety study in mixed breed dogs using Zydax with the common NSAID, carprofen (Rimadyl®). Both products were studied at their approved dose rates (Zydax by APVMA and carprofen by CVM-FDA) for their labeled treatment periods to ascertain if there were any safety concerns regarding concurrent use. No safety effects were evident in the study.

We plan to develop protocols for similar studies for our equine product candidates and submit to the CVM for protocol concurrence. We anticipate that such studies will commence in 2018.

We have conducted several studies to ascertain the effectiveness of Zydax in dogs using various efficacy assessment tools. These pilot studies were designed to determine whether Zydax was effective at reducing the clinical signs of osteoarthritis in dogs to support an approval by the FDA and EMA. Given there had been no previous studies completed for OA drugs using the FDA’s newly mandated efficacy assessment criteria (dog-owner assessed, ‘clinical success’ end-points) we have undertaken studies using various assessment tools.

We announced the results of our pivotal efficacy study in June 2015. The pivotal efficacy clinical trial of Zydax was conducted as a randomized, double-blinded, placebo-controlled study evaluating the field effectiveness and safety of Zydax in the treatment of clinical signs of osteoarthritis in dogs. The trial, conducted at 20 sites in the U.S. and Australia, included 316 client-owned dogs with radiographic evidence of OA, of which 212 were treated with Zydax and 104 with placebo. The clinical endpoint was improvement in Client Specific Outcome Measures (CSOM) that included dog owners' assessment of improvement in activities such as walking, running and climbing stairs. Treatment was four subcutaneous Zydax injections (or placebo) given one week apart. Measurements were taken at baseline, day 14 (one week after second injection) and day 28 (one week after fourth injection). Clinical outcomes were evaluated at day 28 for a reduction in Activity Impairment Score (AIS) compared to baseline, and no increase in any individual CSOM between day 28 and baseline.

Based on the results of all of our clinical studies, we submitted a weight of evidence dossier to provide substantial evidence to support the approval of Zydax by the FDA. We received a response to that filing in the second quarter of 2016 and we met with the FDA to agree on the additional information that is required to support approval. One option is to utilise data produced from a clinical trial we commenced in early 2016 that was aimed at demonstrating the longevity of effect of Zydax treatment and also whether additional injections of Zydax in dogs who do not respond to the initial course of treatment is effective. Both of these end-points are unrelated to the initial approval of Zydax but were aimed at potentially expanding the label claim post-approval. However, the data generated from the first period of the trial may be used to support our current data set submitted to the FDA. We currently expect to refile our efficacy dossier with the FDA, including corroborating data from this new trial once the first period of the study is complete. The trial design is necessarily large to demonstrate the expected end-points (longevity of effect and treatment-to effect) and as such enrolment has taken some time. We currently expect we will complete the period-one enrolment of this study in the second quarter of 2017 which would provide the data we intend to submit with our refiled efficacy dossier to the FDA. If successful, this could lead to a potential approval of the Target Animal Efficacy technical section in late 2017 or early 2018.

We partnered with Lonza, a large and renowned Swiss custom synthesis organization to develop the commercial scale manufacturing process of the API for Zydax. Lonza was able to successfully develop a commercial scale manufacturing process and the associated Drug Master File which we filed with the FDA in the fourth quarter of 2015 and filed with EMA in February 2016. We received responses, as was expected, from both the FDA and EMA in the second quarter of 2016 and we have now compiled all the necessary data and responses to be able to refile the Veterinary (Drug) Master File, or VMF, with the FDA and the EMA in the second quarter of 2017. The VMF will be filed concurrently with the Chemistry and Manufacturing Controls, or CMC, section. We believe we have produced a robust data package and if successful, could lead to an approval of the CMC technical section as early as the fourth quarter of 2017.

We conducted a range of in vitro and in vivo toxicity studies of GXS and formulated drug product. All toxicity studies were planned in accordance with Good Laboratory Practices for non-clinical laboratory studies. The studies were also structured to meet the EU requirement for specific toxicity data in relation to human safety, primarily related to user safety in relation to companion animals.

PAR121 may have therapeutic applications in bone-related diseases and injuries in dogs, cats and horses. It has been shown to significantly enhance bone healing post-fracture.

Experimental formulations of PAR121 have undergone pre-clinical testing in rabbit and rat models for bone regenerating properties in an induced fracture model with encouraging results. In those pre-clinical studies, the mammalian safety of PAR121 was assessed with no significant adverse reports. Early tests have shown that the compounds are non-irritant, non-carcinogenic and have no microbial presence.

PAR121 is being developed from novel botanical extracts. We hold the exclusive worldwide rights to the technology and patent applications for PAR121 under license with a single digit royalty and modest milestone payments.

We are developing PAR121 to bring novel advantages to the management of bone injury in dogs and horses. If recovery were accelerated, performance animals with bone injuries could potentially return to competition earlier, and pets with fractures could be mobile sooner. Earlier quality-of-life restoration would reduce treatment and care costs and responsibilities for owners of dogs and horses sustaining bone injuries treatable with PAR121.

There are approximately 150 million pet dogs and cats in the U.S. Approximately $1.5 billion is annually spent on managing knee injuries in dogs, including surgery. We believe these expenditures primarily relate to surgical procedures and hospitalization as there are currently no available drug therapies. Recovery times from fractures and orthopedic surgeries typically last several weeks, during which dogs must be immobilized through the application of plaster casts, an attractive target for dogs to chew on which requires dogs to wear lampshade devices over their heads to restrain them from inadvertently removing the cast. Ultimately, any opportunity to enhance the recovery process from fractures or orthopedic surgeries would not only benefit the dog’s quality of life but would greatly reduce the owner’s frustrations of caring for a dog post-surgery.

There are estimated to be 9.2 million horses in the U.S., of which approximately 9% are racing horses. Approximately 75% of racehorse injuries involve musculoskeletal damage, of which bone injury is a significant part. An estimated 70% of young racehorses experience buck shins, also known as microfractures, and the recuperative period accounts for 12,000 lost training days and millions of dollars annually. Such high incidences mean much of the treatment focus and cost in racing horses is directed at orthopedic conditions. There are no therapies available that can shorten recovery times following bone injury. The economic and emotional impact of bone injury downtime is substantial and the industry continually seeks ways to return horses to competition or use.

In human medicine, bone growth factors such as Bone Morphogenic Proteins, or BMPs, have entered the human market in recent years. BMPs are applied directly to the bone during surgery to promote bone healing. We believe that PAR121 could be a superior product offering to BMPs as it would not require surgical intervention to be applied yet it may achieve similar outcomes in promoting bone healing.

PAR121 is expected to substantially speed the healing of bone post-fracture and post-orthopedic surgery in dogs, cats and horses. The active ingredients in PAR121 are derived from native botanicals of the Cook Islands, where these plants have been applied to bone fractures as a natural remedy for hundreds of years. The active component of PAR121 is extracted from a plant whose genera are distributed widely in the South Pacific and beyond however we believe that it is the unique terroir of the Cook Islands that gives this plant its medicinal properties. The nominated plant is the subject of patent applications by for pharmaceutical use.

Pre-clinical bone studies of PAR121 were performed in a rabbit ulnar critical defect model. A critical defect is a bone deficit with a substantial gap (20mm) rendering the bone unable to heal naturally. In the experiments, new cartilage and bone development was evident from as early as one week after bone injury.

Further pre-clinical bone studies investigated PAR121 vs. control in a spinal fusion model in rabbits. In the autograft study PAR121 was associated with advanced fusion at six weeks, while control individuals continued to show unattached bone fragments in the fusion mass. At eight weeks, the fusion mass of the PAR121 treatment group had similar tensile strength to controls at 12 weeks.

The initial investigations into PAR121 for bone fracture repair indicate a promising development path for this compound. We believe it has a significant potential in fracture treatment for both animals and humans, as both markets are poorly served by currently available non-drug and drug therapy options.

Parnell has studied this botanical extract in both in vitro and in vivo models of canine bone growth to elucidate the mechanism of action and the exact method of how PAR121 stimulates bone formation. We anticipate undertaking additional proof-of concept studies in 2017 in dogs now that we have shown promising results from rodent and rabbit models and from bone calcification in-vitro studies. The pilot efficacy studies in dogs will investigate whether we can replicate the successful outcomes of previous studies in our target species and whether we can regenerate “normal” bone. If this study is successful we will investigate various sub-fractions of the botanical extract and will commence pilot safety studies in 2017.

To provide the clinical materials for our animal studies, we utilized a pilot manufacturing process in the Cook Islands in 2016. We anticipate that in conjunction with the licensing partner (CIMTECH), we may be able to utilize funds granted from the U.N. The grant, given under the Nagoya Protocol provides for up to $1 million in matched funds for establishing infrastructure and capabilities in the Cook Islands for the botanical extractions that we are using in pilot clinical trials and we may also elect to establish larger infrastructure for producing the botanical extract on the Cook Islands if we are not successful in elucidating a synthetic API.

PAR122 has potential applications in atopic dermatitis and other dermatological conditions. It has been shown in pre-clinical studies to substantially increase the thickness of the epidermis of skin which is frequently diminished in conditions requiring the topical application of corticosteroids such as atopic dermatitis. In vitro investigative trials of PAR122 have also been conducted with similarly encouraging results. PAR122 is being developed from novel botanical extracts. We hold the exclusive worldwide rights to the technology and patent applications for PAR122 under license with a single digit royalty and modest milestone payments.

Flea Allergy Dermatitis, or FAD, is the most common dermatological disease of dogs in the U.S. FAD is an allergic skin reaction to flea bites. Regular treatment with ectoparasiticide products combined with environmental control measures limits exposure to fleas but once FAD develops, dogs are afflicted for life. The result of FAD is that dogs itch themselves excessively as a result of even one flea bite.

In addition to fleas, environmental allergens of various types can cause hypersensitivity and skin itching in a significant proportion of the dog population. Such atopic dermatitis conditions are believed to be genetically predisposed and tend to be incurable and expensive to manage at $1,000 or more per year.

Clinical management of both FAD and atopic dermatitis is centered on reducing pruritus (intense itching) which causes the dog to break the surface of the skin through licking, chewing, scratching and rubbing. This exposes the dermal layers and can lead to infection. Glucocorticoids are generally prescribed to reduce itching, but they cause thinning of the skin over time.

The lifelong burden of constant treatment, variable response and regular recurrence can cause significant emotional impact on a dog owner and reduce the quality of life of the dog. There are no approved treatments available that that can rapidly improve skin thickness.

We believe PAR122 could provide a first-in-class product to address the destructive cycle of pruritic skin disease in dogs. The active ingredients in PAR122 are derived from native botanicals of the Cook Islands, where these plants have been applied to skin conditions as a natural remedy for hundreds of years. The active components of PAR122 are extracts of three specifically nominated plants whose genera are distributed widely in the South Pacific and beyond. The nominated plants are the subject of patent applications by CIMTECH for pharmaceutical, complementary medicinal and cosmetic uses.

PAR122 thickens the epidermis, which should help treat animals affected with flea allergy dermatitis. Flea allergy dermatitis (FAD) or flea bite hypersensitivity is the most common dermatologic disease of domestic dogs in the USA. Cats also develop FAD, which is one of the major causes of feline miliary dermatitis. When feeding, fleas inject saliva that contains a variety of compounds, enzymes, polypeptides, and amino acids that span a wide range of sizes (40–60 kD) and induce Type I, Type IV, and basophil hypersensitivity. Flea-naive dogs exposed intermittently to flea bites develop immediate (15 min) or delayed (24–48 hr) reactions, or both, and detectable concentrations of both circulating IgE and IgG antiflea antibodies. In dogs, the pruritus associated with FAD can be intense and may manifest over the entire body. Classic clinical signs are papulocrustous lesions distributed on the lower back, tailhead, and posterior and inner thighs. In extremely hypersensitive dogs, extensive areas of alopecia, erythema, and self-trauma are evident. Traumatic moist dermatitis (hot spots) can also occur. As the disease becomes chronic, the dog may develop generalized alopecia, severe seborrhea, hyperkeratosis, and hyperpigmentation.

In cats, clinical signs vary from minimal to severe, depending on the degree of sensitivity. The primary dermatitis is a papule, which often becomes crusted. This miliary dermatitis is typically found on the back, neck, and face. The miliary lesions are not actual flea bites but a manifestation of a systemic allergic reaction that leads to generalized pruritus and an eczematous rash. Pruritus may be severe, evidenced by repeated licking, scratching, and chewing. Cats with FAD can have alopecia, facial dermatitis, exfoliative dermatitis, and “racing stripe” or dorsal dermatitis.

Pre-clinical skin studies for PAR122 in rats identified changes to the cutaneous epithelium, a layer of the skin, in the region of application of PAR122 with no observable adverse reactions. The difference between the regions of application and control regions revealed thickening of many layers of the epithelium. The increase in thickness was typically over 100% compared to the adjacent regions of the same animal, and higher if compared to untreated animals. This was reproducible and statistically quantifiable and may have implications for clinical application ranging from disorders of keratinization, skin regeneration and repair through to age related thinning of the skin.

Above: Representative histology at 40x magnification of the skin adjacent to the treated area (a) and the treated area (b) showing the cellular layers and the absence of inflammatory infiltrate.

Currently the only available treatments are supportive, not curative, to control pruritus and secondary skin disease in hypersensitive animals. Systemic glucocorticoids are often needed to control inflammation and associated pruritus. As soon as flea control is accomplished, the glucocorticoid can be discontinued. Secondary bacterial skin infection can be associated with FAD. Systemic antibiotics are commonly used to control the pyoderma and thus reduce the associated inflammation and pruritus. Selection of an appropriate antibiotic should be based on bacterial cultures and results of antibiotic sensitivity tests. We believe that the effects of PAR122 will lead to a paradigm shift in the treatment of FAD and other inflammation associated skin diseases.

The initial investigations into PAR122 for improving the quality of skin in dermatological conditions indicate a promising development path for both compounds. We believe it has significant potential in highly prevalent dermatological diseases for both animals and humans, as both markets are poorly served by currently available drug therapy options.

We plan to run the same development process for PAR122 as described for PAR122 above.

In Australia, we currently market a dual joint care program that combines our Zydax injectable product with a daily dose of Glyde Powder, our at-home nutraceutical treatment which contains a therapeutic dose of the building blocks of cartilage, glycosaminoglycans (glucosamine and chondroitin) and a proven dose of eicosatetranoic acid derived from green-lipped mussel powder, a potent natural anti-inflammatory. Glyde Chews, our new installment in our OA innovation strategy, are flavored dog treats that facilitates treatment and enhance the customer experience. We launched Glyde Chews in Australia and the U.S. in the second half of 2015 by establishing a U.S. companion animal sales and marketing team.

OA in animals is a large and growing global market. We estimate that the market for OA prescription drugs in the U.S. and the EU to be over $410 million in annual sales and the global market for alternative treatments to be at least another $500 million in sales. This large market is driven by increasing pet ownership and the fact that up to 90% of dogs will develop OA in their life time with approximately 20% of dogs suffering osteoarthritis at any one point in time. Additionally, a large percentage of sport horses develop some form of DJD and most will regularly receive joint treatments.

Treatments that utilize various naturally occurring substances are typically referred to as nutraceuticals and most commonly contain marine extracts such as glucosamine and chondroitin (also referred to as glycosaminoglycans, or GAGs). As with popular human supplements for OA, there are a wide-array of products that typically do not require any regulatory approval and as a result do not always contain a dose of the active ingredient that is consistent with established therapeutic doses. As a result, many nutraceutical products may not be effective in achieving their stated product benefits. Similarly, fortified foods from pet food manufacturers are becoming increasingly popular. These specialty dog foods are purported to contain the same marine extracts and may also contain other claimed ingredients such as Omega 3 fatty acids. While the market is crowded with various products, there have been some products that are based on therapeutic doses of GAGs such as Cosequin® and Dasequin® marketed by Nutramax®.

Glyde is our daily nutraceutical for dogs that aids in the treatment of OA. It is provided to the dog once per day either by mixing it in with the dog’s food, when in powder form, or as a treat, when in chew form. Glyde contains a combination of three naturally occurring products, which include glucosamine, chondroitin and green-lipped mussel. Glucosamine works to improve the health of, and provide important building blocks for, healthy cartilage growth. It has been shown to stimulate the production of joint fluid and cartilage by up to 50%. Chondroitin, another direct building block for cartilage, inhibits cartilage degradation by approximately 59% and blocks the formation of micro blood clots in the small blood vessels that supply nutrients and oxygen to the bone and cartilage. Green-lipped mussel is the only naturally occurring source of ETA which has strong anti-inflammatory properties without the risk of gastrointestinal side effects. Glyde is the only nutraceutical product that contains both glucosamine and chondroitin as well as green-lipped mussel (containing ETA), in a validated, therapeutic dose.

We have been marketing our current reproductive hormone products, estroPLAN and GONAbreed, for more than ten years in over 14 countries. We were one of the first companies to gain approval for the use of a Prostaglandin (drug class of estroPLAN) with a GnRH (drug class of GONAbreed) for estrous synchronization to allow for FTAI in a breeding program commonly referred to as Ovsynch. While the active ingredients in both products are generic, the innovation for Ovsynch lies in the way the drugs are used in combination. Consistent with that innovation, we plan to file multiple applications for method of use patents for our PROCEPT breeding program which is intended to increase conception rates in AI programs by 10% to 15% as compared to the Ovsynch program.

Inadequate reproductive programs are widely reported as a significant cause of economic loss on a dairy farm and yet current performance for typical breeding metrics such as “days open” and “rolling 21-day pregnancy rates” are well short of optimal levels. Multiple factors drive reproductive performance but two major activities are above all other factors; insemination rates and conception rates. Timed breeding programs such as Ovsynch and our PROCEPT program can largely overcome the challenges of detecting those cows that are ready to be bred (“in-heat”) and various new technologies such as electronic heat detection aids can also enhance insemination rates in combination with effective hormone-based programs.

There are 9.2 million dairy cows in the U.S., and 40 million doses of GnRH and PG are sold annually for approximately $80 million. We estimate up to 100 million dairy cows globally are milked in industrialized dairy farms, including 20 million in Europe and six million in Australia and New Zealand.

Current options available on the market that seek to increase conception rates above those that are achieved with Ovsynch programs typically require long complex breeding programs such as Presynch-Ovsynch (38 days duration vs. ten days for Ovsynch) or the use of intravaginal progesterone devices such as CIDR® which have known shortcomings including significant cow discomfort and cow-induced expulsion of the device.

PROCEPT is our next generation breeding program which we are developing in conjunction with Dr. Milo Wiltbank. PROCEPT is expected to increase absolute conception rates by 3% to 5% (from a relative increase of 10% to 15%) over and above traditional Ovsynch programs yet still maintain the short ten day duration of oysynch. Such an uplift in conception rates could dramatically improve profitability at a typical U.S. dairy herd by up to $4,200 per year for every 300 cows being milked. PROCEPT is a novel breeding program that uses our existing products estroPLAN and GONAbreed. It is closely related to the Ovsynch program that uses three injections of GnRH and PG in sequence over ten days.

Because PROCEPT is a breeding program that utilizes our currently available products (estroPLAN and GONAbreed) under their approved labels there is not expected to be any regulatory approvals necessary. We have applied for patent protection of PROCEPT in the US and will also seek patents in other markets.

In 2012, we completed the construction and commissioning of a new 33,000 square foot manufacturing facility in Alexandria, a suburb of Sydney, Australia. We have the capability to manufacture aseptically filled and terminally sterilized injectable drugs in vial sizes ranging from 10mL to 200mL on an automated filling line that can produce up to 20,000 vials per day. We also have an auxiliary filling suite which we use to for semi-automated and hand-filled products such as low volume R&D and pilot batches. This flexibility gives us a self-sufficient ability to manufacture a wide variety of products including highly potent drug products at both development and commercial scale. As the facility has been inspected by the FDA, we can manufacture products for the veterinary and human market. We currently have approximately 75% spare capacity in this facility which we expect to fill with our own product demand as our pipeline comes to market and additionally through contract manufacturing opportunities. While our predominant focus in on parenteral drugs, we also have capability to produce oral products such as pastes, powders, and in the near future, medicated chews and treats. Our facility operates with a highly efficient operating set-up that means we can often achieve higher margins than our competitors who rely on third-parties or operate more expensive facilities. We can also further increase our manufacturing capacity through shift expansion and modest investments in larger vessels that enable larger batch sizes.

We have strong partnerships with several API manufacturers who provide us with the drugs which we use in production in our own facility. We partner with Piramal, based in the UK, Bachem and Lonza, based in Switzerland, and several other companies based in Australia and New Zealand. We also procure our product components such as vials from leading multi-national companies including Saint Gobain and West Pharma.

The companion animal market is typically characterized by products for dogs, cats and horses. Pet ownership and per capita spending on pets is increasing globally as pet owners desire to foster a strong, long-lasting, human-animal bond.

The American Pet Products Association, or APPA, reports U.S. consumers spent an estimated $53 billion on their pets in 2012, up 38% over 2006. The U.S. is the single largest pet market and currently 68% of U.S. households own a pet.

Pet owners treat their pets as members of the family, and strive to provide quality care to extend their life and maintain the human-animal bond. We believe the demand for quality of care and effective products to meet medical needs of pets will continue to grow.

Although the market for pet therapeutics is growing, there are a limited number of products licensed by the FDA for use in pets. For example, in 2012, 39 new human drugs were approved by FDA, while only 11 new animal drugs were approved by the FDA, six of which are for use in cats or dogs. In Europe, the EMA approved 52 new drugs for humans in 2012, and only three drugs for animals. Many of the currently-licensed products are parasiticides. As a result, veterinarians often resort to using off-label human drugs to address medical needs in pets. However, due to the biological differences between humans and other species, drugs which are safe and effective in humans can be harmful or not effective when used in other species. Advancements in human medicine have created new therapies for addressing chronic disease associated with aging including OA, cancer, diabetes and cardiovascular disease. Pets often suffer from these same diseases as they age. We believe pharmaceuticals specifically designed for pets can improve their quality and length of life and assist veterinarians in achieving improved medical outcomes for patients. This can lead to increased owner compliance when giving medications to pets as the products are in more palatable dosage forms. In addition, we believe pet owners are becoming better informed about the signs of disease in pets and as more safe and effective treatments become available, they will be more likely to have their pet diagnosed and treated.

The production animal health industry is primarily focused on providing vaccines and pharmaceuticals. The industry is growing in response to increasing demands for food from a growing global population. As standard of living improves, people’s appetite for animal protein grows. Therefore, it is important to consumers and livestock producers that our food supply is safe and nutritious, and that livestock herds are kept free from disease by using proper husbandry, appropriate medicines, and vaccines. As a result, livestock owners are always looking for ways to improve production efficiency through the use of new, innovative, animal health products.

In 2012, the U.S. dairy market consisted of 9.2 million cows managed on approximately 58,000 dairy farms. The market is consolidated, with 63% of milk being produced on just 6% of farms, or 3,300, with greater than 500 cows per farm. Milk production is growing annually as milk production per cow continues to increase. U.S. milk production topped more than 200 billion pounds for the first time in 2013. Export demand for U.S. dairy products is currently robust and dairy farms are expecting improved profit margins in 2014, allowing them to improve their equity position while funding additional incremental management strategies to improve farm efficiency. We expect the number of dairy cows to remain stable as milk production per cow increases; however, there will continue to be fewer dairy farms.

The growing demand for milk and milk products creates increasing need for effective cattle pharmaceuticals and vaccines. This need is driven by several factors:

Since the 1960s, per capita consumption of milk and milk products in many markets has nearly doubled, and meat consumption has more than tripled according to the Food and Agricultural Organization of the United Nations. However, China and other emerging markets, currently have a much lower per capita consumption than developed markets. As a result, the rising demand for milk and meat must be met with increasing efficiency using less production resources.

Animal health products have contributed substantially to the efficiency of animal production since the 1940s resulting in improvements in feed efficiency, production yields and reduced disease pressure in animals. We believe needed improvements in production efficiency will continue to be closely tied to effective animal health products such as reproductive hormones to improve pregnancy rates, and effective medicines to control infection. We believe animal health products will continue to be important tools for dairy producers to meet their productivity enhancement needs.

The process of developing and commercializing pharmaceuticals for pets is similar to human drug development and commercialization. Products must be proven safe and effective in clinical trials approved by regulators. The process depends on new product proof-of-concept, formulation, research, and development. When marketed, companies must adhere to approved label claims regarding impacts on health. However, there are differences between human drug development and animal drug development. Regulatory agencies require prior to approval that a product intended for pets is:

The pathway for development of pet pharmaceuticals is generally faster and less expensive than human drug development since fewer clinical studies are required with fewer patients and the trials are conducted directly in the target animal species. As a result, there is no need to bridge from pre-clinical investigations in one species to the final target species so decisions regarding safety and efficacy can be made more quickly and the likelihood of success can be established sooner. In the U.S., the FDA encourages drug sponsors to interact with the agency early in the development process and through the approval process.

Veterinarians play an active role in diagnosis and treatment of animal medical needs, and are involved in generating revenue by prescribing and selling animal pharmaceuticals to animal owners. Unlike in human medicine, veterinarians perform the dual role of doctor and pharmacist as animal owners typically purchase pharmaceuticals directly from veterinarians. As a result, product sales are a direct and important contributor to clinic revenue. The frequency of veterinary office visits has declined somewhat as vaccination intervals have increased to tri-annual versus annual, and as dispensing of medications has become more common through mail-order catalogs, big-box retailers and online retailers. This is creating a need for veterinarians to continually seek new ways to support clinic revenue by providing differentiated services and products.

According to DVM Newsmagazine’s state of the Profession Report in 2012, pharmaceutical sales comprised about 9% of companion animal veterinarian clinic revenue. We believe this revenue can and will increase as new, novel pharmaceuticals become available specifically designed for animals.

Veterinarians are typically open to engaging with manufacturer sales representatives. As compared to a sales detail in human pharmaceutical sales of less than two to three minutes, veterinarians and their staff may engage with animal health sales reps for 15 to 20 minutes or longer, and frequently participate in learning events to gain a deeper understanding of patient care options. Sales representatives are able to focus on partnering with customers to educate and support disease awareness and treatment options. As a result, relationships and consulting visits are usually more meaningful and interactive than in human. Access to veterinary clinics is normally open and key decision makers within the clinic are willing to meet with sales representatives in person.

Animal health products generally experience strong brand loyalty. Although generic products do exist in some categories, sales of pioneer brands remain strong as companies continue to support the brands with educational platforms to veterinarians and livestock producers. In addition, since the products are self-pay, the animal owners, rather than third-party payer insurance companies or governmental agencies, determine product usage. We believe these dynamics create less downward pricing pressure than in human health when the exclusivity period expires. In addition, the relative smaller size of the animal health generic market versus the human generic market has made it less attractive for large, global, generic competitors.

Animal owners are concerned about safety and efficacy of products for their pets and livestock, which adds to brand loyalty for branded animal health products from reputable companies. We believe this brand loyalty can be maintained even after the loss of marketing or patent exclusivity.

Our customer is ultimately the animal owner, whether the animal is a family pet or a production animal. We have also developed a strong capability to create collaborative business relationships with veterinary practices. This enables us to offer a financially attractive proposition to all stakeholders in the animal health value chain- us, the veterinary practice, and the animal owner. We believe this sets us apart from some of our multi-national competitors, some of which have diminished the role of the veterinarian to focus on promoting their products and offering incentives directly to animal owners.

We sell our products in the U.S. through major distributors with a particular focus on MWI and Animal Health International. We tend to focus on partnering with larger veterinary clinics, typically those which employ three or more veterinarians. Veterinarians typically purchase our products from distributors and sell to animal owners.

We compete against an array of animal health companies, from large multi-nationals to smaller single-product entities, in the regulated pharmaceutical market as well as alternative medicine and therapy markets. It is our view that certain livestock sectors are extremely competitive, and we tend not to focus on them. In particular, we believe that where the animal itself is the commodity, such as in poultry, swine and beef feedlots, there is a predominance of cost minimization. As a result, we prefer to focus on markets such as dairy or beef cow-calf ranches, where the animal itself produces the commodity and therefore provides an opportunity for maximizing animal health. We have never operated in the vaccine market, which we see as crowded, and a difficult market for our value proposition. We focus on enhancing the performance or quality of life for the animal, and therapeutics are better suited to our model.

Our primary competitors currently include Zoetis, Merck, Merial and Bayer in dairy, and Zoetis, Merck, Merial, Novartis, Boehringer Ingelheim GmbH and Ceva in companion animal. In the future, we may compete against other companies such as Vetoquinol, Virbac and Dechra which are larger European companies, and other emerging growth companies such as Aratana, Kindred Biosciences and NexVet.

The level of competition from generic products varies from market to market. For example, the number of smaller, local generic manufacturers is higher in Europe and certain emerging markets than in the U.S. Generic competition is certainly present in many markets and may increase in the U.S., notwithstanding the stringent standards of the FDA. We believe that our strong heritage in competing against generic offerings in many markets has enabled us to hone a strong value proposition that is not always reliant on patent protection. We also believe that because the animal health market is ostensibly a consumer market, unlike human health, marketing and branding strategies can be very effective tools for competing against generic products.

Our technology, brands and other intellectual property are important elements of our business. We rely on patent, trademark, copyright and trade secret laws, as well as regulatory exclusivity periods and non-disclosure agreements to protect our intellectual property rights. Our policy is to vigorously protect, enforce and defend our rights to our intellectual property, as appropriate.

Our product portfolio already enjoys the protection of patents, typically with approximately 15 years or more remaining. We see an increasing array of patent protections as crucial to our growth and development. Additionally, we utilize other mechanisms of protection, including trade secret in manufacturing methods and formulations. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees, consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their employment or engagement.

The chart below highlights our material patents and product groups, the major jurisdictions, and relevant expiration periods. Additional patents have been filed to extend the patent life on some of these products, but there can be no assurance that these will issue as filed.

To obtain regulatory approval for marketing of our veterinary pharmaceutical products, we have to demonstrate the quality, safety and effectiveness of the product. For products that will be used in food producing animals, human food safety of produce from treated animals must additionally be demonstrated. Environmental safety and safety to the human user of the product may also be necessary.

To demonstrate product quality, all products must be manufactured according to Good Manufacturing Practice , or GMP. GMP covers all aspects of manufacturing, including the facility and equipment in which the product is manufactured, the quality systems in operation, controls and testing of raw materials, packaging materials, the manufacturing processes, testing methods and the stability profile. The GMP requirements for injectable products are particularly stringent, given that all products must be sterile to avoid the possibility of introducing infection when treating patients with the product. Both active ingredients and finished products must be manufactured under GMP, and part of the approval process for any drug application is inspection and approval of the specified manufacturing facilities for both the API and the finished products by the regulatory authorities. Our manufacturing facility, located in Sydney, Australia, has been inspected by the FDA.

To demonstrate safety, for new chemical entities, a comprehensive battery of in vitro (laboratory, non-animal tests, for example cell line tests) and in-vivo (in animal) test are necessary, and this data also contributes to the determination of acceptable minimal levels of the drug that may be identified in products that will enter the human food chain, as well as environmental safety and human user safety.

For demonstration of safety in the intended target species, pivotal well controlled studies are necessary in that species to demonstrate the effects of long term use of the product in the animal at both the recommended dose rate and at multiples of that dose rate. For products where a recommended treatment course may be prolonged, as may be required in chronic disease conditions such as OA, such studies must be conducted for a minimum six month period. Additional safety studies such as concurrent use with other products may be required if such use is likely to be common standard of care in practice.

To demonstrate effectiveness of the product, in vitro or in vivo mode of action studies may be necessary. In the intended target species, dose determination studies may also be required, followed by pivotal effectiveness studies in typically 200 or more client-owned animals conducted with veterinarians in several practices. For production animals, such studies must cover a range of geographic and management conditions such as would be expected to be typical of the industry as a whole. In addition, a much larger number of animals is generally required. For production animals particularly, local regulators generally require that studies are conducted within the relevant country, meaning that typically several such studies must be conducted. Even for companion animals, the FDA in particular generally requires that the majority of the study is conducted in the U.S.

For production animals, it is necessary to conduct pivotal human food safety studies to demonstrate potential drug concentrations in products that many enter the human food chain. This requires dosing at the maximum dose rates for the longest proposed course of treatment, followed by laboratory analysis of animal tissues. This analysis is intended to demonstrate any drug residue and to provide for a drug withdrawal period, which is the period of time required between the final treatment and potential collection of produce or slaughter for human consumption.

Data regarding the manufacture of the product and the product chemistry and stability is included in the CMC section.

As the data for each section is generated, it is formatted into a dossier that is specific to each jurisdiction. Based on the information from all the different technical sections, we develop the proposed product label which is also submitted to the regulators in the dossier.

Following approval, sponsors of veterinary pharmaceuticals must comply with post-approval compliance requirements, including monitoring products, submitting any reports of adverse events or product defects, submitting annual updates to the product dossier, and periodic manufacturing facility inspections.

The CVM is the division of the FDA responsible for regulation of veterinary pharmaceutical (non-immunological) products.

The FDA’s data requirements and processes for approval of pharmaceuticals intended for use in animals are largely the same as those required for pharmaceuticals intended for human use. The CVM ensures that animal drugs are safe and effective, and are manufactured according to GMP requirements.

Each new drug application submitted to the CVM consists of up to five major technical sections (safety, efficacy, CMCs, human food safety, environmental safety), and additional sections (labeling, freedom of information summary and all other information), depending whether the application is for a production animal product or a companion animal product. Applications are either NADAs or Abbreviated New Animal Drug Applications, or ANADA, or Conditional New Animal Drug Applications. NADAs are used for drug products with, for example, new compositions, uses or dosage forms. ANADAs are used to show that a proposed drug product is identical, across a number of factors, to an existing, legally marked drug.

The CVM encourages sponsors to schedule prior submission conferences to review development programs and to discuss aspects of individual technical sections. Although not mandated, they will review with pivotal study protocols. With protocol concurrence, the FDA effectively agrees that the study’s design will meet their requirements if the study is conducted with, and data is analyzed in line with, the concurred protocol.

The FDA is required to approve or not approve a complete NADA within 180 days or such longer period as the sponsor and the FDA may agree upon. This means that if all sections of the NADA are simultaneously submitted it could take 180 days for the entire NADA to be reviewed. However the FDA encourages phased submissions of each technical section of the NADA. Typically the FDA applies the same 180 day review period for individual major sections (such as efficacy, safety, and CMCs) and upon the final section of the NADA being deemed complete, an Administrative NADA process is undertaken which technically may take 180 days but the FDA has stipulated they expect it to take 60 days. At the end of the 180 day review for each major section of the NADA, the FDA will typically have two options; deem the section complete or deem it incomplete. If it is incomplete, we will need to rectify the deficiencies and re-submit for a further review of 180 days as stated above.

Historically, the FDA has used a third option after the 180 day review period. Rather than deeming the section incomplete, they may request an end-review amendment, or ERA. This process requires the Company to submit additional information or clarifications within 30 days, and then the FDA takes a further 135 days to complete the review. This means that under an ERA, a review could take as long as 345 days. There is a proposal by the FDA, which may or may not come into effect, which would change the ERA process to a similar process called a “Reactivation” that may allow a company to rectify non-substantial deficiencies and re-submit the section within 120 days and in which case the subsequent review would take 135 days (instead of 180 days).

In addition to the CFRs, the FDA sets performance goals covering all of the various types of submissions, of which there are many. For major sections of an NADA, the performance goals are set to respond to 90% or more of submissions within the 180 day goal and for Administrative NADAs (the final process before approval) within 60 days. Performance goals for review timeframes are not guaranteed, and furthermore, these timeframes do not include the time taken for us to actually “complete” the application. Therefore, we cannot accurately predict when or whether final approval may actually occur.

Generic drugs are reviewed within timelines established under the Animal Generic Drug User Fee Act. The performance goal for the review period for an ANADA is 270 days. The performance goal for the review of a completed, administrative ANADA (used for a phased review process) is 60 days, but again it is not possible to predict whether performance goals will be met or when or whether final approval of a drug product may actually occur.

The FDA provides a period of three years of marketing exclusivity for a new use of an animal drug that requires reports of new clinical or filed investigations for its approval. During this time period, no ANADA for a generic copy may be approved for the new use. There is also a five year marketing exclusivity period for an animal drug no active ingredient of which has been previously approved in any NADA, during which no generic application may be submitted for that drug. However, an ANADA for that product may be submitted after four years if the generic applicant claims non infringement of a listed patent for the approved product or its use. Where an ANADA applicant alleges non infringement or invalidity of a listed patent, and the patent holder or NADA holder sues within 45 days of receipt of notice of non-infringement or invalidity, there is an automatic stay of approval for 30 months or until a court finds that the patent has not been infringed upon or is invalid, whichever is earlier. In the case of an ANADA that is filed after four years of approval of an NADA for a drug subject to five-year exclusivity, the 30-month period is extended until seven and a half years after approval of the NADA.

In all cases, a drug manufacturing facility may not commence initial production of a drug, or continue production of a drug, without evidence acceptable to the FDA that the facility has been inspected and is suitable for conducting manufacturing operations for the products to be manufactured.

The EU is regulated by both central bodies such as the EMA, and national bodies, such as the U.K. Veterinary Medicines Directorate. The EMA section responsible for review of veterinary products is the Committee for Veterinary Medicinal Products.

There are four approval processes that can be followed to obtain Marketing Authorizations within the EU:

In contrast to the FDA, EMA and the national authorities do not concur with pivotal study protocols. Scientific advice can be requested but must be paid for; the EMA is obligated to accept the conclusions of a study conducted following such scientific advice.

The centralized and decentralized procedures have very structured processes and associated time frames, with regulator review time taking 210 days. At specified points in the process, the regulator may submit questions to the applicant, which stops the clock pending return of responses. At the successful completion of the processes, each country must formally register the product, which generally takes an additional 30 days.

In contrast to most of the world, within the EU, the horse is considered a food producing species, therefore human food safety packages are necessary for products intended for use in horses. However, recently a horse passport program has been implemented which records all drug administration to a horse and also deems the horse to be not fit for human consumption. This has allowed the approval of drugs in horses with a contraindication for use in horses destined for human consumption.

Residues packages for new drug products for use in food producing animals are assessed by EMA separately to the application for Marketing Authorization, and are typically submitted six months in advance of any associated application.

A generic equivalent product may not be placed on the market in the EU until ten years have lapsed from the initial authorization of the pioneer product.

Approval of veterinary chemical products in Australia is controlled by the Australian Pesticides and Veterinary Medicines Agency, and in New Zealand by the Agricultural Compounds and Veterinary Medicines group. In New Zealand, applications to the EPA are additionally required. Data requirements generally mirror those outlined above, although there are some unique local requirements. Given that both countries have very large export markets for agricultural produce, international trade considerations must be considered in applications for products for food producing animals. When global data packages are generated to primarily meet FDA and EU requirements, international trade considerations generally do not require additional data.

Most countries have their own regulatory agencies for veterinary products. Some countries essentially recognize approvals by other stringent regulatory authorities and have reduced data requirements (for example many countries in the Middle East). Some follow FDA or EU requirements. Some countries require additional local studies, particularly of products are for use in production animals where management systems may vary. Non-English speaking countries usually require submissions to be submitted in their native language; accordingly, it may be necessary to work with local agents or partner countries to translate and submit dossiers and to manage the regulatory process.

We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These laws and regulations govern matters such as:

Due to our operations, these laws and regulations also require us to obtain, and comply with, permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke our permits, registrations or other authorizations and can enforce compliance through fines and injunctions.

Certain environmental laws, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. In addition to clean-up actions brought by federal, state, local and foreign governmental entities, private parties could raise personal injury or other claims against us due to the presence of, or exposure to, hazardous materials on, from or otherwise relating to such a property. We have made, and intend to continue to make, necessary expenditures for compliance with applicable environmental, health and safety laws and regulations.

The following diagram summarizes the corporate structure of our consolidated group of companies as of December 31, 2016:

Our registered headquarters are located in Alexandria, a suburb of Sydney, Australia. We entered into a lease for 11,550 square feet of office space and 20,161 square feet of manufacturing space. The lessor, Helion Properties Pty Ltd, is controlled by Alan R. Bell, our Chairman. The initial ten-year term of the lease began on January 1, 2011. We have an option to renew the lease for up to two terms of five years each by providing notice in writing between three and twelve months prior to the expiration of the initial term of the lease. This location serves as our manufacturing facility, and also has offices for manufacturing personnel and our global finance team.

Our R&D, clinical science, regulatory, sales, marketing, digital technologies, U.S. finance, human resources and administration functions are located in our 20,026 square feet office in Overland Park, Kansas. We lease this property under a 10-year lease which commenced in December 2014 upon the completion build out. The lease provides for an option to renew as well as a right of first refusal over additional space on the same level of our building allowing for future expansion. The landlord provided a building fit out to the value of USD$35 per square foot, as well as rent abatement for the first six months of the lease term. In addition to the tenant incentives, the Group was also provided with an expansion grant by the Department of Commerce in the State of Kansas in light of the expansion of our U.S. Headquarters to accommodate up to 32 new positions to support our future growth. This incentive provided for a cash grant of USD$400,000 with USD$300,000 upon signing the lease on the new premises and USD$100,000 in twelve months. There are approximately USD$100,000 in ancillary program incentives and USD$200,000 in tax incentives for a total program incentive of USD$700,000

Our revenues, costs and expenses are reported for the fiscal years ended December 31, 2016, December 31, 2015, the six-month periods ended December 31, 2014 and for the fiscal years ended June 30, 2014 and 2013. In order to provide additional meaningful information to investors, we have included unaudited consolidated information related for the fiscal year ended December 31, 2014 and the six month period ended December 31, 2013. This unaudited information is presented for comparative purposes to the corresponding fiscal year ended December 31, 2015 and the six month period ended December 31, 2014.

Our revenues are currently derived from our two major product portfolios that are used to increase reproductive efficiencies in cattle and treat OA in dogs and horses, and our contract manufacturing division. Generally, our products are sold to distributors or veterinarians, by our sales team who augment our sales efforts by utilizing our proprietary and innovative software platforms, FETCH and mySYNCH , to drive profitability for veterinary clinics and ensure animal owners gain the maximum advantage from our animal health solutions.

We have made a substantial investment over the last five years in building and constructing a modern, FDA-inspected sterile manufacturing facility. We estimate that our total costs attributable to running our manufacturing facility is approximately $5.0 million annually. This represents personnel costs of the production and quality teams, utilities costs, internal and external quality testing, manufacturing consumables and rent. It does not include the variable costs of the products such as the product ingredients and packaging.

Because we are focused on operating a cost efficient facility, management uses a activity based cost basis to determine the specific cost of manufacturing an individual product. This method allows us to attribute the exact cost of each manufacturing process for a product as well as the exact costs of the product ingredients and packaging.

We use this costing methodology to identify the direct costs of the products we sell which we call Cost of Sales — Products. Due to our new facility having approximately 64% available capacity, we do not attribute the full overhead costs of operating the facility to our products that we sell. The remainder of unutilized factory capacity is therefore separately identified as Cost of Sales — Facility.

This separation allows our management to have a clear understanding of what the cost of the products are as compared to the cost of not yet utilizing the full capacity of the facility and similarly what the opportunity is to fill this capacity with either contract manufacturing opportunities and/or developing our own pipeline product candidates.

Specifically, Cost of sales – Products and Cost of sales – Facility are comprised of:

Costs of sales – Products consist primarily of cost of materials, facilities and other infrastructure and resources used to manufacture our products based on a standard cost methodology that uses attribution of direct costs plus the actual absorption of fixed and overhead manufacturing costs to each unit of product produced. All remaining fixed costs of operating the manufacturing facility that are not absorbed by actual production are reported in Cost of sales – Facility, as explained below.

Costs of sales – Facility consist of, among other things the fixed and semi-variable expenses, infrastructure and resources required to run our FDA-inspected manufacturing facility less any allocation of these costs based on a standard costing methodology. These net costs represent the costs associated with running the manufacturing facility whilst the facility is not fully utilized. As our sales and associated cost of sales increases the utilization of the facility will be increased and Costs of sales — Facility will be reduced. In addition, with 64% available capacity in this facility we expect to augment this fully operational infrastructure by exploring contract manufacturing opportunities into the future.

Selling and Marketing expenses consist of, among other things, the internal and external direct costs of the sales and marketing, functions including headcount costs for the sales force and marketing team as well as the costs of promotion, advertising and marketing programs.

Regulatory and research and development expenses consist of the costs of maintaining regulatory approvals across all jurisdictions for our approved products. Most of these expenses are associated with the annual government imposed charges to renew registrations as well as the headcount costs of the regulatory affairs team.

Administration expenses consist of, among other things the costs associated with running and maintaining the financial systems and processes, information technology, or IT, systems and infrastructure, as well as the headcount costs of the finance, human resources, executive functions and costs of maintaining our corporate offices.

Net foreign exchange (losses)/gains on borrowings includes conversion costs resulting from movement in foreign currency exchange rates associated with our foreign currency denominated debt facilities.

Finance costs consist primarily of interest and borrowing costs associated with the indebtedness as represented in our consolidated balance sheet.

Other income consists of various items which typically include income from the sale of fixed assets and/or marketing authorizations of products, government grants and tax incentives, adjustments to provisions and unrealized foreign exchange gains.

The animal pharmaceutical industry is characterized by meaningful differences in customer needs across different animal species. In addition, our FDA-inspected sterile manufacturing facility has different operational characteristics. As a result of these differences, among other things, we manage our operations through four separate reportable segments.

Companion Animal. This segment covers our OA portfolios across both canine and equine species. It is currently responsible for the sales of our osteoarthritis suite of products Zydax, Glyde and Tergive in Australia, New Zealand, the Middle East, Asia and more recently in the U.S with the establishment of our U.S. Companion Animal team in September, 2015, and in the future in EU if regulatory approvals are obtained.

Production Animal — U.S. This segment covers our reproductive hormone portfolio across production animals. It is currently responsible for the sales of our reproductive hormone products estroPLAN and GONAbreed in the U.S.

Production Animal — Rest of World. This segment covers our reproductive hormone portfolio in production animal across all regions outside of the U.S. It is responsible for the sales of these reproductive hormone products in Australia, New Zealand, the Middle East, Asia and Canada.

Contract Manufacturing. This segment is responsible for the operation of our FDA-inspected sterile manufacturing facility and the manufacture and release of all of our pharmaceutical products. The manufacturing operations are also responsible for increasing factory utilization through current and future contract manufacturing opportunities.

For discussion of the impact and adoption of accounting standards, see Notes to Consolidated Annual Financial Statements — Note 2 (aa). New Accounting Standards and Interpretations not yet adopted.

Significant accounting policies and application of critical accounting estimates

In presenting our financial statements in conformity with IFRS, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

We believe that the following accounting policies are critical to an understanding of our consolidated financial statements as they require the application of the most difficult, subjective and complex judgments and, therefore, could have the greatest impact on our financial statements: (i) revenue recognition; (ii)provisions; (iii) capitalization of intangible assets; (iv) impairment reviews — long-lived assets, including intangible assets; (v) income taxes; (vi) share-based compensation (vii) and release of non-recurring supplier provision.

For more information regarding our significant accounting policies, estimates and assumptions, see Notes to Consolidated Annual Financial Statements — Note 2. Summary of Significant Accounting Policies.

Revenue is recognized when the amount of the revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the entity and specific criteria relating to the type of revenue as noted below, have been satisfied. Revenue is measured at the fair value of the consideration received or receivable and is presented net of returns, discounts and rebates.

We recognized warrants that were issued in relation to the loan facility from Partners for Growth III, LP, or PFG, and 2013 Parnell Bonds. At June 30, 2013, we had recorded liabilities totalling $2.9 million which we estimate to be the fair value of the warrants to be settled with the third parties.

In January 2014, subsequent to the refinancing of the PFG credit facility with SWK Funding LLC, we purchased the warrant granted to PFG for consideration of USD$2.0 million in cash.

In May 2014, at the election of the 2013 Parnell bondholders, all of the attached warrants issued with the 2013 Parnell bonds, between February to September 2013, were converted to 140,075 ordinary shares of the Company.

In February 2016, the Company issued 150,000 warrants to Lincoln Park Capital Fund, LLC as part of the Securities Purchase Agreement.

We recognized costs associated with identifiable finite-life intangible assets that have been derived from the capitalization of further development of our products upon initial registration in major markets of these products. These assets consist of, but are not limited to, costs associated with the further development and enhancement of product attributes and costs associated with increased geographical registrations of the products. These costs are recognized as intangible assets when:

We consider the criteria met for recognizing an intangible asset, usually when a regulatory filing has been made in a major market and approval is considered probable. The capitalized expenditure comprises all directly attributable costs, including costs of materials, services, direct labor and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs are recorded as intangible assets and amortized from the point at which the asset is ready for use on a straight line basis over its useful life, which is estimated at ten years.

See Note 2 (o) and Note 12 of the consolidated annual financial statements for further details on the accounting treatment of intangible assets.

We test on an annual basis whether Property, Plant & Equipment and Intangible Assets have suffered any impairment, in accordance with the accounting policy stated in the Consolidated Annual Financial Statements — Note 2(n). The recoverable amounts of these assets have been determined based on value in use calculations. These calculations require the use of assumptions.

At December 31, 2016, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deductible temporary differences are anticipated to reverse, management does not believe it is probable that the Group will realize the benefits of the deferred tax assets in relation to tax losses and has not recognized such benefits.

During the years ended December 31, 2016 and December 31, 2015, the Company issued Restricted Stock Units (“RSUs”), stock options, and equity shares to its current employees and directors under the Company's 2014 Omnibus Equity Incentive Compensation Plan (the “Plan”). As a result of the issuance of awards under the Plan, management has determined this to be a significant accounting policy and critical accounting estimate and has adopted the Share-Based Compensation accounting policy described below.

We measure share-based compensation expense based on the fair value of share-based awards on the date of the grant using an option pricing model. The related compensation expense of the awards is recognized net of forfeitures over the requisite service periods, which correspond to the vesting periods of the awards. During 2016, we issued share options and RSUs with service-based vesting conditions, and we record compensation expense for these awards using the graded vesting method. Additionally, we granted shares of the Company’s stock to employees and recognized stock compensation expense based on the Company’s closing price on the date of the grant.

Determining the fair value of share-based awards at the grant date requires the exercise of judgment, and our estimates of the fair value of our share-based awards are highly complex and subjective. The fair value of our ordinary shares is based on the closing price of our ordinary shares on the Nasdaq Global Market.

We use a Black-Scholes option-pricing model to determine the fair value of share options. This determination is affected by our estimated fair value per ordinary share as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our ordinary shares, the expected term of the share option, our volatility over that expected term, expected dividend yield, risk-free interest rates and forfeiture rates. RSUs are valued at the fair value of the underlying ordinary shares as of the grant date. In addition to these assumptions, we estimate forfeitures based upon our historical experience. At each period end, we review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change. Refer to Note 2(b) and Noted 28 in the Consolidated Annual Financial Statements for additional information.

The following discussion and analysis of our consolidated results of operations for the years ended December 31, 2016, 2015, 2014, and 2013 six months ended December 31, 2014 and 2013 should be read along with our consolidated financial statements and the notes thereto, which reflect the results of operations of the business for the year ended December 31, 2016. Additional periods are presented below the analysis for the current periods.

Note: we previously announced results for our fiscal year ended June 30, 2014, and comparative periods. We transitioned to report our results on a calendar year basis (ended December 31, 2015 and 2014), and as such we are reporting herein audited results for the 12 months ended December 31,2015, and the comparative period for 2014 derived from our unaudited results.

Total revenues increased by $5.9 million, or 45%, to $19.0 million for the twelve months ended December 31, 2016 compared to $13.2 million in the same period in 2015.

Our Companion Animal sales increased $1.8 million, or 86.1%, to $3.9 million for the year ended December 31, 2016, compared to the same period in 2015. The increase in revenue is the result of the full year effect of Glyde Chews and FETCH in the U.S. ($1.3 million), strong demand for our OA products in Australia ($0.4 million) and the launch of a Reviderm in the US ($0.1 million). We anticipate that Glyde revenues will continue to generate strong revenues in 2017 in the U.S., Australia, and potentially in Europe in future years through an appointed marketing partner. Additionally, the sales and marketing team allows the Company to establish a Companion Animal presence in the U.S. in preparation for the future launch of Zydax, subject to FDA approval.

Our Companion Animal segment in Australia continued to perform strongly nine years after launch, posting an $0.4 million (27%) revenue increase compared to the same period in 2015.This growth was the combined effect of Glyde growing by $0.2 million (26%) and our Zydax franchise delivering a $0.2 million (37%) revenue increase over the comparable period.

Production Animal – U.S.: sales directly to distributors and customers (“ex-Parnell”) increased for the year ended December 31, 2016, compared to the same period in 2015 by $1.1 million, or 13.8%, to $9.2 million. Total volumes grew by 18% from 2015 to 2016.

The Company has pursued two pillars of differentiation: clinical science leadership and technology differentiation. We completed the PROCEPT trial, which was the largest clinical trial of its kind ever performed in North America, with nearly 4,000 cows completing the study across 12 clinical trial sites. The primary focus of this trial was to demonstrate that an adapted breeding program using our products (estroPLAN and GONAbreed) could yield a 10% - 15% increase in conception rates. Not only does this caliber of trial reinforce our position as a leading innovator within the reproduction market, but we also believe the new PROCEPT breeding protocol will be market expansionary as it utilizes an additional injection of estroPLAN in the protocol. Full study results of PROCEPT were reported in 2016.

mySYNCH is also proving to be a key driver of differentiation in our value proposition to our clients. We continued development and roll out of mySYNCH throughout 2016 and now have over 400,000 cows enrolled into the application.

Production Animal – Rest of World (ROW): sales decreased in the year ended December 31, 2016, compared to the same period in 2015 by $0.9 million, or 31%, to $2.1 million due to increases in Australia ($0.1 million) and Africa ($0.2 million) offset by declines in New Zealand ($0.3 million), Middle East ($0.2 million) and Canada ($0.7 million).

Manufacturing: revenues increased in 2016 increased to $3.9 million from $Nil in the same period in 2015. During 2016 we signed a multi-year agreement with a large Animal Health company and continue to seek out new revenue-generating opportunities in 2017 that would allow us to take advantage of the capabilities we have within our FDA-inspected sterile manufacturing facility. We believe we will reach an agreement, within the first half of 2017, with another large Animal Health organization to conduct contract manufacturing services which would generate revenues in 2017. We are also responding to other requests for quotation from animal pharmaceutical and human pharmaceutical companies.

Adjusted EBITDAOI is a non-GAAP measure we use to evaluate the performance of individual segments and our overall performance by assessing the results of our underlying operations prior to considering certain income statement elements and investing activities. A description of Adjusted EBITDAOI and reconciliation to IFRS reported (Loss)/Income for the year ended December 31, 2016 and 2015 are provided below under, “Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure).”

For the year ended December 31, 2016, adjusted EBITDAOI increased by $1.5 million compared to the same period in 2015 as a result of the following:

Costs of Goods Sold – Product represents the direct manufacturing costs of the products we sold. These costs increased by $1.2 million, or 49.6%, for the year ended December 31, 2016, compared to the same period in 2015. This was due to $2.0 million in additional sales in 2016 compared to 2015. Our product gross margin decreased in 2016 by 0.7% to 81.4% compared to 82.1% for the twelve months ended December 31, 2015 due to a higher mix of Companion sales in 2016 compared to 2015.

Cost of Goods Sold - Facility reflects the costs associated with our manufacturing facility. The modest increase in operational costs was due to the full year effect of the headcount added in 2015 for additional manufacturing output that occurred in 2016 and preparation for Contract Manufacturing opportunities, including the commencement of our first Contract Manufacturing agreement in Q2’ 2016. As a result of increased production output and higher sales in 2016, Cost of Goods Sold – Facility as a percentage of revenue decreased to 28.5%, compared to 40.8% for the same period in 2015.

Selling and Marketing expenses increased $2.3 million, or 19.9%, for the year ended December 31, 2016 compared to the same period in 2015 resulting from the full year effect of the U.S. Companion Animal sales and marketing team and associated support functions to launch Glyde Chews and FETCH in the U.S. in September 2015.

We undertook an analysis of the return on investment from our US Companion Animal sales and marketing team in 2016 and determined that the most effective strategy would be to reduce the size of this team whilst concurrently increasing our focus on our digital technology assets as our primary value proposition. This resulted in the elimination of a number of positions which we expect will reduce total selling and marketing expenses by approximately $6 million in 2017. Despite this reduction, we believe we are well positioned to take advantage of growth opportunities through market share acquisition in our new and existing markets and through category expansion from the potential registration of our product candidates while further leveraging our infrastructure and resources now in place.

Regulatory spending in 2016 of $1.5 million was an increase of $0.6 million over the prior year. The increase is the full year effect of additional staffing added in 2015 to support our new product filings, in addition to incremental expenditure on product development projects (PAR121 and PAR122). All eligible development costs directly associated with the Zydax studies and development work during the years ended December 31, 2016 and 2015 have been capitalized.

We believe our R&D processes are cost and time efficient, and are sufficiently precise to determine the feasibility of prospective products. This approach affords us the ability to both progress our current portfolio of pipeline candidates while simultaneously pursuing in-licensing opportunities throughout the remainder of 2016.

Administration expenses increased $1.3 million, or 10.8%, in the year ended December 31, 2016, compared to the same period in 2015. The increase relates to:

As stated above in the selling and marketing expenses section, in 2016 we undertook an analysis of the cost of remaining a NASDAQ listed entity and becoming a US issuer. The combination of these factors would have resulted in an approximate, ongoing increase in Administration costs of $2 million per year. We believe that shareholder interests were not best served by remaining NASDAQ listed so we voluntarily delisted in December 2016. In January, 2017 our shares began trading on the OTC Open Market. The reduction in costs associated with being NASDAQ listed as well as other cost saving measures instituted in December, 2016 is expected to result in a reduction in Administration Expenses in 2017 of approximately $4 million.

Total finance costs increased $2.5 million, or 197.3%, for the year ended December 31, 2016 compared to the same period in 2015.

The increase in finance costs in 2016 is predominantly due to the fees associated with the pay down of our previously held $USD11.0 million term loan. This facility was in place in the first 11 months of 2016 and was paid off with the issuance of our new $USD20.0 million term loan in November 2016, resulting in approximately $0.3 million in finance related costs during the full year ended December 31, 2016. In addition, the previously held term loan of $USD11.0 million commenced in June 2015, so was only in existent for 6 months in 2015.

At the commencement of the year ended December 31, 2016, the Company held outstanding debt related to the 2013 Parnell Bonds of $2.9 million, this debt was extended for a further twelve months on the same terms.

Other Income decreased $5.8 million, or 86.4%, for the year ended December 31, 2016 as compared to year ended December 31, 2015.

The decrease in other income was driven by management’s re-assessment of contingent provisions associated with supplier obligations in 2015. As of June 30, 2015 management determined that a provision was no longer necessary resulting in $2.6 million (2016: $Nil) being recorded in other income. In addition, exchange gains, realized and unrealized, reduced by $3.1 million and R&D Incentive grants reduced by $0.1 million in 2016 compared to 2015.

The income tax expense recorded in the consolidated statement of comprehensive loss increased approximately $7,000 during the year ended December 31, 2016 as compared to the same period in the prior year.

Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure)

General description of Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income

Adjusted EBITDAOI (a non-GAAP financial measure) is an alternative view of business performance used by the Company, and we believe that investors’ understanding of our performance is enhanced by disclosing this measure.

We report Adjusted EBITDAOI to portray the results of our underlying operations prior to considering certain income statement elements and investing activities.

The executive directors are our chief operating decision makers (“CODMs”) and use the revenues and the segment results (Adjusted EBITDAOI) of the four segments, among other factors, for performance evaluation of both the individual segments and the overall business, as well as for the allocation of resources.

The CODMs believe that Adjusted EBITDAOI represents the results of our underlying operating segments prior to considering certain income statement elements and certain other significant items, which are not directly associated with the activities of the operating segment. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the Adjusted EBITDAOI measure is utilized:

Despite the importance of this measure to directors and the CODM in goal setting and performance measurement, Adjusted EBITDAOI is a non-GAAP financial measure that has no standardized meaning prescribed by IFRS and, therefore, has limitations in its usefulness to investors. Because of its non-standardized definition, Adjusted EBITDAOI, unlike other GAAP measures, may not be comparable to the calculation of similar measures of other companies. Adjusted EBITDAOI is presented to communicate to investors how management currently assesses performance, primarily of our operating segments.

A limitation of the Adjusted EBITDAOI measure is that it provides a view of our operations without including all events during a period and does not provide a comparable view of our performance to other companies. As such, this is not the only measure by which the executive directors may assess performance.

Adjusted EBITDAOI is calculated based on the profit/(loss) for the period, by adding back income tax expense, depreciation, amortization, interest and other finance costs and by removing three significant items:

A reconciliation of Adjusted EBITDAOI to Loss for the year ended December 31, 2016 and 2015, as reported under IFRS, is as follows:

Our net cash outflow from operating activities was $12.1 million for the year ended December 31, 2016 compared to $16.4 million in 2015. The outflow in operating cash flows during 2016 was primarily attributed to:

Cash generated by operating activities fluctuates with changes in net income, non-cash items, such as foreign exchange, share-based compensation and depreciation and working capital.

Our net cash used in investing activities was $5.1 million for the year ended December 31, 2016 compared to $7.9 million in 2015, a reduction of $2.8 million. This decrease is the combined effect of reduced PP&E and intangible purchases of $1.2 million and $3.3 million, respectively, offset by a $1.7 million decrease in tax receipts.

Cash provided by financing activities for the year ended December 31, 2016 was $20.0 million compared to $12.1 million in 2015, an increase of $7.9 million, due to the following:

The following discussion and analysis of our consolidated results of operations for the years ended December 31, 2015 and 2014 should be read along with our consolidated financial statements and the notes thereto, which reflect the results of operations of the business for the year ended December 31, 2015. Additional periods are presented below the analysis for the current periods.

Total revenues increased by $4.8 million, or 58%, to $13.2 million for the twelve months ended December 31, 2015 compared to $8.4 million in the same period in 2014. In addition, we had a very strong second half performance in 2015 with total revenues increasing by $4.7 million, or 130% as both our U.S. Production Animal and total Companion Animal operating segments continued to perform strongly.

Our Companion Animal sales increased $0.7 million, or 51.0%, to $2.1 million for the year ended December 31, 2015, compared to the same period in 2014. The increase in revenue was related to the launch of Glyde Chews and FETCH in the U.S. in September 2015. As part of the U.S. launch of Glyde Chews and FETCH we expanded our presence in the U.S. Companion Animal market with a sales and marketing team consisting of 55 personnel. We anticipate that Glyde could generate strong revenues in 2016 in the U.S. and potentially in Europe in future years through an appointed marketing partner. Additionally, presence of the sales and marketing team allows the Company to establish a Companion Animal presence in the U.S. in preparation for the expected launch of Zydax in 2016, subject to FDA approval.

Our Companion Animal segment in Australia continued to perform strongly seven years after launch, although regulatory delays for the approval of Glyde Chews impacted Australian sales in the first half of 2015, such that full year sales in 2015 were flat when compared to the same period in 2014. With this fully resolved in May 2015, sales of our Companion Animal products in Australia for the six-months to December 31, 2015, were up $0.3 million, or 51%, compared to the same period in 2014, building strong momentum as we proceed into 2016.The sales of our Companion products in Australia remained flat year over year due to a lengthy and unanticipated delay in regulatory approval of Glyde Chews in that country. As a result we were out of the market with both Glyde Chews and Glyde Powder for all of April and much of May 2015. Since 2012 we have operated the Australian Companion Animal business utilizing two Territory Managers and a Sales and Marketing Associate. In 2015, we deployed two additional territory managers in Victoria and Queensland, which we anticipate will increase the number of new clinics we can target to adopt FETCH (our digital technology that we provide to vet clinics to manage their osteoarthritis franchises) in addition to our osteoarthritis products. We have also recruited a Sales & Marketing Director who is responsible for our commercial operations in Australia and New Zealand. This role will further enhance our leadership presence in the Australia and New Zealand markets. These changes, in conjunction with Glyde being fully available for the second half of 2015, resulted in a strong second half of 2015 for the Australian Companion Animal team with total revenues increasing by $0.3 million, or 51%, for the six months ended December 31, 2015 compared to the same period in 2014. This was the result of Zydax sales increasing by 45% and Glyde sales increasing by 74% during this six month period.

Production Animal – U.S.: sales directly to distributors and customers (“ex-Parnell”) increased in the year ended December 31, 2015, compared to the same period in 2014 by $5.9 million, or 269%, to $8.1 million. The increase in 2015 as compared to 2014 was due to an increase in volumes of 251%, price increase of 9% and favorable foreign currency movements 9%. Furthermore, U.S. sales (ex-Parnell) increased in the second half of 2015 compared to the first half by $3.9 million, or 330%, showing continued growth in the U.S. Production Animal market in the second half of 2015. In addition, sales in-market (sales from distributors to veterinarians and dairy producers) over twelve months ended December 31, 2015 were up 55% from USD$3.1 million in 2014 to USD$4.9 million in 2015. As previously communicated, this clearly demonstrates that the inventory run-down by distributors that occurred throughout 2014 has been completed and that ex-Parnell sales will now track in-market demand. Furthermore, sales in-market for the six months ended December 31, 2015 were up 58% to $USD2.8 million compared to $USD1.7 million for the same period in 2014, demonstrating again that sales demand for our products and value proposition continued to grow in the second half of the year.

Strong growth in 2015 was primarily driven by the recent expansion of our sales team to now cover 7 territories and the continued implementation of our value proposition. In 2014 for the same period, we only had 4 territories and we had not commenced the marketing of mySYNCH®, our innovative digital technology that assists dairy farmers to improve the profitability of their operations.

The ongoing success in commercializing our reproductive hormones in the U.S. saw our market share in December 2015 reach its highest level since our launch in the U.S.. Whilst we continue to establish our commercial presence in the U.S. Production Animal segment, we have noted many positive indications that our value proposition is being well-received by the market, and we continue to compete effectively against much larger incumbents as seen by our continued increase in share of market.

The Company has pursued two pillars of differentiation: clinical science leadership and technology differentiation. We completed the PROCEPT trial, which was the largest clinical trial of its kind ever performed in North America, with nearly 4,000 cows completing the study across 12 clinical trial sites. The primary focus of this trial was to demonstrate that an adapted breeding program using our products (estroPLAN and GONAbreed) could yield a 10% increase in conception rates. Not only does this caliber of trial reinforce our position as a leading innovator within the reproduction market, but we also believe the new PROCEPT breeding protocol will be market expansionary as it utilizes an additional injection of estroPLAN in the protocol. Full study results of PROCEPT will be reported in 2016.

mySYNCH is also proving to be a key driver of differentiation in our value proposition to our clients. We continued development of mySYNCH in the first half of 2015, in conjunction with our territory managers and customers, and rolled out to the technology to the US, Australia and New Zealand in Q3, 2015.

Production Animal – Rest of World (ROW): sales decreased in the year ended December 31, 2015, compared to the same period in 2014 by $1.8 million, or 37%, to $3.0 million due primarily by volume declines due to timing difference of shipments to distribution partners in Canada and Turkey. Due to inventory levels, Canada placed two orders in 2014 compared to only one in 2015, resulting in the year on year decrease in ex-Parnell sales in 2015, however these inventory levels are now normalized and are not expected to impact 2016 sales. We expect the trajectory of sales in this segment to improve as our marketing partner inventory levels are normalized. Nevertheless we continue to focus on improving operational performance in the key markets for this segment; in Australia-New Zealand, where declining milk prices are causing some headwinds and in Canada where entry of a low price competitor has caused our growth to slow in the last twelve months. The launch of mySYNCH® into Australia and New Zealand in the second half of 2015 is expected to be a major contributor to improved results in this region as enhanced reproductive performance is especially important during periods of low milk prices. We are also working with our Canadian distribution partner to increase market share and with several orders already received in other regions we expect to improve this segment result in 2016.

We did not generate contract manufacturing revenues during 2015 or the comparable period of 2014. We are focused on identifying revenue-generating opportunities that would commence in 2016, taking advantage of the capabilities we have within our FDA-inspected sterile manufacturing facility. We believe we will reach an agreement, within the first half of 2016, with potentially two large Animal Health organizations to conduct contract manufacturing services which would generate revenues in 2016.

Adjusted EBITDAOI is a non-GAAP measure used by our directors and senior executives to evaluate the performance of individual segments and our overall performance by assessing the results of our underlying operations prior to considering certain income statement elements and investing activities. A description of Adjusted EBITDAOI and reconciliation to IFRS reported (Loss)/Income for the year ended December31, 2015 and 2014 are provided below under, “Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure).”

For the year ended December 31, 2015, adjusted EBITDAOI decreased by $9.4 million compared to the same period in 2014 as a result of the following:

Costs of Goods Sold – Product represents the direct manufacturing costs of the products we sold. These costs increased by $0.6 million, or 31.8%, for the year ended December 31, 2015, compared to the same period in 2014. This was due to $4.8 million in additional sales in 2015 compared to 2014. Our product gross margin continued to improve throughout 2015, increasing 3.6% to 82.1% compared to 78.5% for the twelve months ended December 31, 2014.

Cost of Goods Sold - Facility reflects the costs associated with our manufacturing facility. The increase in operational costs, $0.4 million, was due to two additional headcount added in 2015as a result of higher volumes and in anticipation of 2016 contract manufacturing opportunities, partially offset by increased production resulting in a higher overhead recovery in 2015 as compared to the same period in 2014. As a result of increase production output and higher sales in 2015, Cost of Goods Sold – Facility as a percentage of revenue decreased to 40.8%, compared to 59.4% for the same period in 2014.

Selling and Marketing expenses increased $5.8 million, or 96.3%, for the year ended December 31, 2015 compared to the same period in 2014 as a result of the expansion of our U.S. commercial presence in both our Production Animal and Companion Animal business segments and unfavorable foreign exchange variances of approximately 9%. With the results of our Zydax efficacy study, we recruited a 50-person national Companion Animal sales and marketing team and associated support functions to launch Glyde Chews and FETCH in the U.S. in September 2015.

In 2015 we also expanded our U.S. Production Animal infrastructure by adding a seventh Territory Manager and enhancing our marketing leadership and support functions of our U.S. Production Animal sales team. In addition to utilizing this infrastructure for the launch of our newly developed mySYNCH program in 2015, this team is also responsible for marketing our future product pipeline candidates GONADOPRO and PAR061 in future years, if approved by the FDA.

In the future, we expect our current sales and marketing capability will enable us to take advantage of growth opportunities through market share acquisition in our new and existing markets and through category expansion from the potential registration of our product candidates while further leveraging our infrastructure and resources now in place.

Regulatory spending increased slightly for the year ended December 31, 2015 as compared to the same period in 2014. The small increase was primarily from additional staffing to support our new product filings. All development costs directly associated with the Zydax studies and development work during the year ended December 31, 2015 and 2014 have been capitalized.

Administration expenses increased $8.9 million, or 149.0%, in the year ended December 31, 2015, compared to the same period in 2014. The increase relates to:

Total finance costs and net foreign exchange losses on borrowings decreased $5.6 million, or 81.5%, for the year ended December 31, 2015 compared to the same period in 2014.

Finance costs decreased in 2015 predominantly due to the pay down of our previously held $US25 million senior debt facility. This facility was in place in the first six months of 2014 but was repaid from the proceeds of our initial public offering, or IPO, in June 2014. Further, we incurred non-recurring expenses of $0.3 million in 2014 associated with our IPO.

At the commencement of the year ended December 31, 2015, the Company held outstanding debt related to the 2013 Parnell Bonds of $4.3 million, $1.5 million of which were settled in cash during the period and the remaining balance of $2.9 million was extended for a further twelve months on the same terms. In addition, the Company entered into a debt agreement to obtain a $USD11.0 million term loan on June 15, 2015, resulting in approximately $0.7 million in finance related costs during the full year ended December 31, 2015.

We did not incur foreign exchange losses on borrowing during the year ended December 31, 2015 as the outstanding borrowings consist of the 2013 Parnell Bonds which are denominated in Australian dollars and the term loan is a U.S. dollar loan held in a U.S. dollar entity.

Other Income increased $1.1 million, or 19.9%, for the year ended December 31, 2015 as compared to year ended December 31, 2014.

The increase in other income was primarily driven by management’s re-assessment of contingent provisions associated with supplier obligations. As of June 30, 2015 management determined that a provision was no longer necessary resulting in $2.6 million (2014: $Nil) being recorded in other income. This was partially offset more favorable exchange gains in 2014 as compared to 2015.

The income tax expense recorded in the consolidated statement of comprehensive loss decreased approximately $3.0 million during the year ended December 31, 2015 as compared to the same period in the prior year.

During 2014, management evaluated the evidence bearing upon the potential realization of its deferred tax assets, which primarily consist of net losses carried forward. Based on the analysis, management determined that the Company will not utilize certain tax benefits and accordingly derecognized approximately $3.0 million of deferred tax assets. The elements of unrecognized future tax benefits will be assessed by management going forward and potentially recorded at a point in which management believes they will be utilized.

Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure)

General description of Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income

We report Adjusted EBITDAOI to portray the results of our underlying operations prior to considering certain income statement elements and investing activities.

The independent directors and the CODMs believe that Adjusted EBITDAOI represents the results of our underlying operating segments prior to considering certain income statement elements and certain other significant items, which are not directly associated with the activities of the operating segment. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the Adjusted EBITDAOI measure is utilized:

Adjusted EBITDAOI is calculated based on the loss for the period, by adding back depreciation and amortization and by removing three significant items:

A reconciliation of Adjusted EBITDAOI to Loss for the year ended December 31, 2015 and 2014, as reported under IFRS, is as follows:

Our net cash outflow from operating activities was $16.4 million for the year ended December 31, 2015 compared to $16.2 million in 2014. The outflow in operating cash flows during 2015 was primarily attributed to:

Cash generated by operating activities fluctuates with changes in net income, non-cash items, such as foreign exchange, share-based compensation and depreciation and working capital.

Our net cash used in investing activities was $7.9 million for the year ended December 31, 2015 compared to $2.9 million in 2014, due to significant investment made in the pivotal efficacy clinical trial and Active Product Ingredient (API) development for Zydax, $5.4 million during the period, continued investment in the development of our digital technology platforms, mySYNCH and FETCH, $1.6 million, development of product pipeline, $0.4 million, and the establishment of our new offices in Overland Park, KS and refurbishment of our Australian offices and manufacturing facility improvements, $1.7 million. These were partially offset by the $1.7 million in receipts related to R&D government (or tax) Incentives.

Cash provided by financing activities for the year ended December 31, 2015 was $12.1 million compared to $31.0 million in 2014, attributable to:

The following discussion and analysis of our consolidated results of operations for the six months ended December 31, 2014 and 2013 should be read along with our consolidated financial statements and the notes thereto, which reflect the results of operations of the business for the six months ended December 31, 2014.

Note: we previously announced results for our fiscal year ended June 30, 2014, and comparative periods. We transitioned to report our results on a calendar year basis (ended December 31, 2014), and as such we are reporting herein audited results for the six-months from July 1, 2014 to December 31, 2014, and the comparative period for 2013 derived from our unaudited results.

Total revenue increased by $0.8 million (29%) for the six months ended December 31, 2014, compared to the same period in 2013. This indicates strong revenue growth in the second half of 2014.

Sales in 2014 were affected by the carry-over effects (into early 2014) of stock outages of Zydax due to the transition to a new API supplier that occurred throughout 2013 and into 2014. Specifically we were able to supply the market with product in late 2013 but only for a limited period before an additional delay in supply in the first four months of 2014. The result of this was that our customers purchased larger quantities of product, at normal, commercial terms and conditions, in late 2013 in advance of the stock outage. Most importantly, the API supply for Zydax has now been fully resolved with Lonza producing sufficient quantities of API in the second half of 2014 to last well into 2015. We also expect full commercial supply of API to be readily available in time for anticipated launches in the U.S. and Europe in 2016.

Due to these variations in availability of stock year on year, total Companion Animal sales for the six months ended December 31, 2014 decreased by $0.1 million (17%) compared to the six months ended December 31, 2013.

Glyde sales were flat (up 1%) in calendar year 2014 compared to 2013 largely due to the delayed launch of Glyde Chews, which was initially expected in the second-half of 2014. We did not launch Glyde Chews until September 2015.

Zydax sales increased 18%, or $0.1 million, for the full calendar year of 2014 over calendar year 2013. Whilst this is encouraging, it is also fewer sales than we expected to achieve and was caused by supply challenges in 2013 and early 2014. Availability of API for the Australian market has now been fully resolved given the successful scale up of manufacturing of API by Lonza. Lonza produced three commercial-scale batches in the second half of 2014, which will provide ample API for the Australian market. We also expect that Lonza will produce large quantities of Zydax API in preparation for our anticipated U.S. and European launches in 2016 upon gaining approval.

Since 2012 we have operated the Australian Companion Animal business with two Territory Managers and a Sales and Marketing Associate. In 2015, we established two additional territory managers in Victoria and Queensland which we expect will increase the number of new clinics we can target to adopt FETCH (our digital technology we provide to vet clinics to manage their osteoarthritis franchise, formerly known as iKAM) and our osteoarthritis products. We have also established a new role of Sales & Marketing Director – ANZ who is responsible for the commercial operations of Australia and New Zealand. This role will further enhance our leadership presence in the Australia and New Zealand markets following the move of our corporate headquarters to the USA in 2012.

Sales from Parnell to distributors (ex-Parnell) increased in the six months ended December 31, 2014, compared to the same period in 2013 by $0.5 million, or 85%, to $1.2 million. Furthermore, ex-Parnell sales increased in the second half of 2014 compared to the first half by $0.2 million, or 18%, showing continued growth in the U.S. Production Animal market.

Parnell has pursued two pillars of differentiation: clinical science leadership and technology differentiation. In 2014, we completed the PROCEPT trial, which was the largest clinical trial of its kind ever run in North America with nearly 4,000 cows completing the study across 12 clinical trial sites. The aim of this trial was to demonstrate that an adapted breeding program using our products estroPLAN and GONAbreed could deliver a 10% increase in conception rates. Not only does this caliber of trial reinforce our position as a leader in innovation in the reproduction segment, but we believe the new PROCEPT breeding protocol will be market expansionary as it utilizes an additional injection of estroPLAN in the protocol.

mySYNCH is also proving to be a key driver of differentiation in our value proposition to our clients. We have developed an operational model of mySYNCH which we rolled out to our key customers for their use. Based on their feedback, we expect to continue to develop mySYNCH in 2015 and to offer a truly unique value proposition to our customers.

For the six months ended December 31, 2014, over the same period in 2013, total Production Animal – ROW sales increased by 25% to $0.4 million

All markets experienced growth driven by market share acquisition. In Australia and New Zealand we recovered sales we had lost in 2013 to competitors who had utilized extensive marketing programs to grab market share. We also won some additional large veterinary clinics.

We have also established a new position of Sales & Marketing Director –ANZ based in Sydney. This role will provide leadership to the production and Companion Animal teams in Australia and New Zealand. Mr. Geoff Henthorn has been appointed to this role. Geoff was previously the country manager for New Zealand at Novartis Animal Health and we expect he will bring valuable contacts and networks to our New Zealand Dairy business.

Our marketing partner in Canada, Vetoquinol, has continued to grow market share since their appointment in 2009. At the end of 2015, market share for estroPLAN (we do not currently sell GONAbreed in Canada) was over 30%.

Sales in the Middle East and Africa have improved in 2014 with moderation of economic challenges driven by political instability in previous years.

Manufacturing Operations segment revenues were $Nil for the six months ended December 31, 2014 as they were for the same period in 2013.

We currently have approximately 75% available capacity at our manufacturing facility, which we believe we can leverage to manufacture our current products and pipeline product candidates and for further contract manufacturing opportunities into the future. Typically, sterile manufacturing projects, especially those for FDA-approved products, attract high margins relative to other contract manufacturing sectors. We also have the capability to produce pilot or R&D batches for biotechnology companies for use in clinical trial materials, and due to our highly efficient and flexible operation, we believe we can undertake these projects at a lower cost than other industry participants. Furthermore, recent mergers in the CMO industry potentially open up opportunities for Parnell to enter this market and to generate an additional, high-profit revenue stream.

A reconciliation to IFRS reported (Loss)/Income for six months ended December 31, 2014 and 2013 are provided below - “Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure).”

For the six months ended December 31, 2014, adjusted EBITDAOI decreased by $2.0 million compared to the same period in 2013.

Cost of Goods Sold - Product represents the direct manufacturing costs of the products we sold. This cost increased by $0.2 million, or 21%, in the six months ended December 31, 2014, compared to the same period in 2013, primarily due to a 29% ($0.8 million) increase in revenues during this period. There was a small mix variance of products sold during this period which resulted in the Cost of Goods Sold - Product as a percentage of revenue decreasing from 25.7% in the six months ended December 31, 2013, to 24.2% for the six months ended December 31, 2014.

The increase in Cost of Goods Sold - Facility reflect the fact that our new manufacturing facility is currently operating with 75% spare capacity resulting in unrecovered overhead costs. These costs increased $0.2 million, or 8%, in six months ended December 31, 2014, compared to the six months ended December 31, 2013. The small increase in operational running costs of our facility was due to a $0.2 million reduction in absorption of manufacturing overhead costs resulting from a slightly lower number of units produced the second half of 2014.

Selling and marketing expenses increased $0.5 million, or 27%, in the six months to December 31, 2014, compared to the same period in 2013, as a result of increased employee headcount and related costs associated with the continued sales and marketing of our reproductive hormones in the U.S. During the period we added two additional territory managers in our U.S. Production Animal business unit as we continue to increase our footprint in this market and increase our market share. Furthermore, late in Q4, 2014, we added two additional personnel to commence the establishment of our Companion Animal commercial team in the U.S.

Regulatory and Research & Development expenses increased $0.3 million, during the second half of 2014 compared to the same period in 2013, which was due to an increase in R&D activities associated with our pipeline candidate products following our IPO.

Over the last several years, we have focused heavily on progressing Zydax and, before that, on obtaining the approval for our reproductive hormones in the U.S. and Canada. In the second half of 2014, we started to again focus on our pipeline products, and we expect to invest heavily in the development of these six products in 2015.

Administration expenses increased $1.8 million, in the six months ended December 31, 2014, compared to the same period in 2013, primarily as a result of increased headcount and external costs to support a substantially larger Commercial and R&D organization in the U.S. and increased compliance, regulatory and statutory costs associated with being a public organization following our successful IPO in June 2014.

As we are an organization focused on development of new product candidates and continued development of our current product portfolio, our administration activities are required to support our research and development function. As such, under the Australian Taxation Office’s Research & Development Incentives program, an Australian government initiative that offers a 45% rebate on eligible research and development investment, certain of these administration activities are determined to be eligible research and development expenditures and may be claimed as part of the R&D Incentive program. Eligible research and development expenditures recorded within administration expenses for six months ended December 31, 2014, was $0.4 million.

Total finance costs and net foreign exchange losses on borrowings decreased $1.7 million, or 86% in the second half of 2014 compared to the same period in 2013.

Finance costs decreased by $1.3 million due to full repayment of our senior debt facility with SWK Holdings LLC of USD$25.0 million from the proceeds of the initial public offering. Prior to that, in January 2014, the SWK facility was used to repay our previous senior debt facility with Partners for Growth LLC of USD$10 million. Finance costs of $1.6 million incurred in the six months ended December 31, 2013, related to interest and borrowing costs of the Partners for Growth facility.

Following our successful IPO in June 2014, the only borrowings that remain are the Company's lease liabilities, which are secured by the related leased assets of $0.2 million and the 2013 Parnell Bonds of $4.3 million, which resulted in finance costs of $0.3 million for the six months ended December 31, 2014.

In addition, as the 2013 Parnell Bonds and lease liabilities are both denominated in Australian dollars, we have not incurred any net foreign losses on borrowings in the last six months of 2014 calendar year.

Other income was $4.4 million for the six months ended December 31, 2014, compared to $1.0 million for the same period ended December 31, 2013. This increase of $3.4 million was driven by an increase in unrealized foreign exchange gains on foreign currency loans within the company of $1.3 million in FY2014 compared to FY2013. An additional $1.8 million was due to net favorable foreign currency movements over the period, primarily due to the Australian dollar depreciating from USD$0.942 as at June 30, 2014 to USD$0.8202 as at December 31, 2014.

The tax expense recognized in the consolidated statement of comprehensive income/(loss) relates to current income tax expense plus deferred tax expense (being the movement in deferred tax assets and liabilities and unused tax losses during the year).

Current tax is the amount of income taxes payable (refundable) in respect of the taxable profit (loss) for the year and is measured as the amount expected to be paid to (refunded by) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is provided on temporary differences which are determined by comparing the carrying amounts of tax bases of assets and liabilities to the carrying amounts in the consolidated financial statements.

See Notes to Consolidated Financial Statements - Note 2 (e). Income Tax for further details on the accounting treatment of income tax expense and benefits.

The income tax expense recorded for the six-month periods ended December 31, 2014 and 2013, respectively, is $Nil due to income tax losses incurred during those periods.

During 2014, management evaluated the evidence bearing upon the potential realization of its deferred tax assets, which primarily consist of net losses carried forward. Management considered the (1) the Company has historically been able to generate income; (2) future forecasts and investment costs of pipeline products; (3) the non-recurring expenses incurred with the development of an FDA approved manufacturing facility; (4) the costs of completing an initial public offering; and (5) other tax planning strategies. Based on its analysis management determined that the Company will not utilize $6.4 million of tax losses in the short term and accordingly did not record this amount as a deferred tax asset at June 30, 2014. This element of unrecognized future tax benefits will be assessed by management going forward and may be recorded at a point at which management believes they will be utilized.

At December 31, 2014, the Company had a potential tax benefit related to tax losses carried forward of $7.7 million. Such amount includes net losses of $4.0 million related to subsidiaries in the U.S. that would expire after 20 years, starting in 2032 (recognized at a tax rate of 35%). The remaining tax losses carried forward of $3.7 million are indefinite and are attributable to the Company’s operations in Australia (recognized at a tax rate of 30%), of which $1.7 million relate to transaction costs and are directly recorded to equity. As such, the total unused tax losses available to the Company equal $39.0 million.

Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure)

A reconciliation of Adjusted EBITDAOI to Loss for the six month periods ended December 31, 2014 and 2013, as reported under IFRS, is as follows:

Our net cash outflow from operating activities was $5.4 million in the six months ended December 31, 2014. The outflow in operating cash flows was primarily attributable to:

Our net cash inflow from investing activities was $1.8 million for the six months ended December 31, 2014, due to investment made in the commercial scale-up of the API for Zydax and the commencement of the Zydax efficacy trial during the period, in addition to continued investment in the development of our digital technology platforms, mySYNCH and FETCH (formerly known as iKAM) and the establishment of our offices in Kansas City, KS.

Financing activities for the six months ended December 31, 2014, resulted in a cash outflow of $0.7 million, attributable to:

The following discussion and analysis of our consolidated statements of operations for the years ended June 30, 2014 and 2013 should be read along with our consolidated financial statements and the notes thereto, which reflect the results of operations of the business for the periods presented.

Fiscal Year 2014 (year ended June 30, 2014) vs. Fiscal Year 2013 (year ended June 30, 2013)

Total revenues declined $2.0 million, or 21%, in fiscal year (FY) 2014 compared to FY2013 primarily due to the timing of the launch of our reproductive hormones in the U.S. in FY2013 and the resultant inventory build with distributors prior to June 30, 2013. Distributors purchased $3.7 million of estroPLAN and GONAbreed in the 4 months following launch (Feb 2013 – Jun 2013) in order to build-up inventory levels in the distribution channel. This initial inventory build by distributors carried over into FY2014 resulting in lower ex-Parnell sales (sales from Parnell to distributors) in FY2014 compared to FY2013. However, our in-market sales (sales from distributors to veterinarians and dairy producers) have increased significantly in FY2014 compared to FY2013. The inventory build of FY2013 has been eliminated and as such ex-Parnell sales in the U.S. will match the in-market sales growth we are seeing.

Companion animal segment revenues decreased by $0.1 million, or 8%, in FY2014 compared to the same period in FY2013. $0.2 million of this was due to the delayed supply of API for Zydax resulting in an out of stock situation for seven of the twelve months reported. In April 2014 we were resupplied with the API and returned to market and we have significantly increased our API and finished goods inventory levels. As above, we have already seen a 25% increase in Zydax sales in the second-half of FY2014 compared to the same period in FY2013.

Glyde and Tergive sales increased 9% and 23% respectively in FY2014 compared to FY2013 with Glyde sales increasing 33% in the second-half of FY2014 compared to the same period in 2013. We believe this was due to the return of Zydax which provided us the ability to market our ‘Dual Joint Care’ program effectively through the iKAM (now called FETCH) platform.

Production Animal — U.S. segment revenues decreased by $2.0 million, or 55% in FY2014 compared to the same period in FY2013. After the approval of estroPLAN and GONAbreed in the U.S. in February 2013, we launched our new products and distributors purchased $3.7 million of product through to June 30, 2013 to build-up inventory both in the distribution channel and veterinarian channel. For FY2014 sales totaled $1.6 million ex-Parnell which was based on re-purchases by Distributors from Parnell. From an ‘in-market’ sales perspective, our sales increased from $0.3 million for the period Feb-Jun 2013 to $2.1 million for FY2014. Most notably we saw acceleration in our market share acquisition with the month of June 2014 reaching 5.1%, at the time our highest month since launch.

Within our most established territories (where we launched first) in the North East and West, our market shares reached 8.7% and 8.9% respectively. Subsequent to the end of the financial year, we have established two more territories in the large dairy regions of Minnesota, Wisconsin and surrounding states. Our market share in this region as at June 30, 2014 was only 1.6%.

Production animal – Rest of World segment revenues increased by $0.4 million, or 10% in FY2014 compared to FY2013. This was driven by continued growth in our Australian, New Zealand and other international markets, as our service based offering and global recognition as the leader in clinical science and technology for dairy reproduction continues to drive customer retention in this region. FY2014 sales in Australia, New Zealand and other international markets saw growth of 14%, 22% and 6% respectively with the second-half of the fiscal year demonstrating even greater growth rates of 31% in Australia, 59% in New Zealand and 68% in other international markets compared to the same period in FY2013.

Manufacturing Operations segment revenues for the twelve months ended June 30, 2014 decreased by $0.2 million compared to the same period in FY2013 due to the completion of certain contract manufacturing obligations associated with the divestment of legacy products. In March 2012, we sold the rights to market a number of legacy products that we deemed were not congruent with our global strategy and in doing so provided investment capital for our current product portfolios and candidates. As part of that sale we were engaged to contract manufacture a number of these products for a period of approximately six months. This contract manufacturing commenced in April 2013 and was completed in September 2013 and as such $0.2 million of the revenues from this project were earned in FY2013.

We currently have approximately 75% available capacity at our manufacturing facility, which we believe we can leverage to manufacture our anticipated product candidates and for further contract manufacturing opportunities into the future. Typically, sterile manufacturing projects, especially those for FDA-approved products, attract high margins relative to other contract manufacturing sectors. We also have the capability to produce pilot or R&D, batches for biotechnology companies for use in clinical trial materials and due to our highly efficient and flexible operation we believe we can undertake these projects at a lower cost than other industry participants.

A reconciliation to IFRS reported (Loss)/Income for the years ended June 30, 2014, 2013 and 2012 are provided below under – “Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure)”

In FY2014, adjusted EBITDAOI decreased by $5.9 million compared to FY2013. Revenues decreased by $2.0 million for the period and Cost of Sales — Product decreased by $0.2 million) contributing to a net reduction in product gross margin of $1.8 million (see Revenue analysis above and Cost of Sales — Product analysis below). Overall, we maintained a high product gross margin of 78% compared to 81% in FY2013, with the slight reduction year on year attributable to a product mix variance (see Cost of Sales – Product analysis below).

In the second half of FY2013, subsequent to our successful FDA inspection of our manufacturing facility, we officially completed commissioning works and thus commenced operating the manufacturing facility as a full commercial operation. Previously, much of the expenditure relating to the manufacturing facility was capitalized to the related fixed assets. As such, the operational costs of running our facility increased by $1.0 million in FY2014 as compared to FY2013 (see Cost of Sales — Facility analysis below). However with 75% available capacity in this facility we expect to extract improved value from this fully operational asset by exploring contract manufacturing opportunities and by increasing revenues of our own products and seeking approval of our product candidates into the future.

FY2014 also included a full year of costs of our new U.S sales and marketing team and Kansas City Headquarters to support the launch of our reproductive hormones which resulted in an increase in operating expenditure of $2.1 million (see Selling and Marketing expense analysis below). We also had a $0.4 million increase in Regulatory and Research & Development expenses as a result of our first FDA GMP license fee and Product Approval fees of our reproductive hormones and commence of initial R&D work on pipeline product candidates PAR121 & PAR122 (see Regulatory and R&D expense analysis below). In addition, a total of $0.4 million has been incurred in IPO transaction related costs in FY2014 which was not incurred during the same period in 2013 and a further $0.2 million has been incurred in general and administration expenses, before depreciation expense, in FY2014 over FY2013 relating to the expansion of our operations into the U.S. (see Administration expense analysis below)

Cost of sales — Product represents the direct manufacturing costs of the products we sold. This cost decreased $0.2 million, or 10%, in FY2014 compared to FY2013, due to a mix variance of products sold during this period. During FY2013, sales of estroPLAN in Canada and sales of Zydax in Australia equated to 29% of total sales for the period and for the same period 2014, these sales equated to 22% of total revenues. Both of these products generate a greater gross margin than sales of estroPLAN and GONAbreed into Asia and the Middle East, which represented 8% of total sales in FY2013 and 24% of total sales for the same period in FY2014. As such, Cost of sales — Product as a percentage of revenue increased from 19% in FY2013 to 22% during the same period in FY2014 as a result of a greater portion of sales coming from our lower margin geographies and products.

The increase in Cost of sales — Facility reflect the fact that our new manufacturing facility is currently operating with 75% spare capacity resulting in unrecovered overhead costs. These costs increased $1.0 million, or 25%, in FY2014 compared to FY2013 due to operating our facility for the entire year in FY2014. In FY2013, much of the expenditure attributable to the manufacturing facility was related to commissioning the new facility and was hence capitalized to the related fixed asset. In FY2014, the increase in operational running costs of our facility was due to a $0.7 million increase employee costs from additional headcount to operate the facility, and a $0.2 million reduction in absorption of manufacturing overhead costs resulting from a lower number of units produced FY2014. The lower number of units produced was due to the manufacturing of a higher level of inventory in the period January to March 2013 in preparation for the launch of our reproductive hormones in the U.S. market. With 75% available capacity in this facility we expect to continue to augment this fully operational infrastructure by exploring contract manufacturing opportunities into the future.

Selling and marketing expenses increased $2.1 million, or 64%, in FY2014 compared to the same period in FY2013, as a result of increased employee headcount and related costs associated with the launch of our reproductive hormones in the U.S. FY2014 included the costs of implementing and running our U.S based sales and marketing operation, which resulted in increased employee and associated costs of $1.4 million, increased advertising and promotion costs of $0.3 million, increased travel related costs of $0.2 million and an increase of $0.1 million in depreciation and amortization expense (development costs for the U.S. reproductive hormones had been capitalized under IFRS and as a result upon approval amortization of these capitalized expenses commenced).

Regulatory and Research & Development expenses increased $0.4 million, or 322% in FY2014 compared to FY2013. $0.2 million as a result of increased FDA GMP license and product renewal fees following the approval of our sterile manufacturing facility and reproductive hormones in January 2013 and $0.2 million increase in Research & Development costs associated with the commencement of initial development work and licensing cost for PAR 121 and PAR122.

Administration expenses increased $0.8 million, or 40%, in FY2014 compared to the same period in FY2013, as a result of $0.4 million of transaction costs associated with the IPO, an $0.2 million increase in professional, insurance and audit fees and a $0.2 million increase in depreciation and amortization cost.

Eligible research and development expenditure recorded within administration expenses for FY2014 was $0.4 million compared to $1.5 million for FY2013. This was due to focusing our operational expenditure during FY2014 on the launch of our reproductive hormones into the U.S market, the establishment of U.S. sales and marketing infrastructure and a full period of operational costs associated with operating our FDA-inspected manufacturing facility.

Total Finance costs and Net foreign exchange losses on borrowings increased $3.8 million, or 78% in FY2014 compared to FY2013.

which was partially offset by a decrease in foreign exchange losses on borrowings of $0.6 million. The decrease in foreign exchange losses in FY2014 compared to FY2013 was a result of our U.S denominated indebtedness being impacted by the year on year foreign exchange movement of the U.S. dollar as compared to the Australian dollar. As at June 30, 2014, all our U.S denominated indebtedness has been repaid so no foreign exchange losses on borrowings will be incurred unless we decide to enter into further foreign currency denominated loan facilities or instruments

See Notes to Consolidated Financial Statements — Note 2 (e). Income Tax for further details on the accounting treatment of income tax expense and benefits.

The income tax expense recorded of $3.0 million in FY2014 related entirely to the movement in deferred tax due to the group no longer recognizing certain carried forward tax losses, based upon the projections for future taxable income over the periods in which the deductible temporary differences are anticipated to reverse.

During 2014, management evaluated the evidence bearing upon the realizability of its deferred tax assets, which primarily consist of net losses carry forward. Management considered the facts that the Group has historically been able to generate income, considered the future forecasts and investment costs of pipeline products, the non-recurring expenses incurred with the development of an FDA approved manufacturing facility, and the costs completing an initial public offering and other tax planning strategies. Based on the analysis management determined that the Group will not utilize $5.5 million of tax losses in the short term and accordingly did not record this amount as a deferred tax asset at June 30, 2014. This element of unrecognized future tax benefits will be assessed by management going forward and maybe recorded at a point in which management believes they will be utilized.

At June 30, 2014, the Group had total tax losses carried forward of $6.5 million. Such amount includes net losses of $2.6 million related to subsidiaries in the U.S. which would expire after 20 years starting in 2032 (recognized at a tax rate of 35%). The remaining tax losses carried forward of $3.9 million are indefinite and are attributable to the Group’s operations in Australia (recognized at a tax rate of 30%), of which $1.5 million relate to transaction costs and are directly recorded to equity. As such, the total potential tax losses available to the Group, equal $20.6 million.

Adjusted Earnings before Interest, Tax, Depreciation, Amortization and Other Income (EBITDAOI) (a non-GAAP financial measure)

A reconciliation of Adjusted EBITDAOI to (Loss)/Income for the years ended June 30, 2014 and 2013, as reported under IFRS, is as follows:

Our net cash outflow from operating activities was $11.4 million in the twelve months ended June 30, 2014 compared to an outflow of $3.0 million for the same period in 2013. The increase in operating cash outflows was primarily attributable to:

Our net cash inflow from investing activities was $0.5 million in FY2014 compared to an outflow of $2.4 million in FY2013. The decrease in investing activity cash flows was primarily attributable to:

Our net cash generated from financing activities was $31.9 million in FY2014 compared to a $6.2 million in FY2013. The increase in net cash generated in FY2014 was primarily attributable to:

The primary portion of our cash balance at December 31, 2016 is related to the proceeds from a term loan secured in November 2016. Such proceeds will be used for developing our current pipeline candidates and expanding our U.S. business and customer base. Management believes that the Company’s current available working capital is adequate to sustain its operations at current levels through at least the next twelve months.

During the year, we have expended more on investing activities, for the geographical expansion of our product portfolio, and further expansion of our U.S. presence than we have generated from our operating activities. At the end of 2016 we made decisions to significantly reduce operational costs that should translate to a reduction in costs of over $10 million. We also expect to again grow revenues significantly in 2017 and become cash flow positive and EBITDA positive in 2017. However if we do not, increase our revenues and/or reduce our costs sufficiently our costs may continue to exceed our revenues, which could impact our liquidity and may also impact our ability to continue to invest in future product opportunities.

The global financial markets have recently undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions may arise. As markets change, we will continue to monitor our liquidity position, and there can be no assurance that the challenging economic environment or a further economic downturn will not impact our liquidity or our ability to obtain future financing.

On January 11, 2016, we entered into a share purchase agreement, and a registration rights agreement with Lincoln Park. Under the terms and subject to the conditions of the Lincoln Park Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $15,000,000 in amounts of ordinary shares of the Company, no par value (“Ordinary Shares”) as described below, subject to certain limitations, from time to time, over the 36-month period commencing on February 16, 2016. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 35,000 shares of Ordinary Shares on any business day, increasing to up to 55,000 shares depending upon the closing sale price of the Ordinary Shares (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of Ordinary Shares related to the future funding will be based on the prevailing market prices of such shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Ordinary Shares is not below the threshold price as set forth in the Purchase Agreement. The Company may deliver multiple purchase notices to Lincoln Park so long as at least one (1) business day has passed since the most recent Regular Purchase was completed. On December 21, 2016 we filed a Form S-8 to deregister all unsold securities under this registration statement and terminated the Share Purchase Agreement

In addition, on February 23, 2016, the Company entered into an additional Securities Purchase Agreement with Lincoln Park Capital Fund, LLC. In recognition of Lincoln Park’s belief in the company and its potential long term value, and under the terms and subject to the conditions of the Securities Purchase Agreement, the Company will issue and sell to Lincoln Park, and Lincoln Park will purchase from the Company, at the closing (a) 175,000 ordinary shares at a price of $3.50 per share and (b) a Warrant to purchase up to an additional 150,000 ordinary shares (the “Warrant Shares”) for an exercise price of $5.00 per share. The Purchase Agreement and the Warrant contain customary representations, warranties, agreements and conditions. The Company expects that the net proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement and the Warrant will be used for general corporate purposes and working capital requirements.

Historically, we have obtained funding from equity, borrowings and cash provided by operating activities. The following shows our liquidity and capital resources as of the stated periods.

Trade receivables are usually collected over a period of less than 30 days following the due date of each invoice. Our collection of these receipts has historically been strong with bad debts totalling approximately $0.2 million, less than 0.5%, being written off in the last 5 years. In our consolidated statement of financial position as of December 31, 2016, trade receivables include a $4,286 allowance for doubtful debts. While we believe, based on the historic profile of the collection of our account receivable amounts, that this is sufficient, we may be required to allow for a provision for doubtful debts in the future if this profile were to adversely change. Trade and other receivables decreased in the year ended December 31, 2016, primarily due to a decrease in trade receivables of $1.8 million and a decrease in other receivables of $0.6 million which relates to research and development tax incentives receivable from the Australian Taxation Office for the year ended December 31, 2015. Based on our planned investment, it is expected that as long as the research and development scheme is in place, future research and development tax incentives will be available, with an amount of $3.3 million recorded as receivable for the year ended December 31, 2016, compared to $3.8 million recorded as receivable for the year ended December 31, 2015 and $1.6 million recorded as receivable for the six months ended December 31, 2014. The $0.9 million receivable recorded as of June 30, 2014 was collected in February 2015.

The parent entity issued $4.3 million in "2013 Parnell Bonds" yielding 10% p.a. between February and September 2013. The bonds had a two year term with repayment due between February and September 2015, but may be redeemed earlier by the Company. On May 20, 2014, in association with our IPO, all bondholders, at the option of the Company, exercised their stapled warrant for share consideration. The amount of share consideration was the number of bonds x 0.0000004% of the fully diluted share capital of the Company, as of the date of exercise.

The warrants stapled to the 2013 Parnell Bonds converted into 140,075 ordinary shares of the Company. Subsequent to this conversion, no further warrant obligations exist within the Company. The Company redeemed $1.5 million of these bonds during 2015 and extended the terms of the remaining outstanding bonds. As at December, 31 2016 the balance of the outstanding bonds was $2.8 million and these were extended for at least an additional one-year term at the election of the bondholders.

In January 2014, we entered into a credit agreement with a U.S. based lender, SWK Holdings LLC, for a USD$25.0 million senior secured credit facility. The credit facility was utilized to refinance our previous senior debt facility of USD$9.9 million with Partners For Growth, LLC, which was due to mature in June 2014, and to redeem USD$4.0 million of 2011 Convertible Bonds that were due to mature in March 2014. USD$2.0 million was also paid to Partners for Growth III, L.P. to buy back a warrant attached to their facility. In addition, holders of $2.0 million of the 2011 Convertible Bonds chose to convert their bonds into ordinary shares of the parent entity.

In June 2014, the Company repaid the SWK facility USD$25.0 million, plus of interest of USD$1.7 million from the proceeds of the initial public offering. The unamortized borrowing costs of approximately $1.3 million were charged to expense upon extinguishment of the debt. As at June 30, 2014, all registered mortgages associated with the SWK credit facility and the 2011 have been released. The 2013 Parnell Bonds still hold a mortgage over all assets of the Company.

In June 2015, the Company entered into a non-dilutive $USD11 million term loan agreement with MidCap Financial. The Company intends to use the proceeds of the loan for the expansion of our Companion Animal sales team in the U.S.

The Term Loan has a 45-month term, being interest only for the first 18 months and straight-line amortization for the remaining 27 months. Parnell is able to extend the interest only period to the first 24 months of the term loan upon achieving certain revenue targets as stipulated in the agreement. Interest on the outstanding balance is payable monthly in arrears at an annual rate of the one month LIBOR plus 7.45% subject to a LIBOR floor of 0.50%, current rate of 7.95%. The Term Loan has no warrant coverage and is secured by substantially all of the Company's assets.

Covenants imposed by the lender include various customary negative covenants and require that the Company maintain various levels of trailing twelve-month revenues that increase over the term of the loan. As of December 31, 2015, and for the period from start of the loan to the period end date, the Company was in compliance with all covenants.

In November 2016, the Company repaid the MidCap Term Loan balance of approximately USD$ 11,751,000, inclusive of accrued interest and prepayment fees. The unamortized borrowing costs of approximately USD$ 380,537 were charged to expense upon extinguishment of the debt. The MidCap term loan was registered by a first mortgage over all assets of the Group. As of December 31, 2016, this first registered mortgage has been released.

In November 2016, the Group entered into a credit arrangement with U.S. based lenders, SWK Holdings LLC, HI PPH LLC, and R-S Healthcare Management for a four-year USD $20,000,000 senior security credit facility. The credit facility was utilized to pay off our previous term loan with MidCap Financial Services, LLC, which was due to mature in 2020. Following the payment of fees and associated costs of establishing this new four-year credit facility of approximately USD$ 692,248, USD$7,666,307 of funds were immediately available to us for working and growth capital. The credit facility contains two financial covenants requiring the Company to maintain a ratio of fair market value of its inventory to employee liabilities of 70% and to have unencumbered liquid assets of greater than USD$ 1,000,000 as measured on the last day of any fiscal quarter. In addition, the credit facility contained other customary affirmative and negative covenants.

On January 11, 2016, the Company entered into the Lincoln Park Purchase Agreement and the Lincoln Park Registration Rights Agreement with Lincoln Park.

Under the terms and subject to the conditions of the Lincoln Park Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $15,000,000 in amounts of ordinary shares of the Company as described below, subject to certain limitations, from time to time, over the 36-month period commencing on February 16, 2016. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 35,000 shares of ordinary shares of the Company on any business day, increasing to up to 55,000 shares depending upon the closing sale price of the ordinary shares (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of ordinary shares of the Company related to the future funding will be based on the prevailing market prices of such shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Ordinary Shares is not below the threshold price as set forth in the Purchase Agreement. The Company may deliver multiple purchase notices to Lincoln Park so long as at least one (1) business day has passed since the most recent Regular Purchase was completed.

As consideration for entering into the Purchase Agreement, the Company initially issued to Lincoln Park 47,746 ordinary shares of the Company and is required to issue up to 38,197 additional ordinary shares of the Company pro rata as the Company requires Lincoln Park to purchase the Company’s shares under the Lincoln Park Purchase Agreement over the term of the agreement. The net proceeds under the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares to Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement will be used for general corporate purposes and working capital requirements. No other matters or circumstances have arisen since the end of the financial period which significantly affected or could significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years.

In addition, on February 23, 2016, the Company entered into an additional Securities Purchase Agreement with Lincoln Park Capital Fund, LLC. In recognition of Lincoln Park’s belief in the company and its potential long term value, and under the terms and subject to the conditions of the Securities Purchase Agreement, the Company will issue and sell to Lincoln Park, and Lincoln Park will purchase from the Company, at the closing (a) 175,000 ordinary shares at a price of $3.50 per share and (b) a Warrant to purchase up to an additional 150,000 ordinary shares (the “Warrant Shares”) for a purchase price of $5.00 per share. The Purchase Agreement and the Warrant contain customary representations, warranties, agreements and conditions. The Company expects that the net proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement and the Warrant will be used for general corporate purposes and working capital requirements.

On December 21, 2016 the Company filed a Form S-8 to deregister all unsold securities under this registration statement and terminated the Share Purchase Agreement with Lincoln park Capital Fund LLC.

On April 28, 2014, the shareholders and the directors of the Company approved a ten-for-one consolidation of shares, which had the effect of a reverse share split that became effective on June 6, 2014, when the Australian Securities and Investments Commission (ASIC) altered the registration details of the parent entity. All share, per share and related information presented in these consolidated financial statements and accompanying footnotes has been retroactively adjusted, where applicable, to reflect the impact of the reverse share split.

On June 18, 2014, the Company completed an initial public offering of 5,000,000 shares on the NASDAQ at a share price of USD$10.00 per share resulting in gross proceeds of AUD$53.1 million (USD$50.0 million). The proceeds were partially offset by commissions and issuance costs of AUD$5.7 million for net proceeds of AUD$47.4 million.

We generate free cash flow from our operating segments and in all cases, other than our contract manufacturing segment and U.S. Companion Animal business, our established business units generate positive EBITDAOI. Our manufacturing facility is only operating at 36% capacity which means we do not recover approximately $4 million in overhead annually. We anticipate that in the future this will change as our own revenues (and hence manufacturing requirements) increase and as we pursue contract manufacturing. We have also invested in establishing our Companion Animal commercial infrastructure in the U.S. in anticipation of our Companion Animal product launches, and, as such, our expenditures on facilities, administration, and Companion Animal marketing and digital technology development are all higher than in previous years and are expected to remain so under as we build demand for sales of our U.S. Companion Animal products during 2016. We are also investing in our pipeline product candidates including Zydax for the U.S. and Europe, to bring them closer to approvals. All of these potential growth-related investments mean that we anticipate that we will continue to incur net losses through at least 2016.

As of the date of the filing of this annual report, based on our revenue sources from our five marketed products, our anticipated growth-related investments, and our existing cash and cash equivalents, and our existing financing agreement, we expect to fund our operations through at least the current period ending December 31, 2017. Our operating plans may change as a result of many factors and we may seek additional funds through public or private equity, debt financings or other sources, such as strategic collaborations and partnering arrangements. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current and future operating plans. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the risk factors disclosed in our previous filings.

Our future capital requirements depend on many factors, including but not limited to:

The Group is a fully integrated pharmaceutical company focused on developing, manufacturing and commercializing innovative animal health solutions and performs substantial research and development projects to develop candidate products and improve current products. Our research and development policy is described below.

Research expenditure is recognized as an expense as incurred. Costs incurred on development projects (relating to the design and testing of enhancements or extensions of products) are recognized as intangible assets when:

The Group considers the criteria met for recognizing an intangible asset, usually when a regulatory filing has been made in a major market and approval is considered probable.

The expenditure capitalized comprises all directly attributable costs, including costs of materials, services, direct labor and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs are recorded as intangible assets and amortized from the point at which the asset is ready for use on a straight-line basis over its useful life, which is estimated at 10 years.

Research and development costs of approximately $2.5 million in the year ended December 31, 2016, $4.2 million in the year ended December 31, 2015, $2.0 million for the six month period ended December 31, 2014, and $1.6 million, in the year ended June 30, 2014 were capitalized. Research and development costs of approximately $0.2 million in the year ended December 31, 2015, $0.6 million for the six month period ended December 31, 2014, and $0.6 million for the year ended June 30, 2014 were expensed.

Our current growth plans are focused in the near term around our Companion Animal portfolio. We launched Glyde in the U.S. in September 2015 and expect we may receive FDA approval and would subsequently launch Zydax in the U.S. in late 2017 or early 2018 utilizing our recently established U.S. Companion Animal Sales team. We also anticipate we may receive approval for Zydax in late 2017 or early 2018 in the E.U. and in 2018 in Canada and would subsequently launch both Zydax and Glyde in these markets through a marketing partner.

In addition to marketing Glyde and our digital application Fetch in the U.S. market, we are expecting to launch Luminous our nutraceutical product for dermatological conditions in the U.S. in Q2, 2017.We also expect to continue to grow revenues of Reviderm, our recently launched anti-microbial liquid bandage in the U.S. and potentially launch it in Australia.

We also expect to continue to rapidly grow our U.S. sales of our reproductive hormones, including through the enhancement of additional functionality in mySYNCH in 2017. From these growth opportunities plus continuing sales of our companion animal and production animal products in established markets, we anticipate we may grow our 2017 revenues to $20 million to $22 million in 2017.

In addition to our marketed products, we expect to focus our product development efforts on developing further opportunities for using Zydax in treating osteoarthritis in cats, interstitial cystitis in cats as well as seeking additional geographic expansion of our near-term approvals including filing for approval in additional markets such as Asia and Latin America. In 2017 we expect to focus our R&D efforts on our key pipeline product candidates PAR121 (orthopedics) and PAR122 (dermatology). We also intend to explore further in-licensing and acquisition opportunities as well as complete contract manufacturing agreements with one or more multinational pharmaceutical companies as well as appoint a marketing parent for Zydax in Europe and potentially Canada.

We believe that our planned allocation of resources over the next five years will give us a strong focus on growth opportunities in the multi-billion dollar pet market. Future investment in our pipeline product candidates will allow us to deliver solutions to unmet animal health needs through geographical and category expansion of the OA and reproductive hormone markets and by entering new therapeutic areas that we believe offer significant opportunities. We expect to utilize our currently available spare capacity in our sterile manufacturing facility to efficiently manufacture our products.

During the fiscal year ended December 31, 2016, we have continued to invest in our fully-integrated pharmaceutical value chain, specifically in our U.S.-based sales and marketing operation and the running costs associated with our FDA-inspected sterile manufacturing facility. This operational investment, in addition to the previously incurred capital expenditure, provides us with the unique infrastructure to continue to grow our current products within the markets in which we already operate while also allowing us to take advantage of additional growth prospects from our pipeline product candidates, further geographical expansion, further contract manufacturing opportunities and future in-licensing or acquisition opportunities.

The disclosure set forth in Item 5.A of this Form 20-F further discusses trend information and is incorporated herein by reference.

We do not currently use off-balance sheet arrangements for the purposes of credit enhancement, investment or other financial purposes.

In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a transaction. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications generally are subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of December 31, 2016, there are no recorded amounts for these arrangements.

The following table summarizes our contractual obligations and other commercial commitments at December 31, 2016 as well as the effect these obligations and commitments are expected to have on our liquidity and cash flow in future periods:

The following table presents our directors and executive officers that served in 2016. The directors have served in their respective capacities since their appointment, and unless otherwise stated will serve until their removal pursuant to our constitution.

*Peter Croden, Ellen Richstone, David Rosen and William Hunsinger resigned from Parnell’s board on November 28, 2016 consistent with the decision to deregister from the NASDAQ and achieve significant cost savings.

Robert Joseph - Mr. Joseph has served as our President, Chief Executive Officer and Director since joining us in August 2006. Previously, Mr. Joseph was employed with Eli Lilly and Company, a global pharmaceutical company, serving in various sales and senior marketing roles in Australia and the US from 2002 to 2006. From 2000 to 2002, Mr. Joseph served as a Financial Planning Manager with Allergan, Inc., a global specialty pharmaceutical company, and from 1998 to 2000, was employed as a Business Performance Manager with Herron Pharmaceuticals Pty Ltd, an Australian manufacturer of pharmaceutical and natural healthcare products which has now become a subsidiary of Sigma Pharmaceuticals Limited. Mr. Joseph has undergraduate degrees in science (pre-medicine), finance (accounting and commercial law) and marketing from the University of Queensland in Australia, and is a qualified Certified Public Accountant in Australia.

Brad McCarthy - Mr. McCarthy joined us as Chief Financial Officer and Director in February 2010, and was appointed Chief Operating Officer of Parnell Manufacturing Pty Ltd, one of our wholly-owned subsidiaries, in 2012. Prior to joining us, Mr. McCarthy worked in several positions with subsidiaries of SIRVA, Inc., formerly Allied Worldwide, a privately owned moving industry company, including as Chief Financial Officer from 2007 to 2010 of Pickfords Removals, a former subsidiary company of SIRVA, Inc, and Head of Forecasting, Planning and Analysis, Europe,. Earlier in his career Mr. McCarthy served in financial and accounting positions with Centrica PLC, a multinational utility company, and Volkswagen Group Australia Pty Ltd, a subsidiary of Volkswagen Group, a manufacturer of passenger and commercial vehicles. Mr. McCarthy began his career as a financial accountant with Beale Gaertner Young, an Australian accounting firm. He has undergraduate degrees in science (pharmacology and physiology) from the University of Queensland, as well as degrees in accounting (accounting and corporate law) and management from Macquarie University in Australia. He is also a Certified Public Accountant in Australia.

The current board of directors is comprised of executive officers, Mr. Robert Joseph, Mr. Brad McCarthy and Mr. Alan Bell.

Alan Bell. Mr. Bell has been our Director and Chairman since 2006. From July 1986 until 2006, he was the sole owner and Managing Director of Parnell Laboratories (Aust) Pty Ltd, our legacy entity. Earlier in his career, Dr. Bell worked in private veterinary practice for eight years. He received his bachelor of veterinary science degree from the University of Queensland in Australia, and is a member of the Australian Institute of Company Directors.

Our Board of Directors currently consists of three members, including our Chief Executive Officer and Chief Financial Officer. We believe that each of our current directors has relevant industry experience. Our Constitution specifies that there must be a minimum of one director and a maximum of ten, and our Board of Directors may determine the number of directors within those limits. Our directors serve until removed by us by resolution.

Our Board of Directors has established delegated limits of authority, which define the matters that are delegated to management and those that require Board of Directors approval. Our non-executive directors do not have any service contracts with the Company or any of its subsidiaries providing for benefits upon termination of employment. Our executive directors, as employees, have entered into employment agreements with us that provide for certain benefits upon termination of employment, as discussed in “Employment Agreements with Executive Officers.”

We are not a party to, nor are we aware of, any voting agreements among our shareholders. In addition, no family relationships exist among our directors and executive officers.

Our Board of Directors recognizes that the attraction and retention of high-caliber directors and executives with appropriate incentives is critical to generating shareholder value. We have designed our compensation program to provide rewards for individual performance and corporate results and to encourage an ownership mentality among our executives and other key employees.

Non-executive directors receive an annual fee for board membership and committee chairmanships and are eligible persons under the Omnibus Equity Incentive Plan. Directors do not receive any other benefits or incentive.

In the fiscal year ended December 31, 2016, the aggregate remuneration we paid to our directors and senior management, including salary, director’s fees, retirement contributions (if applicable), and cash bonuses paid under our quarterly and annual bonus scheme was $2.1 million. We also recorded share-based compensation expense of $0.8 million related to shares issuable to employees and directors.

We currently operate a cash bonus plan for all employees. This plan is based on the performance of the company against the annual Board-approved business plan for sales and operating profit (stated as EBITDAOI).

We adopted an omnibus equity incentive plan during the year ended June 30, 2014. The plan provides us flexibility to grant a variety of share-based awards to incentivize our employees, officers, consultants and members of our board of directors. Under the plan, we are able to grant share options, share awards, share units, performance-based awards and other share-based awards.

We have reserved a total of 3,000,000 ordinary shares for issuance under the equity incentive plan, subject to adjustment for changes in capitalization as provided in the plan. Shares underlying awards that are cancelled, forfeited, expired, terminated unearned or settled in cash or that use a “net settled option” exercise will be returned to the plan and may be used for future awards.

The plan for awards to employees and for awards to directors and senior management (CEO, CFO, CCO, CSO and SVP Finance) is administered by our compensation committee. The compensation committee has full power to select the individuals to whom awards are granted and to determine the specific terms and conditions of each award, subject to the provisions of the plan.

The following is a brief summary of the types of awards that may be granted under the plan:

Share Options. Share options represent a right to purchase a specified number of ordinary shares from us at a specified price during a specified period of time. Share options granted under the plan will have an exercise price that is not less than the fair market value of an ordinary share on the date of grant. Options will be exercisable at times and under conditions as determined by the compensation committee, but in no event will they be exercisable later than ten years from the date of grant. We use a net settled option exercise process whereby we deliver only gain shares, that is shares with a fair market value equal to the option spread upon exercise directly to the employee or director. The net economic result to the employee or director is the same as a broker-assisted cashless exercise however net share settlement has the important benefit of reducing the number of shares that must be issued in connection with an option exercise and thereby reduces shareholder dilution.

Share Awards. Share awards may be unrestricted, or vested, at grant or restricted shares. Restricted shares are actual ordinary shares that are issued to a participant, but that are subject to forfeiture if the participant does not remain employed by us for a certain period of time and/or if certain performance goals are not met. Except for these restrictions and any others imposed by the compensation committee, the participant will generally have all of the rights of a shareholder with respect to the restricted shares, including the right to vote the shares, but will not be permitted to sell, assign, transfer, pledge or otherwise encumber the shares before the risk of forfeiture lapses.

Share Units. Share units may be unrestricted, or vested, at grant or restricted share units. An award of restricted share units represents a contractual obligation of the Company to deliver a number of ordinary shares, an amount in cash equal to the fair market value of the specified number of shares subject to the award, or a combination of shares and cash, upon vesting. Until our ordinary shares are issued to the participant in settlement of share units, the participant does not have any rights of a shareholder with respect to the underlying shares. Vesting of restricted share units may be subject to performance goals, the continued service of the participant or both. The compensation committee may provide that dividend equivalents will be paid or credited with respect to restricted share units.

Performance-Based Awards. An award of performance shares refers to ordinary shares or share units that are expressed in terms of our ordinary shares, the issuance, vesting, lapse of restrictions or payment of which is contingent on performance as measured against predetermined objectives over a specified performance period. An award of performance units refers to dollar-denominated units valued by reference to designated criteria established by the compensation committee, other than our ordinary shares, whose issuance, vesting, lapse of restrictions or payment is contingent on performance as measured against predetermined objectives over a specified performance period. The compensation committee will determine whether the award will be settled in cash or ordinary shares.

Our employees in Australia receive retirement contributions at the superannuation guarantee contribution amount required by the Australian government, which was 9.5% as of December 31, 2016, we also sponsor a 401K Plan for our U.S. employees and make matching contributions up to 4% of employee’s annual salary. We are not required to set aside any amount to meet future retirement benefit obligations.

Our executive directors, Mr. Joseph and Mr. McCarthy, have entered into employment agreements with us which provide for certain benefits in the event of a termination of their employment with us. In the event that we terminate our employment with either of Mr. Joseph or Mr. McCarthy without the requisite notice, Mr. Joseph or Mr. McCarthy would be entitled to six months’ salary continuation in lieu of notice of termination.

Our Board of Directors is currently composed of three members, Mr. Bell, Mr. Joseph and Mr. McCarthy. Mr Bell serves a term that extends to the next annual meeting of stockholders and until his successors are duly elected and qualified or until his earlier resignation or removal. Mr Joseph and Mr McCarthy do not require to be re-elected at each annual Meeting Mr. Bell, Mr. Joseph and Mr. McCarthy do not qualify as independent directors under ASX rules.

None of our directors is a party to a service contract that provides for benefits upon termination of service.

As of December 31, 2016, we had 78 employees including 34 employees based in Australia and 44 in the U.S. We have approximately 26 employees in Manufacturing, 34 employees in Sales, Marketing and Digital Technology, 13 employees in Corporate and Administration functions and 5 employees in R&D and Regulatory functions.

The following table sets forth information regarding the beneficial ownership of our outstanding ordinary shares as of December 31, 2016, by:

Beneficial ownership generally includes voting or investment power over securities. Percentage of beneficial ownership is based on 18,145,760 of our ordinary shares outstanding as of December 31, 2016,

The table in Section “ITEM 6.E. Share Ownership” above sets forth the beneficial ownership of our ordinary shares as of December 31, 2016 held by each person known to us to have 5.0% of more beneficial share ownership based on an aggregate of 18,145,760 ordinary shares outstanding as of that date.

All our shares, both issued and unissued, are ordinary shares of the same class and rank equally as to dividends, voting powers and participation powers. Accordingly, there are no special voting powers held by our major shareholders.

We are an Australian public company limited by shares with shareholders in Australia, the U.S. and other foreign jurisdictions. We are not controlled by any foreign governments or other person. We are not aware of any arrangements that would result in a change of control of our Company.

As of December 31, 2016, we had 18,145,760 ordinary shares issued. We believe that the number of beneficial owners is substantially greater than the number or record holders because a large portion of our outstanding ordinary shares are held in broker “street” names for the benefit of individual investors or other nominees. Management believes that the U.S. shareholders hold approximately 58% of our outstanding ordinary shares. In addition to these record holders there may be more persons located in the U.S. holding our ordinary shares in “street’ name.

Between February and September 2013, we issued to certain qualified subscribers 4,300,000 2013 Parnell Bonds (with an interest rate of 10%) for an aggregate offering price of AUD$4,300,000. In accordance with our Constitution, our Board of Directors passed resolutions approving this issuance on February 8, 2013. Robert Joseph, our President and Chief Executive Officer, and certain of his relatives, as well as certain relatives of Brad McCarthy, our Chief Financial Officer, participated in this bond offering as follows: Robert Joseph and his relatives purchased an aggregate of 625,000 bonds for an aggregate of AUD $625,000 and Brad McCarthy’s relatives purchased 960,000 bonds for an aggregate of AUD $960,000. The bonds matured between February and September 2015, but could be redeemed early by us or by the bondholder in accordance with the Conditions of 2013 Bonds. The Bonds were issued with a stapled warrant which converted into 140,075 ordinary shares of the Company, pursuant to the election of the bondholders on May 20, 2014. In 2015 AUD$125,000 of the bonds sold to Robert Joseph were redeemed. The remaining AUD $2,845,000 bond maturities were extended for an additional period and will mature throughout 2018.

On June 27, 2011, Parnell Manufacturing Pty Limited, or Parnell Manufacturing, a wholly-owned subsidiary of the Company, entered into a lease for 11,550 square feet of office space and 20,161 square feet of manufacturing space at Unit 4, Century Estate, 476 Gardeners Road, Alexandria NSW 2015, Australia. The lessor, Helion Properties Pty Ltd, is controlled by Alan R. Bell, our Chairman. The initial ten-year term of the lease began on January 1, 2011. Parnell Manufacturing has an option to renew the lease for up to two terms of five years each by providing notice in writing between three and 12 months prior to the expiration of the initial term of the lease. The base rent for this property is AUD$443,445 per annum, plus Goods and Services Tax of 10%, payable monthly. The rent is subject to two market review dates during the initial term to determine the prevailing market rent for the premises, and may be adjusted accordingly. The lease may be terminated by mutual agreement of the Company and Helion Properties Pty Ltd or in certain events of breach by either party. We refurbished made various improvements to this facility in 2015 of which AUD$77,000 was paid by Mr. Bell.

On April 1, 2015, the Company entered into a Consultancy Agreement with the Chairman of the Board, Dr. Alan Bell. The Company desired that Dr. Bell will provide consulting services and periodic advice to the Company, primarily in relation to product development activities. The Compensation Committee authorized the Company to engage Dr. Bell as needed, in the discretion of the CEO of the Company, to a maximum of $60,000 per calendar quarter. To the extent that Dr. Bell’s services are utilized by the Company, Dr. Bell shall report to the Committee promptly after the end of each quarter on the services provided by him during that quarter.

Beginning on February 18, 2014, Pinehill Pty Ltd sold an aggregate of 513,972 Class A shares of the Company to 17 shareholders of the Company. Pinehill Pty Ltd is beneficially owned by, and is the trustee for, the Bell Family Trust, of which Dr. Bell is the sole director.

Our financial statements are stated in Australian Dollars (AUD) and are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

See our audited financial statements for the fiscal years ended December 31, 2016, December 31, 2015, and June 30, 2014, and the six-month period ended December 31, 2014 are included under Item 18 of this annual report.

As at December 31, 2016, we were not a party to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. We intend to defend vigorously against any future claims and litigation.

Since December 31, 2016, the date of our most recent financial statements there have been no significant changes except for the matter described below:

Our ordinary shares began trading on the OTC Pink® Open Market on January 3, 2017 under the symbol PARNF. Prior to January 3, 2017, and through June 18, 2014, our ordinary shares were listed on the NASDAQ Global Market under the symbol PARN. Prior to June 18, 2014, our ordinary shares were not traded in public markets.

Our ordinary shares qualified for listing on the OTC Pink® Open Market on January 3, 2017 under the symbol PARNF. Prior to January 3, 2017, and through June 18, 2014, our ordinary shares were listed on the NASDAQ Global Market under the symbol PARN. Prior to June 18, 2014, our ordinary shares were not traded in public markets. The following sets forth the high and low prices expressed in U.S. Dollars on the NASDAQ Global Market for August, 2016 through December, 2016 and on the OTC Pink® Open Market from January, 2017 through March 29, 2017, for each quarter for the past two fiscal years, and for the one completed fiscal year (ended December 31, 2014, at which time we changed from a June 30 fiscal year to a December 31 fiscal year) for which our stock was publicly traded.

As of December 31, 2016, there were outstanding 18,145,760 shares of our ordinary no par value shares held of record by approximately 58 holders.

Information relating to our Articles of Association is incorporated by reference to the Constitution of Parnell Pharmaceuticals Holdings Ltd (incorporated by reference to Exhibit 3.1 on Form 6-K for May 2015, filed with the SEC on May 7, 2015.

On September 26, 2011, Parnell Manufacturing Pty Ltd, our wholly-owned manufacturing subsidiary, or Parnell Manufacturing, entered into a non-exclusive Supply Agreement with Bachem to supply us Gonadorelin Acetate, the API in our GONAbreed product. Certain minimum purchases are required by Parnell Manufacturing under the agreement. The agreement contains standard termination provisions and provides for an initial term of seven years, with the right to negotiate subsequent terms beginning upon the sooner of (i) 24 months prior to expiration, or (ii) the supply to Parnell Manufacturing of five kilograms of Gonadorelin Acetate. The per-gram price of the API is set in the agreement, and may be increased by Bachem; however, increases of over 2% require Bachem to provide Parnell Manufacturing with at least 60 days’ advanced notice of the increase, and provide Parnell Manufacturing the right to renegotiate the price. The agreement also contains a provision that limits the supply by Bachem of gonadorelin acetate to any other veterinary products company in the U.S. for five years following approval of our GONAbreed product.

On January 1, 2014, Parnell Manufacturing renewed a Supply Agreement with Piramal to supply Cloprostenol Sodium, the API for our estroPLAN product. The agreement requires Parnell Manufacturing to make an annual minimum purchase of 1,500 grams of API. Any purchases by Parnell Manufacturing in excess of 5,000 grams per calendar year will be provided by Piramal on a best-efforts basis. The agreement contains standard termination provisions and provides for an initial term of four years, with the right to negotiate subsequent terms upon 90 days’ notice prior to expiration. The per-gram price of the API is set in the agreement, and may be reviewed and renegotiated by Parnell Manufacturing and Piramal at any time following January 1, 2016, or following a fluctuation in currency resulting in the U.S. dollar increasing by more than 10% against the base ratio in the agreement equating $1.60 to £1.00.

On March 18, 2014, Parnell Technologies Pty Ltd, our wholly-owned subsidiary, or Parnell Tech, entered into an exclusive, perpetual, and irrevocable worldwide License Agreement with CIMTECH, to develop and commercialize products using certain intellectual property of CIMTECH.

The agreement requires Parnell Tech to pay a modest up-front payment and certain fees upon achievement of regulatory milestones totalling up to $2.0 million, and royalty payments ranging from 10% to 1% depending on the total cost of development and the total annual sales of any approved product.

The agreement provides that all new intellectual property that is developed by Parnell Tech using the patents that Parnell Tech licensed from CIMTECH will be owned by us. CIMTECH will continue to own all patents and applications existing as of the date of the agreement. CIMTECH may only terminate the agreement if Parnell becomes insolvent, materially breaches and does not cure such breach or in the event Parnell Tech does not undertake any development work on a product in a 12 month period.

On May 27, 2016, Australian Pharma Services Pty Ltd, our wholly-owned subsidiary, entered into a contract manufacturing agreement with Merial, Inc, as the exclusive supplier of the Synchsure product for SALE by Merial in the U.S. Under the terms of the Contract Manufacturing Agreement, Merial will purchase certain sterile injectable products, exclusively from Parnell, with minimum annual purchase commitments over the 10-year term of the agreement.

On October 14, 2011, in connection with a now-terminated credit agreement with PFG, originally for a $10.0 million revolving line of credit, we and our non-U.S. subsidiaries entered into a Revenue Sharing Agreement with PFG. The revenue sharing agreement, which survived the termination of the credit agreement, provides PFG the right to receive revenue payments comprised of 5% of total gross sale revenue, including payments and fees, resulting from all sales or disposals of our estroPLAN and GONAbreed products in the U.S.

The term of the revenue sharing agreement is through June 30, 2021, or until maximum aggregate payments of $3.0 million have been made by us under the agreement. As of December 31, 2016 we have paid an aggregate total of $0.9 million. In addition to standard termination provisions, the agreement may be terminated by us at any time upon payment of an early redemption fee of $3.0 million less any revenue payments we have already made. The agreement may also be terminated by PFG following the occurrence of certain events, including our inability to sell our estroPLAN and GONAbreed products in the U.S., and if we experience a change in control, which includes change in the power to exercise or the power to control the exercise of at least half of the voting power of any class of our shares. Upon such termination, PFG is entitled to a minimum payment of $3.0 million.

Between February and September 2013, we issued to certain qualified subscribers 4,300,000 2013 Parnell Bonds (with an interest rate of 10%) for an aggregate offering price of AUD$4,300,000. In accordance with our Constitution, our Board of Directors passed resolutions approving this issuance on February 8, 2013. Robert Joseph, our President and Chief Executive Officer, and certain of his relatives, as well as certain relatives of Brad McCarthy, our Chief Financial Officer, participated in this bond offering as follows: Robert Joseph and his relatives purchased an aggregate of 625,000 bonds for an aggregate of AUD $625,000 and Brad McCarthy’s relatives purchased 960,000 bonds for an aggregate of AUD $960,000. The bonds mature between February and September 2015, but may be redeemed early by us or by the bondholder in accordance with the Conditions of 2013 Bonds.

In June 2015, the Company entered into a non-dilutive $USD11 million term loan agreement with MidCap Financial. The Company intended to use the proceeds of the loan for the expansion of our Companion Animal sales team in the US.

The Term Loan had a 45-month term, being interest only for the first 18 months and straight-line amortization for the remaining 27 months. Parnell was able to extend the interest only period to the first 24 months of the term loan upon achieving certain revenue targets as stipulated in the agreement. Interest on the outstanding balance was payable monthly in arrears at an annual rate of the one month LIBOR plus 7.45% subject to a LIBOR floor of 0.50%, current rate of 7.95%. The Term Loan had no warrant coverage and was secured by substantially all of the Company's assets.

Covenants imposed by the lender included various customary negative covenants and required that the Company maintain various levels of trailing twelve-month revenues that increased over the term of the loan. As of December 31, 2015, and for the period from start of the loan to the period end date, the Company was in compliance with all covenants.

In November 2016, the Company repaid the MidCap Term Loan balance of approximately USD $11,751,000, inclusive of accrued interest and prepayment fees. The unamortized borrowing costs of approximately USD $380,537 were charged to expense upon extinguishment of the debt. The MidCap term loan was registered by a first mortgage over all assets of the Group. As at December 31, 2016, this first registered mortgage has been released.

In November 2016, the Group entered into a credit arrangement with U.S. based lenders, SWK Holdings LLC, HI PPH LLC, and R-S Healthcare Management for a four-year USD $20,000,000 senior security credit facility. The credit facility was utilized to pay off our previous senior debt facility with MidCap Financial Services, LLC, which was due to mature in 2020. Following the payment of fees and associated costs of establishing this new four-year credit facility of approximately USD $692,248, USD $7,666,307 of funds were immediately available to us for working and growth capital. The credit facility contained two financial covenants requiring the Company to maintain a ratio of fair market of its inventory to employee liabilities of 70% and to have unencumbered liquid assets of greater than USD $1,000,000 as measured on the last day of any fiscal quarter. In addition, the credit facility contained other customary affirmative and negative covenants.

On February 23, 2016, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Lincoln Park. In recognition of Lincoln Park’s belief in our company’s business and the potential value, under the terms and subject to the conditions of the Purchase Agreement, the Company will issue and sell to Lincoln Park, and Lincoln Park will purchase from the Company, at the closing (a) 175,000 ordinary shares (the “Initial Shares”) at a price of $3.50 per share and (b) a Warrant to purchase up to an additional 150,000 ordinary shares (the “Warrant Shares”) for a purchase price of $5.00 per share (the “Warrant”). Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501 (a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and the Company is selling the Initial Shares and the Warrant Shares in reliance upon an exemption from registration contained in Section 4(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Purchase Agreement and the Warrant contain customary representations, warranties, agreements and conditions. The Company expects that the net proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement and the Warrant will be used for general corporate purposes and working capital requirements. The Purchase Agreement and associated Registration Statement with the SEC was terminated as at December 31, 2016.

The representations, warranties and covenants contained in the aforementioned agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with execution of the agreements. On December 21, 2016 the Company filed a Form S-8 to deregister all unsold securities under this registration statement.

On May 17, 2016, the Company completed a secondary public offering of 2,550,000 shares on the NASDAQ at a share price of USD$1.65 per share resulting in gross proceeds of USD$4,207,500. The proceeds were partially offset by commissions and issuance costs of USD$252,450 for net proceeds of USD$3,955,050.

On June 8, 2016, the underwriters of the secondary public offering elected to take-up 380,500 overallotment shares on the NASDAQ at a share price of USD$1.65 per share resulting in gross proceeds of USD$627,825. The proceeds were partially offset by commissions and issuance costs of USD$37,669 for net proceeds of USD$590,156.

There are no Australian governmental laws, decrees or regulations that restrict, in a manner material to the Company, the export or import of capital, including any foreign exchange controls, or that generally affect the remittance of dividends or other payments to non-residents or non-citizens of Australia who hold shares of the Company.

The following is a summary of material U.S. federal and Australian income tax considerations to U.S. holders, as defined below, of the acquisition, ownership and disposition of ordinary shares. This discussion is based on the laws in force as at the date of this annual report, and is subject to changes in the relevant income tax law, including changes that could have retroactive effect. The following summary does not take into account or discuss the tax laws of any country or other taxing jurisdiction other than the U.S. and Australia. Holders are advised to consult their tax advisors concerning the overall tax consequences of the acquisition, ownership and disposition of ordinary shares in their particular circumstances. This discussion is not intended, and should not be construed, as legal or professional tax advice.

This summary does not describe U.S. federal estate and gift tax considerations, or any state and local tax considerations within the U.S., and is not a comprehensive description of all U.S. federal or Australian income tax considerations that may be relevant to a decision to acquire or dispose of ordinary shares. Furthermore, this summary does not address U.S. federal or Australian income tax considerations relevant to holders subject to taxing jurisdictions other than or in addition to the U.S. and Australia, and does not address all possible categories of holders, some of which may be subject to special tax rules.

The following discussion is limited to the material U.S. federal income tax consequences relating to the purchase, ownership and disposition of ordinary shares by U.S. holders (as defined below). This discussion applies to U.S. holders that purchase ordinary shares pursuant to the offering and hold such ordinary shares as capital assets for U.S. federal income tax purposes. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, U.S. Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. There can be no assurances that the U.S. Internal Revenue Service, or the IRS, will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of ordinary shares or that such a position would not be sustained. This discussion does not address all of the tax consequences that may be relevant to specific U.S. holders in light of their particular circumstances or to U.S. holders subject to special tax rules, such as banks, insurance companies, individual retirement and other tax-deferred accounts, regulated investment companies, individuals who are former U.S. citizens or former long-term U.S. residents, dealers in securities or currencies, tax-exempt entities, persons subject to the alternative minimum tax, persons that hold ordinary shares as a position in a straddle or as part of a hedging, constructive sale or conversion transaction for U.S. federal income tax purposes, persons that have a functional currency other than the U.S. dollar, investors in pass-through entities, or persons that own (directly, indirectly or constructively) 10% or more of our equity.

For purposes of this description, a “U.S. holder” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes:

A “non-U.S. holder” is a beneficial owner of ordinary shares that is not a U.S. holder.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ordinary shares, the U.S. federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships that will hold ordinary shares should consult their tax advisors.

You are urged to consult your own tax advisor with respect to the U.S. federal, as well as state, local and non-U.S., tax consequences to you of acquiring, owning and disposing of ordinary shares in light of your particular circumstances, including the possible effects of changes in U.S. federal and other tax laws.

Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. holder that receives a distribution with respect to ordinary shares generally will be required to include the U.S. dollar value of the gross amount of such distribution (before reduction for any Australian withholding taxes) in gross income as a dividend when actually or constructively received to the extent of the U.S. holder’s pro rata share of our current and/or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent a distribution received by a U.S. holder is not a dividend because it exceeds the U.S. holder’s pro rata share of our current and accumulated earnings and profits, the distribution will be treated first as a tax-free return of capital and reduce (but not below zero) the adjusted tax basis of the U.S. holder’s ordinary shares. To the extent the distribution exceeds the adjusted tax basis of the U.S. holder’s ordinary shares, the remainder will be taxed as capital gain. Notwithstanding the foregoing, we do not intend to maintain calculations of earnings and profits, as determined for U.S. federal income tax purposes. Consequently, any distributions generally will be reported as dividend income for U.S. information reporting purposes. See “Backup Withholding Tax and Information Reporting” below. Dividends paid by us will not be eligible for the dividends-received deduction generally allowed to U.S. corporate shareholders.

The U.S. dollar value of any distribution on ordinary shares paid in Australian dollars, including any Australian withholding taxes, should be calculated by reference to the exchange rate in effect on the date of actual or constructive receipt of such distribution, regardless of whether the Australian dollars are converted into U.S. dollars at that time. If Australian dollars are converted into U.S. dollars on the date of actual or constructive receipt of the distribution, the tax basis of the U.S. holder in those Australian dollars will be equal to their U.S. dollar value on that date and, as a result, a U.S. holder generally should not be required to recognize any foreign exchange gain or loss. If Australian dollars so received are not converted into U.S. dollars on the date of actual or constructive receipt, the U.S. holder will have a basis in the Australian dollars equal to their U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the Australian dollars generally will be treated as ordinary income or loss to such U.S. holder and generally such gain or loss will be income or loss from sources within the U.S. for U.S. foreign tax credit limitation purposes.

Subject to the passive foreign investment company rules, certain distributions treated as dividends that are received by non-corporate U.S. holders from a “qualified foreign corporation” generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than a corporation that is treated as a passive foreign investment company for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the U.S. which the Secretary of Treasury of the U.S. determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the U.S. We expect to be considered a qualified foreign corporation with respect to our ordinary shares because we believe we are eligible for the benefits under the Double Taxation Convention between Australia and the U.S. and because our ordinary shares are listed on the NASDAQ. Accordingly, dividends we pay generally should be eligible for the reduced income tax rate. However, the determination of whether a dividend qualifies for the preferential tax rates must be made at the time the dividend is paid. U.S. holders should consult their own tax advisors.

The additional 3.8% “net investment income tax” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted gross income thresholds.

Dividends received by a U.S. holder with respect to ordinary shares will be treated as foreign source income, which may be relevant in calculating the holder’s foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For these purposes, dividends will be categorized as “passive” or “general” income depending on a U.S. holder’s circumstance.

Subject to certain complex limitations, a U.S. holder generally will be entitled, at its option, to claim either a credit against its U.S. federal income tax liability or a deduction in computing its U.S. federal taxable income in respect of any Australian taxes withheld by us. If a U.S. holder elects to claim a deduction, rather than a foreign tax credit, for Australian taxes withheld by us for a particular taxable year, the election will apply to all foreign taxes paid or accrued by or on behalf of the U.S. holder in the particular taxable year.

The availability of the foreign tax credit and the application of the limitations on its availability are fact specific. You are urged to consult your own tax advisor as to the consequences of Australian withholding taxes and the availability of a foreign tax credit or deduction. See “Australian Tax Considerations — Taxation of Dividends.”

Subject to the passive foreign investment company rules, discussed below, a U.S. holder generally will, for U.S. federal income tax purposes, recognize capital gain or loss on a sale, exchange or other disposition of ordinary shares equal to the difference between the amount realized on the disposition and the U.S. holder’s tax basis in the ordinary shares. This gain or loss recognized on a sale, exchange or other disposition of ordinary shares generally will be long-term capital gain or loss if the U.S. holder has held the ordinary shares for more than one year. Generally, for U.S. holders who are individuals (as well as certain trusts and estates), long-term capital gains are subject to U.S. federal income tax at preferential rates. For foreign tax credit limitation purposes, gain or loss recognized upon a disposition generally will be treated as from sources within the U.S. The deductibility of capital losses is subject to limitations for U.S. federal income tax purposes. You should consult your own tax advisor regarding the availability of a foreign tax credit or deduction in respect of any Australian tax imposed on a sale or other disposition of ordinary shares. See “Australian Tax Considerations — Tax on Sales or other Dispositions of Shares.”

The Code provides special, generally adverse, rules regarding certain distributions received by U.S. holders with respect to, and sales, exchanges and other dispositions, including pledges, of shares of stock of, a passive foreign investment company, or PFIC. A foreign corporation will be treated as a PFIC for any taxable year if at least 75% of its gross income for the taxable year is passive income or at least 50% of its gross assets during the taxable year, based on a quarterly average and generally by value, produce or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, rents, royalties, gains from commodities and securities transactions and gains from assets that produce passive income. In determining whether a foreign corporation is a PFIC, a pro-rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.

The determination of whether or not we are a PFIC is a factual determination that must be determined annually at the close of each taxable year. Based on our business results for the last fiscal year and composition of our assets, we do not believe that we were a PFIC for U.S. federal income tax purposes for the taxable year ended June 30, 2014. Similarly, based on our business projections and the anticipated composition of our assets for the current and future years, we do not expect that we will be a PFIC for the taxable year ended June 30, 2015. Even if we determine that we are not a PFIC after the close of our taxable year ended June 30, 2014, there can be no assurance that the IRS will agree with our conclusion. Because PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we are not or will not become a PFIC. Our U.S. counsel expresses no opinion with respect to our PFIC status in any prior taxable year or the current taxable year ended June 30, 2014 and also expresses no opinion with respect to our predictions regarding our PFIC status in the future.

If we are a PFIC for any taxable year during which a U.S. holder holds ordinary shares, any “excess distribution” that the holder receives and any gain realized from a sale or other disposition (including a pledge) of such ordinary shares will be subject to special tax rules, unless the holder makes a mark-to-market election or qualified electing fund election as discussed below. Any distribution in a taxable year that is greater than 125% of the average annual distribution received by a U.S. holder during the shorter of the three preceding taxable years or such holder’s holding period for the ordinary shares will be treated as an excess distribution.

The tax liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any net operating loss, and gains (but not losses) realized on the transfer of the ordinary shares cannot be treated as capital gains, even if the ordinary shares are held as capital assets. In addition, individual shareholders will be denied a “step up” in the tax basis of any shares in a PFIC at death.

If we are a PFIC for any taxable year during which any of our non-U.S. subsidiaries is also a PFIC, a U.S. holder of ordinary shares during such year would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules to such subsidiary. You should consult your tax advisors regarding the tax consequences if the PFIC rules apply to any of our subsidiaries.

If a U.S. holder owns ordinary shares during any year in which we are a PFIC, the U.S. holder generally will be required to file an IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with respect to the company, generally with the U.S. holder’s federal income tax return for that year. U.S. holders should consult their tax advisors regarding whether we are a PFIC and the potential application of the PFIC rules.

A U.S. holder may avoid some of the adverse tax consequences of owning shares in a PFIC by making a “qualified electing fund” election. The availability of this election with respect to our ordinary shares requires that we provide information to shareholders making the election. We do not intend to provide you with the information you would need to make or maintain a qualified electing fund election and you will, therefore, not be able to make such an election with respect to your ordinary shares.

Alternatively, a U.S. holder owning marketable stock in a PFIC may make a mark-to-market election to elect out of the tax treatment discussed above. If a valid mark-to-market election for the ordinary shares is made, the electing U.S. holder will include in income each year an amount equal to the excess, if any, of the fair market value of the ordinary shares as of the close of the holder’s taxable year over the adjusted basis in such ordinary shares. The U.S. holder is allowed a deduction for the excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the holder’s taxable year. Deductions are allowable, however, only to the extent of any net mark-to-market gains on the ordinary shares included in the U.S. holder’s income for prior taxable years. Amounts included in the U.S. holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the ordinary shares, as well as to any loss realized on the actual sale or disposition of the ordinary shares, to the extent the amount of such loss does not exceed the net mark-to-market gains previously included for such ordinary shares. The tax basis in the ordinary shares will be adjusted to reflect any such income or loss amounts. A mark-to-market election will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ordinary shares are no longer regularly traded on an applicable exchange or the IRS consents to the revocation of the election.

The mark-to-market election is available only for stock which is regularly traded on (i) a national securities exchange that is registered with the U.S. Securities and Exchange Commission, (ii) NASDAQ, or (iii) an exchange or market that the U.S. Secretary of the Treasury determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Our ordinary shares are listed on the NASDAQ and actively traded, as such mark-to-market election would be available to you were we to be or become a PFIC.

U.S. holders are urged to contact their own tax advisors regarding the determination of whether we are a PFIC and the tax consequences of such status.

With respect to taxable years beginning on or after January 1, 2013, certain U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare surtax, or “net investment income tax,” on unearned income. For individuals, the additional net investment income tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. Investment income generally includes, among other things, passive income such as interest, dividends, annuities, royalties, rents, and capital gains. U.S. holders are urged to consult their own tax advisors regarding the implications of the additional net investment income tax resulting from their ownership and disposition of ordinary shares.

Certain U.S. holders who are individuals are required to report information relating to an interest in our common stock, subject to certain exceptions (including an exception for shares held in accounts maintained by financial institutions) by filing IRS Form 8938 (Statement of Specified Foreign Financial Assets) with their U.S. federal income tax return. U.S. holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our common stock.

U.S. holders that are “exempt recipients” (such as corporations) generally will not be subject to U.S. backup withholding tax and related information reporting requirements on payments of dividends on, and the proceeds from the disposition of, ordinary shares unless, when required, they fail to demonstrate their exempt status. Other U.S. holders (including individuals) generally will be subject to U.S. backup withholding tax at the applicable statutory rate, currently 28%, in respect of any payments of dividends on, and the proceeds from the disposition of, ordinary shares if they fail to furnish their correct taxpayer identification number or otherwise fail to comply with applicable backup withholding requirements. Information reporting requirements generally will apply to payments of dividends on, and the proceeds from the disposition of, ordinary shares to a U.S. holder that is not an exempt recipient. U.S. holders who are required to establish their exempt status generally must provide IRS Form W-9 (Request for Taxpayer Identification Number and Certification).

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. holder’s U.S. federal income tax liability. A U.S. holder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service in a timely manner and furnishing any required information.

U.S. holders are urged to contact their own tax advisors as to their qualification for an exemption from backup withholding tax and the procedure for obtaining this exemption.

The discussion above is not intended to constitute a complete analysis of all tax considerations applicable to an investment in ordinary shares. You should consult with your own tax advisor concerning the tax consequences to you in your particular situation.

In this section, we discuss the material Australian income tax, stamp duty and goods and services tax considerations related to the acquisition, ownership and disposal by the absolute beneficial owners of the ordinary shares. This discussion represents the opinion of Atanaskovic Hartnell, our Australian counsel. It is based upon existing Australian tax law as of the date of this annual report, which is subject to change, possibly retrospectively. This discussion does not address all aspects of Australian tax law which may be important to particular investors in light of their individual investment circumstances, such as shares held by investors subject to special tax rules (for example, share traders holding shares as trading stock). In addition, this summary does not discuss any foreign or state tax considerations, other than stamp duty and goods and services tax. Prospective investors are urged to consult their tax advisors regarding the Australian and foreign income and other tax considerations of the purchase, ownership and disposition of the shares. This summary is based upon the premise that the holder is not an Australian tax resident and is not carrying on business in Australia through a permanent establishment.

Australia operates a dividend imputation system under which dividends may be declared to be `franked’ to the extent of tax paid on company profits. Fully franked dividends are not subject to dividend withholding tax. Unfranked dividends payable to non-Australian resident shareholders that are not operating from an Australian permanent establishment (Foreign Shareholders) will be subject to dividend withholding tax, to the extent the dividends are Australian sourced. Unfranked dividends which are foreign sourced and declared to be conduit foreign income, or CFI, should not be subject to dividend withholding tax. Dividend withholding tax will be imposed at 30%, unless a shareholder is a resident of a country with which Australia has a double taxation agreement, or DTA, and qualifies for the benefits of the treaty. Under the provisions of the current DTA, between Australia and the U.S., the Australian tax withheld on unfranked dividends that are not CFI paid by us to which a resident of the U.S. is beneficially entitled is limited to 15%.

If a company that is a non-Australian resident shareholder owns a 10% or more interest, the Australian tax withheld on dividends paid by us to which a resident of the U.S. is beneficially entitled is limited to 5%. In limited circumstances the rate of withholding can be reduced to zero.

Tax on Sales or other Dispositions of Shares — Shareholders Holding Shares on Capital Account

Foreign Shareholders who hold shares on capital account will not be subject to Australian capital gains tax on the gain made on a sale or other disposal of our shares, unless they, together with associates, hold 10% or more of our issued capital, at the time of disposal or for 12 months of the last two years prior to disposal.

Foreign Shareholder who, together with associates, owns a 10% or more interest would be subject to Australian capital gains tax if more than 50% of our direct or indirect assets determined by reference to market value, consists of Australian land, leasehold interests or Australian mining, quarrying or prospecting rights. The DTA between the U.S. and Australia is unlikely to limit the amount of this taxable gain. Australian capital gains tax applies to net capital gains at a taxpayer’s marginal tax rate. We note that a bill was passed by both houses of the Australian Parliament in June 2013 to remove the 50% discount for foreign resident individuals on gains accrued after May 8, 2012. Companies are not entitled to a discount on capital gains tax. Net capital gains are calculated after reduction for capital losses, which may only be offset against capital gains.

Tax on Sales or other Dispositions of Shares — Shareholders Holding Shares on Revenue Account

Some Foreign shareholders may hold shares on revenue rather than on capital account, for example, share traders. These shareholders may have the gains made on the sale or other disposal of the shares included in their assessable income under the ordinary income provisions of the income tax law, if the gains are sourced in Australia.

Non-Australian resident shareholders assessable under these ordinary income provisions in respect of gains made on shares held on revenue account would be assessed for such gains at the Australian tax rates for non-Australian residents, which start at a marginal rate of 32.5% (with respect to the income year from July 1, 2013 to June 30, 2014. Some relief from Australian income tax may be available to such non-Australian resident shareholders under the DTA between the U.S. and Australia.

To the extent an amount would be included in a non-Australian resident shareholder’s assessable income under both the capital gains tax provisions and the ordinary income provisions, the capital gain amount would generally be reduced, so that the shareholder would not be subject to double tax on any part of the income gain or capital gain.

If a shareholder were a resident of both Australia and the U.S., under those countries’ domestic taxation laws, the shareholder’s residency status for tax purposes will be determined by the provisions of the DTA between the U.S. and Australia. Tax consequences follow from the determination of residency status of the shareholder. Shareholders should obtain specialist taxation advice in these circumstances.

No stamp duty is payable by Australian residents or foreign residents on the issue and trading of shares that are quoted on NASDAQ at all relevant times and the shares do not represent 90% or more of all issued shares in the Company.

Australia does not have estate or death duties. As a general rate, no capital gains tax liability is realized upon the inheritance of a deceased person’s shares. The disposal of inherited shares by beneficiaries, may, however, give rise to a capital gains tax liability if the gain falls within the scope of Australia’s jurisdiction to tax (as discussed above).

The issue or transfer of shares to a non-Australian resident investor will not incur Australian GST. Foreign shareholders may not be entitled to input tax credits for GST included in the price of services, if any, associated with the purchase of shares.

Publicly filed documents concerning our Company which are referred to in this Annual Report may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials can also be obtained from the Public Reference Room at the SEC’s principal office, 100 F Street, N.E., Washington D.C. 20549, after payment of fees at prescribed rates.

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings through its Electronic Data Gathering, Analysis, and Retrieval or EDGAR, system. We have made all our filings with SEC using the EDGAR system.

For further information on the Public Reference Room, please call the SEC at 1-800-SEC-0330. Our SEC filings, including the Annual Report, are also available to you on the SEC’s website at http://www.sec.gov .

Information may also be found on the Investor Relations section of our website at http://investors.parnell.com/.

A substantial portion of our current revenues and costs are exposed to changes in foreign exchange rates. Our products are sold in 14 countries predominantly under U.S. dollar denominated contracts. We do however have sales in Canadian dollars, New Zealand dollars and Australian dollars. As a result, our revenues are influenced by changes in foreign exchange rates. In fiscal year 2016, approximately 81% of our revenues were denominated in foreign currencies (non-Australian dollars): 80% in U.S. dollars and 1% in New Zealand dollars. We seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and implementing both U.S. dollar and Australian dollar denominated debt liabilities to offset exposure from U.S. dollar and Australian dollar denominated revenues. Additionally, we occasionally secure forward foreign exchange contracts against known foreign currency receipts. Going forward, we will evaluate if a similar approach to managing foreign exchange risk is appropriate for our company. Exchange rate fluctuations may also have an impact beyond our reported financials and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances.

Refer to the Notes to Consolidated Annual Financial Statements — Note 20 Financial Risk Management for additional disclosures related to market risk.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

The company maintains “disclosure controls and procedures” as such term is defined under Rule 13a-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer , as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below, relating to the operating effectiveness of the internal control in relation to segregation of duties and related information technology general controls regarding user access and change management activities.

Management is responsible for establishing and maintaining adequate “internal control over financial reporting” as such term is defined under Rule 13a-15(f) of the Exchange Act. We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that adherence to controls in place may be subject to risk because of changes in conditions. Therefore, internal control over financial reporting determined to be effective provides only a reasonable assurance regarding the reliability of financial reporting and in the preparation of financial statements for external purposes in accordance within generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual financial statements will not be prevented or detected on a timely basis.

Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 and concluded that it did not maintain effective internal control over financial reporting due to a material weakness in segregation of duties and related information technology general controls regarding user access and change management activities. Specifically, the control in place in relation to information technology general controls regarding user access and change management activities was not fully adhered to for assuring that incompatible access within the system, including the ability to record transactions, was appropriately segregated. The transactions impacted were associated only with general journal entries, as assessed and confirmed by management.

Whilst this material weakness did not result in a misstatement of the financial statements or related disclosures, if not detected, it could have resulted in a material misstatement to the annual consolidated financial statements that may not be prevented or detected on a timely basis.

Because of this material weakness, management has concluded that we did not maintain effective internal control over financial reporting as of 31 December 2016, based on criteria described in Internal Controls – Integrated Framework (2013) issued by the COSO.

As a result of the identification of this material weakness, management implemented and continues to implement various measures to address this material weakness in order to strengthen the operation of its internal controls. These measures are outlined below.

In 2017, training of the appropriate personnel has been conducted to ensure that all future adherences to this specific control procedure will occur.

In February 2017, management has conducted an independent review of certain entries impacted by this non-adherence to ensure that there has been no material effect, or reasonably likely material effect, from these entries on the Company’s internal control over financial reporting.

Further no future finance personnel will be allowed to commence financial duties with the Company without confirming they have a complete and thorough understanding of these internal control procedures.

During the period covered by this annual report, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected or are reasonably likely to materially affect, internal control over financial reporting.

At December 31, 2016, our Audit Committee consisted of three members, appointed by the Board of Directors: Dr Allan bell, chairperson, Robert Joseph, and Brad McCarthy. This committee oversees, reviews, acts on and reports on various auditing and accounting matters to our Board of Directors, including the selection of our independent accountants, the scope of our annual audits, fees to be paid to the independent accounts, the performance of our independent accountants and accounting practices. In addition, the committee oversees, reviews and acts on and reports on various risk management matters to our Board of Directors.

Our Board determined that Mr. McCarthy qualified as an “audit committee financial expert” within the requirements of the rules promulgated by the SEC relating to the audit committee for the fiscal year ended December 31, 2016. See “Item 6. Directors, Senior Management and Employees - 6.A. Directors and Senior Management” for their experience and qualifications.

We have adopted a written Code of Business Conduct and Ethics that is applicable to all of our directors, executive officers, senior management and employees. The Code of Business Conduct and Ethics focuses on the manner in which the Company and its employees should establish and maintain its relationship with government bodies. Further, a corporate communications and disclosure policy is established by the Company that will ensure compliance with the Code of Business Conduct and Ethics and any material information relating to the Company or the group is accurately communicated to interested parties.

We have posted the code on our website at http://investors.parnell.com/corporate-governance.cfm. Information contained in our website does not constitute a part of this Annual Report.

PricewaterhouseCoopers Australia has served as our independent registered public accountant since 2013. The following table shows the aggregate fees for the professional services and other services rendered:

All services to be performed by our auditor must be approved in advance by the Audit Committee. The Audit Committee has considered whether the provision of services other than audit services is compatible with maintaining the auditors’ independence and has adopted a policy governing these services. This policy requires pre-approval by the Audit Committee of all audit and non-audit services provided by the external auditor.

The following financial statements are filed as part of this Annual Report, together with the report of the independent registered public accounting firm:

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

To the Board of Directors and shareholders of Parnell Pharmaceuticals Holdings Ltd

In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of loss and comprehensive loss, consolidated statement of changes in equity and consolidated statement of cash flows present fairly, in all material respects, the financial position of Parnell Pharmaceuticals Holdings Ltd and its subsidiaries at 31 December 2016, 31 December 2015 and 31 December 2014, and the results of their operations and their cash flows for the twelve month period ended 31 December 2016 and 2015, the six months ended 31 December 2014 and the twelve month period ended 30 June 2014 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

This financial report covers the consolidated financial statements and notes of Parnell Pharmaceuticals Holdings Limited (the 'Company') and controlled entities (the 'Group'). The Company is limited by shares and domiciled in Australia.

The Group is a fully integrated veterinary pharmaceutical company focused on developing, manufacturing and commercializing innovative health solutions. We currently market five products for companion and production animals in 14 countries and augment our pharmaceutical products with our proprietary iKAM and mySYNCH software platforms.

The Group is subject to risks common to companies in the biotechnology and pharmaceutical industries. There can be no assurance that the Group's research and development will be successfully completed, that adequate protection for the Group's technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. The Group operates in an environment of substantial competition from other animal health companies. In addition, the Group is dependent upon the services of its employees and consultants, as well as third-party contract research organizations and manufacturers.

Each of the entities within the Group prepare their financial statements based on the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency.

On April 28, 2014, the shareholders and the directors of the Group approved a ten for one consolidation of shares, which had the effect of a reverse share split that became effective on June 6, 2014 when the Australian Securities and Investments Commission (ASIC) altered the registration details of the parent entity. All share, per share and related information presented in these consolidated financial statements and accompanying footnotes has been retroactively adjusted, where applicable, to reflect the impact of the reverse share split.

On May 20, 2014, at the election of the 2013 Parnell bondholders, all of the attached warrants issued with these 2013 Parnell Bonds were converted into 140,075 ordinary shares of the Company. Subsequent to this conversion no further warrant obligations exist within the Company.

On June 18, 2014, the Company completed an initial public offering of 5,000,000 shares on the NASDAQ at a share price of USD$10.00 per share resulting in gross proceeds of AUD$53,067,289. The proceeds were partially offset by commissions and issuance costs of AUD$5,724,638 for net proceeds of AUD$47,363,267.

On December 8, 2014, the Board of Directors of Parnell Pharmaceuticals Holdings Ltd. (the "Company") authorized a change of fiscal year end to December 31, 2014 to align fiscal reporting with existing management processes which use calendar year planning and to provide more efficient reporting for US investors. The change was approved by the Australian Tax Office (ATO) on December 8, 2014. As a result, the Company was required to file a transition report for the period of July 1, 2014 to December 31, 2014.

On January 11, 2016, the Company entered into a purchase agreement (the "Purchase Agreement"), and a registration rights agreement (the "Registration Rights Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park").

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $15,000,000 in amounts of ordinary shares of the Company, no par value ("Ordinary Shares") as described below, subject to certain limitations, from time to time, over the 36-month period commencing on the date that a registration statement, which the Company agreed to file with the Securities and Exchange Commission (the "SEC") pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed (the "Commencement Date"). The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 35,000 shares of Ordinary Shares on any business day, increasing to up to 55,000 shares depending upon the closing sale price of the Ordinary Shares (such purchases, "Regular Purchases"). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of Ordinary Shares related to the future funding will be based on the prevailing market prices of such shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Ordinary Shares is not below the threshold price as set forth in the Purchase Agreement.

As consideration for entering into the Purchase Agreement, the Company initially issued to Lincoln Park 47,746 Ordinary Shares and is required to issue up to 38,197 additional Ordinary Shares pro rata as the Company requires Lincoln Park to purchase the Company's shares under the Purchase Agreement over the term of the agreement. The net proceeds under the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares to Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement will be used for general corporate purposes and working capital requirements. This registration statement was terminated on December 21, 2016.

On February 23, 2016, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). In recognition of Lincoln Park’s belief in our company’s business and the potential value, under the terms and subject to the conditions of the Purchase Agreement, the Company will issue and sell to Lincoln Park, and Lincoln Park will purchase from the Company, at the closing (a) 175,000 ordinary shares (the “Initial Shares”) at a price of $3.50 per share and (b) a Warrant to purchase up to an additional 150,000 ordinary shares (the “Warrant Shares”) for a purchase price of $5.00 per share (the “Warrant”). Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501 (a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and the Company is selling the Initial Shares and the Warrant Shares in reliance upon an exemption from registration contained in Section 4(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Purchase Agreement and the Warrant contain customary representations, warranties, agreements and conditions. The Company expects that the net proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement and the Warrant will be used for general corporate purposes and working capital requirements.

On December 21, 2016 the Company filed a Form S-8 to deregister all unsold securities under this registration statement.

On December 21, 2016, the Company filed a Form 25, Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act, with the Securities and Exchange Commission and NASDAQ on December 21, 2016.

The NASDAQ delisting became effective on December 31, 2016 and trading on the NASDAQ Global market will continued up until this date. The Company also filed a Form 15, Notice of Termination of Registration or Suspension of Duty to File, with the Securities and Exchange Commission to terminate its reporting obligations under the Exchange Act.

The Company moved the trading of its ordinary shares to be quoted on the OTC Pink® Open Market, a centralized electronic quotation service for over-the-counter securities. This service enables current shareholders of the Company to continue to buy and sell their shares in the Company after delisting from the NASDAQ.

This financial report covers the consolidated financial statements of the Group and were authorized for issue by the directors on , 2017.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

These financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The significant accounting policies used in the preparation and presentation of these financial statements are provided below and are consistent with prior reporting periods unless otherwise stated.

The financial statements are based on historical costs, except for the measurement at fair value of selected financial assets and financial liabilities.

The financial statements have been prepared on the basis of going concern which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business.

For the year ended December 31, 2016, the Group experienced a loss from continuing operations of AUD$21,691,443 and operating cash outflows of AUD$12,115,514 for the year then ended. The loss was largely driven by continued investment in the US market.

During the period the Group refinanced the Midcap loan facility (USD$11,000,000) with a new USD$20,000,000 term loan from SWK Holdings LLC (“SWK”). The new facility with SWK is a four year revenue sharing facility which, after the payment of fees and associated costs, which generated approximately USD$8,000,000 of additional funds for the Group to use for working capital purposes. The SWK facility contains a number of covenants, including a financial covenant requiring the Group maintains employee related liabilities at less than 70% of the market value of inventory and also that the Group maintains unencumbered liquid assets at no less than USD$1,000,000 at the end of each fiscal quarter. At December 31, 2016, the Company was in compliance with these covenants.

The continuing viability of the Group and its ability to continue as a going concern and meet its debts and commitments as and when they fall due requires that it meets or exceeds operational budgets in the future, delivers on its existing and new contract manufacturing agreements and continues to have the support from its lenders. The Directors and management believe that the Group will be successful in the above matters and, accordingly, have prepared the financial report on a going concern basis.

The Directors and management have a responsibility to prepare the financial statements in accordance with accounting standards, which requires entities to prepare financial statements on a going concern basis unless the directors intend to liquidate the entity, cease trading or have no realistic alternative but to do so. No adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or classification of liabilities that might be necessary should the Group not continue as a going concern.

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are:

We review intangible assets and property, plant and equipment for impairment whenever external or internal factors indicate that the carrying amount of the assets may not be fully recoverable. Factors we consider in deciding when to perform an impairment review include significant declines in market value, negative outlooks on the industry or economy, obsolescence or damage to the assets, significant underperformance of the business compared to expectations and changes in the use of the assets. If an impairment analysis is performed to evaluate a long-lived asset for recoverability, we compare forecasts of cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. If the expected cash flows are less than the carrying amount an impairment charge would be recognized. To date, we have not recorded any impairment losses on intangible assets or property, plant and equipment.

The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

The Group has not recognized deferred tax assets relating to carried forward tax losses as at December 31, 2016. However, utilization of the tax losses going forward will depend on the ability of the entity, to satisfy certain tests at the time the losses are recouped.

The Group had recognized warrants that were issued by the Company in relation to the loan facility from Partners for Growth III LP and 2013 Parnell Bonds. At December 31, 2015 the Group has $Nil (December 31, 2014: $Nil, June 30, 2014: $Nil, June 30, 2013: $2,952,954) recorded in liabilities for warrants as all existing warrants were extinguished during the year ended June 30, 2014. In connection with the Lincoln Park transactions (note 16), the Company issued 150,000 warrants which allow the warrant holder to convert at an exercise price of USD$5. As the exercise price is denominated in US dollars and the Company’s functional currency is Australian dollars, the warrants are classified as a financial liability and measured at fair value through profit and loss.

The Group has recognized government grant revenue receivable at December 31, 2016 of $3,258,350 (December 31, 2015: $3,807,193, December 31, 2014: $1,610,986, June 30, 2014: $913,719, June 30, 2013: $2,189,000). Management estimates that the costs applied are consistent with the requirements of the R&D incentive scheme.

The key judgment relating to the Group is the recognition criteria for the capitalization of intangible assets which accounting treatment of these assets has been documented in Note 2(o)

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The consolidated financial statements include the financial position and performance of controlled entities from the date on which control is obtained until the date that control is lost.

Intragroup assets, liabilities, equity, income, expenses and cashflows relating to transactions between entities in the consolidated entity have been eliminated in full for the purpose of these financial statements.

Appropriate adjustments have been made to a controlled entity’s financial position, performance and cash flows where the accounting policies used by that entity were different from those adopted by the consolidated entity. All controlled entities have a June financial year end.

A list of controlled entities is contained in Note 23 to the financial statements.

Subsidiaries are all entities (including structured entities) over which the parent has control. Control is established when the parent is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the relevant activities of the entity.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The executive directors are the chief operating decision maker, responsible for allocating resources and assessing performance of the operating segments.

The tax expense recognized in the consolidated statement of profit/(loss) and comprehensive income/(loss) relates to current income tax expense plus deferred tax expense (being the movement in deferred tax assets and liabilities and unused tax losses during the period).

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for the period and is measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets are recognized for all deductible temporary differences and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and losses can be utilised.

Current tax assets and liabilities are offset where there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Deferred tax assets and liabilities are offset where there is a legal right to set off current tax assets against current tax liabilities and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Current and deferred tax is recognized as income or an expense and included in profit or loss for the period except where the tax arises from a transaction which is recognized in other comprehensive income or equity, in which case the tax is recognized in other comprehensive income/(loss) or equity respectively.

The Company and its wholly-owned Australian controlled entities have formed a tax-consolidated group under the legislation and as a consequence these entities are taxed as a single entity.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that are transferred to entities in the Group, are classified as finance leases.

Finance leases are capitalized by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Lease payments for operating leases, where substantially all of the risks and benefits remain with the lessor, are charged as expenses on a straight-line basis over the life of the lease term.

Lease incentives under operating leases are recognized as a liability and amortized on a straight-line basis over the life of the lease term.

Revenue is measured at the fair value of the consideration received or receivable and is presented net of returns, discounts and rebates.

Revenue is recognized on local sales on delivery of goods to the customer as this is deemed to be the point in time when risks and rewards are transferred and there is no longer any ownership or effective control over the goods. Revenue is recognized on international sales when the goods are available for collection by the customer, and a firm purchase commitment is received. This is the point in time when risks and rewards are transferred and there is no longer any ownership or effective control over the goods.

Government grants, including Australian Research and Development incentives, are recognized at fair value where there is reasonable assurance that the grant will be received and all grant conditions will be met. Grants relating to expense items are recognized as income over the periods necessary to match the grant to the costs they are compensating.

Revenue, expenses and assets are recognized net of the amount of goods and services tax (GST), which is recoverable from the Australian Taxation Office (ATO).

The net amount of GST recoverable from, or payable to, the ATO is included as part of receivables or payables in the consolidated balance sheet. Cash flows in the consolidated statement of cash flows are included on a gross basis which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

Cash and cash equivalents comprises cash on hand, demand deposits and short-term investments which are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

Bank overdrafts also form part of cash and cash equivalents for the purpose of the consolidated statement of cash flows and are presented within current liabilities on the consolidated balance sheet.

Trade receivables are amounts due from customers for products sold or services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment.

Inventories are measured at the lower of cost and net realizable value. Cost of inventory is determined using the weighted average cost basis and are net of any rebates and discounts received.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale. Net realizable value is estimated using the most reliable evidence available at the reporting date and inventory is written down through an obsolescence provision if necessary.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Classes of property, plant and equipment are measured using the cost model as specified below.

Under the cost model the asset is carried at its cost less any accumulated depreciation and any impairment losses. Costs include purchase price, other directly attributable costs and the initial estimate of the costs of dismantling and restoring the asset, where applicable. Expenditures for repairs and maintenance of assets are charged to expense as incurred.

Expenditures of repairs and maintenance of assets are charged to expense as incurred.

The depreciable amount of all property, plant and equipment is depreciated on a straight-line method from the date that management determine that the asset is available for use.

Assets held under a finance lease and leasehold improvements are depreciated over the shorter of the term of the lease and the assets useful life.

The depreciation rates used for each class of depreciable asset are shown below:

At the end of each annual reporting period, the depreciation method, useful life and residual value of each asset is reviewed. Any revisions are accounted for prospectively as a change in estimate.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater that its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within Other Income and Other Expenses.

Capital works in progress of AUD$709,483 relates to enhancements to the manufacturing facility (December 31, 2015: $509,620, December 31, 2014: AUD$52,193, June 30, 2014: $Nil, June 30, 2013: $Nil).

Derivative instruments, including warrants, are measured at fair value. Gains and losses arising from changes in fair value are taken to the consolidated statement of profit/(loss) and comprehensive income/(loss) unless they are designated as hedges.

Financial instruments are recognised initially using trade date accounting, i.e. on the date that the Group becomes party to the contractual provisions of the instrument.

On initial recognition, all financial instruments are measured at fair value plus transaction costs (except for instruments measured at fair value through profit or loss where transaction costs are expensed as incurred).

Financial assets are divided into the following categories which are described in detail below:

The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers but also incorporate other types of contractual monetary assets.

After initial recognition these are measured at amortized cost using the effective interest method, less provision for impairment. Any change in their value is recognized in profit or loss.

The Group’s trade and most other receivables fall into this category of financial instruments.

Receivables are considered for impairment on an individual asset basis when they are past due at the reporting date or when objective evidence is received that a specific counterparty will default.

The amount of the impairment is the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.

For trade receivables, impairment provisions are recorded in a separate allowance account with the loss being recognized in profit or loss. When confirmation has been received that the amount is not collectable, the gross carrying value of the asset is written off against the associated impairment provision.

Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

In some circumstances, the Group renegotiates repayment terms with customers which may lead to changes in the timing of the payments, the Group does not necessarily consider the balance to be impaired, however assessment is made on a case-by-case basis.

Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest-related charges and, if applicable, changes in an instrument's fair value that are reported in profit or loss are included in the income statement line items 'finance costs' or 'finance income', unless these interest related charges relate to a qualifying asset in which case they are capitalised to that asset.

Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or other financial liabilities at amortized cost depending on the purpose for which the liability was acquired. Although the Group uses derivative financial instruments in economic hedges of currency and interest rate risk, it does not hedge account for these transactions.

The Group‘s financial liabilities include borrowings, trade and other payables (including finance lease liabilities), which are measured at amortized cost using the effective interest rate method.

All of the Group‘s derivative financial instruments that are not designated as hedging instruments are accounted for at fair value through profit or loss.

At the end of each reporting period, the Group determines whether there is evidence of an impairment indicator for non-financial assets. Where there is evidence of such an impairment indicator, the recoverable amount of the assets is estimated.

Where assets do not operate independently of other assets, the recoverable amount of the relevant cash-generating unit (CGU) is estimated.

The recoverable amount of an asset or CGU is the higher of the fair value less costs of disposal and the value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Where the recoverable amount is less than the carrying amount, an impairment loss is recognized in the consolidated statement of comprehensive income immediately.

Reversal indicators are considered in subsequent periods for all assets which have suffered an impairment loss, except for goodwill.

The Group considers the criteria met for recognizing an intangible asset, usually when a regulatory filing has been made in a major market and approval is considered probable.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The expenditure capitalized comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs are recorded as intangible assets and amortized from the point at which the asset is ready for use on a straight-line basis over its useful life, which is estimated at 10 years.

Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalized include external direct costs of materials and service and direct payroll and payroll related costs of employees' time spent on the project. Amortization is calculated on a straight-line basis over periods generally ranging from 3 to 5 years

IT development costs include only those costs directly attributable to the development phase and are only recognized following completion of technical feasibility and where the group has an intention and ability to use the asset.

These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

Provisions are recognized when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.

Provisions are measured at the present value of management's best estimate of the outflow required to settle the obligation at the end of the reporting period. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the unwinding of the discount is taken to finance costs in the consolidated statement of profit/(loss) and comprehensive income/(loss).

Liabilities for annual leave that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled.

The liability for annual leave is recognized in the provision for employee benefits as a current liability.

The liabilities for long service leave are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. They are therefore recognized in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows.

The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur.

The Group recognizes a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

Secured and unsecured loans have been obtained. Loans that are repayable within 12 months are presented as current liabilities.

The fair value of the liability portion of the convertible notes are determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortized cost basis until extinguished on conversion or maturity of the notes. The remainder of the proceeds is allocated to the conversion option/warrants. This is recognized separately as a derivative on the balance sheet.

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit and loss as other income or finance costs.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset.

All other borrowing costs are recognized as an expense in the period in which they are incurred.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Borrowing costs incurred for the construction or development of any qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax from the proceeds.

Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period.

(i) Basic net loss per share
Basic net loss per share is calculated by dividing:

(ii) Diluted net loss per share
Diluted net loss per share adjusts the figures used in the determination of basic earnings per share to take into account:

For periods in which the Company has reported net losses, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common stockholders, since their impact would be anti-dilutive to the calculation of net loss per share. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders for the years ended December 31, 2016, December 31, 2015, the six month period ended December 31, 2014 and the year ended June 30, 2014, respectively.

The functional currency of each of the Group's entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity's functional and presentation currency.

Foreign currency transactions are recorded at the spot rate on the date of the transaction.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition or in prior reporting periods are recognized through profit or loss, except where they relate to an item of other comprehensive income or whether they are deferred in equity as qualifying hedges.

The financial results and position of foreign operations whose functional currency is different from the Group's presentation currency are translated as follows:

Exchange differences arising on translation of foreign operations are transferred directly to the Group's foreign currency translation reserve in the consolidated balance sheet. These differences are recognized in the consolidated statement of loss and comprehensive loss in the period in which the operation is disposed.

The Group has applied the following standards and amendments for the first time for their reporting period commencing 1 January 2016:

The adoption of these standards did not have any impact on the current period or any prior period and is not likely to affect future periods.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Certain new accounting standards and interpretations have been published that are not mandatory for December 31, 2016 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

International and domestic government grants/tax incentives recognised during the year totalled $999,749 (12 months ended December 31, 2015: $1,070,526, 6 months ended December 31, 2014: $298,777 year ended June 30, 2014: $239,782) and recognised as other income. Included in other receivables are government grants for tax incentives totalling $3,258,350 (December 31, 2015: $3,807,193, December 31, 2014: $2,571,559). There are no unfulfilled conditions or contingencies attaching to these grants.

The capitalization rate used to determine the amount of borrowing costs to be capitalized is the weighted average interest rate applicable to the entity's outstanding borrowings during the year ended December 31, 2016, in this case 9.3% (year ended December 31, 2015: 9%, six-month period ended December 31, 2014: 10%, year ended June 30, 2014: 14%).

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The tax losses available for future use in U.S. will expire starting in 2033. The tax losses available for future use in Australia do not expire but are subject to satisfying certain conditions (e.g. same business and continuity of ownership).

Aggregate deferred tax arising in the reporting period are not recognized in net profit or loss or other comprehensive income/(loss) but are directly credited to equity.

Note there is a further deferred tax asset of $485,402 that has not been recognised as at 30 June 2014 but is available for future use by the Group.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

During 2016, management evaluated the evidence bearing upon the realizability of its deferred tax assets, which primarily consist of net loss carry forwards. Management considered the facts that the Group has historically been able to generate income, considered the future forecasts and investment costs of pipeline products, the incurred with the development of an FDA approved manufacturing facility, and the costs completing an initial public offering and other tax planning strategies. Based on the analysis management determined that the Group will not utilize of tax benefit of $18,994,793 as of December 31, 2016 ($12,478,944 as of December 31, 2015, December 31, 2014: $7,735,765) and accordingly did not record these amounts as a deferred tax asset at December 31, 2016, December 31, 2015, or December 31, 2014. This element of unrecognized future tax benefits will be assessed by management going forward and maybe recorded at a point in which management believes they will be utilized

The animal health pharmaceutical industry is characterized by meaningful differences in customer needs across different animal species and regions. In addition, our FDA approved sterile manufacturing facility has different operational characteristics. As a result of these differences, among other things, we manage our operations through four separate reportable segments.

This segment covers the Groups Osteoarthritis portfolios across both Canine and Equine species. It is responsible for sales of our patented product Zydax, along with the complementary product Glyde across Australia, New Zealand, the Middle East and Asia.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

This segment covers the Groups Reproductive Hormone portfolio across Production Animal in the United States of America. It is responsible for the sales of the first reproductive hormone products approved for the indication of estrous synchronization in both dairy and beef cows in the U.S.

This segment covers the Group's Reproductive Hormone portfolio in Production Animal across all regions outside of the United States of America. It is responsible for the sales of these reproductive hormone products in Australia, New Zealand, the Middle East, Asia and Canada.

This segment is responsible for the operation of the Group's FDA approved sterile manufacturing facility, the manufacture and release of all of the Groups pharmaceutical products and performing contract manufacturing. The Manufacturing operations are also responsible for increasing factory utilization via exploring future contract manufacturing opportunities.

The Executive Directors (which includes the CEO, CFO and Chairman), who are the Group's chief operating decision maker's ("CODM's"), use the revenues and the segment results, being Adjusted Earnings Before Interest, Tax, Depreciation, Amortization and Other Income (Adjusted EBITDAOI) of the four segments, among other factors, for performance evaluation of the individual segments and the overall Group, and the allocation of resources.

The CODM's believe that Adjusted EBITDAOI represents the results of our underlying operating segments prior to considering certain income statement elements and other certain significant items, which are not directly associated with the activities of the operating segment.

The basis of calculating Adjusted EBITDAOI is by the removal of certain significant items and also additional items that are substantive and non-operating in nature. The items that are always removed are:

Certain costs are not allocated to our reporting segment results, such as costs associated with the following:

We manage our assets and liabilities on a Group basis, not by segment. CODM does not regularly review any asset or liability information by segment and its preparation is impracticable. Accordingly, we do not report asset and liability information by segment.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The total segment costs and unallocated expenses reconcile to selling and marketing expenses, regulatory expenses and administration expenses on the statement of comprehensive loss less depreciation and amortization. reconciliation of segment and unallocated costs to operating costs provided as follows:

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers whereas segment assets are based on the location of the assets.

The Group is domiciled in Australia, with the amount of its revenue from external customers for the year ended December 31, 2016 in Australia totalling $2,387,870 (year ended December 31, 2015: $1,936,632, six months to December 31, 2014: $836,337, and year ended June 30, 2014:$2,179,765), revenues from external customers in the USA totalling $15,266,462 (year ended December 31, 2015: $8,807,405, six months to December 31, 2014: $1,188,791, and year ended June 30, 2014: $1,646,503), revenues from external customers in Canada totalling $Nil (year ended December 31, 2015: $735,125, six months ended December 31, 2014: $485,204, and year ended June 30, 2014: $1,159,243), revenues from external customers in New Zealand totalling $222,956 (year ended December 31, 2015: $539,265, six months ended December 31, 2014: $121,335, and year ended June 30, 2014: $755,327) and the total revenues from external customers in other countries totalling $1,171,362 (year ended December 31, 2015: $1,151,326, six months ended December 31, 2014: $1,030,785, and year ended June 30, 2014: $1,801,761). Segment revenues are based on the country in which the customer is based.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The Group's exposure to interest rate risk is discussed in note 20. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above.

Current other receivables relate primarily to Australian Tax Office R&D Incentives receivable, recorded as per the terms of the R&D Incentive Scheme.

Non-current other receivables relate to deposits paid by the Group in the ordinary course of business.

The Group's accounts receivable balances are usually collected within a period of less than 30 days following due date of invoice. Our collection of these receipts has historically been strong with less than 0.5% of bad debts being written off during the last three financial years, as such we have not provided for doubtful debts in the Groups accounts over this period. In our consolidated balance sheet as at December 31, 2016 trade receivables includes a $4,286 allowance for doubtful debts (year ended December 31, 2015: Nil, six months to December 31, 2014: Nil). While we believe, based on the historic profile of the collection of our account receivables amounts, that this is sufficient, we may be required to allow for a provision for doubtful debts in the future if this profile is to adversely change.

During the year, the following losses recognized in profit or loss in relation to impaired receivables.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The Group has no significant concentration of credit risk with respect to any single counterparty or group of counterparties. The class of assets described as 'trade and other receivables' is considered to be the main source of credit risk related to the Group.

On a geographical basis, the Group has significant credit risk exposures in Australia, New Zealand, Canada and United States of America given the substantial operations in those regions. The Group's exposure to credit risk for receivables at the end of the reporting period in those regions is as follows:

The following table details the Group's trade and other receivables exposure to credit risk (prior to collateral and other credit enhancements) with aging analysis and impairment provided for thereon. Amounts are considered as 'past due' when the debt has not been settled, within the terms and conditions agreed between the Group and the customer or counter party to the transaction. Receivables that are past due are assessed for impairment by ascertaining solvency of the debtors and are provided for where there is objective evidence indicating that the debt may not be fully repaid to the Group.

The balances of receivables that do not remain within initial trade terms (as detailed in the table) are considered to be of high credit quality.

The Group does not hold any financial assets with terms that have been renegotiated, but which would otherwise be past due or impaired.

The carrying value of trade and other receivables is considered a reasonable approximation of fair value.

The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivable in the financial statements.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Write downs of inventories to net realizable value during the period were $ NIL (year ended December 31, 2015: $Nil, six months to December 31, 2014: $Nil, year ended June 30, 2014: $ Nil).

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial period:

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

During the year ended December 31, 2016 the Group recorded a receivable related to Government Grants for tax incentives totalling $3,258,350 (December 31, 2015: $3,807,193, December 31, 2014: $2,571,559), which is included in Note 9 in Other Receivables, with $2,393,224 (December 31, 2015: $3,112,534, December 31, 2014: $1,359,072) offsetting development costs and $865,123 (December 31, 2015: $758,207, December 31, 2014: $251,914, June 30, 2014: $246,445) included in Other Income.

All the carrying values are considered to be a reasonable approximation of fair value.

Information about the Group's exposure to foreign exchange risk is provided in note 20.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

As at December 31, 2016, the Company had borrowings related to a term-loan of $27,639,580 and the 2013 Parnell Bonds of $2,845,000 (December 31, 2015: $2,845,000, December 31, 2014: $4,300,000), excluding capitalized interest. The Company had lease liabilities that are secured by the related leased assets of $10,178 (December 31, 2015: $Nil, December 31, 2014: $49,178).

In June 2011, the Company entered into credit agreement with Partners For Growth III, L.P., originally for a USD$7,000,000 revolving line of credit. In October 2011, the Company and its U.S. subsidiaries increased this revolving line of credit by USD$3,000,000 and entered into a Revenue Sharing Agreement with Partners For Growth III, L.P. In December 2013, the parties amended the revenue sharing agreement to add our U.S. subsidiaries as parties. The revenue sharing agreement provides Partners For Growth III, L.P. the right to receive revenue payments comprised of 5% of total gross sales revenue including payments and fees and resulting sales or disposals of our estroPLAN and GONAbreed products in the U.S. The term of the revenue sharing agreement is through June 30, 2021, or until a maximum aggregate payment of $3.0 million has been made. The Agreement may be terminated by us at any time upon payment of an early redemption fee of USD$3,000,000 less any revenue payments already made. The agreement also provides that Partners For Growth III, L.P. is entitled to minimum payment of USD$3,000,000 upon the change in control of the business. The Company's IPO did not trigger a change of control event as stipulated in the agreement.

Covenants imposed by the lender required that Earnings before Income Tax, Interest, Depreciation and Amortization ("EBITDA") for the prior twelve months was not less than AUD$3,000,000, that a current ratio of 1.25:1.0 be maintained, and a minimum net worth of AUD$12,500,000 be maintained. The loan facility was extinguished in February 2014 and a charge for unamortized borrowing costs of AUD$75,053 was recorded upon extinguishment. The Company was in breach of its covenants at the time the facility was extinguished. The revenue sharing agreement remains in place in accordance with the terms above and the Group accrued AUD$496,407, AUD$109,885, AUD$191,042 and AUD$17,901 in current liabilities as of December 31, 2016, December 31, 2015, June 30, 2015 and December 31, 2014, respectively.

In March 2011, the parent entity issued 12% convertible notes for USD$6,250,000. The notes were convertible into ordinary shares of the parent entity, at the option of the holder, or repayable in March 2014. The conversion rate is AUD$0.3710526 (AUD$3.71 after ten for one share consolidation) for each note held, which is based on the market price per share at the date of the issue of the notes, but subject to adjustments for reconstructions of equity. In January 2014, USD$2,042,105 of these 2011 Convertible Bonds converted into ordinary equity of the parent entity and USD$3,957,895 (AUD$4,495,317) was redeemed.

The 2011 Convertible Bonds were registered by a second mortgage over all assets of the Group. As at January 31, 2014, this second registered mortgage has been released.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The parent entity issued 10% 2013 Parnell Bonds totalling AUD$4,150,000 from February 2013 to June 2013, with another AUD$150,000 issued in 2014 with the same terms. The bonds have a two year term with repayment due between February and September 2015, but may be redeemed earlier by the Company. In addition, at maturity or upon a valuation event, bondholders had the option to exercise an attached warrant for cash and/or share consideration at the election of the bondholder. The amount of cash consideration is calculated at 20% of total bond investment and warrant shares are represented by the number of bonds x 0.0000004% of the fully diluted share capital of the Company, as at the date of the valuation event.

In 2015, the Company redeemed $1,455,000 of 2013 Parnell bonds in cash and the remaining outstanding bonds were extended for an additional one-year term at the election of the bondholders.

In 2016, the outstanding bonds were extended for an additional one-year term at the election of the bondholders.

The 2013 Parnell Bonds were registered by a third mortgage over all assets of the Group, which upon full payment of the loan facility and term facility became a first ranking mortgage over all of the assets of the Group.

In January 2014, the Group entered into a credit agreement with a U.S. based lender, SWK Holdings LLC, for a seven year USD$25,000,000 senior secured credit facility. The credit facility was utilized to refinance our previous senior debt facility of USD$9,900,000 with Partners For Growth, LLC, which was due to mature in June 2014, and to redeem USD$3,957,895 of Convertible Bonds that were due to mature in March 2014. USD$2,000,000 was paid to Partners for Growth III, L.P. to pay out a warrant attached to their facility. In addition, 2.0 million 2011 Convertible Bonds converted to ordinary shares of the parent entity. Following the payment of fees and associated costs of establishing this new seven-year credit facility of approximately AUD$1.45 million, USD$7,900,000 of funds were immediately available to us for working and growth capital. The credit facility contained two financial covenants requiring us to retain a current asset ratio of greater than 1.25, after adjusting for subordinated debt (2013 Parnell Bonds), and to maintain a level of last 12 months revenues greater than that stipulated in the credit agreement, measured at the end of each quarter and increasing over time to a maximum of AUD$16,000,000 by quarter ending December 31, 2017. In addition, the credit facility contained other customary affirmative and negative covenants.

In June 2014, the Company repaid the term loan balance of approximately USD$26,750,000, inclusive of interest of USD$1,750,000, which equated to a total Internal Rate of return, or IRR, of 20%, from the proceeds of the initial public offering. The unamortized borrowing costs of approximately AUD$1.26 million were charged to expense upon extinguishment of the debt.

The SWK Holdings LLC term loan facility was registered by a first mortgage over all assets of the Group. As at June 30, 2014, this first registered mortgage had been released.

In November 2016, the Company repaid the MidCap Term Loan balance of approximately USD $11,751,000, inclusive of accrued interest and prepayment fees. The unamortized borrowing costs of approximately USD $380,537 were charged to expense upon extinguishment of the debt. The MidCap term loan was registered by a first mortgage over all assets of the Group. As at December 31, 2016, this first registered mortgage has been released.

In November 2016, the Group entered into a credit arrangement with U.S. based lenders, SWK Holdings LLC, HI PPH LLC, and R-S Healthcare Management for a four-year USD $20,000,000 senior security credit facility. The credit facility was utilized to pay off our previous senior debt facility with MidCap Financial Services, LLC, which was due to mature in 2020. Following the payment of fees and associated costs of establishing this new four-year credit facility of approximately USD $692,248, USD $7,666,307 of funds were immediately available to us for working and growth capital. The credit facility contained two financial covenants requiring the Company to maintain a ratio of fair market of its inventory to employee liabilities of 70% and to have unencumbered liquid assets of greater than USD $1,000,000 as measured on the last day of any fiscal quarter. In addition, the credit facility contained other customary affirmative and negative covenants.

* Movement in face value of notes issued relates to the movement in USD/AUD exchange rate and redemption of one bondholder during the year. This movement has been recognized as part of the "net foreign exchange losses on borrowings".

** Interest expense is calculated by applying the effective interest rate of 12% to the liability component for the 2011 Parnell bonds and 10% for the 2013 Parnell bonds.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

On June 18, 2014, the Company completed an initial public offering of 5,000,000 shares on the NASDAQ Global Market at a share price of USD$10.00 (AUD$10.61) per share resulting in proceeds of AUD$53,067,289. The proceeds were partially offset by commissions and issuance costs of AUD$5,724,638 for net proceeds of AUD$47,363,267.

There were no other movements in other classes of ordinary shares in 2015, 2014 and 2013, other than those previously discussed in the notes to the consolidated financial statements.

Basic and diluted net loss per share calculated for the Group have been disclosed in the Statements of Comprehensive Loss.

A reconciliation of the net loss used in calculating net loss per share is included below:

A calculation of the weighted average number of shares used for the denominator is included below:

A summary of the conversion details relating to the different classes of bonds is included in Note 14.

The Group's objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including 'borrowings' and 'derivatives' as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as 'equity' as shown in the balance sheet plus net debt.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The gearing ratios at 31 December 2016, 31 December 2015, 31 December 2014, 30 June 2014 and 30 June 2013 were as follows:

The increase in the gearing ratio for 2016 resulted primarily from the increase in borrowings to fund our operations. The increase in the gearing ratio during 2015 resulted primarily from the increase in borrowings to fund our operations and development of a Companion Animal sales team. In 2014, the large majority of our borrowings were paid down from funds raised at IPO, resulting in the reduction in the gearing ratio.

Exchange differences arising on translation of the foreign controlled entity are recognized in other comprehensive income - foreign currency translation reserve. The cumulative amount is reclassified to profit or loss when the net investment is disposed of.

The Group leases various plant and equipment expiring within one and four years. The leases have purchase options.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The Group leases various offices, warehouses and equipment under non-cancellable operating leases expiring within 6 months to 10 years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of these leases are renegotiated.

The Group is exposed to a variety of financial risks through its use of financial instruments.

This note discloses the Group‘s objectives, policies and processes for managing and measuring these risks.

The Group‘s overall risk management plan seeks to minimize potential adverse effects due to the unpredictability of financial markets.

The most significant financial risks to which the Group is exposed to are described below:

Risk management is carried out by the Group’s Risk Management Committee under the delegated power from the Board of Directors. The Finance Manager has primary responsibility for the development of relevant policies and procedures to mitigate the risk exposure of the Group, these policies and procedures are then approved by the risk management committee and tabled at the board meeting following their approval.

Reports are presented at each Board meeting regarding the implementation of these policies and any risk exposure which the Risk Management Committee believes the Board should be aware of.

Specific information regarding the mitigation of each financial risk to which Group is exposed is provided below.

Exposure to credit risk relating to financial assets arises from the potential non-performance by counterparties of contract obligations that could lead to a financial loss to the Group and arises principally from the Group's receivables.

It is the Group’s policy that all customers who wish to trade on credit terms undergo a credit assessment process which takes into account the customer’s financial position, past experience and other factors. Credit limits are then set based on ratings in accordance with the limits set by the Board of Directors, these limits are reviewed on a regular basis.

Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. The Group maintains cash and marketable securities to meet its liquidity requirements for up to 30-day periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets.

The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business.

Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 180-day and a 360-day period are identified monthly.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

At the reporting date, these reports indicate that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

The Group’s liabilities have contractual maturities which are summarized below:

Most of the Group's transactions are carried out in Australian Dollars. Exposures to currency exchange rates arise from the Group's overseas sales and purchases, which are primarily denominated in US dollars, Canadian dollars and New Zealand dollars.

To mitigate the Group's exposure to foreign currency risk, non-Australian Dollar cash flows are monitored in accordance with Group‘s risk management policies.

In order to monitor the effectiveness of this policy, the Board receives a monthly report showing the settlement date of transactions denominated in non-Australian Dollar currencies and expected cash reserves in that currency.

Foreign currency denominated financial assets and liabilities, translated into Australian Dollars at the closing rate, are as follows:

The following table illustrates the sensitivity of the net result for the period and equity in regards to the Group‘s financial assets and financial liabilities and the US Dollar, Canadian Dollar and New Zealand Dollar to the Australian dollar exchange rate. There have been no changes in the assumptions calculating this sensitivity from prior periods.

It assumes a +/- 10% change of the Australian Dollar/foreign currency exchange rate for the period ended 31 December 2016 (31 December 2015, 31 December 2014 and 30 June 2014: $10%). This percentages has been determined based on the average market volatility in exchange rates in the previous 12 months.

The sensitivity analysis is based on the foreign currency financial instruments held at the reporting date.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

If the Australian dollar had strengthened and weakened against the following currencies by 10% (31 December 2015: 10%, 31 December 2014: 10% and 30 June 2014: 10%) then this would have had the following impact:

Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group's exposure to foreign currency risk.

The Group was exposed to interest rate risk as the loan facility funds borrowed in 2013, 2014 and 2015 were at floating rates.

At December 31, 2014, the Group was not exposed to changes in market interest rates as all borrowings had been settled in the prior period.

The following table illustrates the sensitivity of the net result for the year and equity to a reasonably possible change in interest rates of +0.75% and -0.75% (31 December 2015: +0.75%/-0.75%), with effect from the beginning of the period. These changes are considered to be reasonably possible based on observation of current market conditions.

The calculations are based on the financial instruments held at each reporting date. All other variables are held constant.

The 2016 Term Loan facility is a fixed rate facility; as such there is no interest sensitivity on this facility.

Credit risk refers to the risk that counterparties will default on its contractual obligations resulting in a financial loss to the Group.

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to wholesale and retail customers, including outstanding receivables and committed transactions.

The Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The utilization of credit limits by customers is regularly monitored by line management. Customers who subsequently fail to meet their credit terms are required to make purchases on a prepayment basis until creditworthiness can be re-established.

Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.

The five largest trade receivables balance total $1,922,638 as at 31 December, 2016.

The Board receives monthly reports summarising the turnover, trade receivables balance and aging profile of each of the key customers individually and the Group's other customers analyzed by industry sector as well as a list of customers currently transacting on a prepayment basis or who have balances in excess of their credit limits. Refer to Note 7.

Management considers that all the financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due.

The credit risk for liquid funds and other short-term financial assets is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The fair values of financial assets and financial liabilities are presented in the following table and can be compared to their carrying values as presented in the consolidated balance sheet. Fair values are those amounts at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Fair values derived may be based on information that is estimated or subject to judgment, where changes in assumptions may have a material impact on the amounts estimated. Areas of judgment and the assumptions have been detailed below. Where possible, valuation information used to calculate fair value is extracted from the market, with more reliable information available from markets that are actively traded. In this regard, fair values for listed securities are obtained from quoted market bid prices. Where securities are unlisted and no market quotes are available, fair value is obtained using discounted cash flow analysis and other valuation techniques commonly used by market participants.

Key management personnel remuneration included within employee expenses for the period is shown below:

For the purposes of this note, Key Management Personnel has been assessed as being the Board of Directors, which includes the Chief Executive Officer and the Chief Financial Officer.

For details of other transactions with key management personnel, refer to Note 26: Related Party Transactions.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The parent entity within the Group is Parnell Pharmaceuticals Holdings Limited, which changed its name from Parnell Pharmaceuticals Holdings Pty Limited on June 6, 2014 upon becoming a public entity. There is no ultimate parent entity above the Group.

*The percentage of ownership interest held is equivalent to the percentage voting rights for all subsidiaries.

The Group measures the following assets and liabilities at fair value on a recurring basis:

All assets and liabilities measured at fair value are required to be assigned to a level in the fair value hierarchy as follows:

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The finance function of the group includes a team that performs the valuations of non-property assets required for financial reporting purposes, including level 3 fair values. The team reports directly to the Chief Financial Officer (CFO) and the Board of Directors. Discussion of the valuation processes and results are held between the CFO, Board of Directors and the finance function at least once every twelve months, in line with the Group's annual reporting dates.

The main level 3 inputs used by the Group in measuring the fair value of the financial instruments are derived and evaluated as follows:

Changes in level 2 and 3 fair values are analysed at each reporting date during the annual valuation discussion between the CFO, Board of Directors and the finance function.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

In the opinion of management, the Group did not have any material contingencies at December 31, 2016 (December 31, 2015: None, December 31, 2014: None, June 30, 2014: None).

Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated.

In addition to the above, $175,000 of 2013 Parnell Bonds were redeemed in the six months ended June 30, 2015 (2016: $Nil, 2014: $Nil) from associates connected to related parties and an additional $2,886,923 of 2013 Parnell Bonds to associates were extended by an additional one-year term.

The Company also issued 13,386 Restricted Stock Units and 31,949 stock options to directors of the Company in the year ended December 31, 2016 (six months ended June 30, 2015: 68,909 and 488,515 respectively, year ended December 31, 2014: Nil).

Any person(s) having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity are considered key management personnel.

For the purposes of this note, Key Management Personnel has been assessed as being the Board of Directors.

For details of remuneration disclosures relating to key management personnel, refer to Note 21: Interests of Key Management Personnel (KMP).

The consolidated financial statements include the financial statements of Parnell Pharmaceuticals Holdings Limited and those entities disclosed in note 23.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

Reconciliation of result for the year to cash flows from operating activities

The Company established the 2014 Omnibus Equity Incentive Plan (the "2014 Plan") in June 2014 to allow for the issuance of up to 1,500,000 shares to officers and employees, and other individuals, including non-employee directors. The Company amended the Plan in May 2015 increasing the available shares for issuance to 3,000,000 shares. The Company may issue share options, share awards, share units, performance shares, performance units, and other share-based awards to eligible individuals. The 2014 Plan is administered by the Company's board of directors. All awards are evidenced by a written agreement between the Company and the holder of the award. The board of directors has the authority to construe or interpret the terms of the 2014 Plan and awards granted under the 2014 Plan.

Pursuant to the 2014 Plan the board of directors approved the initial issuance of stock option and restricted stock units during the year ended December 31, 2015.

The fair value of each share option is estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected share volatility based on the historical volatility of its publicly traded peer companies and expects to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The risk-free interest rate is determined by reference to the appropriate reserve bank yield in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected term is determined based on the life of the grant of 10 years. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The fair value of the underlying ordinary shares is determined by the closing price of our ordinary shares on the NASDAQ Global Market. The fair value of the share options was estimated using the following assumptions:

If any assumptions used in the option-pricing model changed significantly, share-based compensation for future awards may differ materially from the awards granted previously.

The following table summarizes share option activity for the year ended December 31, 2016:

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

The following table summarizes share option activity for the year ended December 31, 2015:

The aggregate intrinsic value of share options is calculated as the difference between the exercise price of the share options and the fair value of the Company's ordinary shares for those share options that had exercise prices lower than the fair value of the Company's ordinary shares.

There were no options exercised during the years ended December 31, 2016 and December 31, 2015. The Company did not receive cash proceeds from stock option exercises for the years ended December 31, 2016 and December 31, 2015.

In addition to the stock options described above, the Company has granted service-based RSU's to its employees. RSU's are valued at the fair value of the underlying ordinary shares as of the date of the grant. The following table summarizes restricted stock unit activity for the year ended December 31, 2016:

The following table summarizes restricted stock unit activity for the year ended December 31, 2015:

On December 30, 2016 the board approved a grant of 782,702 shares of the Company's stock. This grant resulted in an additional AUD$744,371 of stock compensation expense.

For the years ended December 31, 2016 and December, 31, 2015, share-based compensation expense was $2.2 million and $1.7 million. The Company had an aggregate of USD$537,854 of unrecognized share-based compensation expense as of December 31, 2016, which we expect to recognize over an estimated period of 1.4 years for outstanding awards.

Parnell Pharmaceuticals Holdings Ltd

Notes to the Consolidated Financial Statements

For the Fiscal Period Ended 31 December 2016

No other matters or circumstances have arisen since the end of the financial period which significantly affected or could significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years.

The registered office and principal place of business of the company in Australia is:

Australia	Unit 4, Century Estate 476 Gardeners Road Alexandria 2015 NSW Australia
(Jurisdiction of Incorporation or Organization)	(Address of Principal Executive Offices)

None	None
(Title of Each Class)	(Name of Exchange On Which Registered)

FORWARD-LOOKING STATEMENTS				5

PART I				6

	Item	1.	Identity of Directors, Senior Management and Advisers	6

	Item	2.	Offer Statistics and Expected Timetable	6

	Item	3.	Key Information	6

		3.A	Selected Financial Data	6

		3.B	Capitalization and Indebtedness	9

		3.C	Reasons for the offer and use of proceeds	9

		3.D	Risk Factors	9

	Item	4.	Information on the Company	19

		4.A	History and Development of the Company	19

		4.B	Business Overview	19

		4.C	Organizational Structure	34

		4.D	Property, Plants and Equipment	35

	Item	4A.	Unresolved Staff Comments	35

	Item	5.	Operating and Financial Review and Prospects	35

		5.A	Operating Results	35

		5.B	Liquidity and Capital Resources	58

		5.C	Research & Development, Patents and Licenses	60

		5.D	Trend Information	61

		5.E	Off-Balance Sheet Arrangements	61

	7.A	Major Shareholders	65

	7.B	Related Party Transactions	65

	7.C	Interests of Experts and Counsel	66

Item	8.	Financial Information	66

	8.A	Consolidated Statements and Other Financial Information	66

	8.B	Significant Changes	66

Item	9.	The Offer and Listing	66

	9.A	Offer and Listing Details	66

	9.B	Plan of Distribution	67

	9.C	Markets	67

	9.D	Selling Shareholders	67

	9.E	Dilution	67

	9.F	Expenses of the Issue	67

Item	10.	Additional Information	67

	10.A	Share Capital	67

	10.B	Memorandum and Articles of Association	67

	10.C	Material Contracts	67

	10.D	Exchange Controls	68

	10.E	Taxation	68

	10.F	Dividends and Paying Agents	71

		10.G	Statement by Experts	71

		10.H	Documents on Display	72

		10.I	Subsidiary Information	72

	Item	11.	Quantitative and Qualitative Disclosures about Market Risk	72

	Item	12.	Description of Securities Other than Equity Securities	72

		12.A	Debt Securities	72

		12.B	Warrants and Rights	72

		12.C	Other Securities	72

		12.D	American Depositary Shares	72

PART II				72

	5.F	Tabular Disclosure of Contractual Obligations	61

Item	6.	Directors, Senior Management and Employees	62

	6.A	Directors and Senior Management	62

	6.B	Compensation	63

	6.C	Board Practices	64

	6.D	Employees	64

	6.E	Share Ownership	64

Item	7.	Major Shareholders and Related Party Transactions	65

	Item	13.	Defaults, Dividend Arrearages and Delinquencies	73

	Item	14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	73

	Item	15.	Controls and Procedures	73

	Item	16A.	Audit Committee Financial Expert	74

	Item	16B.	Code of Ethics	74

	Item	16C.	Principal Accountant Fees and Services	74

	Item	16D.	Exemptions from the Listing Standards for Audit Committees	75

	Item	16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	75

	Item	16F.	Change in Registrant's Certifying Accountant	75

	Item	16G.	Corporate Governance	75

	Item	16H.	Mine Safety Disclosure	76

PART III				76

	Item	17.	Financial Statements	76

	Item	18.	Financial Statements	76

	Item	19.	Exhibits	76

	(AUD$ in thousands, except percentages)
	Year Ended December 31,									Year Ended December 31,									Six-Months Ended December 31									Year Ended June 30,
	2016			2015			v%			2015			2014 (Unaudited)			v%			2014			2013 (Unaudited)			v%			2014			2013			v%
Revenues		19,049			13,170			45	%		13,170			8,361			58	%		3,663			2,843			29	%		7,543			9,538			(21	%)
Other Income		916			6,725			(86	%)		6,725			5,615			20	%		4,347			980			344	%		2,248			2,203			2	%
Costs and expenses		(41,647	)		(33,630	)		(24	%)		(33,630	)		(25,338	)		(33	%)		(9,436	)		(8,241	)		(15	%)		(24,144	)		(15,892	)		(52	%)
Income/(loss) before income tax (expense)/benefit		(21,682	)		(13,735	)		(58	%)		(13,735	)		(11,363	)		21	%		(1,426	)		(4,418	)		67	%		(14,353	)		(4,151	)		(246	%)
Income tax (expense)/benefit		(9	)		(2	)		(350	%)		(2	)		(2,983	)		(100	%)		(2	)		-			-			(2,980	)		673			(543	%)
(Loss)/income for the period		(21,691	)		(13,737	)		(54	%)		(13,737	)		(14,345	)		(4	%)		(1,428	)		(4,418	)		67	%		(17,333	)		(3,478	)		(398	%)
Other comprehensive income/(loss) for the period, net of tax		(728	)		(1,630	)		(55	%)		(1,630	)		(1,272	)		28	%		(1,434	)		(679	)		111	%		(517	)		(32	)		1,513	%
Total comprehensive income/(loss) for the period		(22,419	)		(15,367	)		(46	%)		(15,367	)		(15,617	)		(2	%)		(2,862	)		(5,097	)		43	%		(17,851	)		(3,510	)		(413	%)

Per Share Data
Earnings per share:		AUD$			AUD$						AUD$			AUD$						AUD$			AUD$						AUD$			AUD$
Basic and diluted		(1.37	)		(1.03	)					(1.03	)		(1.32	)					(0.11	)		(0.59	)					(2.18	)		(0.46	)
Weighted-average shares outstanding
Basic and diluted		15,809,277			13,283,722						13,283,722			10,866,977						13,283,722			7,518,599						7,960,723			7,518,599

	(in thousands)
	At December 31, 2016		At December 31, 2015		At December 31, 2014		At June 30, 2014		At June 30, 2013
Cash and cash equivalents		7,115		5,667		15,819		20,804		860
Total Assets		47,579		46,209		48,240		47,744		31,563
Borrowings, including current portion		29,842		17,476		4,590		4,287		20,200
Ordinary Shares		63,522		55,343		55,343		55,343		3,104
Total Equity		8,064		20,255		33,913		36,776		2,388

Month	High		Low
Through March 29, 2017		0.7724		0.7514
February 2017		0.7717		0.7566
January 2017		0.7576		0.7234
December 2016		0.7493		0.7202
November 2016		0.7700		0.7324
October 2016		0.7683		0.7537
September 2016		0.7698		0.7469

Year Ended December 31, ($ per AUD)	Period End	Average(1)	Low	High
2016	0.7236	0.7451	0.6867	0.7812
2015	0.7306	0.7576	0.6924	0.8244
2014	0.8202	0.9069	0.8140	0.9458
Year ended June 30, ($ per AUD)
2014	0.9420	0.9182	0.8716	0.9651
2013	0.9275	1.0271	0.9202	1.0593
6-month Period ended December 31, ($ per AUD)
2014	0.8202	0.8821	0.8140	0.9458
2013	0.8948	0.9226	0.8836	0.9672

●	Our manufacturing facility is subject to ongoing, periodic, unannounced inspection by regulatory authorities, including the FDA, the APVMA, Health Canada and other agencies for compliance with strictly enforced regulations. Violations could potentially lead to interruptions in our supply that could lead to lost sales to competitive products that are more readily available.

●	We may not be able to control or adequately monitor the quality of our products. Poor quality products could damage our reputation with our customers or subject us to potential legal liability toward such customers.

●	changes in customer demands;
●	fluctuations in commodity prices;
●	the impact of general economic trends on our business;
●	currency fluctuations;
●	increases in reserves for bad debts; and
●	increases in competition.

●	make it more difficult for us to satisfy our obligations with respect to our term loan indebtedness and other current and future indebtedness;
●	require us to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the availability of cash to fund working capital and capital expenditures and for other general corporate purposes;
●	restrict us from making strategic acquisitions and exploiting business opportunities;
●	place us at a disadvantage compared to our competitors that have less debt; and
●	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

●	be expensive and time consuming to defend;
●	cause us to cease making or using products or services that incorporate the challenged intellectual property;
●	require us to redesign, reengineer, or rebrand our products or packaging, or change our company name;
●	divert management’s attention and resources; or
●	require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.

●	complete target animal studies due to deviations from study protocol;
●	address any safety concerns that arise during the course of testing;
●	address any conflicts with new or existing laws or regulations;
●	add new study sites; or
●	manufacture sufficient quantities of formulated drug for use in studies.

●	changes to manufacturing methods;
●	recall, replacement, or discontinuance of certain products; and
●	additional record keeping.

●	take advantage of expansion opportunities;
●	acquire complementary businesses or technologies;
●	develop new services and products; or
●	respond to competitive pressures.

	☐	Using a validated measure for assessing changes in the clinical signs of osteoarthritis, Zydax treated dogs achieved significant improvements in mobility.
	☐	Dog owners used the Client Specific Outcome Measures (CSOM) tool to quantify an Activity Impairment Score (AIS) to track changes in their dogs' mobility. After four injections Zydax treated dogs achieved an AIS reduction of 3 (30% improvement; p=0.02 vs. placebo) with 56% of Zydax treated dogs achieving this outcome versus only 40% of Placebo treated dogs achieving an AIS reduction of 3 or more.
	☐	Additional trial analysis assessed the spectrum of responses in dogs with early to mid-stage clinical signs of osteoarthritis at enrollment. Zydax treated dogs demonstrated a range of improvements in AIS; after 28 days of treatment with Zydax, 81% of dogs achieved at least an 10% improvement (AIS reduction of ≥1; p=0.02) while 23% of dogs achieved more than 50% improvement (AIS reduction of ≥5; p=0.03).

●	Increasing pet ownership;
●	Growing disposable incomes, particularly in emerging markets;
●	Increasing medical needs of companion animals as they live longer and begin to experience many of the medical conditions seen in older humans; and
●	Growing emphasis on development of new medical therapies specifically for pets.

●	Global human population growth and improving living standards, especially in developing countries;
●	Increasing demand for quality animal protein including milk and meat;
●	Natural resource constraints including the scarcity of suitable farm land and fresh water for animal consumption and irrigation of crops resulting in the need for more efficiency to maximize available resources; and
●	More focus on food safety and security.

●	Proven safe for the intended use in the target animal species;
●	Proven efficacious for the intended use in the target animal species;
●	Produced under a defined manufacturing process ensuring the product can be made consistently and in a high-quality manner;
●	Proven to be safe for humans handling the product; and
●	Proven to be safe for the environment.

Product Group	Description/Indications	Patent Term	Patent Expiration	Patent Type	Major Jurisdictions
Zydax	Low molecular weight sulfated xylans/osteoarthritis in dogs and horses	20 years	October 8, 2028	Standard	Australia, New Zealand, Hong Kong, Europe, U.S.*

PAR121	Orthopedics in dogs, cats and horses	20 years	December 10, 2030	Standard	Australia, Brazil, China, Europe, Singapore, U.S., India

PAR122	Dermatology in dogs	20 years	May 4, 2030	Standard	Australia, Brazil, Canada, China, Europe, Japan, Korea, Singapore, U.S., India

●	The Centralized Procedure, which is run by EMA, is obligatory for high technology products and growth promotants. It is optional for other innovative products, provided such products are considered to fall within the EMA remit. At the completion of the centralized process, the Marketing Authorization approval is valid for all EU and European Economic Area-European Free Trade Association states.
●	The Mutual Recognition Procedure is run by the national regulatory bodies, where a product already has an approval within one or more countries within the EU. The country in which the product is approved is selected as Reference Member State, which completes the primary review and makes recommendations to other selected countries acting as Concerned Member States.
●	The Decentralized Procedure is similar to the Mutual Recognition Procedure for products that have not previously been approved within the EU. The review process is run in parallel by national regulatory bodies with one country selected as a Reference Member State and other countries acting as Concerned Member States, under a Mutual Recognition process.
●	The National Procedure is used for products for which approval in a single EU country only is being sought.

●	the emission and discharge of hazardous materials into the ground, air or water;
●	the generation, use, storage, handling, treatment, packaging, transportation, exposure to, and disposal of hazardous and biological materials, including record keeping, reporting and registration requirements; and
●	the health and safety of our employees.

	•	Sale of goods: recognized on transfer of goods to the customer, as this is deemed to be the point in time when risks and rewards are transferred and there is no longer any ownership or effective control over the goods.
	•	Grant income: Government grants, including Australian Research and Development incentives, are recognized at fair value where there is reasonable assurance that the grant will be received and all grant conditions will be met. Grants relating to expense items are recognized as income over the periods necessary to match the grant to the costs they are compensating.
	•	Interest income: Interest is recognized using the effective interest method.
	•	Divestment of product income: Divestment of product income is recognized at the point in when the marketing authorization and the rights to sell the divested product were transferred to the acquirer for consideration received.

	•	the technical feasibility of completing the intangible asset so that it will be available for use or sale;
	•	the intention to complete the intangible asset and use or sell it;
	•	the ability to use or sell the intangible asset;
	•	how the intangible asset will generate probable future economic benefits;
	•	the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
	•	the ability to measure reliably the expenditure attributable to the intangible asset during its development.

	(AUD$ in thousands, except percentages)
	Year Ended
	December 31, 2016			December 31, 2015			v%
Revenues		19,049			13,170			45	%
Cost of Goods Sold – Product		(3,543	)		(2,368	)		50	%
Cost of Goods Sold – Facility		(5,435	)		(5,378	)		1	%
Cost of Goods Sold – Total		(8,978	)		(7,746	)		16	%
Gross Margin		10,071			5,424			86	%
Selling and Marketing expenses		(14,121	)		(11,777	)		20	%
Regulatory & R&D expenses		(1,495	)		(882	)		70	%
Administration expenses		(13,232	)		(11,940	)		11	%
Finance Costs		(3,821	)		(1,285	)		197	%
Other income		916			6,725			(86	)%
Loss before income tax		(21,682	)		(13,735	)		58	%
Income tax (expense)/benefit		(9	)		(2	)		350	%
Loss for the year		(21,691	)		(13,737	)		58	%
Other comprehensive loss for the year, net of tax		(728	)		(1,629	)		(55	)%
Total comprehensive loss for the year		(22,419	)		(15,367	)		46	%

	(AUD$ in thousands, except percentages)
	Year Ended
	December 31,			December 31,			Change		Change
	2016			2015			$		%
Adjusted EBITDAOI		(16,163	)		(17,694	)		1,531		8.7	%

☐	Revenues increased by $5.9 million, or 45%, for the period, (see “Revenues” analysis, above). Overall, we maintained a high product gross margin of 81.4%, which is a slight decline, 0.7%, from 82.1% for the same period ended December 31, 2015;
☐	Cost of Goods Sold – Facility increased very slightly as a result of the full year effect of the headcount added in 2015 for additional manufacturing output that occurred in 2016 and in preparation for Contract Manufacturing opportunities including the commencement of our first Contract Manufacturing agreement in Q2’ 2016;
☐	As such, our Gross Margin increased by $5.7 million, or 86%;
	Offset by;
☐	$2.3 million increase in Selling and Marketing expenses (see “Selling and Marketing Expenses” analysis, below);
☐	Regulatory and R&D expenses increased $0.6 million (see “Regulatory & R&D Expenses” analysis, below);
☐	$1.3 million increase in Administration expenses, primarily a result of:
		o	increased headcount and external costs to support a substantially larger Commercial R&D organization in the US;
		o	increased compliance, regulatory and statutory costs associated with being a public company following our IPO in June 2014; and
		o	share-based compensation related to stock options and RSUs issued to employees and directors.

●	Senior management receives a monthly analysis of our operating results that are prepared with this Adjusted EBITDAOI measure included;
●	The operating segments of our annual budgets are prepared on an Adjusted EBITDAOI basis; and
●	It is used in other goal-setting and performance measurements.

●	Net foreign exchange losses/(gains) associated with the translation of foreign currency-denominated indebtedness over time, which are considered to be a direct result of financing activities that are dependent upon fluctuations in foreign currency rates;
●	Other income, which typically includes income from the sale of assets, adjustments to provisions or research and grant income received; and
●	Certain transactions and events where expenses associated with the capital structure of the Company or with certain significant purchase accounting items that result from business combinations and/or asset acquisitions and divestments.

	(AUD$ in thousands)
	Year ended
	December 31, 2016			December 31, 2015
Cash provided by/(used in):
Operating activities		(12,116	)		(16,417	)
Investing activities		(5,082	)		(7,881	)
Financing activities		19,963			12,089
Net increase in cash and cash equivalents held		2,765			(12,208	)

●	$35.2 million outflow associated with (1) the running of our operations because of our increased investment in our commercial infrastructure in the US; (2) the fixed costs associated with the unutilized capacity within our manufacturing facility; (3) financing costs.
●	The cash outflows were offset by inflows of (1) $22.9 million in sales revenue collected during the period; and (2) collections of R&D tax incentives and interest related to operating activities during the year of $0.2 million.

	☐	Net increase of $12.1 million associated with the loan redemption/reissuance, being $27.9 million raised from the new 2016 Term Loan Facility of which $14.9 million was utilized to repay the MIDCAP Term Loan in full.
	☐	Net proceeds from the issuance of ordinary shares of $7.7 million.
	☐	Issuance of warrants $0.1 million