Consolidated Statement of Cash Flows

For the half year ended 31 December 2021         

The accompanying notes form part of these consolidated interim financial statements.

Notes to the Consolidated Interim Financial Statements

NOTE 1.      CORPORATE INFORMATION

The consolidated interim financial report of MGC Pharmaceuticals Ltd ('MGC Pharma' or the 'Company') and its controlled entities (the "Group") for the half-year ended 31 December 2021 was authorised for issue in accordance with a resolution of the directors dated 28 February 2022.

MGC Pharmaceuticals Ltd is a Company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (primary market) and the London Stock Exchange (secondary market).

NOTE 2.      BASIS OF PREPARATION AND ACCOUNTING POLICIES

Statement of Compliance

The consolidated interim financial report is a condensed general purpose financial report prepared in accordance with the Corporations Act 2001 and AASB 134 'Interim Financial Reporting'. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 'Interim Financial Reporting'. The half-year report does not include notes of the type normally included in an annual financial report and should be read in conjunction with the annual financial report for the year ended 30 June 2021 and any public announcements made by the Group during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

Basis of Preparation

The consolidated interim financial statements have been prepared on the basis of historical cost, except for the revaluation of certain financial assets and liabilities. All amounts are presented in Australian dollars, unless otherwise noted.

The accounting policies and methods of computation adopted in the preparation of the consolidated interim financial report for the half-year ended 31 December 2021 are consistent with those adopted and disclosed in the Group's 2021 annual financial report for the financial year ended 30 June 2021.

Going Concern

During the half-year ended 31 December 2021 the Group incurred a loss from continuing operations of $7,604,868 (2020: $5,926,816) and net operating cash outflows of $5,393,156 (2020: $5,850,954). At 31 December 2021, the consolidated group had a working capital surplus of $5,822,224 (30 June 2021: $3,351,280), including a cash and cash equivalents balance of $8,064,812 (30 June 2021: $5,433,241). Within the current liabilities are convertible notes with a face value of $2,100,000 due 24 November 2022, which at the date of this report are favourable for the holder to elect to convert to equity. 

The Group's cashflow forecasts for the 12 months ending 28 February 2023 indicate that the Group will require additional capital to meet its expenditure requirements and carry out its planned activities. Further to the recent listing and capital raising of $10.4 million on the London Stock Exchange in November 2021, the Directors are satisfied that additional capital can be raised as and when required to meet its current commitments and further planned activities.

Based on the matters detailed above, the Directors are satisfied that the going concern basis of preparation is appropriate and that the Group will be able to realise its assets and settle its obligations in the ordinary course of business over the next 12 months.

The consolidated interim financial report has been prepared on a going concern basis which contemplates continuity of normal business activities and realisation of assets and settlement of liabilities in the normal course of business. In the event that the Group is unable to obtain additional funding, there is significant uncertainty as to whether the Group will be able to meet its debts as and when they fall due and thus continue as a going concern. The consolidated interim financial report does not include any adjustments relating to the recoverability and classification of the recorded asset amounts, nor to the amounts or classification of liabilities that might be necessary should the Group not be able to continue as a going concern.

a)     New and amended Accounting Standards and Interpretations adopted by the Group

The Group has adopted all new and revised Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective from 1 July 2021.

The adoption of these new and amended Accounting Standards and Interpretations did not result in any significant changes to the Group's accounting policies.

The Group has not early adopted any new or amended Accounting Standards or Interpretations issued but not yet effective.

b)      Significant Accounting Judgments, Estimates and Assumptions

In preparing these consolidated interim financial statements, significant judgements made by management in applying the Company's accounting policies and key sources of estimation uncertainty were the same as those that were applied to the consolidated financial statements as at and for the year ended 30 June 2021.

NOTE 3.      REVENUE

NOTE 4.      PLANT AND EQUIPMENT

During the period, the Group completed construction on a manufacturing facility in Malta for liquid dose form product and the anti-inflammatory product, ArtemiC^TM. Although construction has completed, at 31 December 2021 the plant is under commissioning with submissions for a GMP licence to follow. The facility is 80% funded by way of grant from Malta Enterprises (refer to note 7).

NOTE 5.      INTANGIBLE ASSETS AND GOODWILL

Medicinal Cannabis Clinics (MCC)

On 23 November 2020 MGC Pharma completed the acquisition of the business of an operating telehealth clinic, Medicinal Cannabis Clinics (MCC). Alongside revenue generated from consults, this acquisition provides MGC Pharma with an operating platform with direct access to patients, along with a distribution agreement with Cannvalate, the current operator of the clinic. The acquisition also allows the Group to continue providing its high-quality GMP certified cannabinoid products to patients in Australia and further improves profit margins while keeping its products at the current competitive prices. A new wholly owned subsidiary, Medicinal Cannabis Clinics Pty Ltd, has been incorporated to acquire the MCC business.

The total purchase consideration for the business was $1,400,000, comprising $400,000 in cash and $1,000,000 in ordinary shares (45,454,545 shares issued at a fair value of $0.022 per share on the date of issue).

The acquisition accounting which had previously been provisionally determined was finalised during the period and the assets recognised as a result of the acquisition are as follows:

The carrying value of the Group's goodwill at 31 December 2021 was as follows:

*The provisional goodwill arising from the MedicaNL acquisition is not yet at a stage to be reliably determined or allocated to cash generating units. The Group assessed that there were no impairment triggers in relation to the unallocated provisional goodwill at 31 December 2021.

Acquisition of subsidiary - asset acquisition 

During the period, the Group acquired a 54% interest in MGC Pharmaceutical sro (Czech Republic), which in turn held a 100% interest in MGC Pharmaceuticals Ltd (Russia). The acquisition occurred via a share transfer with nil consideration. The acquiree did not meet the definition of a business and therefore the acquisition was accounted for as an asset acquisition. In the previous financial year, loan funds of $546,995 had been advanced to MGC Pharmaceutical sro. The loan was classified as a financial asset at fair value through profit or loss due to the equity risk associated with the loan, with a fair value determined to be nil at 30 June 2021. During the half-year, a fair value gain of $418,595 was recognised on the loan on the basis of the fair value of the net assets of MGC Pharmaceutical sro acquired.

A non-controlling interest of $109,377 was recognised at the acquisition date. The non-controlling interest's share of loss for the period was $166,110 and the non-controlling interest's share of other comprehensive income for the period was $31,944.

NOTE 6.      FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Convertible notes

In September 2020, the Company entered into a convertible note financing facility with Mercer Street Global Opportunity Fund (Mercer), under which up to $15,000,000 can be drawn down in exchange for the issue of a number of convertible notes with a face value of $1.00 each equal to 110% of the amount of funding received. The facility expires on 8 March 2022. The notes are repayable at face value 12 months from the date of the respective draw down, if not converted or repurchased prior to maturity. Following the initial tranche of $2,250,000 funding received (Tranche 1 as described below), further drawdowns under the agreement are subject to the discretion of both the Company and Mercer. Upon commencement of the facility, ordinary shares to the value of $225,000 were issued to Mercer as transaction costs.

During November 2021, the Company executed an extension to the $2,100,000 convertible notes on issue allowing Mercer an additional 12 months to convert the notes into ordinary shares.

The notes are convertible at the discretion of Mercer at any time prior to maturity, with a conversion price as follows:

·      The conversion price will be the lower of $0.035 or 92% of the lowest daily VWAP of the Company's shares selected by Mercer over the 10 trading days on which the Company's shares are traded on the ASX immediately prior to the issue of the conversion notice, subject to the conversion price being no less than $0.018.

The company made no requests for additional draw downs on the facility during the period. The entire hybrid contract has been designated as at fair value through profit or loss.

The fair value (Level 3) of the hybrid contract was determined using valuation techniques including use of a Black-Scholes option pricing model, with estimates of projected conversion prices and the following significant inputs to the valuation at 31 December 2021 and 30 June 2021: 

¹ calculated using a weighted average of $0.031

² calculated using a weighted average of $0.033

Loan receivable

Refer to Note 5 for details of the loan advanced to MGC Pharmaceutical sro and classified as fair value through profit or loss, including the fair value gain recognised during the period. Subsequent to the acquisition of MGC Pharmaceutical sro, the loan eliminates on consolidation. As part of the acquisition, the group acquired a loan to a third party, which was accounted for to a fair value of nil resulting in an additional loss of $253,136.

NOTE 7.      DEFERRED INCOME AND REVENUE

Current

¹ The Group has received approval for a grant from Malta Enterprises to cover 80% of the construction costs of a production facility, to the value of €3,073,000 ($4,925,000). As at 31 December, an amount of $3,100,951 had been received from Malta Enterprise. In accordance with AASB 120, the grant will be recognised as income on a systematic basis over the useful life of the building once completed. The Company expects to receive additional grant funds post balance date, following review and approval by Malta Enterprise of its final grant submission.

²During the period, MGC Pharma signed a distribution agreement with US Based AMC Holdings Inc. Under the terms of the agreement, AMC were to pay US$750,000 as an advance payment prior to receiving their first order of CimetrA. The approval process for this order remains underway, and is anticipated to be completed in the coming months.

NOTE 8.      CONTRIBUTED EQUITY

Reconciliation of movement in share capital

^1.  Refer to note 6 for further information

NOTE 9.      SHARE BASED PAYMENTS

a)     Performance rights

There were no performance rights granted during the period. A summary of those on issue as at 31 December 2021 are summarised below.

Director Rights

Employee Rights

b)    Options

^1.         Unvested at 31 December 2021

Share-based payment expense

For the six months ended 31 December 2021, the Group has recognised $416,529 of share-based payment expenses in the statement of profit or loss (31 December 2020: $248,992) relating to share-based payments to directors and employees.

As part of the capital raising in December 2021, the Company agreed to issue 9,000,000 options to the broker, Turner Pope Investments.

Inputs to the valuation of the abovementioned options are identified in the table below.

The broker options have been valued based on the fair value of the equity instruments issued, as the Company was unable to reliably determine the fair value of the services provided. Total amount included within share issue costs equated to $187,191.

NOTE 10.    LEASES

At reporting date the Group has two long-term leases for the use of the land for the construction of facilities in Malta - a 65 year lease for a larger production facility and a 5 year lease entered into the ArtemiC production facility now constructed. The Group also has leases for office and lab rental. 

Below are the carrying amounts of right-of-use assets recognised for the period:

Below are the carrying amounts of lease liabilities for the period:

NOTE 11.    COMMITMENTS AND CONTINGENT LIABILITIES

There have been no significant changes to commitments and contingent liabilities since 30 June 2021.

NOTE 12.    RELATED PARTY TRANSACTIONS

There have been no material changes to related parties since 30 June 2021, with exception to the following;

1.     During the period, a payment of £80,000 ($149k) was made to Sputnik Enterprises Ltd, an entity controlled by Mr Roby Zomer and Mr Brett Mitchell, for advisory services in relation to the capital raising in December.

2.     A Royalty agreement was signed with Graft Polymer Limited (GPO), an entity to which Mr Roby Zomer is a Director of, whereby €1 is payable to GPO on all sales of Cimetra. During the period there were no sales of Cimetra, however €34,500 ($54k) was paid to GPO as an advance payment of future sales to AMC Holdings.

NOTE 13.    EVENTS SUBSEQUENT TO REPORTING DATE

There have been no other matters or circumstances that have arisen since 31 December 2021 that have significantly affected, or may significantly affect:

(i)      The Group's operations in future financial years, or

(ii)     The results of those operations in future financial years, or

(iii)    The Group's state of affairs in future financial years.

Directors' Declaration

The Directors of the Company declare that:

1.     the interim financial statements and notes, are in accordance with the Corporations Act 2001 and:

a)     comply with Australian Accounting Standard AASB134 Interim financial reporting and the Corporations Regulations 2001; and

b)    give a true and fair view of the Group's financial position as at 31 December 2021 and its performance for the half year ended on that date; and

2.     Subject to the matters set out in note 2, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors, pursuant to s 303(5) of the Corporations Act.

Brett Mitchell

Executive Chairman

Dated 28 February 2022

Independent auditor's review report to the members of MGC Pharmaceuticals Ltd

Conclusion

We have reviewed the accompanying half-year financial report of MGC Pharmaceuticals Ltd (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 31 December 2021, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the half-year ended on that date, notes comprising a statement of accounting policies and other explanatory information, and the directors' declaration.

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the half-year financial report of the Group is not in accordance with the Corporations Act  2001, including:

a)     giving a true and fair view of the consolidated financial position of the Group as at 31 December 2021 and of its consolidated financial performance for the half-year ended on that date; and

b)    complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

Basis for conclusion

We conducted our review in accordance with ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity (ASRE 2410). Our responsibilities are further described in the Auditor's responsibilities for the review of the half-year financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the annual financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

Material uncertainty related to going concern

We draw attention to Note 2 of the half-year financial report, which describes the principal conditions that raise doubt about the Group's ability to continue as a going concern. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our conclusion is not modified in respect of this matter.

Directors' responsibility for the half-year financial report

The directors of the Company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor's responsibility for the review of the half-year financial report

Our responsibility is to express a conclusion on the half-year financial report based on our review. ASRE 2410 requires us to conclude whether we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including giving a true and fair view of the Group's financial position as at 31 December 2021 and its performance for the half-year ended on that date, and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Ernst & Young

T G Dachs

Partner

Perth

28 February 2022