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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 20-F**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT   TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF   1934**                             |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                          |
| **OR**     |
| ** ** | ** **                                                                                                                                          |
| **x**      | **ANNUAL REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended June 30, 2011** |
| ** ** | ** **                                                                                                                                          |
| **OR**     |
| ** ** | ** **                                                                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |
| ** ** | ** **                                                                                                                                          |
| **OR**     |
| ** ** | ** **                                                                                                                                          |
| **o**      | **SHELL COMPANY REPORT PURSUANT   TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                         |

 

Date of event requiring this shell company report

 

**For the transition period from                       to                        **

 

Commission file number: 000-29228

 
| **PROGEN PHARMACEUTICALS LIMITED**                                                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                                                                                |
|                                                                                                                                                                                                                  |
| **Not Applicable**                                                                                                                                                                                                    |
| (Translation of Registrant’s name into English)                                                                                                                                                                  |
|                                                                                                                                                                                                                  |
| **Australia**                                                                                                                                                                                                         |
| (Jurisdiction of incorporation or organization)                                                                                                                                                                       |
|                                                                                                                                                                                                                  |
| **2806 Ipswich Rd, Darra, Queensland 4076,   Australia**                                                                                                                                                              |
| (Address of principal executive office)                                                                                                                                                                               |
|                                                                                                                                                                                                                  |
| **Mr. Paul Dixon, General Manager of Finance and   Company Secretary,   Progen Pharmaceuticals Limited, 2806 Ipswich Road, Darra, Queensland 4066,   Australia   Tel: +61 7 3273 9133,  Fax: +61 7 3375   1168** |
| (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:

 

| Title of each   class |   | Name of each   exchange on which registered |
|-----------------------|--------|---------------------------------------------|
| Ordinary Shares       |   | Australian Securities Exchange and OTCQB    |
|                  |   |                                        |

 

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

 
| **None**         |
|------------------|
| (Title of Class) |
|             |

 

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

 
| **None**         |
|------------------|
| (Title of Class) |

 

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:
|   | Ordinary   Shares: 24,709,097 (as of June 30, 2011) |
|--------|-----------------------------------------------------|

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

o Yes   x No

 

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:

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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:

x Yes   o 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).

o Yes   x No

 

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

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

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

 

| U.S. GAAP o |   | International Financial Reporting Standards as issued   by the International Accounting Standards Board x |   | Other o |
|-------------|--------|-----------------------------------------------------------------------------------------------------------|--------|---------|

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

o Item 17   o 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 Exchange Act).

o Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 

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**TABLE OF CONTENTS**

 
| ** **       | ** **                                                                         | **Page**   |
|------------------|------------------------------------------------------------------------------------|------------|
| ** **       | ** **                                                                         | ** ** |
| **ITEM 1.**      | **IDENTITY OF DIRECTORS,   SENIOR MANAGEMENT AND ADVISERS**                        | **5**      |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 2.**      | **OFFER STATISTICS AND   EXPECTED TIMETABLE**                                      | **5**      |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 3.**      | **KEY INFORMATION**                                                                | **5**      |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 3.A.**    | **SELECTED FINANCIAL DATA**                                                        | **5**      |
| **ITEM 3.D.**    | **RISK FACTORS**                                                                   | **7**      |
| **ITEM 4.A.**    | **HISTORY AND   DEVELOPMENT OF THE COMPANY**                                       | **24**     |
| **ITEM   4.B.**  | **BUSINESS OVERVIEW**                                                              | **27**     |
| **ITEM 4.C.**    | **ORGANIZATIONAL   STRUCTURE**                                                     | **40**     |
| **ITEM 4.D.**    | **PROPERTY,   PLANT AND EQUIPMENT**                                                | **40**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 5.**      | **OPERATING   AND FINANCIAL REVIEW AND PROSPECTS**                                 | **41**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM   5.A.**  | **OPERATING RESULTS**                                                              | **45**     |
| **ITEM 5.B.**    | **LIQUIDITY   AND CAPITAL RESOURCES**                                              | **50**     |
| **ITEM 5.C.**    | **RESEARCH   AND DEVELOPMENT, PATENTS AND LICENSES, ETC.**                    | **51**     |
| **ITEM   5.D.**  | **TREND INFORMATION**                                                              | **51**     |
| **ITEM 5.E.**    | **OFF-BALANCE   SHEET ARRANGEMENTS**                                               | **51**     |
| **ITEM 5.F.**    | **TABULAR   DISCLOSURE OF AGGREGATE CONTRACTUAL OBLIGATIONS**                      | **51**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 6.**      | **DIRECTORS,   SENIOR MANAGEMENT AND EMPLOYEES**                                   | **53**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 6.A.**    | **DIRECTORS   AND SENIOR MANAGEMENT**                                              | **53**     |
| **ITEM   6.B.**  | **COMPENSATION**                                                                   | **56**     |
| **ITEM   6.C.**  | **BOARD PRACTICES**                                                                | **58**     |
| **ITEM   6.E.**  | **SHARE OWNERSHIP**                                                                | **60**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 7.**      | **MAJOR   SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**                            | **61**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM   7.A.**  | **MAJOR SHAREHOLDERS**                                                             | **61**     |
| **ITEM 7.B.**    | **RELATED   PARTY TRANSACTIONS**                                                   | **62**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 8.**      | **FINANCIAL   INFORMATION**                                                        | **63**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 8.A.**    | **CONSOLIDATED   STATEMENTS AND OTHER FINANCIAL INFORMATION**                      | **63**     |
| **ITEM 8.B.**    | **SIGNIFICANT   CHANGES**                                                          | **63**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 9.**      | **THE OFFER AND   LISTING**                                                        | **65**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM   9.C.**  | **MARKETS**                                                                        | **65**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 10.**     | **ADDITIONAL   INFORMATION**                                                       | **67**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 10.B.**   | **MEMORANDUM   AND ARTICLES OF ASSOCIATION**                                       | **67**     |
| **ITEM 10.C.**   | **MATERIAL CONTRACTS**                                                             | **67**     |
| **ITEM   10.D.** | **EXCHANGE CONTROLS**                                                              | **68**     |
| **ITEM   10.E.** | **TAXATION**                                                                       | **69**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 11.**     | **QUANTITATIVE   AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                   | **81**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 12.**     | **DESCRIPTION   OF SECURITIES OTHER THAN EQUITY SECURITIES**                       | **83**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 13.**     | **DEFAULTS,   DIVIDEND ARREARAGES AND DELINQUENCIES**                              | **84**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 14.**     | **MATERIAL   MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS** | **84**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 15.**     | **CONTROLS AND   PROCEDURES**                                                      | **84**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 16.**     | **[RESERVED]**                                                                     | **85**     |
| ** **       | ** **                                                                         | ** ** |
| **ITEM 16A.**    | **AUDIT   COMMITTEE FINANCIAL EXPERT**                                             | **85**     |
|                  |                                                                                    |            |  |

 

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| **ITEM 16B.** | **CODE OF ETHICS**                                                           | **86**     |
|---------------|------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                   | ** ** |
| **ITEM 16C.** | **PRINCIPAL   ACCOUNTANT FEES AND SERVICES**                                 | **86**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 16D.** | **EXEMPTIONS   FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**             | **86**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 16E.** | **PURCHASES   OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS** | **86**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 16G.** | **CORPORATE   GOVERNANCE**                                                   | **87**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 17.**  | **FINANCIAL   STATEMENTS**                                                   | **88**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 18.**  | **FINANCIAL   STATEMENTS**                                                   | **88**     |
| ** **    | ** **                                                                   | ** ** |
| **ITEM 19.**  | **EXHIBITS**                                                                 | **88**     |

 

References in this annual report to “Progen,” “we,” “our,” “us” and “the Company” refer to Progen Pharmaceuticals Limited.

 

All references to dollars or $ are to the currency of the Australian dollars (AUDs).

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This annual report contains forward-looking statements that involve risks and uncertainties.  Forward-looking statements relate to future events or our future financial performance and include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effect of future regulation and the effects of competition. These statements are based on our current expectations, beliefs and assumptions, and on information currently available to our management. In some cases, you can identify forward-looking statements by the use of words such as “anticipate,” “expect,” “intend,” “plan,” “seek,” “may,” “will,” “should,” “could,” “would,” “believe,” “estimate,” “project,” “predict,” “potential,” “continue,” or the negative of such terms or similar expressions. These forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our actual results, levels of activities, performance and other factors to be materially different from those anticipated in such forward-looking statements.  Factors that might cause such differences include the risks discussed in “Item 3. Key Information — Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” as well as those discussed elsewhere in this annual report.

 

Certain statements contained in this report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, certain statements included herein under “Item 3. Key Information” and “Item 5. Operating and Financial Review and Prospects,” including without limitation, those concerning the Company’s strategy and competitive strengths, the Company’s expectations and plans, the Company’s collaborative revenues, research and development and general and administrative expenses, contain certain forward-looking statements concerning the Company’s operations, performance and financial condition. Such statements may generally, but not always, be identified by their use of words such as “anticipates,” “expects,” or “believes.” Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove in hindsight to be correct. Many important factors could cause actual results to differ materially from such expectations including, among others, those set forth in “Item 3. Key Information—Risk Factors” and “Item 4. Information on the Company—Australian Government Regulation and U.S. Government Regulation” (collectively, the “Risk Factors”). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified by the Risk Factors. Other relevant risks may be detailed from time to time in the Company’s press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this report.

 

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**PART I**

 

**ITEM 1.****                                                    ****IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

 

Not applicable.

 

**ITEM 2.****                                                    ****OFFER STATISTICS AND EXPECTED TIMETABLE**

 

Not applicable.

 

**ITEM 3.****                                                    ****KEY INFORMATION**

 

**Item 3.A.                Selected Financial Data**

 

The following selected consolidated financial data for the five years ended June 30, 2011 should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” below and our financial statements and related notes contained elsewhere in this Annual Report. Our financial statements and related notes have been prepared in accordance with International Financial Reporting Standards (IFRS).

 

The consolidated statement of financial position information as of June 30, 2011 and 2010 and the consolidated statement of comprehensive income data for fiscal 2011, 2010 and 2009 are derived from our audited financial statements included in this annual report. Consolidated statement of financial position information as of June 30, 2007, 2008 and 2009 and consolidated statement of comprehensive income information for fiscal 2008 and 2009 are derived from our audited financial statements which are not included in this annual report.

 
| ** **                                                 | ** ** | **For the years ended June 30,** | ** **  |
|------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                                 | ** ** | **2007**                                                  | ** **  | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| **Consolidated Statement   of Comprehensive Income Data:** |       |                                                      |        |   |   |   |   |   |   |   |   |
| Revenue                                                    |       | $                                                         | 2,665,947   |   | $ | 6,477,931 |   | $ | 4,940,369 |   | $ | 2,711,471 |   | $ | 3,610,695 |   |
| Other income                                               |       | 1,113,245                                                 |        | 1,120,137 |   | 7,021,310 |   | 150,371 |   | 55,752 |   |
| Research and development   expenses                        |       | 6,991,757                                                 |        | 16,143,407 |   | 7,048,870 |   | 5,091,919 |   | 2,882,947 |   |
| Manufacturing facility   expenses                          |       | 2,372,679                                                 |        | 2,721,370 |   | 1,683,136 |   | 2,026,643 |   | 2,506,383 |   |
| Administration and   corporate expenses                    |       | 5,438,437                                                 |        | 10,832,072 |   | 8,689,364 |   | 7,053,169 |   | 4,178,106 |   |
| Finance costs                                              |       | 15,355                                                    |        | 19,490 |   | 7,269 |   | 2,930 |   | 3,636 |   |
| Impairment loss                                            |       | 1,769,198                                                 |        | — |   | — |   | 2,644,186 |   | 53,911 |   |
| Other expenses                                             |       | 9,645,903                                                 |        | 4,029,302 |   | — |   | 1,882,818 |   | 139,170 |   |
| Net loss from operations                                   |       | $                                                         | (22,454,137 | ) | $ | (26,147,573 | ) | $ | (5,466,960 | ) | $ | (15,839,823 | ) | $ | (6,097,706 | ) |
| Income tax expense                                         |       | —                                                    |        | — |   | — |   | — |   | — |   |
| Net loss for the period                                    |       | $                                                         | (22,454,137 | ) | $ | (26,147,573 | ) | $ | (5,466,960 | ) | $ | (15,839,823 | ) | $ | (6,097,706 | ) |
| Other comprehensive income   (loss)                        |       |                                                      |        |   |   |   |   |   |   |   |   |
| Foreign currency   translation                             |       | —                                                    |        | (61,000 | ) | 100,000 |   | 44,000 |   | (12,049 | ) |
| Total comprehensive income   (loss) for the period         |       | $                                                         | (22,454,137 | ) | $ | (26,208,573 | ) | $ | (5,366,960 | ) | $ | (15,795,823 | ) | $ | (6,109,755 | ) |
| Basic and diluted loss per   share (cents per share)       |       | (50.2                                                     | )           | (43.3 | ) | (10.0 | ) | (64.1 | ) | (24.7 | ) |

 

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| ** **                                               | ** ** | **As of June 30,** | ** **  |
|----------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                               | ** ** | **2007**                          | ** **  | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| **Consolidated Statement   of Financial Position Data:** |       |                              |        |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                |       | $                                 | 98,222,758  |   | $ | 76,747,878 |   | $ | 28,044,529 |   | $ | 3,892,365 |   | $ | 6,332,589 |   |
| Working capital                                          |       | $                                 | 96,928,384  |   | $ | 70,864,837 |   | $ | 26,814,764 |   | $ | 14,376,203 |   | $ | 8,630,252 |   |
| Total assets                                             |       | $                                 | 100,639,229 |   | $ | 82,592,581 |   | $ | 32,661,315 |   | $ | 17,184,275 |   | $ | 12,180,433 |   |
| Long-term debt                                           |       | —                            |        | — |   | — |   | — |   | — |   |
| Capital stock                                            |       | $                                 | 191,089,162 |   | $ | 194,519,063 |   | $ | 155,516,344 |   | $ | 155,583,443 |   | $ | 155,655,390 |   |
| Accumulated losses                                       |       | $                                 | (93,112,536 | ) | $ | (119,258,442 | ) | $ | (124,727,069 | ) | $ | (140,566,211 | ) | $ | (146,663,917 | ) |
| Net assets                                               |       | $                                 | 97,976,626  |   | $ | 75,260,621 |   | $ | 30,789,275 |   | $ | 15,017,232 |   | $ | 8,991,473 |   |
| Shares on issue                                          |       | 59,416,427                        |        | 60,393,891 |   | 24,709,097 | (1) | 24,709,097 |   | 24,709,097 |   |
|                                                     |       |                              |        |   |   |   |   |   |   |   |   |

 

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(1) Share Buyback in April 2009

 

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**Currencies and Exchange Rates**

 

The Company publishes its consolidated financial statements in Australian dollars.  In this Annual Report, references to $ are to Australian dollars currency and references to “U.S. dollars” or “US$” are to U.S. currency. Solely for informational purposes, this Annual Report contains translations of certain Australian dollars into or from U.S. dollars at specified rates. These translations should not be construed as representations that the Australian dollars amounts actually represent such U.S. dollar amounts or could be converted into or from U.S. dollars at the rate indicated or at any other rate. Unless otherwise stated herein, the translations of Australian dollars into or from U.S. dollars have been made at $1.00 to US$1.0597, the Buying Rate on June 30, 2011.

 

The following table sets forth, for the periods and dates indicated, certain information concerning the Buying Rate for Australian dollars expressed in U.S. dollars per $1.00. The period average data set forth below is the average of the Buying Rate on the last day of each full month during the period. On October 31, 2011 the Buying Rate was $1.00 to US$1.0696.

 
| **2011 Month End** | ** ** | **High** | ** ** | **Low** |
|------------------------------|------------|----------|------------|---------|
| June 30, 2011           |       | 1.0687   |       | 1.0521  |
| July 31, 2011           |       | 1.0043   |       | 1.1001  |
| August 31, 2011         |       | 1.0721   |       | 1.0622  |
| September 30, 2011      |       | 1.0711   |       | 0.9755  |
| October 31, 2011        |       | 1.0696   |       | 0.9478  |
| November 29, 2011            |       | 1.0590   |       | 0.9705  |

 
| **Year end June 30,** | ** ** | **Average** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|
| 2007                                 |       | 0.78592     |       |       |       |
| 2008                                 |       | 0.89599     |       |       |       |
| 2009                                 |       | 0.74803     |       |       |       |
| 2010                                 |       | 0.88219     |       |       |       |
| 2011                                 |       | 0.98940     |       |       |       |

 

**Item 3.D.                Risk Factors**

 

*The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develops into actual events, our business, financial condition and results of operations could be materially and adversely affected, and the trading price of our ordinary shares could decline.*

 

**RISKS RELATED TO OUR BUSINESS**

 

***We are primarily engaged with activities at a stage in the development of pharmaceutical products where success is uncertain***

 

Although we****are presently generating revenues from the sale of contract manufacturing services, we have not sufficiently advanced the development of PG545 or our other product

 

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candidates to enable their registration, and, accordingly, have not begun to market or generate revenues from their commercialization. PG545 and other future pharmaceutical product candidates will require significant additional investment in research and development, preclinical testing and clinical trials, drug manufacture and supply, regulatory and sales and marketing activities, and regulatory approval prior to any commercial sales. Since being licensed to a third party, PI-88 (muparfostat) has generated revenues through milestone payments linked to its development.  PG11047 and the other epigenetic assets have been rolled into a new entity named Epi Pharmaceuticals Inc, in which Progen holds a significant stake.  These assets also have not been sufficiently advanced to a point where they can generate revenues.  We cannot make any assurances that any of our product candidates or licensed products, if successfully developed, will generate sufficient or sustainable revenues to enable us to be profitable.

 

***There is a significant risk that we may not be able to complete the development of PG545, PI-88 or develop other pharmaceutical products***

 

We cannot make any assurances that we or our collaborative partners will be able to develop PG545, PI-88 or any future pharmaceutical product candidates adequately to successful commercialization, the development of one or more suitable collaborative partners, or a combination thereof, or that our research will lead to the discovery of additional product candidates, or that any of our current and future product candidates will be successfully developed, will be proven to be safe and efficacious in clinical trials, meet applicable regulatory standards and receive regulatory approval, will be capable of being produced in commercial quantities at reasonable costs, or will be successfully or profitably marketed, either by us or a collaborative partner. We****also cannot make any assurances that the products we develop will be able to penetrate the potential market for a particular therapy or indication or gain market acceptance among health care providers, patients and third-party payers. We cannot predict if or when PG545, PI-88 or any of our other pharmaceutical products under development will be commercialized.

 

***The results of on-going and future clinical trials of PG545 and PI-88 are uncertain and we or our collaborative partners will not be able to commercialize PG545, PI-88 or any of our other product candidates if we fail to adequately demonstrate their safety, efficacy and superiority over existing therapies***

 

Before obtaining regulatory approvals for the commercial sale of any of our pharmaceutical products, we must demonstrate through preclinical testing and clinical studies that our product candidates are safe and effective for use in humans for each target indication. Conducting preclinical testing and clinical studies is an expensive, protracted and time-consuming process. Furthermore, the results of preclinical *in vitro* (within an artificial environment) and *in vivo* animal studies may not necessarily be predictive of results obtained in human clinical testing. Likewise, results from early clinical trials may not be predictive of results obtained in large-scale, later-stage clinical testing. In addition, even though a potential drug product shows promising results in clinical trials, regulatory authorities may not grant the necessary approvals without sufficient safety and efficacy data.

 

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Until the July 2008 termination of the Phase 3 PATHWAY trial of PI-88 in liver cancer, we were embarking on the global registration of PI-88. Since the termination of this trial, we signed a License and Collaboration Agreement with a Taiwanese company for the worldwide rights of PI-88.

 

We have finished treating patients in a Phase 2 clinical trial of PI-88 in Melanoma cancer patients in the United States and Australia, and are awaiting the completion of the clinical study report.  Further clinical trials in this indication will not be pursued by Progen as we have granted a worldwide license for oncology indications for PI-88.

 

During 2010, the board of directors made the decision to divest the assets acquired in the CellGate transaction in February 2008 to enable the Company to focus on its core strengths — dual mechanism anti-angiogenesis compounds.  The CellGate assets include PG11047, PG11144 and the epigenetics assets, which have now all been rolled into a U.S. entity called Epi Pharmaceuticals Inc, in which Progen retains a significant stake.  Progen has completed the Phase 1(b) clinical trial of PG11047 in combination with other approved agents in the United States both to maximize the salability of the divestment package and to fulfill its ethical obligations. We cannot make any assurances that attracting investment in, or a sale of Epi Pharmaceuticals Inc will be successful nor specify the amount of consideration (if any) that may be received by Progen for its stake in Epi Pharmaceuticals Inc, nor can we make assurances that any potential buyer or investor will be able to commence new or additional clinical trials of PG11047, PG11144 or the epigenetics assets resulting in a financial benefit to Progen.

 

Clinical trials may take several years to complete. The length of time varies substantially according to the type, complexity, novelty, patient recruitment into and intended use of the product candidate. We cannot make any assurances that, when clinical trials are completed by us or our collaborative partners, we will be able to pursue further clinical development, execute market development efforts, enter into a collaborative arrangement with a suitable pharmaceutical or biotechnology company to complete the development of, or commercialize our drug candidates. Nor can we make any assurances that once clinical trials are completed by us or a collaborative partner, we will be able to submit as scheduled a marketing approval request to the Australian Therapeutic Good Administration’s (TGA) Drug Safety and Evaluation Branch, the U.S. Food and Drug Administration (FDA) or any other authority, or, that such request and application will be reviewed and cleared by any of these authorities, as applicable, in a timely manner, or at all.

 

During the course of clinical trials and toxicology studies, our product candidates may exhibit unforeseen and unacceptable drug-related toxicities or side effects. If any unacceptable toxicities or side effects were to occur, we may, or regulatory authorities may require us to, interrupt, limit, delay or abort the development of our potential products. In addition, unacceptable toxicities could ultimately prevent the clearance of our product candidates by the TGA or the FDA for any or all targeted indications. Even after being cleared by the TGA or the FDA, any of our products may later be shown to be unsafe or not to have its purported effect, thereby preventing widespread use or requiring withdrawal from the market. We cannot make any assurances that any of our other product candidates will be safe or effective when administered to patients.

 

In September 2011, Progen’s Phase 1a PG545 human clinical trial in advanced cancer patients was put on hold due to unexpected local injection site reactions seen in patients.  These reactions appeared to be a very specific side effect in humans and were not seen to this extent in the extensive preclinical animal testing of the drug.  Progen is conducting additional preclinical studies

 

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through an intravenous route of administration instead of the original subcutaneous route of administration.

 

***We may experience delays in our clinical trials that could adversely affect our business and operations***

 

We do not know whether planned clinical trials will begin on time or whether we will complete any of our clinical trials on schedule or at all. Our ability to commence and complete clinical trials may be delayed by many factors, including:

 

·                                          Government or regulatory delays, including delays in obtaining approvals from applicable hospital ethics committees and internal review boards;

 

·                                          Slower than expected patient recruitment;

 

·                                          Our inability to manufacture or prepare, as applicable, sufficient quantities of pharmaceutical product;

 

·                                          Unforeseen safety issues; and

 

·                                          Lack of efficacy during clinical trials.

 

Patient enrollment is a function of, amongst other things, the nature of the clinical trial protocol, the existence of competing protocols, the size and longevity of the target patient population and the availability of patients who meet the eligibility criteria for the clinical trial. Delays in planned patient enrollment may result in increased costs, delays in trial completion or termination of clinical trials. Moreover, we have limited experience in conducting and managing clinical trials and may rely on third parties to assist us in managing and monitoring clinical trials. Any failure by these third parties to perform under their agreements with us may cause the trials to be delayed or result in a failure to complete the trials.

 

Product development costs to our collaborators and us will increase if we have delays in testing or approvals or if we need to perform more or larger clinical trials than planned. Significant delays could have a material adverse effect on the commercial prospects of our product candidates and our business, financial condition and results of operations.

 

***We may be unable to enroll a sufficient number of patients to complete our clinical trials***

 

Our clinical trials may be suspended at any time for a variety of reasons. Completion of clinical trials depends on, among other things, our ability to enroll a sufficient number of patients, which is a function of many factors, including:

 

·                                          the therapeutic endpoints chosen for evaluation;

 

·                                          proximity of patients to clinical sites;

 

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·                                          the eligibility criteria for participation in the clinical trials;

 

·                                          the size of the patient population required for meaningful analysis of the trial results;

 

·                                          our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

·                                          our ability to obtain and maintain patient consents;

 

·                                          the risk that patients enrolled in clinical trials will drop out of the trials before completion; and

 

·                                          competition for patients by clinical trial programs for other treatments.

 

We have in the past experienced, and may again experience difficulties in enrolling patients in our clinical trials, particularly due to the rate of incidence for our target indications in certain populations, as well as the geographical locations we may select for conducting our clinical trials.  Any such difficulties could increase the costs or affect the timing or outcome of these trials and could prevent us from completing these trials.

 

***We may not be successful in performing additional clinical trials in other indications***

 

If our product candidates are approved for one or more initial indications and are successfully commercialized, our strategy calls for the execution of additional clinical trials in other indications. We may not be able to initiate such additional trials due to a number of factors, including the following:

 

·                                          we may not have sufficient financial or other resources to undertake such trials;

 

·                                          we may be unable to secure sufficient support from leading authorities or influential parties to build trial protocols and support for conduct of a new trial;

 

·                                         there may not be sufficient market size to warrant product development in other new indications; and

 

·                                          the health care community may believe that our products are limited in use to the already-approved indications.

 

Any failure to initiate additional clinical trials in other indications could have a material adverse effect on our business.

 

***We have limited manufacturing experience, and delays in manufacturing sufficient quantities of PI-88 and PG545 for preclinical and clinical trials, whether internally or externally, may negatively impact our business and operations***

 

We cannot make any assurances that we will be able to manufacture sufficient quantities of PI-88, PG545 or any of our other product candidates in a cost-effective or timely manner. Any delays in production would delay our preclinical and clinical trials which could have a material adverse effect on our business, financial condition and results of operations.

 

We may be required to enter into contracting arrangements with third parties to manufacture PG545 and our other product candidates for large-scale, later-stage clinical trials. We may need to enter into collaborative arrangements with other parties who have established manufacturing

 

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capabilities, or have third parties manufacture or prepare our products on a contract basis. We cannot make any assurances that we will have access on acceptable terms to the necessary and substantial financing that would be required to scale-up production and develop effective commercial manufacturing processes and technologies. We also cannot make any assurances that we will be able to enter into collaborative or contracting arrangements on acceptable terms with parties that will meet our requirements for quality, quantity and timeliness.

 

***If we are unable to independently commercialize or establish and manage strategic collaborations to develop PI-88, PG545 or any of our other product candidates, we may have to reduce or delay product development and/or increase our expenditures***

 

Our strategy for developing and commercializing our product candidates includes entering into various relationships with pharmaceutical or biotechnology companies to provide us with funding and/or to perform research, clinical development, regulatory clearance, commercial scale manufacturing, sales, marketing or distribution activities relating to PI-88, PG545 or some or all of our current or future product candidates. To date, we have secured a license with a Taiwanese company who is managing the development of PI-88 in oncology indications.  We have not entered into any agreements with third parties capable of providing such services for PG545 or our other product candidates. Establishing strategic collaborations is difficult and time-consuming. Our discussions with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. If we are unable to establish collaborative arrangements, we may have to reduce or delay further development of or our product candidates and/or increase our expenditures and undertake the development and commercialization activities at our own expense. If we elect to fund our research and development programs on our own, we will need to obtain additional financing which may not be available on acceptable terms, or at all.

 

If we successfully establish strategic collaborations, the management of our relationship with collaborators will require significant time and effort from our management team, coordination of our research and development programs with the research and development priorities of our collaborators, and effective allocation of our resources to multiple projects. We cannot be certain that these relationships will result in the successful development or commercialization of our product candidates or the generation of sales revenue. If we enter into strategic collaborations at an early phase of product development, our success will in part depend on the performance of our corporate collaborators. Factors that could harm a successful collaboration include:

 

·                                          Collaborators may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

·                                          Collaborators could independently develop, or develop with third parties, products that could compete with our current and future product candidates;

 

·                                          Collaborators may not commit adequate resources to the marketing and distribution of our product candidates, limiting potential revenues from the commercialization of a product;

 

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·                                          Collaborators may not pursue further development and commercialization of compounds resulting from collaborations or may elect not to continue or renew research and development programs;

 

·                                          The terms of our agreements with collaborators may not be favorable to us;

 

·                                          Disputes may arise delaying or terminating the research, development or commercialization of our product candidates, resulting in significant litigation or arbitration, or causing collaborators to act in their own self-interest and not in the interest of our shareholders; and

 

·                                          Collaborators may terminate their agreements with us if, for example, we fail to meet a required milestone or observe other obligations in those agreements.

 

***Our limited oversight of contract research organizations may not be sufficient to avoid significant problems with the protocols and conduct of the clinical trials.***

 

We engage third-party contract research organizations to help us with the conduct of our clinical trials. These organizations may not perform all of their obligations under arrangements with us. If contract research organizations and other third parties do not perform clinical trials in a satisfactory manner or breach their obligations to us, the development and commercialization of our product candidates may be delayed or precluded. We cannot control the amount and timing of resources these contract research organizations devote to our programs or product candidates. The failure of any of these contract research organizations to comply with any governmental regulations would substantially harm our development and marketing efforts and delay or prevent regulatory approval of our product candidates. If we are unable to rely on clinical data collected by others, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

 

***Our efforts to discover, develop and commercialize new product candidates beyond PI-88 and PG545 are at a very early stage and, therefore, these efforts are subject to a high risk of failure***

 

The process of successfully developing product candidates is very time consuming, expensive and unpredictable. We may not be successful in identifying, developing or commercializing any additional new product candidates.

 

***If we cannot enter into new licensing arrangements, our ability to develop a broad product portfolio could be limited***

 

A component of our business strategy is in-licensing drug compounds developed by other commercial or academic entities. Competition for promising compounds is intense. If we are not able to identify additional licensing opportunities or enter into licensing arrangements on acceptable terms, if at all, our ability to develop a diverse portfolio of product candidates is restricted.

 

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***We may require substantial additional financing in the future to sufficiently fund our operations, development efforts and research***

 

We have been unprofitable to date and expect to incur losses over the next several years as we continue our drug discovery and development programs and preclinical testing and as we conduct clinical trials of PG545 and our other product candidates. Although our future capital requirements will depend on many factors, we believe that our existing cash and cash equivalents and short-term investments will be adequate to satisfy the requirements of our current and planned operations through June 2012. We cannot, however, make any assurances that such funds will be sufficient to meet our actual operating expenses and capital requirements during this period.  In order for our drug development and other business operations to be sustained beyond June 2012, the Company will need to raise additional capital.  Our actual cash requirements may vary materially from those now planned and will depend upon numerous factors, including:

 

·                                          The continued progress of our research and development programs;

 

·                                          The timing, scope, results and costs of preclinical studies and clinical trials;

 

·                                          The progress of licensing and partnering efforts;

 

·                                          The cost, timing and outcome of regulatory submissions and approvals;

 

·                                          Determinations as to the commercial potential of our product candidates;

 

·                                          Our ability to successfully expand our contract manufacturing services, should we choose to do so;

 

·                                          Our ability to establish and maintain collaborative arrangements; and

 

·                                          The status and timing of competitive developments.

 

We may require additional funds to conduct future clinical trials, pursue regulatory clearances, prosecute and defend our intellectual property rights, establish commercial scale manufacturing facilities, develop marketing and sales capabilities and fund operating expenses. We have no established bank financing arrangements, and we cannot be certain that we will be able to establish such arrangements on satisfactory terms, or at all. We may seek such additional funding through public or private financings and/or through strategic alliances or other arrangements with corporate partners. We cannot, however, be certain that such additional financing will be available from any sources on acceptable terms, or at all, or that we will be able to establish strategic alliances or other arrangements with corporate partners on acceptable terms, or at all. Any shortfall in funding could result in our having to curtail our operations, including our research and development activities, which could have a material adverse effect on our business, financial condition and results of operations.

 

***We have a history of operating losses and may not achieve profitability in the near future***

 

We have incurred net operating losses in each year since we began operations in 1989. As of June 30, 2011, we had an accumulated deficit of $146.7 million primarily attributable to our research and development activities. We expect to incur additional operating losses and to increase our cumulative losses substantially as we expand our research and development and preclinical 

 

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activities.  In addition, further losses are expected to be incurred in the continuation of our drug development programs.

 

***Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel and cultivate key academic and scientific collaborations***

 

We are a company with 24 employees as of October 31, 2011. Our success is highly dependent on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions and scientists. Competition among biotechnology and pharmaceutical companies for qualified employees is intense, and we cannot be certain that we will be able to continue to attract and retain qualified scientific and management personnel critical to our success. We also have relationships with leading academic and scientific collaborators who conduct research at our request or assist us in formulating our research and development strategies. These academic and scientific collaborators are not our****employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us.

 

***Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance will negatively impact our business and operations***

 

We cannot make any assurances that our products will achieve market acceptance even if they are approved by the TGA, the FDA, and the regulatory agencies of other countries. The degree of market acceptance of our products will depend on a number of factors, including:

 

·                                          The receipt and timing of regulatory approvals for the uses that we are studying;

 

·                                          The establishment and demonstration in the medical community of the safety, clinical efficacy and cost-effectiveness of our product candidates and their potential advantages over existing therapeutics and technologies; and

 

·                                          The pricing and reimbursement policies of governments and third-party payers.

 

Physicians, patients, payers or the medical community in general may be unwilling to accept, use or recommend any of our products.

 

***We may need to rely on the marketing and distribution capabilities of third parties***

 

As a company, we currently have limited experience in marketing, sales or distribution of pharmaceutical products. If we develop any commercially marketable pharmaceutical products, we may be required to enter into marketing arrangements with other parties who have established appropriate marketing, sales and distribution capabilities. We cannot make any assurances that we will be able to enter into marketing arrangements with any marketing partner or that if such arrangements are established, our marketing partners will be able to commercialize our products successfully. Other companies offering similar or substitute products may have well-established and well-funded marketing and sales operations in place that will allow them to market their products more successfully. Failure to establish sufficient marketing capabilities may have a material adverse impact our potential revenues and results of operations.  Alternatively, if we decide to perform our****own sales and marketing activities**,**we will require additional management, will need to hire sales

 

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and marketing personnel, and will require additional capital. We cannot make any assurances that qualified personnel will be available in adequate numbers or at a reasonable cost, that additional financing will be available on acceptable terms, or at all, or that our sales staff will achieve success in their marketing efforts.

 

***Healthcare insurers and other organizations may not pay for our products, or may impose limits on reimbursement***

 

The drugs we strive to develop may be rejected by the marketplace due to many factors, including cost. The continuing efforts of governments, insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce healthcare costs may affect our future revenues and profitability and those of our potential customers, suppliers and collaborative partners, as well as the availability of capital. In Australia and certain foreign markets, the pricing or profitability of prescription pharmaceuticals is already subject to government control. We expect initiatives for similar government control at both the state and federal level to continue in the United States. The adoption of any such legislative or regulatory proposals could have a material adverse effect on our potential revenues and results of operations.

 

Our ability to commercially exploit our products successfully will depend in part on the extent to which reimbursement for the cost of our products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Third-party payers, such as government and private health insurers, are increasingly challenging the price of medical products and services. Although the Australian government continues to provide a subsidy to certain prescribed prescription pharmaceutical products through the Pharmaceutical Benefits Scheme, uncertainty exists as to the reimbursement status of newly approved health care products and in foreign markets, including the United States. If third-party coverage is not available to patients for any of the products we develop, alone or with collaborators, the market acceptance of these products may be reduced which may adversely affect our future revenues and profitability. In addition, cost containment legislation and reductions in government insurance programs may result in lower prices for our products and could materially adversely affect our ability to operate profitably.

 

***Exchange rate fluctuations will continue to affect our reported results of operations***

 

Substantially all of our revenues are realized, and a significant portion of our operating costs are incurred, in Australian dollars. Movement in currency exchange rates will affect cash denominated in U.S. dollars and therefore will affect our reported results of operations.

 

**RISKS ASSOCIATED WITH OUR TECHNOLOGY AND INTELLECTUAL PROPERTY**

 

***Potential technological changes in our field of business create considerable uncertainty***

 

* *We are engaged in the biopharmaceutical field, which is characterized by extensive research efforts and rapid technological progress. New developments in research are expected to continue at a rapid pace in both industry and academia. Research and discoveries by others may render some or all of our programs or product candidates uncompetitive or obsolete.

 

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Our business strategy is based in part upon new and unproven technologies to the development of pharmaceutical products for the treatment of cancer and other serious diseases. Unforeseen problems may develop with these technologies or applications and it is possible that commercially feasible products will not ultimately be developed by us.

 

***We may not be able to keep pace with technological change or with the advances of our competitors***

 

The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Our competitors in Australia and elsewhere are numerous and include, among others, major pharmaceutical companies, large biotechnology firms, universities and other research institutions. These competitors may develop technologies and products that are more effective than any that we are developing, or which would render our technology and products obsolete or non-competitive. Many of these competitors have greater financial and technical resources and manufacturing and marketing capabilities than we do. In addition, many of our competitors have much more experience than we do in preclinical testing and human clinical trials of new or improved drugs, as well as in obtaining FDA, TGA and other regulatory approvals.

 

We know that competitors are developing or manufacturing various technologies or products for the treatment of diseases that we have targeted for product development. Some of these competitive products use therapeutic approaches that compete directly with some of our product candidates. Our ability to further develop our products may be adversely affected if any of our competitors were to succeed in obtaining regulatory approval for their competitive products sooner than we would.

 

***Our success depends upon our ability to protect our intellectual property and our proprietary technology***

 

Our success will depend in large part on whether we can:

 

·                                          Obtain and maintain patents to protect our own products;

 

·                                          Obtain licenses to relevant patented technologies of third parties;

 

·                                          Operate without infringing on the proprietary rights of third parties;

 

·                                          Protect our trade secrets and know-how; and

 

·                                          Retain our valuable scientific staff who are experts on the subject matters.

 

Patent matters in biotechnology are highly uncertain and involve complex legal and factual questions. Accordingly, the availability and breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. Statutory differences in patentable subject matter may limit the protection we can obtain on some or all of our inventions outside Australia or prevent us from obtaining patent protection outside Australia, either of which could have a material adverse effect on our business, financial condition and results of operations. For example, methods of treating humans are not patentable in many countries outside Australia and the United States. Moreover, since patent applications in Australia and the United States are maintained in secrecy

 

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until the patent is issued, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we or any of our licensors were the first creator of inventions covered by pending patent applications or that we or our licensors were the first to file patent applications for such inventions. Additionally, the enforceability of a patent depends on a number of factors that may vary amongst jurisdictions. These factors may include the novelty of the invention, the requirement that the invention not be obvious in light of prior art (including prior use or publication of the invention), the utility of the invention, and the extent to which the patent clearly describes the best method of working the invention.

 

While we intend to seek patent protection for our therapeutic products and technologies, we cannot be certain that any of the pending or future patent applications filed by us or on our behalf will be approved, or that we will develop additional proprietary products or processes that are patentable or that we will be able to license any other patentable products or processes. We also cannot be certain that others will not independently develop similar products or processes, duplicate any of the products or processes developed or being developed by us or licensed to us, or design around the patents owned or licensed by us, or that any patents owned or licensed by us will provide us with competitive advantages. Furthermore, we cannot be certain that patents held by third parties will not prevent the commercialization of products incorporating the technology developed by us or licensed to us, or that third parties will not challenge or seek to narrow, invalidate or circumvent any of the issued, pending or future patents owned or licensed by us.

 

Our commercial success will also depend, in part, on our ability to avoid infringement of patents issued to others. If a court determines that we were infringing any third-party patents, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain activities. We cannot be certain that the licenses required under patents held by third parties would be made available on terms acceptable to us or at all. To the extent that we are unable to obtain such licenses, we could be foreclosed from the development, manufacture or commercialization of the product requiring such license or encounter delays in product introductions while we attempt to design around such patents, and any of these circumstances could have a material adverse effect on our business, financial condition and results of operations.

 

We may have to resort to litigation to enforce any patents issued or licensed to us or to determine the scope and validity of third party proprietary rights. Such litigation could result in substantial costs to be incurred by us and the diversion of our efforts. We may have to participate in opposition proceedings before the Australian Patent and Trademark Office or another foreign patent office, or in interference proceedings declared by the United States Patent and Trademark Office, to determine the priority of invention for patent applications filed by competitors. Any such litigation, interference or opposition proceeding, regardless of outcome, could be expensive and time consuming, and adverse determinations in any such proceedings could prevent us from developing, manufacturing or commercializing our products and could have a material adverse effect on our business, financial condition and results of operations.

 

In addition to patent protection, we rely on unpatented trade secrets and know-how and proprietary technological innovation and expertise that are protected in part by confidentiality and invention assignment agreements with our employees, advisors and consultants. We cannot make any assurances that we will have adequate remedies for any breach. In addition, third parties could independently develop the same or similar technologies.

 

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***If we are not able to protect and control unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.***

 

In addition to patented intellectual property, we also rely on unpatented technology, trade secrets, confidential information and know-how to protect our technology and maintain our competitive position. Trade secrets are difficult to protect. In order to protect proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment agreements with our employees, consultants and others. These agreements may not effectively prevent disclosure of confidential information or result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover trade secrets and proprietary information that have been licensed to us or that we own, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using trade secrets that have been licensed to us or that we own is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States and Australia may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could have a material adverse effect on our business.

 

***We do not have patent protection in certain countries and we may not be able to effectively enforce our intellectual property rights in certain countries, which could significantly erode the market for our product candidates.***

 

We intend to seek regulatory approval to market our product candidates in a number of foreign countries. Our product candidates are not protected by patents in certain countries, which means that competitors may be free to sell products that incorporate the same technology that is used in our products in those countries. In addition, the laws and practices in some foreign countries may not protect intellectual property rights to the same extent as in the United States. We, or our licensors, may not be able to effectively obtain, maintain or enforce rights with respect to the intellectual property relating to our product candidates in those countries. Our lack of patent protection in one or more countries, or the inability to obtain, maintain or enforce intellectual property rights in one or more countries, could adversely affect our ability to commercialize our products in those countries and could otherwise have a material adverse effect on our business.

 

**RISKS ASSOCIATED WITH GOVERNMENT REGULATION**

 

***We may not be able to obtain the extensive government approvals required to bring our pharmaceutical products to market***

 

Our ongoing research and development activities are, and the production and marketing of our pharmaceutical product candidates derived there from will be, subject to regulation by numerous governmental authorities in Australia, principally the TGA, and by the FDA in the United States, the European Medicines Evaluation Agency (EMEA) of the European Union and the regulatory agencies of other countries. Prior to marketing, any therapeutic product developed must undergo rigorous preclinical testing and clinical trials, as well as an extensive regulatory approval process mandated by the TGA and, to the extent that any of our pharmaceutical products under development are marketed abroad, by foreign regulatory agencies including the FDA in the United States and the

 

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EMEA in Europe. These processes can take many years and require the expenditure of substantial resources. Delays in obtaining regulatory approvals could adversely affect the development and commercialization of our pharmaceutical product candidates and could have a material adverse impact on our business, financial condition and results of operations. Although we intend to make use of fast-track and abbreviated regulatory approval programs when possible, we cannot be certain that we will be able to obtain the clearances and approvals necessary for clinical testing or for manufacturing and marketing our pharmaceutical products candidates.

 

***Our business and operations may be negatively impacted if we fail to comply with government regulations applicable to our current revenue generating business***

 

To date, we have derived revenues from contract manufacturing services. Our contract manufacturing operations include some manufacturing processes that are required to comply with the applicable current Good Manufacturing Practice (cGMP) requirements of the TGA, the Australian Office of Gene Technology Regulator and the Australian National Registration Authority (agricultural and veterinary chemicals), which govern the methods, controls, facilities and quality assurance procedures used in manufacturing, packing and storing biological and pharmaceutical products. In addition, certain international markets have quality assurance and manufacturing requirements that may be more or less rigorous than those in Australia. Our manufacturing facilities are also subject to periodic inspections by the TGA and the Australian National Registration Authority. Any potential failure to comply with cGMP requirements or with any other international requirements could have a material adverse impact on our business, financial condition and results of operations.

 

***Changes in government legislation and policy may adversely affect us***

 

While we do not anticipate in the near future any specific material changes in government legislation that may adversely affect us, any material changes in interest rate, exchange rate, relevant taxation and other legal regimes and government policies may adversely affect our operations, the use of our financial resources and the market price of our ordinary shares.

 

**RISKS ASSOCIATED WITH OUR SHARES**

 

***Our stock price may be volatile and the U.S. trading market for our ordinary shares is limited***

 

The market price for our ordinary shares, like that of the securities of many other biotechnology companies, has fluctuated substantially and may continue to be highly volatile in the future. We believe that the following factors, in addition to other risk factors described above and elsewhere in this annual report, will continue to significantly affect the market price of our ordinary shares:

 

·                                          The results of preclinical testing and clinical trials by us and our competitors;

 

·                                          Developments concerning research and development, manufacturing, and marketing alliances or collaborations by us and our competitors;

 

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·                                          Announcements of technological innovations or new commercial products by us and our competitors;

 

·                                          Determinations regarding our patent applications and those of others;

 

·                                          Publicity regarding actual or potential results relating to medicinal products under development by us and our competitors;

 

·                                          Proposed governmental regulations and developments in Australia, the U.S. and elsewhere;

 

·                                          Litigation;

 

·                                          Economic and other external factors; and

 

·                                          Period-to-period fluctuations in our operating results.

 

In addition, stock markets have recently experienced extreme price and volume fluctuations. These fluctuations have especially affected the stock market price of many high technology and healthcare-related companies, including biotechnology companies, and, in many cases, are unrelated to the operating performance of the particular companies. We believe that these broad market fluctuations may continue to affect the market price of our ordinary shares.

 

From time to time, there has been limited trading volume with respect to our ordinary shares quoted on the U.S. financial markets (OTCQB Market), but we cannot make any assurances that there will continue to be a trading market in our ordinary shares.  We cannot make any assurance that the Company’s securities will continue to be listed on a U.S. market.

 

***U.S. shareholders may not be able to enforce civil liabilities against us***

 

A number of our directors and executive officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to affect service of process within the United States upon such persons or to enforce against them judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Australia in original actions, or in actions for enforcement of judgments of U.S. courts, of civil liabilities to the extent predicated upon the federal securities laws of the United States.

 

***U.S. holders of our ordinary shares could be subject to material adverse tax consequences if we are considered a PFIC for U.S. federal income tax purposes***

 

There is a risk that we will be classified as a passive foreign investment company, or “PFIC”, for U.S. federal income tax purposes. Our status as a PFIC could result in a reduction in the after-tax return to U.S. holders of our ordinary shares and warrants and may cause a reduction in the value of such shares. We will be classified as a PFIC for any taxable year in which (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average value of all our assets produce, or are held for the production of passive income. For this purpose, passive income includes interest,

 

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gains from the sale of stock, and royalties that are not derived in the active conduct of a trade or business. Because we receive interest and may recognize gains from the sale of appreciated stock, there is a risk that we will be considered a PFIC under the income test described above. In addition, because of our cash position, there is a risk that we will be considered a PFIC under the asset test described above. While we believe that the PFIC rules were not intended to apply to companies such as us that focus on research, development and commercialization of drugs, no assurance can be given that the U.S. Internal Revenue Service or a U.S. court would determine that, based on the composition of our income and assets, we are not a PFIC currently or in the future. If we were classified as a PFIC, U.S. holders of our ordinary shares could be subject to greater U.S. income tax liability than might otherwise apply, imposition of U.S. income tax in advance of when tax would otherwise apply, and detailed tax filing requirements that would not otherwise apply. The PFIC rules are complex and you are urged to consult your own tax advisors regarding the possible application of the PFIC rules to you in your particular circumstances.

 

***As a foreign private issuer we do not have to provide you with the same information as an issuer of securities based in the U.S.***

 

Given that we are a foreign private issuer within the meaning of the rules under the Exchange Act, we are exempt from certain provisions of that law that are applicable to U.S. public companies, including (i) the rules under the Exchange Act requiring the filing with the U.S. Securities and Exchange Commission (“SEC”) of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a registered security; and (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time. Thus, investors are not afforded the same protections or information which would be ordinarily available were they investing in a U.S. public corporation.

 

In accordance with the requirements of the Australian Securities Exchange and the Corporations Act 2001, we disclose annual and semi-annual results. Our results are presented in accordance with Australian Accounting Standards and International Financial Reporting Standards (IFRS). Our annual results are audited, and our semi-annual results undergo a limited review by our independent auditors. We lodge annual audited results presented in accordance with Australian Accounting Standards and IFRS as issued by International Accounting Standards Board with the SEC on Form 20-F. Subject to certain exceptions, we are also required to immediately disclose to the Australian Securities Exchange any information concerning us that a reasonable person would expect to have a material effect on the price or value of our shares. This would include matters such as (i) any major new developments relating to our business which are not public knowledge and may lead to a substantial movement in our share price; (ii) any changes in our board of directors; (iii) any purchase or redemption by us of our own equity securities; (iv) interests of directors in our shares or debentures; and (v) changes in our capital structure. We are required to provide our semi-annual results and other material information that we disclose in Australia in the U.S. under the cover of Form 6-K. Nevertheless, this information is not the same and may not be as much information as would be made available to investors were they investing in a U.S. public corporation.

 

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***Future issuances and sales of our stock could dilute your ownership and cause our stock price to decline***

 

We intend to continue to finance our operations through the issuance of securities, if feasible, including by way of the public equity markets, private financings and debt. If we raise additional capital through the issuance of equity or securities convertible into equity, existing holders of our securities may experience dilution. Those securities may have rights, preferences or privileges senior to those of the holders of our ordinary shares. Additional financing may not be available to us on favorable terms, and financing available at less favorable terms may lead to more substantial dilution of existing shareholders.

 

***If we fail to comply with internal controls evaluations and attestation requirements our stock price could be adversely affected***

 

We are subject to United States securities laws, including the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted by the SEC pursuant to such Act. As a foreign private issuer, under Section 404 of the Sarbanes-Oxley Act and the related regulations, we have previously been required to perform an evaluation of our internal control over financial reporting, including (1) management’s annual report on its assessment of the effectiveness of internal control over financial reporting; and (2) our independent registered public accounting firm’s annual audit of the effectiveness of internal control over financial reporting. In 2010, the enactment of the Dodd Frank Bill resulted in an exemption from Section 404(b) of the Sarbanes-Oxley Act for fiscal 2010 onwards, meaning that we did not have to comply with point (2) above.  For further information, see “Item 15—Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.”

 

The requirements of Section 404(a) of the Sarbanes-Oxley Act are ongoing and also apply to future years. We expect that our internal control over financial reporting will continue to evolve as our business develops. Although we are committed to continue to improve our internal control processes and we will continue to diligently and vigorously review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. Therefore, we cannot be certain that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If our efforts to remediate weaknesses identified are not successful or if other deficiencies occur, these weaknesses or deficiencies could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or other material effects on our business, reputation, results of operations, financial conditions or liquidity.

 

***Our Constitution and other 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 United States. Our constituent document, or Constitution, as well as the Corporations Act 2001 and the ASX Listing Rules set forth various rights and obligations that are unique to us as an Australian company. These requirements may limit or otherwise adversely affect our ability to take actions that could be beneficial to our shareholders. 

 

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**ITEM 4.                  INFORMATION ON THE COMPANY**

**Item 4.A.                History and Development of the Company**

 

We were incorporated in September 1989 as Almagest Pty. Ltd. in the State of Queensland, Australia, and changed our name to Progen Industries Pty. Ltd. in April 1990.  In 1991, we converted to a public limited liability company under the name Progen Industries Limited and introduced our first life sciences products to the Australian market for use in DNA recombinant research. In March 2007, we changed our name to Progen Pharmaceuticals Limited to better reflect the Company’s focus on the discovery and development of novel cancer therapies.

 

Since October 1993, we have been engaged in the research and development of small molecule pharmaceuticals, including heparanase inhibitors, that are potent and selective inhibitors of carbohydrate-protein interactions implicated in a range of disease states. Our research and development activities are conducted in collaboration with private industry and academic and research institutions in Australia, the United States and elsewhere.

 

As part of our focused strategy towards drug discovery and development, we sold our Life Sciences division in November 2003 and intend to pursue selective strategic alliances to complete product development and move our product candidates into the marketplace.

 

In February 2008, the Company acquired CellGate, Inc., a California-based oncology drug development company. This acquisition provided the Company with a product candidate in Phase 1 and multiple preclinical compounds.

 

For many years, PI-88 has been the lead product candidate in Progen’s drug development pipeline. In March 2008, the Company commenced a Phase 3 human clinical trial of PI-88 in patients with post-resection liver cancer (the PATHWAY trial). In July 2008, the Company terminated this Phase 3 trial for commercial reasons.

 

Following the termination of the Phase 3 trials of PI-88 and its subsequent licensing, various requisitions were received from shareholders for general meetings to remove current board members and appoint new board members.  Such meetings were held on January 9, 2009, March 27, 2009 and July 17, 2009.  In the March 27 meeting, four Progen directors were removed from office.  In the July 17 meeting, three shareholder candidates were appointed as directors of the Company.

 

On July 1, 2009, our subsidiary, PharmaSynth, executed a license agreement with a U.S.-based company, Global TransBiotech Inc. to conduct Phase 3 trials and subsequently commercialize muparfostat (formerly known as PI-88).  This license agreement was terminated on April 8, 2010 due to a lack of progress in the compound’s development.

 

On August 4, 2009, Progen instituted proceedings in the Supreme Court of Queensland (“the Court”) against various shareholders alleged to have contravened section 606 of the Corporations Act 2001. Progen sought an order to restrain the respondents from contravening section 606 of the Corporations Act 2001, and further or alternatively, an order vesting all of the respondents’ shareholdings in Progen in the Australian Securities & Investments Commission. On November 18, 2009, the parties reached a settlement designed to restore stability to the Company.  The key aspects of the settlement were as follows:

 

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·                  The respondents were not to cause a general meeting to be convened for a period of 18 months concerning resolutions electing, appointing or removing a director or otherwise affecting the tenure of directors or the composition of the Board;

 

·                  for a period of 18 months, the respondents were to cause their shares to be voted on resolutions electing, appointing or removing a director or otherwise affecting the tenure of directors or the composition of the Board, in accordance with the recommendations of a majority of directors of Progen;

 

·                  for a period of 18 months, the respondents are not to increase their shareholding in Progen, subject to certain exclusions;

 

·                  Progen was to pay Medigen Biotechnology Corp. $1.8 million in full and final settlement of a commercialization milestone arising from a previous agreement; and

 

·                  Progen was to immediately terminate the employment of its then CEO, T Justus Homburg.

 

On June 30, 2010, the Company signed a license and collaboration agreement with Medigen Biotechnology Corp. for the exclusive rights to PI-88.  We are entitled to various milestone payments linked to progression in the development of PI-88 and to date have received two milestone payments, relating to regulatory approval to commence the trial (April 2011), and the commencement of patient recruitment (September 2011).  We are also entitled to royalties on all product sales upon commercialization.

 

During the first half of 2010, Progen undertook a strategic review of its assets and the recommendation was made to the Board that the assets acquired in the February 2008 CellGate acquisition (CellGate Assets) should be divested to place a strategic focus on Progen’s core competencies — dual mechanism oncology products.

 

On October 29, 2010, the Company closed its U.S. office based at 2479 East Bayshore Road, Suite 709, Palo Alto, California, 94303.  The closure also resulted in the termination of two part-time positions and the Company’s Chief Scientific Officer, Dr Laurence Marton.

 

Following the strategic review, the Company appointed a U.S. based investment bank to assist in creating a saleable package for the assets and seeking out interested parties.  Throughout 2011, Progen has continued the Phase 1b clinical trial of PG11047 and has completed patient enrolment.  It is expected that this will maximise the return from the assets.

 

Following the Board’s decision to divest the CellGate Assets, Progen closed down the California and North Carolina offices of its subsidiary, Progen Pharmaceuticals Inc and has significantly scaled back its presence in the U.S.  This has resulted in a substantial administrative cost saving for the Company.

 

The Company has divested the intellectual property held by Progen Pharmaceuticals Inc to a new incorporated entity, Epi Pharmaceuticals Inc (“EPI”).  EPI is incorporated in the USA and holds all of the epigenetic and cell proliferation assets acquired through the CellGate acquisition. The goals of the restructuring were to place the CellGate Assets and related assets into a separately funded or

 

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fundable vehicle in order to eliminate or minimise any existing and future obligations of Progen related to CellGate stockholders or the CellGate licensors, limit further investment by the Company into these programs and preserve potential returns for Progen shareholders.

 

Under this structure, a combination of equity and debt instruments, royalties and milestone payments were issued to various parties that were entitled to consideration pertaining to the development of the CellGate Assets.  In return, Progen has extinguished its obligations under the contracts with these parties, reducing the economics owed to these parties to make the assets investable, whilst itself retaining a significant interest in this new entity.

 

In exchange for giving up their right to the potential milestone payments, the former CellGate holders (including SLIL Biomedical Corporation which was previously acquired by CellGate) have received equity in EPI, along with Progen as follows:

 
| **Holder**       | ** ** | **Shares**                   | ** ** | **% Ownership of EPI** |
|------------------|------------|------------------------------|------------|---------------------------------------|
| CellGate holders |       | 5,737,500 Series A Preferred |       | 45                                    |
| SLIL Biomedical  |       | 1,530,000 Series A Preferred |       | 12                                    |
| Progen           |       | 5,482,500 Series A Preferred |       | 43                                    |

 

This new entity has also entered into new amended and restated license agreements with Johns Hopkins University/Wayne State University and Wisconsin Alumni Research Foundation (WARF) to secure the epigenetic and cell proliferation assets, including PG11047, PG11144 and other epigenetics program compounds.

 

In November 2010, Progen commenced an open-label, single centre Phase I study of the safety and tolerability of PG545 in patients with advanced tumors.  This study treated patients until it was stopped in September following unforeseen injection site reactions in patients.  Progen is currently conducting further preclinical tests with the view of using an intravenous route of administration for PG545 moving forward.

 

In August 2011, the Company completed a major restructure of its Board and senior management.  As a result, the Board was reduced to four, CEO Sue MacLeman departed the Company and General Manager of Finance and Company Secretary Paul Dixon reverted to a consultancy arrangement with the Company.  Further, the company relocated its executive offices to 2806 Ipswich Road, Darra QLD which was the existing premises of its manufacturing subsidiary, PharmaSynth.

 

We have incurred significant losses since our inception and as of June 30, 2011, our accumulated losses were $146.7 million. We expect to incur additional operating losses for the year ending June 30, 2012 on the development of our clinical product candidate PG545 as well as other potential product candidates.

 

To date, we have funded our operations primarily through sales of equity securities.

 

The Company’s ordinary shares are listed on the Australian Securities Exchange (ASX: PGL) and on the OTCQB market (OTCQB: PGLA).

 

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**Corporate Information**

 

Our principal executive offices are located at 2806 Ipswich Road, Darra Queensland 4076, Australia. Our telephone number is + 61 7 3273 9133.

 

We make available free of charge on or through our web site our annual reports on Form 20-F as soon as practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Our web site is located at www.progen-pharma.com.  Information contained on our web site is not incorporated by reference into and does not form a part of this Annual Report.

 

Progen is a registered trademark of Progen Pharmaceuticals Limited. Trademarks, tradenames or service marks of other companies appearing in this Annual Report are the property of their respective owners**.**

 

**Item 4.B.                Business Overview**

 

We are a globally focused biotechnology company committed to the discovery, development and commercialization of small molecule therapeutics primarily for the treatment of cancer.

 

The Company operates the Research and Development business segment primarily in Australia following the closure of the U.S. office in October 2010.

 

Progen’s primary focus is on dual mechanism anti-angiogenesis oncology products, which control tumor size and spread.

 

**Angiogenesis**

 

Progen’s angiogenesis products have been developed to target a number of proteins, including VEGF and FGF-2, which bind to a complex sugar called heparan sulfate. PI-88 was formerly our lead product candidate from this technology platform. PI-88 is currently licensed to a Taiwan-based company for all oncology indications seeking global registration. The PG500 program capitalizes upon Progen’s longstanding expertise in the area of heparan sulfate mimetics. This program is aimed toward providing a product for clinical development with significant enhancements to the first generation products (e.g. PI-88) in efficacy, manufacturability and pharmacokinetic properties. Our lead candidate, PG545, is currently being put through pre-clinical models using an intravenous route of administration, with a view to recommencing a phase 1 clinical trial in the future.  PG545 had completed toxicology studies, gained ethics approval in Australia and was treating patients in a Phase I clinical trial using a subcutaneous route of administration.  The trial was stopped due to unforeseen injection site reactions in humans.

 

**Cell Proliferation and Epigenetics (through Epi Pharmaceutials Inc)**

 

Progen retains a significant stake in Epi Pharmaceuticals Inc, which now houses the cell proliferation and epigenetics assets which Progen had acquired in the CellGate Transaction in February 2008.

 

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Progen’s cell proliferation platform is centered around the role of polyamines in cellular function. The requirement for adequate polyamine levels for cell proliferation makes polyamine function and metabolism attractive targets for therapeutic intervention. PG11047 has completed Phase 1 clinical development. PG11047 is a polyamine analogue that competes with natural polyamines, and treatment with PG11047 results in alterations to the natural cascade of events involved in cell division and may be able to induce cell death in tumors. To date, PG11047 has shown anti-tumor activity in animal models along with a good safety profile in human trials.

 

Much of the focus in epigenetics (the process of changing gene expression) is on a group of enzymes that help control how tightly DNA is coiled around a group of proteins called histones. Genes can only be activated when key pieces of DNA are unwrapped, allowing the data to be accessed to manufacture proteins. In cancer, the coiling of DNA can be dysregulated resulting in the silencing of important tumor suppressor genes, and the goal with most epigenetic research is the use of drugs to control the way DNA is coiled so that those tumor suppressor genes can be switched back on.

 

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**Products**

 

The following table lists the Company’s products currently under development:

 
| **Product**                     | ** ** | **Principal Uses** | ** ** | **Status**                                                                                                    | ** ** | **Next Significant Milestone**                                                                            |
|---------------------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|
| PI-88                           |       | Cancer                  |       | Phase 2 clinical trial completed treatment (Australia and U.S.)                                               |       | · Analysis of   data from Phase 2 Melanoma trial                                                               |
| Muparfostat 

 

(PI-88)   |       | Cancer                  |       | Phase 3 Clinical Development (undertaken by Medigen)                                                          |       | · Completion   of Phase 3 Liver Cancer Trial by Medigen                                                        |
| PG545                           |       | Cancer                  |       | Preclinical   models to assess efficacy and safety using intravenous route of   administration (IV)           |       | · Commencement   of new Phase 1 clinical trial using IV 

· Data   analysis of new Phase 1 clinical trial |
| PG11047                         |       | Cancer                  |       | Phase   1(b) clinical development completed by Progen.

 

Divested   into Epi Pharmaceuticals Inc. |       | · Licensing   activity through Epi Pharmaceuticals Inc.                                                        |
| Heparanase   Discovery Program  |       | Cancer                  |       | Discovery                                                                                                     |       | · Currently on   hold due to resource constraints                                                              |
| Epigenetics   Discovery Program |       | Cancer                  |       | Discovery.

 

Divested   into Epi Pharmaceuticals Inc.                                                  |       | · Licensing   activity through Epi Pharmaceuticals Inc.                                                        |

 

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**PI-88**

 

*PI-88 Description*

 

PI-88 is a carbohydrate-based small-molecule which is believed to work via two mechanisms. Firstly, it inhibits the enzyme heparanase, which plays an important role in tumor spread and invasion through surrounding tissues. Tumors must ordinarily degrade the basement membrane and extracellular matrix of surrounding tissues in order to grow and heparanase is an enzyme that facilitates this process. By inhibiting this degradation process, PI-88 reduces the ability of tumors to expand and spread. Secondly, PI-88 exerts an anti-angiogenic effect by inhibiting the interaction between growth factors, heparan sulfate and cellular receptors. As tumors grow, they require additional blood supply to provide oxygen and nutrients. The generation of these new blood vessels to supply additional blood supply is a process known as angiogenesis, and it is controlled in part by proteins such as Vascular Endothelial Growth Factor, or VEGF, and Fibroblast Growth Factor, or FGF-1 and FGF-2, binding to their receptors. PI-88 competitively links to the binding domain of these growth factors, limiting their ability to bind to heparan sulfate and their receptors. Angiogenesis has been widely validated as an important target in the development of novel anti-cancer therapies; however, PI-88, a First-in-Class heparanase inhibitor, employs a unique mechanism to target angiogenesis.

 

Most oncology drugs are designed to be toxic to the cancer, as their name — cytotoxics — indicates. These drugs are designed to eradicate tumor cells, often with adverse consequences for non-cancerous cells as well. Historically, the efficacy of cytotoxic compounds was measured by assessments such as the degree to which tumors shrink. PI-88 belongs to the class of cytostatic drugs. As the name implies, cytostatic drugs are designed to keep the disease stable, so the efficacy of these cytostatic drugs is measured by assessments such as time to disease recurrence, disease progression, time of stable disease, disease free survival, and overall survival.

 

*License of muparfostat (PI-88) to Medigen Biotechnology Corp*

 

On June 30, 2010, Progen announced that a binding license and collaboration agreement had been executed with Medigen Biotechnology Corporation (Medigen) for the development and commercialization of muparfostat globally.

 

The agreement grants Medigen the exclusive worldwide and sub-license rights for the commercialization of muparfostat for the therapeutic and prophylactic treatment of cancer. The agreement includes royalties on sales of muparfostat as well as milestones payments at the following time points:

 

·              when regulatory approval is obtained for commencement of the Phase III trial;

·              when  the Phase III trial is commenced;

·              when the  Phase III trial is completed; and

·              when regulatory approval is in place for the product to be marketed.

 

To date, Medigen has achieved the first two milestones.  There are also additional milestone payments due to Progen based on follow-up market approvals.  Progen is also contracted to manufacture the clinical trial material via its subsidiary company, PharmaSynth.

 

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The intellectual property owned or licensed by Progen to Medigen includes the rights to PI-88 covered in the global patent family entitled “Preparation and Use of Sulfated Oligosaccharides”. It does not include any intellectual property relating to Progen’s PG500 series compounds. The term of the agreement is 15 years from the commencement date (July 1, 2010) unless terminated earlier in accordance with the agreement.

 

*PI-88 Clinical Development Program*

 

All clinical trials of PI-88 have been conducted under an active Investigational New Drug Application, or IND, with the FDA. In the preclinical and clinical studies executed to date, PI-88 has shown an acceptable safety and tolerability profile in clinical trials. PI-88 has also showed signs of clinical efficacy in PI-88’s multinational clinical development program.

 

*Phase 2 clinical trial of PI-88*

 

Our metastatic melanoma trial recruited patients that have not previously received chemotherapy (i.e. first line patients). In this indication, the efficacy of PI-88 in combination with DTIC (dacarbazine) is being investigated. DTIC is a chemotherapy drug used as standard first-line treatment for patients with newly diagnosed metastatic melanoma and the goal of the study is to determine whether PI-88 can increase efficacy in combination with DTIC. The approved anti-angiogenic drug, Avastin® (bevacizumab), has been shown to enhance efficacy in combination with chemotherapy in patients with various solid tumors, including bowel cancer, lung cancer and breast cancer. The PI-88 Phase 2 trial in combination with DTIC has been conducted across seven sites in Australia and at three sites in U.S.  The study has now finished treating patients and data analysis is nearing completion.

 

*Commercialization Strategy for PI-88*

 

Worldwide oncology rights to PI-88 have been licensed to Medigen Biotechnology Corp, who will further develop and commercialize the compound.  Progen has determined that the current Phase 2 PI-88 melanoma trial, will be completed but no further development in melanoma by Progen is anticipated at this stage.

 

**PG545**

 

*PG545 Description*

 

PG545 is a heparan sulfate mimetic and its efficacy as an anti-tumor agent is based on a dual mechanism critical to the growth and progression of solid tumors, namely angiogenesis and metastasis.  PG545 is Progen’s lead candidate from the PG500 series.

 

*PG545 Preclinical Development*

 

This compound has been shown to inhibit solid tumor progression in a variety of animal models of melanoma (B16F1 syngeneic mouse model), breast cancer (T41 orthotopic mouse model), lung cancer (LLC/2 syngeneic mouse model), human colorectal cancer (HT29 xenograft model), human pancreatic cancer (MiaPaCa-2 xenograft model), human breast cancer (MDA-MB-231

 

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xenograft model), human prostate cancer (PC3 xenograft model) and human liver cancer (HepG2 xenograft model and Hep3B orthotopic model). Importantly, these compounds also potently block the development of metastases as shown in the aforementioned B16F1, T41 and LLC/2 models.

 

Potent inhibition has also been observed in other *in vitro* models such as the tube formation assay and the rat aortic angiogenesis assay. Daily treatment or twice weekly treatment significantly reduced angiogenesis in the *in vivo* AngioSpongeTM model. Blocking these interactions inhibits the angiogenesis and metastasis processes critical in tumor growth and progression.

 

Through a lead validation methodology incorporating aspects such as efficacy, pharmacokinetics, toxicology and ease of manufacture we have identified PG545 as the lead compound. Pharmacokinetic studies have demonstrated that half-life of PG545 in mice or rats is in the region of 21-50 hours and elimination is reasonably slow. Thus, the current dosing schedule of a once weekly subcutaneous injection has been found to be sufficient to maintain significant antitumor activity in many of the cancer models mentioned previously. Non-GLP toxicology studies have been completed in mice, rats and dog and data supports the progression of PG545 toward the clinic.

 

*Phase I clinical trial of PG545*

 

The study is entitled “an open-label, single centre Phase I study of the safety and tolerability of PG545 in patients with advanced tumors”.  The enrolled advanced cancer patients with non haematologic, malignant solid tumors, excluding primary brain or spinal tumors. During the study, patients experienced injection site reactions.  Following this, the Company decided not to continue with dose escalation and to close the study.  Progen is reviewing the route of administration and conducting preclinical studies to investigate intravenous as an alternative route of administration.

 

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**PG11047**

 

*PG11047 Description*

 

PG11047 is a polyamine analogue that competes with natural polyamines, and treatment with PG11047 results in alterations to the natural cascade of events involved in cell division and may be able to induce cell death in tumors.  PG11047 is the most advanced compound acquired through the acquisition of CellGate in February 2008.

 

*PG11047 Clinical Development Program*

 

In September 2009, Progen completed the PG11047 monotherapy study which was initially commenced by CellGate Inc.  The trial was conducted at the University of Chicago and was designed to evaluate the safety PG11047 in advanced cancer patients that have failed all other treatment options or that have few treatment options open to them. A total of 46 patients were treated.  CellGate commenced the PG11047 Phase 1(b) combination study with approved cancer therapies (Gemzar, Taxotere, Avastin, Tarceva, Cisplatin, Sutent and 5-fluorouracil) which Progen also re-initiated following the acquisition of CellGate Inc.  The trial has completed treating patients and data analysis is nearing completion.

 

In May 2011, the Company divested the intellectual property held by Progen Pharmaceuticals Inc to a new incorporated entity, Epi Pharmaceuticals Inc (“EPI”).  EPI is incorporated in the USA and holds all of the epigenetic and cell proliferation assets, including PG11047, acquired through the CellGate acquisition.

 

**Heparanase Discovery Program**

 

Heparanase discovery program is targeted towards the identification of molecules that selectively inhibit the enzyme heparanase.

 

The objective of this program is to replenish and to diversify the Company’s product development portfolio by creating a robust drug pipeline.   Presently, the company is directing funds towards PG545 development; however Progen may reinitiate this discovery program in the future.

 

**Manufacturing**

 

PharmaSynth Pty Ltd (PharmaSynth), a subsidiary of the Company, operates a current good manufacturing practice, or cGMP, certified pilot manufacturing facility that provides contract manufacturing services to the biotechnology industry, earning revenues on a fee for service basis. Contract and consulting services revenues constituted 100% of our consolidated sales revenue in each of the fiscal years ended June 30, 2007, 2008, 2009, 2010 and 2011, respectively. PharmaSynth’s business is the provision of contract pharmaceutical manufacturing development services and manufacture of material for phase 1 to phase 3 clinical trials, as well as the manufacture of veterinary and animal health products.

 

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**Government Regulation**

 

**General**

 

Regulation by government authorities in the U.S., Australia and other countries in which the Company operates is a significant factor in the development, manufacture and marketing of our proposed products and in our ongoing research and development activities. The nature and extent to which such regulation applies to us will vary depending on the nature of any products which may be developed by us. We anticipate that many, if not all, of our proposed products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in European and other countries. Various governmental statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and recordkeeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there can be no guarantee that approvals will be granted.

 

The Company is also subject to various laws, regulations, policies, guidelines and recommendations relating to such matters as safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the protection of the environment. Furthermore, there has been a general trend towards greater regulation of the pharmaceutical industry and its products.

 

**Manufacturing**

 

The manufacturing facility, run by PharmaSynth, is licensed by the Australian Therapeutic Goods Administration for the manufacture of biological-based starting materials for human therapeutics to cGMP and by the Australian Office of Gene Technology Regulator for the manufacture of large scale genetically modified organisms. In addition, certain international markets have quality assurance and manufacturing requirements that may be more or less rigorous than those in Australia. Our manufacturing facilities are also subject to regular inspections by the TGA. We cannot make any assurances that we will continue to be in compliance with cGMP requirements. Failure to comply with cGMP requirements or with any other international requirements could have a material adverse effect on our business, financial condition and results of operations.

 

**Research and Development**

 

The research and development, manufacture and commercialization of our pharmaceutical products are subject to regulation by governmental entities in Australia and other countries including the United States. Pharmaceutical products are subject to rigorous regulation by the TGA under the Australian Therapeutic Goods Act, by the FDA in the United States, and by similar health authorities in foreign countries under laws and regulations that govern, among other things, the testing, clinical trials, manufacture, safety, efficacy, labeling, storage, record keeping, advertising, promotion, export, marketing and distribution of such products. Product development and approval within this regulatory framework is uncertain and can take a number of years and require the expenditure of substantial resources. Any failure to obtain regulatory approval or any delay in obtaining such approvals could have a material adverse effect on our business, financial condition and results of operations.

 

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*Australian Government Regulation*

 

The steps required before a drug may be approved for marketing in Australia generally include:

 

·                                          Preclinical laboratory and animal testing;

 

·                                          Submission to the TGA of a clinical trial notification, or CTN, or a clinical trial exemption, or CTX, application for human trials;

 

·                                          Submission of an investigators’ brochure and clinical protocols to the independent ethics committee, or IEC, of each institution at which the trial is to be conducted;

 

·                                          Adequate and well-controlled clinical trials to demonstrate the safety and efficacy of the product;

 

·                                          Development of chemistry, manufacture and control documentation, which demonstrates that the manufacture of the product conforms to GMP guidelines;

 

·                                          Submission of the manufacturing, preclinical and clinical data to the TGA; and

 

·                                          Approval by the TGA for inclusion in the Australian Register of Therapeutic Goods.

 

The testing and approval processes for a drug require substantial time, effort and financial resources. Furthermore, post-market surveillance must be carried out, and any adverse reactions to the drug must be reported to the TGA. We cannot make any assurances that any approval will be granted on a timely basis, if at all.

 

Preclinical studies include laboratory evaluation of the product as well as animal studies to assess the potential safety and efficacy of the product. The results of the preclinical studies are submitted to each investigator’s IEC and, in some instances, to the TGA. Approval by each IEC and by the TGA is necessary before clinical trials can commence. An IEC is a review committee at each institution at which a study is conducted and is set up under guidelines of the Australian National Health and Medical Research Council. The role of an IEC is to review proposals for clinical trials, and approve and subsequently monitor the clinical trials.  The IEC will consider, among other things, ethical factors and the safety of human subjects. We cannot make any assurances that submission to the applicable IECs and the TGA will result in authorization to commence clinical trials.

 

Clinical trials are typically conducted in three sequential phases that may overlap:

 

·                                          Phase 1 clinical trials that involve the initial introduction of the drug into human subjects and the exploration of its safety (adverse effects), dosage tolerance, absorption, metabolism, excretion and pharmacodynamics;

 

·                                          Phase 2 clinical trials that (i) evaluate the efficacy of the drug for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. Phase 2 trials usually involve studies in a limited patient population; and

 

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·                                          Phase 3 clinical trials that generally further evaluate clinical efficacy and further test for safety within an expanded patient population sufficient to provide statistically significant data.

 

In the case of products with a high risk of toxicity, the initial clinical trials are sometimes conducted in patients with the target disease rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such clinical trials may provide evidence of efficacy traditionally obtained in Phase 2 clinical trials. We cannot make any assurances that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specific time period, if at all, with respect to any of our product candidates. Furthermore, the TGA and/or the applicable IEC may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

 

All PI-88 patient clinical trials have been conducted under an active IND application with the FDA, under a CTN application with the TGA for Australian sites and other health authority jurisdictions where relevant.

 

All PG11047 patient clinical trials have been conducted under an active IND application with the FDA.

 

The recently closed patient clinical trial in PG545 was being conducted under a CTN application with the TGA.

 

In order to obtain Australian marketing approval for a drug, the results of the preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the TGA with a request for registration of the product in the Australian Register of Therapeutic Goods. The TGA may delay approval if applicable regulatory criteria are not satisfied, require additional testing or information, and/or require post-marketing testing and surveillance to monitor the safety or efficacy of a product. We cannot make any assurances that approval by the TGA will be granted on a timely basis, if at all. Also, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed.

 

*U.S. Government Regulation*

 

FDA approval to market our drug products in the U.S. is expected to be undertaken by us or in conjunction with a commercial partner. The approval process of the FDA and TGA are similar, with substantial requirements for preclinical research, conduct of clinical trials, and manufacture of the product. Human clinical testing of a new drug requires the submission of an IND that must include the results of preclinical studies, together with manufacturing information and analytical data. We cannot make any assurances, however, that submission of an IND will allow us to commence clinical trials. In addition to the IND process, the clinical trial protocol also requires approval by the study sites Institutional Review Board (IRB), a similar process to the IEC review performed for Australian based trials. Furthermore, once trials have commenced, the FDA or IRB may stop the trials, or particular types of trials, by placing a “clinical hold” on such trials because of, for example, concerns regarding the safety of the product being tested. Such holds can cause substantial delay and, in some cases, may require abandonment of a product. In addition, Phase 4

 

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clinical trials may be required by the FDA following initial license approval, to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial requirement. These clinical trials are often referred to as “Phase 3/4 post-approval clinical trials.”  Failure to promptly conduct Phase 4 clinical trials could result in withdrawal of product approval under accelerated approval regulations.

 

The results of preclinical studies and clinical trials, together with detailed information on the manufacture and composition of the product, are submitted to the FDA in the form of a New Drug Application, or NDA, requesting approval to market the product. Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facility is in GMP compliance. The FDA may delay an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, and/or require post-marketing testing and surveillance to monitor the safety or efficacy of a product. We cannot make any assurances that FDA approval of any NDA submitted by us will be granted on a timely basis, if at all. Also, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which the product may be marketed.

 

**Patents**

 

Our success will depend in large part on whether we can:

 

·                                          Obtain patents to protect our own products;

 

·                                          Obtain licenses to the patented technologies of third parties;

 

·                                          Operate without infringing on the proprietary rights of third parties; and

 

·                                          Protect our trade secrets and know-how.

 

For a discussion of the risks and uncertainties associated with our intellectual property position, see “Risk Factors — Our success depends upon our ability to protect our intellectual property and our proprietary technology.”

 

The Company’s policy is to protect and defend the intellectual property associated with its technology and products, principally through patent protection. We achieve this by filing patent applications for discoveries made by our scientists, as well as those that we make in conjunction with our scientific collaborators and strategic partners.

 

The most material of these patents and patent applications being:

 

1.               PI-88 — Composition of matter and method of use patent families have been granted in countries including the U.S., Australia, Korea, Taiwan, Japan, Europe, China, South Africa and New Zealand. Further, the PI-88 composition of matter patent application has been accepted in Canada. The PI-88 composition of matter patent expires in 2016. Under laws

 

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such as the U.S. Waxman Hatch law, extensions for PI-88 patents are possible in some countries and we intend to maximize the opportunities to pursue such patent extensions.

 

2.               PG545 — composition of matter compounds and method of use patents have been granted in countries including Mexico, Singapore, Russia and South Africa, while patents are pending in various other key jurisdictions.  The PG545 composition of matter patents expire in 2025.

 

3.               PG11047**—**There are two granted U.S. composition of matter and method of use patents claiming compounds within a family of polyamines with defined formulae, including PG11047. These patents have also been issued in Europe and are pending in other jurisdictions.  Ownership of these patents has been transferred to Epi Pharmaceuticals Inc.

 

The availability and breadth of claims allowed in biotechnology and pharmaceutical patents is highly uncertain and generally involves complex legal and factual questions. We cannot make any assurances that any of our pending or future patent applications will be approved, or that we will develop additional proprietary products or processes, or be able to license any other patentable products or processes. We also cannot make any assurances that others will not independently develop similar products or processes, duplicate any of the products or processes developed or being developed by or licensed to us, or design around the patents owned or licensed by us, or that any patents owned or licensed by us will provide us with competitive advantages. Furthermore, patents held by third parties may prevent the commercialization of products incorporating the technology developed by or licensed to us, and third parties may challenge or seek to narrow, invalidate or circumvent any or all of the issued, pending or future patents owned or licensed by us.

 

If it were determined that we were infringing any third-party patents, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain activities. We cannot make any assurances that the licenses required under patents held by third parties would be made available to us on acceptable terms, or at all. To the extent that we are unable to obtain such licenses, we could be foreclosed from the development, manufacture or commercialization of the product requiring such license or encounter delays in product introductions while we attempt to design around such patents.

 

We also believe that because of the differences in patent laws, foreign patents, if obtained, and the protection afforded by such foreign patents and foreign intellectual property laws may be more limited than that provided under Australian or United States patents and intellectual property laws. Litigation, which could result in substantial costs and diversion of effort on our part, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third party proprietary rights. We may have to participate in opposition proceedings before the Australian Patent and Trademark Office or another foreign patent office, or in interference proceedings declared by the United States Patent and Trademark Office, to determine the priority of the invention for patent applications filed by competitors. Any such litigation, interference or opposition proceeding, regardless of outcome, could be expensive and time consuming, and adverse determinations in any such proceedings could have a material adverse effect on our business, financial condition and results of operations.

 

**Licenses**

 

*PI-88**.*We have an exclusive worldwide license from the Australian National University in

 

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Canberra, Australia, to five families of patents and patent applications relating to PI-88, our sulfated oligosaccharide heparanase inhibitor. Our license rights terminate on March 10, 2028. Our license with the Australian National University requires us to pay the University a portion of PI-88 related payments that we receive including royalties on sales of PI-88 as well as on any fees we receive from sublicensing this technology. In addition we are the assignee to a sixth patent application.

 

PI-88 (muparfostat) was out-licensed to Medigen Biotechnology Corp. on June 30, 2010. Under the agreement, Progen’s subsidiary, PharmaSynth, is to provide the technical and manufacturing support to Taiwan-based Medigen Biotechnology Corp. to develop and commercialize muparfostat elsewhere in the world.  We are entitled to various milestone payments linked to progression in the development of muparfostat, as well as a royalty on product sales upon commercialization. To date, Progen has received two milestone payments, being related to the regulatory approval of the Phase 3 clinical trial and one for the commencement of recruitment.

 

*PG11047**.*Progen acquired PG11047 through the acquisition of CellGate, Inc.  Progen has since rolled all CellGate assets into Epi Pharmaceuticals Inc.  Prior to this, there were three agreements that imposed milestone obligations upon Progen in relation to the CellGate products:

 

1.               The 2008 Progen Acquisition of CellGate Inc. (CellGate)

2.               The 2004 acquisition by CellGate of certain SLIL Biomedical Corp (SLIL) assets

3.               The 2004 licensing of certain Wisconsin Alumni Research Foundation (WARF) assets

 

Under the Epi Pharmaceuticals Inc formation documents, the various milestone beneficiaries were issued equity in Epi Pharmaceuticals Inc in return for extinguishing the milestone obligations.

 

Progen has retained a U.S.-based investment bank to attract investment or licensees to the Epi Pharmaceuticals Inc portfolio of products.

 

**Proprietary Technology**

 

In addition to patent protection, we rely on unpatented trade secrets and know-how and proprietary technological innovation and expertise, all of which are protected in part by confidentiality and invention assignment agreements with our employees, advisors and consultants. We cannot make any assurances that these agreements will not be breached, that we will have adequate remedies for any breach, or that our unpatented proprietary intellectual property will not otherwise become known or independently discovered by competitors. We also cannot make any assurances that persons not bound by an invention assignment agreement will not develop relevant inventions.

 

**Competition**

 

*Drug Development*

 

We face competition in each of our target product markets. The pharmaceutical and biotechnology industries are also intensely competitive. Our anti-cancer pharmaceutical product candidates would be subject to significant competition from existing drugs and therapies, as well as from products and therapies utilizing alternative or similar technologies. There are many pharmaceutical and biotechnology companies, and public and private academic institutions and

 

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research organizations actively engaged in the research and development of alternative products and therapies for the treatment of diseases that we have targeted for product development. Many of these organizations have greater financial, technical, manufacturing and marketing resources.

 

Some of our competitors may succeed in developing products earlier than us, obtain governmental approvals more rapidly than us, or develop products that are safer and more effective than those under development by us. Other companies may also develop products or therapies that render our technology and products obsolete or non-competitive. We also cannot make any assurances that any therapy developed by us will be preferred to any existing or newly developed technologies. Some of our competitors may succeed in developing treatments that are superior to any therapy or product developed by us. Our ability to successfully compete with these and other companies will also depend to a considerable degree on the continuing availability of capital to us, as well as our ability to recruit and retain highly qualified scientific personnel and consultants, and to compete with the established manufacturing and marketing capabilities of our competitors.  Competition among products will be determined by, among other things, efficacy, safety, convenience, reliability, price and patent position.

 

*Contract Manufacturing*

 

The clients of our contract manufacturing business, PharmaSynth, are mostly from Australia with a limited number also from Asia. Our ability to compete with our competitors will depend on our marketing efforts, our ability to remain cost competitive, recruit and retain qualified personnel and maintain adequate levels of compliance with regulatory bodies.

 

**Item 4.C.****                                              ****Organizational Structure**

 

Progen Pharmaceuticals Limited acts as an operating holding company of a group consisting of its directly held subsidiaries. Progen Pharmaceuticals Limited has the following subsidiaries:

 
| ** **                        | ** ** | **% Held** | ** ** | **Country of   Incorporation** |
|-----------------------------------|------------|-----------------|------------|-------------------------------------|
| PharmaSynth Pty Ltd               |       | 100             |       | Australia                           |
| Progen Pharmaceuticals, Inc. |       | 100             |       | U.S.A. (Delaware)                   |

 

The Company has a 43% interest in Epi Pharmaceuticals Inc., a company incorporated in Delaware which was incorporated to hold the CellGate and other divested assets. Epi Pharmaceuticals has not had any transactions in the period and the investment is carried at a $nil carrying value.

 

**Item 4.D.****                                              ****Property, Plant and Equipment**

 

The Company leased its principal offices at Toowong, a suburb of Brisbane, Queensland, Australia until October 2011.  In August 2011, all staff relocated to 2806 Ipswich Road, Darra, Queensland, Australia.  This is also the location of PharmaSynth Pty Ltd’s manufacturing facility.

 

Progen Pharmaceuticals, Inc, a subsidiary of the Company, leased offices at 2479 East Bayshore Road, Palo Alto, California, USA, until the closure of this office on October 29, 2010.

 

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PharmaSynth Pty Ltd, a subsidiary of the Company, leases an 11,200 square foot fully-integrated pharmaceutical raw material manufacturing facility in Darra, also a suburb of Brisbane, Queensland, Australia. This manufacturing facility has the capability to develop and manufacture therapeutic products for worldwide markets and consists of 15 modular laboratories, each with a designated function.

 

This facility is used to manufacture a range of biological products, including the PI-88 active ingredient for clinical trials and preparation of PG545 for preclinical and clinical trials. It is equipped for the genetic manipulation of micro-organisms, cell culture, small and large-scale fermentation of micro-organisms, purification and downstream processing, freeze-drying, and sterile packing and filling.

 

This manufacturing facility is licensed by the Australian Therapeutic Goods Administration, or TGA, for the manufacture of biological-based starting materials for human therapeutics to cGMP standards and by the Australian Office of Gene Technology Regulator for the manufacture of large scale genetically modified organisms. The TGA regulates the manufacture of compounds intended as starting materials for human therapeutics. In addition, the facility is licensed by the Australian National Registration Authority for manufacture of sterile and immunobiological veterinary products to cGMP standards and by the Australian Quarantine and Inspection Service as a quarantine facility.

 

The lease agreement on PharmaSynth Pty Ltd’s manufacturing facility is on a month to month basis with a six month notice period on termination.  A three year lease of these premises is currently nearing implementation.  We pay a current rental of $143,535 per annum.

 

**ITEM 4A.****                                           ****UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 5.****                                                    ****OPERATING AND FINANCIAL REVIEW AND PROSPECTS**

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes included elsewhere in this Annual Report.

 

This discussion may contain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in “Item 3. Key Information — Risk Factors” above and elsewhere in this Annual Report.

 

**Overview**

 

We have incurred significant losses since our inception and as of June 30, 2011, our accumulated losses were $146.7 million. We devote a substantial portion of our financial resources to fund the development of our cancer product candidates and our drug discovery research efforts.

 

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Whether we incur operating losses for the financial year ending June 30, 2012 and beyond, and if so the extent of those losses, depends on research and development efforts, licensing arrangements, success of our cancer product candidates and potential merger and acquisition activity.

 

Our operations have historically been financed by the issuance of capital stock because it is generally difficult to fund pharmaceutical research via borrowings due to the lack of revenues to service debt and the significant inherent uncertainty as to results of this research and the timing of those results.

 

**Critical Accounting Policies**

 

The following discussion and analysis of our operating and financial review and prospects are based upon our financial statements, which have been prepared in accordance with International Financial Reporting Standards. These accounting principles require us to make certain estimates and assumptions that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Based on the nature of our operations, our accounting policies do not require difficult, subjective or highly complex judgments and therefore our reported amounts are not subject to material variation based on changes in assumptions. Our significant accounting policies are more comprehensively described in Note 2 to the financial statements.

 

The following are the most significant accounting estimates and judgments we apply in producing our consolidated financial statements.

 

*Revenue recognition*

 

(i) Rendering of services

 

Revenue from the provision of contract manufacturing services is recognized by reference to the stage of completion. Stage of completion is measured by reference to the outcome achieved to date as a percentage of the total outcome required for each contract.

 

Licensing revenue from milestone payments are recognized when the milestone has been achieved by the licensee.

 

(ii) Interest income

 

Revenue is recognized as interest accrues using the effective interest method. This is a method of calculating the amortized cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

 

*Cash and cash equivalents*

 

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.  For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above.

 

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*Short-term investments*

 

Short-term investments in the statement of financial position include a term deposit with an original maturity between 3 and 12 months.

 

*Foreign currency translation*

 

(i) Functional and presentation currency

 

The functional and presentation currency of Progen Pharmaceuticals Limited is Australian dollars ($). The United States subsidiary’s functional currency is United States dollars which is translated to presentation currency (see below).

 

(ii) Transactions and balances

 

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.

 

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

 

(iii) Translation of consolidated group companies’ functional currency to presentation currency

 

The results of the United States subsidiary are translated into Australian dollars as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at balance date.

 

Exchange variations resulting from the translation are recognized in the foreign currency translation reserve in equity.

 

*Intangible assets*

 

Intangible assets acquired separately or in a business combinations are initially measured at cost. The cost of an intangible asset acquired in a business combination or as an asset acquisition is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is recognised in profit or loss in the period in which the expenditure is incurred.

 

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible assets with a finite useful life is reviewed at least each financial year-end.

 

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Changes in the expected useful life of the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortization period or method, as appropriate, which is a change in accounting estimate. The amortization expense on intangible assets with finite lives is recognized in profit or loss in the expense category consistent with the function of the intangible asset.

 

A summary of the policy applied to the Company’s intangible assets is as follows:

 

*Useful life*

Finite

*Amortisation method used*

Amortised over the period of expected future benefit from the related project on a straight-line basis

*Internally generated or acquired*

Acquired

*Impairment testing*

Conducted when an impairment indicator arises. The amortisation method is reviewed at each financial year-end.

 

*Provisions*

 

Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

When the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement.

 

If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability.

 

When discounting is used, the increase in the provision due to the passage of time is recognized as a borrowing cost.

 

*Share-based payment transactions*

 

The Company provides benefits to employees (including senior executives) and consultants of the Company in the form of share-based payments, whereby employees and consultants render services in exchange for shares or rights over shares (equity-settled transactions).

 

The cost of these equity-settled transactions are measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of rights over shares is determined using a binomial model, further details of which are given in Note 13 to the financial

 

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statements. The fair value of shares is determined by the market value of the Company’s shares at grant date.

 

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (market conditions) if applicable.

 

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting period).

 

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects

 

(i) the extent to which the vesting period has expired; and

 

(ii) the Company’s best estimate of the number of equity instruments that will ultimately vest.

 

No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The statement of comprehensive income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

 

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is only conditional upon a market condition.

 

If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification.

 

If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

 

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share.

 

**Item 5.A.****                                              ****Operating Results**

 

***Years ended June 30, 2011, 2010 and 2009***

 

The functional currency for the Company’s operations is the Australian dollar.

 

The consolidated operating result for the year ended June 30, 2011 was a loss of $6.098 million, being a decrease of 61.5% over the 2010 loss of $15.839 million. The overall operating

 

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result for the year ended June 30, 2009 was a loss of $5.467 million.

 

The decrease in the loss for 2011 of $9.741 million is attributable to various factors, including decreased research and development expenses of $2.209 million following the completion of the PG11047 Phase 1a monotherapy study and winding down of both the PG11047 Phase 1b combination study in advanced cancer patients and the PI-88 Phase 2 study in metastatic melanoma.  General and administrative savings of $2.874 million were realised primarily due to reduced legal and other consultancy fees.  License fee revenue relating to the license of PI-88 to Medigen Biotechnology Corporation (“Medigen”) together with the increased profitability of the Company’s manufacturing operations contributed to a $0.550 million improvement to the result. Further, 2010 figures include the one-off impairment of the intangible asset associated with the CellGate acquisition of $2.644 million and the legal settlement with Medigen for $1.8 million.

 

*Revenue from Operations*

 

Our consolidated revenue from continuing operations for fiscal 2009, 2010 and 2011 is as follows (in AUD thousands):

 
| ** **                                     | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2011** | ** ** |
| Revenue from manufacturing   services          |       | $                                       | 1,724      |   | $ | 1,973 |   | $ | 2,585 |   |
| License fee revenue                            |       | —                                  |       | — |   | 475 |   |
| Interest income                                |       | 3,216                                   |       | 739 |   | 551 |   |
| **Total revenue from   continuing operations** | ** ** | **$**                                   | **4,940**  | ** ** | **$** | **2,712** | ** ** | **$** | **3,611** | ** ** |

 

For the fiscal year ended June 30, 2011, revenues from manufacturing services division increased 31.0% to $2.585 million due to additional manufacturing contracts being received, including the contract entered between Progen and Medigen for the manufacture of PI-88 in accordance with the Exclusive License and Collaboration Agreement.

 

For the fiscal year ended June 30, 2010, revenues from manufacturing services division increased 14.4% to $1.973 million due to additional manufacturing contracts being received.

 

Interest income fell by 25.4% to $0.551 million during fiscal year 2011 primarily due to reduced funds on deposit due to the operating cash outflows throughout the year, despite stronger interest rates on deposits.

 

License fee revenue of $0.475 million was realised in 2011 (2010: nil, 2009: nil) as the Company’s licensee, Medigen reached its first milestone in the development of PI-88.

 

*Research and Development Expenses*

 

Our consolidated research and development expenses for compounds under development and discovery programs are as follows (in AUD thousands):

 

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| ** **                                    | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2011** | ** ** |
| PI-88                                         |       | $                                       | 1,393      |   | $ | 423 |   | $ | 215 |   |
| PI-166                                        |       | 47                                      |       | — |   | — |   |
| PG11047                                       |       | 2,037                                   |       | 1,518 |   | 555 |   |
| PG500 Series and   Heparanase discovery  |       | 1,676                                   |       | 2,221 |   | 1,524 |   |
| Epigenetics discovery   program               |       | 1,217                                   |       | 610 |   | 364 |   |
| General research and   development expenses   |       | 679                                     |       | 320 |   | 225 |   |
| **Total research and   development expenses** | ** ** | **$**                                   | **7,049**  | ** ** | **$** | **5,092** | ** ** | **$** | **2,883** | ** ** |

 

In fiscal year 2011 expenditure on our Research and Development segment initiatives decreased year on year by 43.4% to $2.883 million, following the completion of enrolment in the PG11047 combination study in the USA and the treatment of the final patient in the PI-88 metastatic melanoma study.

 

In fiscal year 2011, we expended $0.2 million on the ongoing PI-88 Phase 2 Melanoma trial (2010: $0.4 million, 2009: $1.4 million) and $1.9 million on drug discovery across PG545, PG562 and PI-166 (2010: $2.8 million, 2009: $2.9 million).  Expenditure of $0.5 million was booked against the ongoing PG11047 phase 1 trial in the U.S. and a further $0.2 million was related to PI-88.

 

Our lead non-partnered drug candidate, PG545 was involved in a phase 1 clinical trial during the financial year, until it was stopped due to an unforeseen injection site reaction issue. Many drugs in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. Even if our drugs progress successfully through initial human testing, they may fail in later stages of development. Regulatory agencies, including the FDA and TGA, regulate many aspects of a product candidate’s life cycle, including research and development and pre-clinical and clinical testing. We or the regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks. Completion of clinical trials depends on, among other things, the number of patients available for enrollment in a particular trial, which is a function of many factors, including the availability and proximity of patients with the relevant condition. We rely on third parties to conduct clinical trials, which may result in delays and failure to complete trials if the third parties fail to perform or meet applicable standards. Our drug discovery efforts are still in the research phase and have not yet commenced pre-clinical development, which means they have not yet been tested on humans. We will need to commit significant time and resources to develop these product candidates.

 

Our products will only be successful if:

 

·                  our product candidates are developed to a stage that will enable us to commercialize them or sell related marketing rights to pharmaceutical companies;

 

·                  we are able to commercialize product candidates in clinical development or sell the marketing rights to third parties; and

 

·                  our product candidates, if developed, are approved.

 

We depend on the successful completion of these goals in order to generate significant revenues. We also enter into collaboration agreements for the development and commercialization of our product candidates. We cannot control the amount and timing of resources our collaborators

 

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devote to product candidates, which may also result in delays in the development or marketing of our products.

 

Because of these risks and uncertainties, we cannot accurately predict when or whether we will successfully complete the development of our product candidates or the ultimate product development cost.

 

Without revenue generated from commercial sales, we anticipate that funding to support our ongoing research, development and general operations will primarily come from public equity financings, collaborations, milestones and licensing opportunities from future collaborations.

 

*Administrative and Corporate Expenses*

 

Administrative and corporate expenses in fiscal year 2011 were $2.87 million below fiscal 2010, primarily due to savings in management consulting fees and legal fees of $1.2 million and $780,000, respectively.  This is primarily due to the recognized consultancy fee provision relating to the divestment of the CellGate assets in fiscal 2010 and minimized external legal and consultancy fees. Further, amortization relating to the impaired intellectual property rights of $361,000 was booked in fiscal 2010. The savings was further expanded due to the reduced foreign exchange losses of $433,000 due to reduced U.S. deposits and stronger Australian Dollar against the U.S. Dollar.

 

Rentals on operating leases increased $183,000 or 46.4% in fiscal 2011 over fiscal 2010 to $577,000. This is due to the termination provision of lease agreement relating to Progen Pharmaceuticals Limited corporate office in October 2011 per the tenancy agreement reduced by the cost savings that resulted from the closure of US office.  Further, a CPI increase on both Progen and PharmaSynth premises contributed to the increase.

 

Rentals on operating leases decreased $57,000 or 10.3% in fiscal 2010 over 2009 to $495,000. During fiscal 2010, Progen Pharmaceutical Limited’s office rentals increased by 3% and PharmaSynth increased by 4% due to a CPI increase. However, the decision of Progen Pharmaceuticals, Inc. to move to a smaller office space has offset the increase thereby realizing net cost savings of $57,000.

 

Rental costs on the corporate offices of Progen Pharmaceuticals Limited and Progen Pharmaceuticals, Inc. are included in *Administrative and corporate expenses*, whilst rental costs of the Darra manufacturing facility are included in *Manufacturing facility expenses*.

 

*Manufacturing Facility Expenses*

 

In fiscal year 2011, manufacturing facility expenses increased by 23.7% to $2.506 million over fiscal 2010, reflecting the increase in manufacturing revenue during fiscal 2011.

 

In fiscal year 2010, manufacturing facility expenses increased by $0.343 million to $2.026 million over fiscal 2009, also reflecting an increase in manufacturing revenue during fiscal 2010.

 

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*Other Income*

 

We realized total net other income of $56,000 in fiscal 2011, compared with $150,000 in fiscal 2010 and $7.02 million in fiscal 2009. The components of Other Income as shown in our statement of comprehensive income included elsewhere in this Annual Report are (in AUD thousands):

 
| ** **                         | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2011** | ** ** |
| Grant income                       |       | $                                       | 83         |   | — |   | — |   |
| Gain on derivative                 |       | 508                                     |       | — |   | — |   |
| Unrealized foreign   exchange gain |       | 6,319                                   |       | — |   | — |   |
| Other income                       |       | 111                                     |       | $ | 150 |   | $ | 56 |   |
| **Total other income**             | ** ** | **$**                                   | **7,021**  | ** ** | **$** | **150** | ** ** | **$** | **56** | ** ** |

 

Grant income relates to the funding we receive for our drug discovery program under the Commercial Ready grant. The Commercial Ready grant partially funded our PG500 Series and Heparanase drug discovery programs for the three years beginning August 2005.

 

The unrealized foreign exchange gain in fiscal 2009 arose as a result of large amounts of U.S. currency being held by the Company to fund clinical trials in the U.S.

 

*Income Taxes*

 

Due to the Company’s loss position, no income tax expense has been recognized in any period.  The Company has tax losses in Australia of $147.5 million in fiscal 2011 (2010: $142.7 million, 2009: $137.9 million) that are available indefinitely for offset against future taxable profits of the companies in which the losses arose, subject to satisfying the relevant income tax loss carry forward rules. The Company has U.S. federal and state net operating loss carry-forwards of US$8.3 million and US$63,000, which have a carry forward period between 2028 — 2029 are available a maximum of 20 years, subject to a continuity of ownership test.

 

*Impairment Loss*

 

During fiscal 2011, the Company recognized an impairment loss of $54,000 relating to leasehold improvements write-offs following the termination of Toowong office premises.

 

During fiscal 2010, the Company recognized an impairment loss of $2.644 million relating to the intangible asset associated with the CellGate acquisition in 2008.  The impairment arose primarily due to the uncertainty of the consideration that may flow to the Company from the divestment of the CellGate assets, and the costs involved in preparing the assets for sale.

 

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**Item 5.B.****                                              ****Liquidity and Capital Resources**

 

*Sources of Liquidity*

 

Since inception, we have financed our operations primarily through public and private sales of equity securities totaling approximately $191.3 million in net proceeds. The Company ended the 2011 fiscal year with cash and cash equivalents and short-term investments totaling $10.448 million compared with $15.143 million at the end of fiscal 2010. Cash and cash equivalents and short-term investments at June 30, 2011 were represented by a mix of highly liquid interest bearing investments with maturities ranging from 30 to 180 days and deposits on call. These investments do not constitute any material financial market risk exposure. Investments are made in accordance with a Board approved Investment Policy. We believe that these investments do not constitute any material market risk exposure. The majority of cash and cash equivalents and short-term investments held at June 30, 2011 were in Australian dollars with the Company maintaining a small balance of U.S. dollars to service its U.S. operating subsidiary, Progen Pharmaceuticals, Inc.

 

*Cash Flows from Operating Activities*

 

Cash of $4.651 million was disbursed during the year to fund consolidated net operating activities, compared to $12.375 million in 2010.  Decreased R&D, corporate and other expenses, paired with an advance payment of US$2.0 million from licensee, Medigen, for the manufacture of PI-88 positively impacted the result.

 

*Cash Flows from Investing Activities*

 

Cash outflows from investing activities in 2011 included $7.135 million for the purchase of short-term investments (2010: $11.250 million, 2009: nil); and $63,000 on the purchase of plant and equipment (2010: $74,000, 2009: $109,000).

 

*Cash Flows from Financing Activities*

 

There were no cash flows from financing activities during the period ended June 30, 2011.

 

Cash outflows from financing activities in the fiscal year 2009 of $39.420 million related entirely to the off-market, equal-access share buy-back undertaken by the Company in April 2009. The shares were bought back at $1.10 which was $0.22 more than the volume weighted average price over the 60 days prior to the date of the buy-back. The buy-back was carried out to return funds to shareholders following the reduced cash requirement of the Company due to the cessation of the PATHWAY Phase 3 trial.

 

*Funding Requirements*

 

Currently there are no significant commitments for capital expenditure. However, the Company expects to incur substantial future expenditure in light of the clinical oncology and drug discovery programs.  Progen commenced and subsequently stopped a Phase 1a clinical trial to assess the safety of PG545 during the 2011 financial year.  The Company has funded the Phase 1b clinical trial assessing the safety of PG11047 in combination with approved cancer drugs and has finished

 

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treating patients in the PI-88 Phase 2 study in metastatic melanoma.  Clinical study reports for these trials are currently being compiled.

 

At June 30, 2011, the Company has outstanding commitments of $1.245 million (2010: $1.662 million; 2009: $2.446 million), of which $390,000 relates to the PG545 series and Phase 1 clinical trial of PG11047, the remainder pertaining to operating lease commitments and general expenditure commitments.  The Company has also committed to paying the premium of its insurance portfolio of $412,000 over the 2012 fiscal year.

 

Future cash requirements will depend on a number of factors, including the scope and results of preclinical studies and clinical trials, continued progress of research and development programs, the Company’s in-licensing and out-licensing activities, the ability to generate positive cash flow from contract manufacturing services, the ability to generate revenues from the commercialization of drug development efforts and the availability of other funding.

 

**Item 5.C.****                                              ****Research and Development, Patents and Licenses, etc.**

 

Refer to *Research and Development Expenses* under Item 5.A.

 

**Item 5.D.****                                              ****Trend Information**

 

At June 30, 2011, the Company had $10.4 million in cash and cash equivalents and short-term investments.  As the Company has divested the CellGate assets (including PG11047, PG11144 and Epigenetics assets) into Epi Pharmaceuticals Inc and has finished treating patients in the PG11047 Phase 1b and PI-88 Phase 2 Melanoma trials, a significant reduction in clinical trial costs will be realized.  Notwithstanding this, the Company expects that it will need to raise capital within the next 12-18 months years to support its ongoing activities.  We cannot make any assurances that our capital raising efforts will be successful.

 

**Item 5.E.****                                                ****Off-Balance Sheet Arrangements**

 

We have not entered into any off-balance sheet transactions, agreements or other contractual arrangements (including contingent obligations) with any unconsolidated entity that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

**Item 5.F.****                                                ****Tabular Disclosure of Aggregate Contractual Obligations**

 

As of June 30, 2011, we had known contractual obligations and commitments of $1.2 million. Of this amount $390,000 relates to sponsored research commitments and estimates to fund the trial of PG545 and to complete the close out of our clinical trials of PI-88 (melanoma) and PG11047. The remaining $855,000 relates to the following: payment of our insurance premium ($412,000), our current operating lease obligations including the lease of our premises ($34,000),

 

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and other commitments ($409,000) most of which relates to payment obligations under various consulting and advisory agreements.

 

The following table sets forth our aggregate contractual obligations for the three years following June 30, 2011 (in AUD thousands):

 
| ** **                                                          | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**                                    | ** ** | **Total**                                 | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** |
| Operating leases                                                    |       | $                                         | 34         |   | $ | 34 |   | — |   |
| Sponsored research and   clinical trial obligations and commitments |       | 390                                       |       | 390 |   | — |   |
| Insurance premium funding                                           |       | 412                                       |       | 412 |   | — |   |
| Other commitments                                                   |       | 409                                       |       | 409 |   | — |   |
| **Total**                                                           | ** ** | **$**                                     | **1,245**  | ** ** | **$** | **1,245** | ** ** | **—** | ** ** |

 

We do not have any contractual obligations that extend beyond the next three years.

 

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**ITEM 6.****                                                    ****DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

 

**Item 6.A.****                                              ****Directors and Senior Management**

 

The following table sets forth certain information as of October 31, 2011 about our directors and executive officers:

 
| **Name**                   | ** ** | **Position**                                               |
|----------------------------|------------|------------------------------------------------------------|
|                       |       |                                                       |
| Mr. Stuart James      |       | Non-Executive Chairman                                     |
| Dr. Julie Cherrington |       | Non-Executive Director (resigned 22 August 2011)      |
| Dr. John Chiplin      |       | Non-Executive Director (resigned 22 August 2011)      |
| Mr. Heng Hsin Tang    |       | Non-Executive Director                                     |
| Mr. Thomas Burt       |       | Non-Executive Director                                     |
| Dr. Paul Lin          |       | Non-Executive Director (resigned 16 June 2011)        |
| Dr. Woei Jia-Jiang    |       | Non-Executive Director (appointed 16 June 2011)       |
| Sue MacLeman               |       | Chief Executive Officer (terminated 26 August 2011)   |
| Paul Dixon                 |       | General Manager Finance and Company Secretary              |
| Dr. Laurence Marton   |       | Chief Scientific Officer (terminated 29 October 2010) |

 

**Mr Stuart James**has held a number of high profile executive positions during his career and has extensive experience in the oil, health and financial services sector.  Following a 25 year career with Shell both in Australia and internationally, Mr James past roles have included Managing Director of Australian Financial Services for Colonial and Managing Director of Colonial State Bank (formally the State Bank of NSW).  Mr James’ most recent executive role was a CEO of The Mayne Group, including Mayne Health and Mayne Pharma.  He is a Member of the Supervisory Board of Wolters Kluwer NV, Chairman of Pulse Health Ltd, Prime Financial Group Ltd and a Non-Executive Director of Greencross Ltd and Phosphagenics Ltd.

 

**Mr Heng Hsin Tang** has a bachelor’s degree in Civil Engineering with honors, and an MBA from the University of Queensland. Mr Tang has more than 10 years experience in project and financial management in engineering and property development, specializing in feasibility studies, cash-flow management, structural finance and acquisitions for major projects. Until recently, Mr Tang was Commercial Manager for a national property developer, and managed the finance for their Queensland projects valued at over $1 billion.

 

**Mr Thomas Burt** has over 40 years experience across a number of industries including telecommunications, postal and retail operations, logistics, property management/development and management consulting. He attended the University Of Hawaii Advanced Management Program in 1988 and the Mt Eliza Business School Directors’ Course in 1991. Mr Burt has held positions including Managing Director, New Zealand Post Properties Ltd, Managing Director, Total Logistics Company Ltd, National General Manager Facilities Management, Telstra, National General Manager Program Office and Service Improvement, Telstra and Manager International Business Development Asia-Pacific for Lockheed Martin Distribution Technologies. Over the past 4 years, Mr Burt has worked for various companies in a management consulting role as well as undertaking a one year special assignment for Lockheed Martin Overseas Corporation.

 

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**Dr Woei Jia-Jiang** is a bio-entrepreneur with more than 20 years’ experience in the pharmaceutical and biotechnology industries working in research, corporate advisory and various senior management roles. Dr Jiang was the Managing Director of Wholesome Biopharm Pty Ltd, a Melbourne-based biotechnology company focused on the development of innovative asthma treatments.  Dr Jiang was also a co-founder of Metabolic Pharmaceuticals Limited, now Calzada Limited when his co-invention of AOD9604 was out-licensed to Circadian Technologies Limited and he has also consulted to biotechnology companies locally and internationally, including former Meditech Research Limited (now Alchemia Oncology Pty Ltd, a subsidiary of Alchemia).

 

**Mr. Paul Dixon** Paul Dixon joined Progen in late 2008 on a contract basis and in April 2009, commenced as General Manager Finance and Company Secretary on a full time basis.  Paul has since reverted to a contract arrangement with the Company.  Paul holds a Bachelor of Business from Queensland University of Technology and is a member of the Institute of Chartered Accountants in Australia.  Paul is also a member of Chartered Secretaries Australia.

 

Prior to joining Progen, Paul was Group Financial Controller for ASX listed manufacturing company, Style Limited, where he was responsible for ASX reporting and the management of the international finance function.  Prior to this, Paul held accountancy positions with Rio Tinto Coal Australia, Mack Trucks Australia and Betta Stores Limited.

 

**Directors and executives who were in office during the year, but not at October 31, 2011 were:**

 

**Dr. Paul Lin (Tzong-Pai Lin)** received his B.S. (Pharmacy) and Ph.D. (Toxicology) degrees from the School of Pharmacy at the National Taiwan University in 1974, and North Carolina State University in 1982, respectively.  In his 25 year career in the pharmaceutical and biotechnology industries, he has worked for Burroughs Wellcome Research Foundation (USA), E.I. Du Pont de Nemours Company (USA) and Kendall McGaw Pharmaceutical Company (USA) in a variety of research and quality control positions. Following this he became the Vice President of Standard Pharm & Chem Company (Taiwan) in 1993.  Dr. Lin was also Director of French RPR Pharmaceuticals Company (China), German Madaus AG (China) and Guower Consulting Company (Beijing).  Currently he is Senior Scientific Advisor to Vanway Pharmaceutical Co. Inc. (HK), President of JP International Development, Ltd (Taiwan) and Founder of NuBio Pharmaceutical Technology Co. Ltd (Beijing).  Dr Lin has extensive experience in the pharmaceutical and biotechnology industries, particularly in development, manufacturing, quality control and marketing of pharmaceutical products in the Greater China Area.

 

**Dr. Laurence Marton MD** joined Progen in February 2008 as Chief Scientific Officer. Prior to joining Progen, Dr. Marton was the Chief Scientific Officer of CellGate and before that Chief Scientific and Medical Officer of SLIL Biomedical Corporation, both companies focused on the discovery and development of novel polyamine analogs and other compounds for the treatment of cancer and other serious diseases. Dr. Marton was previously Dean of the University of Wisconsin-Madison Medical School and before that Chaired the Department of Laboratory Medicine at the University of California, San Francisco. He is a leading expert with extensive experience in the fields of cell growth and drug development. His work is focused on the use of polyamines in treating human diseases related to aberrant cell growth, including cancer and infectious diseases.  His research has resulted in more than 180 original publications, 60 scientific reviews and chapters, four books, and numerous patents, and his work has been acknowledged internationally. Dr. Marton

 

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serves as a consultant for industry and for governmental and academic institutions.  He serves on the Board of the Foundation for Cardiovascular and Transplant Research and was appointed by the Governor of Wisconsin to the Wisconsin Technology Council.  Dr. Marton received his BA from Yeshiva University and his MD from the Albert Einstein College of Medicine.

 

**Dr Julie Cherrington** joined Pathway Therapeutics as President and CEO in October 2009. Previously, Dr Cherrington was president at Phenomix Corporation with strategic and operational responsibilities for drug research and development at the discovery, pre-clinical and clinical stages and played a leadership role in the financing, business development and corporate development functions in the company. Prior to joining Phenomix in 2003, she was vice president of preclinical and clinical research at SUGEN, a Pfizer company. SUGEN focused on the discovery and development of small molecule kinase inhibitors for cancer and was a leader in molecular profiling patient samples in concert with innovative Phase 1 and Phase 2 clinical trial designs with novel targeted agents. Dr Cherrington was instrumental in the development of SUTENT and its approval for renal cell cancer and gastrointestinal stromal tumors. Prior to SUGEN, Dr Cherrington held a range of positions of increasing responsibility at Gilead Sciences. Dr Cherrington is currently a member of the Board of Directors of Xenome Ltd, a pain focused biotechnology company.

 

**Dr John Chiplin** has broad-based experience in the life science and technology industries, both from an operational and investment perspective.  His most recent accomplishment was the corporate reengineering of Arana Therapeutics, a world leading antibody developer, which resulted in the acquisition of the company by Cephalon for a significant premium to market (July 2009).  Immediately prior to running Arana, Dr. Chiplin was head of the $300M ITI Life Sciences investment fund in the UK. His own investment vehicle, Newstar Ventures Ltd, has funded more than a dozen early stage companies in the past ten years.  Dr. Chiplin’s Pharmacy and Doctoral degrees are from the University of Nottingham, UK. In addition to Progen, John currently serves on the boards of Benitec Ltd, Sciencemedia Inc, Velocity Partners LLC, Calzada Ltd and Healthlinx Ltd.

 

**Sue MacLeman**Sue graduated with a Bachelor of Pharmacy from the University of Queensland in 1984. In addition to pharmacy qualifications, Sue MacLeman has completed a Masters of Marketing degree at Melbourne University (Melbourne Business School), a Masters of Commercial Law degree (Deakin University) and a Fellowship with the Australian College of Pharmacy Practice. She is also a Fellow of the Australian Institute of Company Directors. Sue is also a member of the Pharmaceutical Industry Council (PIC) and Pharmaceutical Industry Working Group (PIWG) and the Chair of the Pharmaceutical Industry Development Taskforce (PIDT).

 

In 1991 Sue joined the pharmaceutical industry with Schering Plough in the biotechnology business unit. She then went on to work with Amgen Inc and Bristol Myers Squibb Pharmaceuticals in the areas of oncology and infectious diseases medical, marketing, sales management and business development. In 2002 Sue took up the position of global Vice President for Agenix Ltd where she was responsible for the product development of the molecular clot imaging project. From 2004 to 2006 she was the CEO of publicly listed biotechnology investment and management company EQiTX Ltd. Most recently Sue was CEO of RNAi therapeutics company Benitec Ltd.

 

Our executive officers are appointed by, and serve at the pleasure of, our board of directors. There are no family relationships among our directors or executive officers. No director has a contractual right to serve as a member of our board of directors.

 

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**Item 6.B.****                                              ****Compensation**

 

The following table sets forth certain information concerning the compensation that we paid to our directors and our five most highly compensated executive officers, both individually and as a group, during the fiscal year ended June 30, 2011:

 

Table 1: Non-executive directors’ remuneration for the year ended June 30, 2011.

 
| ** **            | ** ** | **Short term**            | ** ** | **Post   employment** | ** ** | ** **                        | ** ** | **Share-   based   payment** | ** ** | ** **                    | ** ** |
|-----------------------|------------|--------------------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **Directors**         | ** ** | **Salary   and fees   $** | ** ** | **Cash   bonus   $**  | ** ** | **Non   monetary   benefits   $** | ** ** | **Super-   annuation   $**   | ** ** | **Termination   payment   $** | ** ** | **Options   $** | ** ** | **Total   $** | ** ** |
| Stuart James          | ** ** | **2011**                       | ** ** | **138,480**           | ** ** | **—**                        | ** ** | **—**                   | ** ** | **12,463**                    | ** ** | **—** | ** ** | **—** | ** ** | **150,943** | ** ** |
|                  |       | 2010                           |       | 123,161               |       | —                            |       | —                       |       | 11,084                        |       | — |   | — |   | 134,245 |   |
| Thomas JamesBurt      | ** ** | **2011**                       | ** ** | **75,470**            | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **75,470** | ** ** |
|                  |       | 2010                           |       | 68,718                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | 68,718 |   |
| John Chiplin(1)       | ** ** | **2011**                       | ** ** | **61,321**            |       | —                            |       | —                       |       | —                        |       | — |   | — | ** ** | **61,321** | ** ** |
|                  |       | 2010                           |       | 30,400                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | 30,400 |   |
| JulieCherrington(1)   | ** ** | **2011**                       | ** ** | **75,472**            |       | —                            |       | —                       |       | —                        |       | — |   | — | ** ** | **75,472** | ** ** |
|                  |       | 2010                           |       | 71,667                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | 71,667 |   |
| GordonSchooley        | ** ** | **2011**                       |       | —                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | — |   |
|                  |       | 2010                           |       | 45,000                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | 45,000 |   |
| Joe Lin               | ** ** | **2011**                       | ** ** | **—**            | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                  |       | 2010                           |       | 20,568                |       | —                            |       | —                       |       | 1,852                         |       | — |   | — |   | 22,420 |   |
| Heng Tang             | ** ** | **2011**                       | ** ** | **71,837**            | ** ** | **—**                        | ** ** | **—**                   | ** ** | **3,635**                     | ** ** | **—** | ** ** | **—** | ** ** | **75,472** | ** ** |
|                  |       | 2010                           |       | 63,035                |       | —                            |       | —                       |       | 5,673                         |       | — |   | — |   | 68,708 |   |
| Paul Lin(2)           | ** ** | **2011**                       | ** ** | **59,106**            | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **59,106** | ** ** |
|                  |       | 2010                           |       | 37,610                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | 37,610 |   |
| Woei-Jia Jiang(3)     | ** ** | **2011**                       | ** ** | **—**            | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                  |       | 2010                           |       | —                |       | —                            |       | —                       |       | —                        |       | — |   | — |   | — |   |
| Total - Non-executive | ** ** | **2011**                       | ** ** | **481,686**           | ** ** | **—**                        | ** ** | **—**                   | ** ** | **16,098**                    | ** ** | **—** | ** ** | **—** | ** ** | **497,784** | ** ** |
| Directors             |       | 2010                           |       | 460,159               |       | —                            |       | —                       |       | 18,609                        |       | — |   | — |   | 478,768 |   |

 

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(1) Resigned 22 August 2011

(2) Resigned 16 June 2011

(3) Commenced 16 June 2011

 

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Table 2: Remuneration for the other key management personnel for the year ended 30 June 2011.

 
| ** **                                     | ** ** | **Short term**            | ** ** | **Post-employment**  | ** ** | ** **                        | ** ** | **Share-   based   payment** | ** ** | ** **                    | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|-----------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **Other key   management personnel** | ** ** | **Salary   and fees   $** | ** ** | **Cash   bonus   $** | ** ** | **Non   monetary   benefits   $** | ** ** | **Super-   annuation   $**   | ** ** | **Termination   payment   $** | ** ** | **Options   $** | ** ** | **Total   $** | ** ** |
| T Justus Homburg                               | ** ** | **2011**                       | ** ** | **—**           | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |       | 2010                           |       | 150,803              |       | —                            |       | 13,417                       |       | 32,192                        |       | 245,000 |   | — |   | 441,412 |   |
| Laurence Marton(1)                             | ** ** | **2011**                       | ** ** | **218,621**          | ** ** | ** **                        | ** ** | **18,645**                   | **(5)**    | **—**                    | ** ** | **39,449** | ** ** | **—** | ** ** | **276,715** | ** ** |
|                                           |       | 2010                           |       | 369,493              |       | —                            |       | 36,613                       |       | —                        |       | — |   | — |   | 406,106 |   |
| Michael Fitzgerald                             | ** ** | **2011**                       | ** ** | **151,467**          | ** ** | **—**                        | ** ** | **28,161**                   | **(5)**    | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **179,628** | ** ** |
|                                           |       | 2010                           |       | 149,513              |       | —                            |       | 22,588                       |       | —                        |       | — |   | — |   | 172,101 |   |
| Paul Dixon (2)                                 | ** ** | **2011**                       | ** ** | **149,350**          | ** ** | **4,500**                         | ** ** | **—**                   | ** ** | **13,847**                    | ** ** | **—** | ** ** | **3,511** | ** ** | **171,208** | ** ** |
| ** **                                     |       | 2010                           |       | 120,462              |       | 43,500                            |       | —                       |       | 14,757                        |       | — |   | — |   | 178,719 |   |
| John Chiplin(3)                                | ** ** | **2011**                       | ** ** | **—**           | ** ** | **—**                        | ** ** | **—**                   | ** ** | **—**                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |       | 2010                           |       | 240,000              |       | —                            |       | 19,442                       |       | —                        |       | — |   | — |   | 259,442 |   |
| Darryn Bampton                                 | ** ** | **2011**                       | ** ** | **149,350**          | ** ** | **1,650**                         | ** ** | **—**                   | ** ** | **13,590**                    | ** ** | **—** | ** ** | **1,873** | ** ** | **166,463** | ** ** |
|                                           |       | 2010                           |       | 145,000              |       | —                            |       |                         |       | 13,050                        |       | — |   | — |   | 158,050 |   |
| Susan MacLeman(4)                              | ** ** | **2011**                       | ** ** | **303,738**          | ** ** | **87,210**                        | ** ** | **—**                   | ** ** | **35,185**                    | ** ** | **—** | ** ** | **68,170** | ** ** | **494,303** | ** ** |
|                                           |       | 2010                           |       | 49,506               |       | —                            |       | —                       |       | 4,456                         |       | — |   | 19,133 |   | 73,095 |   |
| Fleur Lankesheer                               | ** ** | **2011**                       | ** ** | **154,552**          | ** ** | **—**                        | ** ** | **—**                   | ** ** | **13,910**                    | ** ** | **—** | ** ** | **1,404** | ** ** | **169,866** | ** ** |
|                                           |       | 2010                           |       | —               |       | —                            |       | —                       |       | —                        |       | — |   | — |   | — |   |
| Total - Other key                              | ** ** | **2011**                       | ** ** | **1,127,078**        | ** ** | **93,360**                        | ** ** | **46,806**                   | ** ** | **76,532**                    | ** ** | **39,449** | ** ** | **74,958** | ** ** | **1,458,183** | ** ** |
| management personnel                           |       | 2010                           |       | 1,224,777            |       | 43,500                            |       | 92,060                       |       | 64,455                        |       | 245,000 |   | 19,133 |   | 1,688,925 |   |

 

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(1) CSO position terminated 31 October 2010

(2) Changed from an employed executive to a consultant effective 15 July 2011

(3) Appointed Interim CEO from 1 December 2009 to 31 May 2010

(4) CEO position to terminate 26 August 2011

(5) U.S. based health plans

 

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**Item 6.C.****                                              ****Board Practices**

 

We currently have four directors. Our constitution provides that at least one-third of our directors (except the managing director) must retire at each annual general meeting of shareholders. As a result, only a portion of our board of directors will be elected each year.

 

Further, our constitution provides that directors appointed either to fill a casual vacancy or as an addition to the existing directors hold office until the next annual general meeting and are not to be taken into account in determining the directors who are to retire by rotation.

 

No termination benefits are provided to directors other than statutory superannuation.

 

***Audit Committee.***  At 31 October 2011, our audit consisted of Mr. Heng Tang (Chair), Mr. Stuart James and Dr. Woei-Jia Jiang, being non-management members of our board of directors. The authority and responsibilities of our audit committee are set forth in its charter and includes:

 

·                                          The appointment, compensation, retention, and oversight of the work of the independent auditors who report directly to the audit committee;

 

·                                          The approval of all audit and non-audit engagements and fees with the independent auditors;

 

·                                          The authority to engage, without board approval, independent legal counsel and other advisors, at the Company’s expense, as deemed necessary to carry out its duties;

 

·                                          Reviewing and monitoring the framework of our internal controls and the objectivity of our financial reporting;

 

·                                          Oversight of the adequacy and effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;

 

·                                          Reviewing, prior to filing, our unaudited interim or audited annual financial statements and discussing the statements and reports with our management and the independent auditors, including any significant adjustments, management judgments and estimates, new accounting policies and disagreement with management;

 

·                                          Reviewing and discussing with management the Company’s interim and year-end earnings press releases prior to the release being issued; and

 

·                                          Establishing and reviewing procedures for complaints received by us regarding accounting matters.

 

***Remuneration Committee.***  At 30 June 2011, our remuneration committee consisted of Mr. Thomas Burt (Chair), Mr. Stuart James and Dr. Julie Cherrington, being non-management members of our board of directors. The function of our remuneration committee includes:

 

·                                          Reviewing and, as it deems appropriate, recommending to our board of directors, policies, practices and procedures relating to the compensation arrangements for

 

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management and other personnel, including the granting of options under our option plans;

 

·                                          Establishing and reviewing general compensation policies with the objective to attract and retain superior talent, reward individual performance and achieve our financial goals; and

 

·                                          Advising and consulting with our executive officers regarding managerial personnel and development.

 

***Service Agreements.*** Generally, the Company’s policy is to enter into service contracts with executive directors and senior executives on appointment that are unlimited in term but capable of termination on specified notice periods and that the Company has the right to terminate the contract immediately by making payment equal to the specified notice period as pay in lieu of notice other than for misconduct when termination is immediate. The executive directors and senior executives are also entitled to receive on termination of employment their statutory entitlements of accrued annual leave and long service leave.  Paul Dixon, General Manager of Finance and Company Secretary is currently retained on a consultancy basis.

 

The service contract outlines the components of remuneration paid to the executive directors and key management personnel but does not prescribe how remuneration levels are modified year to year.

 

The current termination notice periods included in the service agreements with key management personnel are detailed below:

 

·                                         **P Dixon, General Manager of Finance and Company Secretary**. Term of agreement — to 31 August 2012, capable of termination on 28 days’ notice.

 

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**Item 6.D.****                                              ****Employees**

 

The number of persons, including executive directors, employed by the Company as of June 30, 2011, 2010 and 2009, broken down by activity is shown below:

 
| ** **                      | ** ** | **As of June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2009**                          | ** ** | **2010** | ** ** | **2011(1)** | ** ** |
| Management and   administration |       | 7                                 |       | 6 |   | 6 |   |
| Research and development        |       | 9                                 |       | 9 |   | 6 |   |
| Manufacturing                   |       | 9                                 |       | 11 |   | 12 |   |
| **Total**                       | ** ** | **25**                            | ** ** | **26** | ** ** | **24** | ** ** |

 

----

(1) This is current as of 31 October 2011

 

We had one employee based in the U.S. who works for the Research and development team as at June 30, 2011, whose position terminated on October 31, 2011 following the closure of the U.S. office. All remaining employees are based at our research and manufacturing facility at Darra, Queensland.

 

None of our employees are represented by a labor union, nor have we experienced work stoppages. We believe that our relations with our employees are good.

 

**Item 6.E.****                                                ****Share Ownership**

 

The following table sets forth, for each director or senior executive of the Company, their interest in the ordinary shares of the Company (including the interests of their immediate families and persons connected with them) and the percentage of the Company’s outstanding share capital represented by such ownership interests as of October 31, 2011.

 
| **Name**                                                             | ** ** | **Number of Issued   Ordinary Shares** | ** ** | **Percentage of   Issued Ordinary   Shares (1)** | ** ** | **Number of   Ordinary Shares   Issuable   Pursuant to   Options** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Heng Hsin Tang                                                       |       | 1,500                                                 |       | 0.0                                                             | %          | —                                                                            |       |
| Thomas Burt                                                          |       | —                                                |       | —                                                          |       | —                                                                            |       |
| Stuart James                                                         |       | —                                                |       | —                                                          |       | —                                                                            |       |
| Woei Jia-Jiang                                                       |       | 41,001                                                |       | 0.17                                                            | %          |                                                                              |       |
| Paul Dixon                                                           |       | —                                                |       | —                                                          |       | —                                                                            |       |
| **All directors and   executive officers****As a group (5 persons)** | ** ** | **42,501**                                            | ** ** | **0.17**                                                        | **%**      | **0**                                                                             | ** ** |

 

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**Option Plans**

 

The following director and employee option plans were in existence during the fiscal year ended June 30, 2011. The plans are overseen by the Remuneration Committee which determines the terms under which eligible individuals may participate.  1,000,000 options were granted to the Chief Executive Officer during the 2010 fiscal year, the first tranche of options expired due to share price conditions not met. 331,000 options were granted to eligible Progen employees and executives during the 2011 fiscal year.

 

In accordance with Australian law, we will not grant any option if, after such issuance, the number of options issued to non-executive employees during the previous five years whether or not exercised and which have not yet terminated or expired would exceed 5% of the then total number of outstanding ordinary shares. In accordance with Australian Securities Exchange Listing Rules all grants of options to directors require the prior approval from our shareholders.

 

In November 2010, our shareholders approved the directors and employee option incentive plan. All our directors and all employees, whether full time or part time, are eligible to participate in this plan. The minimum exercise price of options granted under this plan shall not be less than the average closing share price as recorded on the Australian Securities Exchange in the five business days preceding the grant of those options. The expiry date of options issued under this plan cannot exceed 10 years from the date of grant.  As of October 31, 2011, there were outstanding options to purchase an aggregate of 523,000 ordinary shares under this plan.

 

**ITEM 7.****                                                    ****MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

 

**Item 7.A.****                                              ****Major Shareholders**

 

The table below shows all holders who, to the Company’s knowledge, own, directly or indirectly, 5% or more of the Company’s ordinary shares, as of December 2, 2009, December 17, 2010 and October 31, 2011, each being the most recent practicable date before reporting for the last three fiscal years.

 
| ** **                                                  | ** ** | **2009**               | ** ** | **2010**                        | ** ** | **2011**               | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|------------------------|------------|
| **Name**                                                    | ** ** | **# of   Shares** | ** ** | **% of   issued   shares** | ** ** | **# of   Shares** | ** ** | **% of   issued   shares** | ** ** | **# of   Shares** | ** ** | **% of   issued   shares** | ** ** |
| Su Hua Chuang, Fu Ying Wang, Fu Mei Wang, Pai-Mao   Lin (1) |       | 2,122,781              |       | 8.59                            |       | 2,122,781              |       | 8.59 |   | 2,122,781 |   | 8.59 |   |
| Medigen Biotechnology Corp (2)                              |       | 2,096,482              |       | 8.48                            |       | 2,096,482              |       | 8.48 |   | 2,096,482 |   | 8.48 |   |
| CCH Investment Corp & Tzu Liang Huang (2)          |       | 1,243,251              |       | 5.03                            |       | 1,243,251              |       | 5.03 |   | 1,243,251 |   | 5.03 |   |

 

----

(1)   Substantial holder notice lodged 9 June 2009

(2)   Substantial holder notice lodged 14 July 2009

 

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As of October 31, 2011, a total of 2,302,989 ordinary shares (or 9.32% of the total number of our ordinary shares then outstanding) were held by five registered holders with registered addresses in the United States. As the majority of these ordinary shares were held by brokers or other nominees, the number of record or registered holders in the U.S. is not representative of the number of beneficial holders in the U.S. or of the residence of the beneficial holders. There are no different voting rights for major shareholders.

 

On August 5, 2009, the Company announced that it had commenced legal proceedings in the Supreme Court of Queensland against a group of shareholders alleged to have contravened section 606 of the Corporations Act 2001. The alleged contraventions relate to the respondents (together having an interest in the shares of Progen greater than 20%) acting in concert for the purpose of controlling or influencing the composition of the board of Progen.  On November 18, 2009, a settlement was reached with a number of key respondents representing 19.32% of the voting shares.  The parties to the settlement agreed that in respect of board composition resolutions at general meetings, the votes would be assigned to Stuart James as Chairman.  This arrangement was in place from the date of settlement until May 17, 2011.

 

Except for the circumstances mentioned above, to the best of our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any other natural or legal persons severally or jointly, and we disclaim control by the companies, entities or individuals listed in the table above. We do not know of any arrangements in place that could result in a change in control of our Company.

 

**Item 7.B.****                                              ****Related Party Transactions**

 

Except as disclosed herein and elsewhere in this Annual Report, there were no material transactions to which we were a party and in which any of our directors, executive officers or major shareholders (or any of their affiliates, associates or enterprises) were involved since July 1, 2011.

 

None of our directors, executive officers or major shareholders (or any of their affiliates, associates or enterprises) was indebted to us at any time since July 1, 2011.

 

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**ITEM 8.****                                                    ****FINANCIAL INFORMATION**

 

**Item 8.A.****                                              ****Consolidated Statements and Other Financial Information**

 

Our audited financial statements and related notes for our fiscal years ended June 30, 2009, 2010 and 2011 are contained on pages F-1 through F-47 of this Annual Report.

 

**Export Sales**

 

The following table indicates the percent of revenues derived from export:

 
| ** **                                | ** ** | **For the Years Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2011** | ** ** |
| Contract manufacture   export revenues    |       | $                                                         | 328,000    |   | $ | 156,931 |   | $ | 1,320,343 |   |
| % of total revenues   derived from export |       | 19.0                                                      | %          | 7.9 | % | 36.5 | % |
|                                           |            |                                                           |            |  |  |  |  |  |  |  |

 

The percentage of contract manufacturing revenues derived from customers outside Australia fluctuates as these contracts are typically ad-hoc in nature.

 

In fiscal 2011, we derived 26.0% of our total revenues from one Australian-based customer, Pfizer Animal Health. In fiscal 2010 and 2009, we derived 44.0% and 73.0%, respectively, of our total revenues from this same customer.

 

**Dividend Policy**

 

We have never declared cash dividends on our ordinary shares and have no present intention of declaring such cash dividends in the foreseeable future. Our board of directors will not be able to recommend the payment of any dividends until we make a profit. Future profitability will depend on future earnings and our working capital requirements. Our board of directors currently intends to reinvest income in the continued development and operations of our business. We expect to continue to generate operating losses on our research and development projects until products arising from our research and development activities are successfully commercialized. Factors beyond our control, such as market competition, exchange rate fluctuations and changing government policy may also affect profitability and our capacity to pay dividends.

 

**Item 8.B.****                                              ****Significant Changes**

 

**Divestment of the “CellGate Assets”**

 

During the first half of 2010, Progen undertook a strategic review of its assets and the recommendation was made to the board that the assets acquired in the February 2008 CellGate acquisition (CellGate Assets) should be divested to place a strategic focus on Progen’s core competencies — dual mechanism oncology products.

 

Following the strategic review, the Company appointed a U.S. based investment bank to assist in creating a saleable package for the assets and seeking out interested parties.  During 2011, Progen

 

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completed treating patients in the Phase 1b clinical trial of PG11047 and is currently analyzing data.  It is expected that the completion of this clinical trial will maximise the value of the assets.

 

Following the board’s decision to divest the CellGate Assets, Progen closed down the California and North Carolina offices of its subsidiary, Progen Pharmaceuticals Inc and has significantly scaled back its presence in the U.S.  This has resulted in a substantial administrative cost saving for the Company.

 

The Company has divested the intellectual property held by Progen Pharmaceuticals Inc to a new incorporated entity, Epi Pharmaceuticals Inc (“EPI”).  EPI is incorporated in the U.S. and holds all of the epigenetic and cell proliferation assets acquired through the CellGate acquisition. The goals of the restructuring was to place the CellGate Assets and related assets into a separately funded or fundable vehicle in order to eliminate or minimize any existing and future obligations of Progen related to CellGate stockholders or the CellGate licensors, limit further investment by the Company into these programs and preserve potential returns for Progen shareholders.

 

Under this structure, a combination of equity and debt instruments, royalties and milestone payments were issued to various parties that were entitled to consideration pertaining to the development of the CellGate Assets.  In return, Progen has extinguished its obligations under the contracts with these parties, reducing the economics owed to these parties to make the assets investable, whilst itself retaining a significant interest in this new entity.

 

In exchange for giving up their right to the potential milestone payments, the former CellGate holders (including SLIL Biomedical Corporation which was previously acquired by CellGate) have received equity in EPI, along with Progen as follows:

 
| **Holder**       | ** ** | **Shares**                        | ** ** | **% Ownership of EPI** |
|------------------|------------|-----------------------------------|------------|---------------------------------------|
| CellGate holders |       | 5,737,500 Series A Preferred |       | 45                                    |
| SLIL Biomedical  |       | 1,530,000 Series A Preferred |       | 12                                    |
| Progen           |       | 5,482,500 Series A Preferred |       | 43                                    |

 

This new entity has also entered into new amended and restated license agreements with Johns Hopkins University/Wayne State University and Wisconsin Alumni Research Foundation (WARF) to secure the epigenetic and cell proliferation assets, including PG11047, PG11144 and other epigenetics program compounds.

 

**Corporate restructure**

 

In June 2011, the Company undertook a corporate restructure, including the termination of the Company’s lease at its corporate office in Toowong, Brisbane and a restructure of the Company’s board and senior management.

 

Dr John Chiplin and Dr Julie Cherrington stepped down from the board in August 2011.

 

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Further, CEO Sue MacLeman finished with the Company in August 2011 and Paul Dixon has moved to a consultancy agreement, however will continue in his existing capacity as General Manager of Finance and Company Secretary.  Dr Woei-Jia Jiang was appointed as a non-executive director during June 2011.  Mr Tom Burt has advised the Company that he will be stepping down from the board on November 30, 2011.

 

The Toowong corporate office was vacated August 2011with all staff moving to the Company’s manufacturing facility at Darra.  The consolidation of facilities represents a significant cost saving to the Company moving forward.

 

**PG545 Phase 1 clinical trial**

 

In November 2010, Progen commenced a an open-label, single centre Phase I study of the safety and tolerability of PG545 in patients with advanced tumors.  In September 2011, Progen stopped the trial as a result of unexpected local injection site reactions seen in patients.  These reactions appeared to be a very specific side effect in humans and were not seen to this extent in the extensive preclinical animal testing of the drug.

 

Encouragingly, no significant systemic toxicities were observed at the doses administered; with the drug being well tolerated with the exception of the injection site reactions. The Company is currently reviewing a potential change in the route of administration from subcutaneous to intravenous (IV) to address this issue.

 

Except as disclosed elsewhere in this Annual Report, no significant change has occurred since the date of the annual financial statements included in this Annual Report.

 

**ITEM 9.****                                                    ****THE OFFER AND LISTING**

 

**Item 9.C.****                                              ****Markets**

 

The principal non-United States trading market for our ordinary shares is the Australian Securities Exchange, or the ASX, under the code “PGL”. Our ordinary shares are also quoted on the OTCQB Market under the symbol “PGLA”.

 

**Price Range of Ordinary Shares**

 

***Australian Securities Exchange (ASX)***

 

The following table sets forth the high and low closing sales prices in Australian dollars and the trading volume of our ordinary shares as reported on the ASX during the periods indicated:

 

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| ** **             | ** ** | **High** | ** ** | **Low** | ** ** | **Trading   Volume** | ** ** |
|------------------------|------------|----------|------------|---------|------------|----------------------|------------|
| Yearly Data:           |       |     |       |    |       |                 |       |
| Fiscal year 2007  |       | 9.49     |       | 2.52    |       | 53,491,809           |       |
| Fiscal year 2008  |       | 4.54     |       | 1.20    |       | 47,820,800           |       |
| Fiscal year 2009  |       | 1.34     |       | 0.57    |       | 37,768,800           |       |
| Fiscal year 2010  |       | 0.85     |       | 0.59    |       | 2,887,100            |       |
| Fiscal year 2011  |       | 0.47     |       | 0.22    |       | 2,788,900            |       |
|                   |       |     |       |    |       |                 |       |
| Quarterly Data:        |       |     |       |    |       |                 |       |
| Third Quarter 2009     |       | 0.85     |       | 0.58    |       | 899,200              |       |
| Fourth Quarter 2009    |       | 0.66     |       | 0.50    |       | 630,600              |       |
| First Quarter 2010     |       | 0.65     |       | 0.63    |       | 753,200              |       |
| Second Quarter 2010    |       | 0.60     |       | 0.59    |       | 604,100              |       |
| Third Quarter 2010     |       | 0.47     |       | 0.30    |       | 525,300              |       |
| Fourth Quarter 2010    |       | 0.39     |       | 0.28    |       | 400,300              |       |
| First Quarter 2011     |       | 0.40     |       | 0.30    |       | 886,800              |       |
| Second Quarter 2011    |       | 0.41     |       | 0.22    |       | 976,500              |       |
|                   |       |     |       |    |       |                 |       |
| Monthly Data:          |       |     |       |    |       |                 |       |
| June 2011         |       | 0.32     |       | 0.22    |       | 561,900              |       |
| July 2011         |       | 0.29     |       | 0.23    |       | 34,700               |       |
| August 2011       |       | 0.29     |       | 0.21    |       | 121,100              |       |
| September 2011    |       | 0.22     |       | 0.14    |       | 152,900              |       |
| October 2011      |       | 0.20     |       | 0.15    |       | 47,100               |       |

 

***OTCQB Market (formerly listed on Nasdaq Capital Market)***

 

The following table sets forth the high and low closing sales prices in United States dollars and the trading volume of our ordinary shares as reported on the NASDAQ Capital Market (to July 2, 2010) and the OTCQB Market (from July 5, 2010 onwards) during the periods indicated:

 
| ** **          | ** ** | **High** | ** ** | **Low** | ** ** | **Trading   Volume** | ** ** |
|---------------------|------------|----------|------------|---------|------------|----------------------|------------|
| Yearly Data:        |       |     |       |    |       |                 |       |
| Fiscal year 2007    |       | 7.78     |       | 1.81    |       | 23,776,100           |       |
| Fiscal year 2008    |       | 4.01     |       | 1.12    |       | 5,652,400            |       |
| Fiscal year 2009    |       | 1.29     |       | 0.15    |       | 4,372,700            |       |
| Fiscal year 2010    |       | 0.75     |       | 0.18    |       | 884,400              |       |
| Fiscal year 2011    |       | 0.35     |       | 0.20    |       | 325,500              |       |
|                |       |     |       |    |       |                 |       |
| Quarterly Data:     |       |     |       |    |       |                 |       |
| First Quarter 2009  |       | 0.62     |       | 0.31    |       | 180,600              |       |
| Second Quarter 2009 |       | 0.80     |       | 0.30    |       | 211,800              |       |
| Third Quarter 2009  |       | 0.75     |       | 0.32    |       | 201,800              |       |
| Fourth Quarter 2009 |       | 0.61     |       | 0.37    |       | 240,000              |       |
| First Quarter 2010  |       | 0.59     |       | 0.40    |       | 177,200              |       |
| Second Quarter 2010 |       | 0.59     |       | 0.18    |       | 342,900              |       |
| Third Quarter 2010  |       | 0.34     |       | 0.21    |       | 93,800               |       |
| Fourth Quarter 2010 |       | 0.35     |       | 0.23    |       | 122,000              |       |
| First Quarter 2011  |       | 0.35     |       | 0.25    |       | 73,900               |       |
| Second Quarter 2011 |       | 0.35     |       | 0.20    |       | 35,800               |       |
| Monthly Data:       |       |     |       |    |       |                 |       |
| June 2011      |       | 0.31     |       | 0.20    |       | 13,500               |       |
| July 2011      |       | 0.26     |       | 0.22    |       | 21,000               |       |
| August 2011    |       | 0.25     |       | 0.24    |       | 9,700                |       |
| September 2011 |       | 0.24     |       | 0.20    |       | 9,000                |       |
| October 2011   |       | 0.20     |       | 0.16    |       | 6,100                |       |

 

On October 31, 2011, the closing sales price of the ordinary shares as reported on the ASX and the OTCQB Market was AU$0.16 and U.S.$0.16, respectively.

 

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**ITEM 10.****                                            ****ADDITIONAL INFORMATION**

 

**Item 10.B.****                                       ****Memorandum and Articles of Association**

 

A description of our ordinary shares and warrants, including brief summaries of the rights of our shareholders and warrant holders as conferred by our constitution and Australian law is incorporated by reference to the description of our securities contained in our Registration Statement on Form F-3 filed with the SEC on March 22, 2007 and any amendment or report filed for the purposes of updating that description. Our constitution may be inspected and copied at the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.

 

**Item 10.C.****                                       ****Material Contracts**

 

*Termination of Collaboration with Medigen Biotechnology Corporation*

 

In May 2000, we entered into a strategic alliance agreement, the “Alliance Agreement”, with Medigen Biotechnology Corporation, or MBC, a biotechnology company based in Taiwan. The collaboration related to early stage clinical trials of PI-88. The strategic alliance required Medigen to undertake and complete certain clinical trials of PI-88. On completion of these PI-88 clinical trials, Medigen was entitled to a 15% royalty on PI-88 proceeds of commercialization received by Progen. Both parties agreed to end the strategic alliance to allow Progen to develop and commercialize PI-88 as rapidly as possible and with maximum flexibility.

 

In January 2007, the Company announced that it had agreed terms with MBC to conclude the Alliance Agreement. In consideration for MBC agreeing to end the Alliance Agreement, and foregoing their entitlement to the 15% royalty, and to compensate MBC for their contribution to the development of PI-88, Progen agreed to:

 

·                  Return 15,176,525 MBC ordinary shares that comprised part of the consideration under the Alliance Agreement, to MBC;

 

·                  Issue 500,000 Progen shares to MBC on execution of the termination agreement;

 

·                  Reimburse to MBC $300,000 being the funds they contributed to the costs of the PI-88 Phase 2 Melanoma clinical trial on execution of the agreement;

 

·                  Issue a further 732,600 Progen shares and pay $2,000,000 in cash or shares, at Progen’s discretion, to MBC on MBC completing two clinical milestones in relation to the current PI-88 Phase 2 HCC Trial;

 

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·                  Pay MBC up to $4,000,000 on PI-88 achieving specified clinical and commercial milestones; and

 

·                  Issue 1,000,000 options to MBC upon MBC providing to Progen the HCC Phase 2 Trial Final Study Report.

 

The financial statements for the year ended June 30, 2007 include the financial impact of the return of the 15,176,525 MBC shares to MBC, that being an impairment loss of $1,769,198, the reimbursement of the $300,000, the value of 1,232,600 Progen shares and the 1,000,000 options on Progen shares. The fair value at the measurement date of the 1,232,600 Progen shares was $8,325,000 and 1,000,000 options over Progen shares was $1,321,000. The total 2007 financial impact was an increase in the operating loss from continuing operations of $11,715,198.

 

The financial statements for the year ended June 30, 2008 include the financial impact $2,029,000 on MBC completing the second clinical milestone in relation to the PI-88 phase 2 HCC trial (this obligation was satisfied via the issue of 732,600 shares of which 171,240 were newly issued shares and 561,360 were acquired on-market and re-issued to MBC) and $2,000,000 paid to MBC on PI-88 achieving a specified clinical milestone.  There was no impact on the financials for fiscal years 2009, 2010 or 2011.

 

A further $2,000,000 was to be paid on a defined PI-88 commercialization milestone or transaction event being achieved. As part of the settlement reached on November 18, 2009, Progen was released of this obligation.  Refer to “Item 8.A. Financial Statements and Other Financial Information” for further details on the settlement.

 

There are no further obligations to Medigen under the Termination Agreement.

 

*License agreement with Global TransBiotech Inc.*

 

On July 1, 2009, our subsidiary, PharmaSynth, executed a license agreement with a U.S.-based company, Global TransBiotech Inc. to conduct Phase 3 trials and subsequently commercialize muparfostat (formerly known as PI-88).  This license agreement was terminated on April 8, 2010 due to a lack of progress in the compound’s development.

 

*License and Collaboration Agreement with Medigen Biotechnology Corp.*

 

On June 30, 2010, the Company signed a license and collaboration agreement with Medigen Biotechnology Corp. for the exclusive rights to PI-88.  We are entitled to various milestone payments linked to progression in the development of PI-88, as well as a royalty on all product sales upon commercialization.  To date, two milestone payments have been received relating to progress in the clinical development of PI-88.

 

**Item 10.D.****                                       ****Exchange Controls**

 

In the early 1980s, the Australian Government began a program of deregulation of the Australian financial sector. This led to the introduction of competition from foreign banks and, perhaps more notably, the deregulation of foreign exchange controls. Deregulation has been at the forefront of Australian Government policy since the early 1980s and, except as discussed below, 

 

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there are no laws or regulations in Australia that restrict the export or import of capital or affect the remittance of dividends or other payments to holders of our ordinary shares who are non-residents of Australia, subject to withholding taxes under Australian law with respect to remittances of dividends (to the extent the taxes on the dividends are not paid by us) and interest payments. See “Taxation” below.

 

***The Foreign Acquisitions and Takeovers Act 1975***

 

The Foreign Acquisitions and Takeovers Act 1975 is an act of the Parliament of the Commonwealth of Australia which seeks to regulate overseas investment in Australia. By and large, the Government’s policy is to encourage foreign investment provided that it is consistent with the needs of the Australian community. Although restrictions are applied in certain areas, in the majority of industry sectors, proposals are approved unless they are judged contrary to the national interest.  The Act requires compulsory notification of certain proposed acquisitions of Australian assets and makes other proposed acquisitions and arrangements subject to prohibition or divestiture after they have been examined and found to be contrary to the national interest.

 

***The Financial Transactions Reports Act 1988***

 

The Financial Transactions Reports Act 1988 is an act of the Parliament of the Commonwealth of Australia, designed to facilitate the administration and enforcement of Australia’s revenue laws. It provides for the reporting of certain financial transactions and transfers, including the export or import of currency exceeding $10,000 to the Cash Transactions Reporting Agency.

 

***The Income Tax Assessment Act of 1936 and the Income Tax Assessment Act of 1997 (collectively, the “Tax Act”)***

 

The Tax Act is the principal law of the Commonwealth of Australia, concerning the collection and administration of taxes (except goods and services tax). Under the Tax Act, overseas residents are obliged to pay income tax in Australia on income derived from Australian sources.

 

**Item 10.E.****                                         ****Taxation**

 

The following is a summary of the current tax laws of the U.S. (including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) and Australia as they relate to us and our shareholders, including United States and other non-Australian shareholders. The summary is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change, possibly on a retroactive basis. The discussion does not address any aspects of U.S. taxation other than federal income taxation or any aspects of Australian taxation other than federal income taxation, inheritance taxation, stamp duty and goods and services tax.

 

Prospective purchasers of ordinary shares are advised to consult their own tax advisors with respect to the specific tax consequences to them of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.

 

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***Australian Tax Consequences***

 

Non-Australian residents are liable to pay tax on income derived from Australian sources.  The mechanism by which that tax is paid (for non-residents who have no permanent establishment in Australia or where the income is not connected with a permanent establishment) is known as withholding tax. Dividends paid by a resident Australian company to a resident of the United States of America are subject to withholding tax at the rate of 15%. The rate of withholding tax on dividends is normally 30%, but since the United States has concluded a double tax treaty agreement with Australia, the rate is reduced to 15%. It should be noted, however, that under Section 128B(3) of the Tax Act, to the extent that dividends paid to non-residents have been franked (generally where a company pays tax itself), such dividends are exempt from withholding tax. “Franked dividends” is the expression given to dividends when the profits out of which those dividends are paid have been taxed in our hands. Accordingly, an Australian company paying fully franked dividends to a non-resident is not required to deduct any withholding tax. Dividends on which withholding tax has been paid are not subject to any further Australian tax. In other words, the withholding tax represents the final Australian tax liability in relation to those dividends.

 

The pertinent provisions of the double tax treaty between Australia and the United States provide that dividends are primarily liable for tax in the country of residence of the beneficial owner. However, the source country, in this case Australia, may also tax them, but in such case the tax will be limited to 15%. Where the beneficial owner is a United States resident corporation that holds at least 10% of us, the tax will be limited to 5%. The 15% limit does not apply to dividends derived by a resident of the United States of America who has a permanent establishment or fixed base in Australia, if the holding giving rise to the dividends is effectively connected with that establishment or base. Such dividends are taxed in the normal way as business profits or independent personal services income as the case may be.

 

We have not paid any cash dividends since our inception and we do not anticipate the payment of cash dividends in the foreseeable future. Additionally, we expect to incur additional operating losses until products arising from our research and development programs are successfully commercialized. See “Item 8.A. Financial Statements and Other Financial Information—Dividend Policy.”

 

Capital gains tax in Australia is payable on real gains over the period in which the shares have been held, that is, the difference between the selling price and the original cost price. The cost price is indexed for inflation if the shares have been held for more than one year, and individual taxpayers can, with respect to shares held for more than one year, elect to forego indexation of the cost base in exchange for being taxed on 50% of the realized gain. Capital losses are available as deductions but only against other capital gains.

 

***Stamp Duty***

 

Any transfer of shares through trading on the ASX and OTCQB, whether by Australian residents or foreign residents, are not subject to stamp duty.

 

***Australian Death Duty***

 

Australia does not have estate or death duties. 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.

 

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***Goods and Services Tax***

 

The issue or transfer of shares will not incur Australian goods and services tax and does not require a stockholder to register for Australian goods and services tax purposes.

 

***U.S. Federal Income Tax Considerations***

 

The following discussion summarizes the principal U.S. federal income tax considerations relating to the purchase, ownership and disposition of our ordinary shares or warrants by a U.S. holder (as defined below) holding such shares or warrants as capital assets (generally, property held for investment). This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”) and judicial decisions, all as in effect on the date hereof, and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. This summary does not describe any state, local or non-U.S. tax law considerations, or any aspect of U.S. federal tax law other than income taxation; U.S. holders are urged to consult their own tax advisors regarding such matters.

 

This summary does not purport to address all material federal income tax consequences that may be relevant to a holder of ordinary shares or warrants. This summary does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks or other financial institutions, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, U.S. expatriates, investors liable for the alternative minimum tax, partnerships and other pass-through entities, investors that own or are treated as owning 10% or more of our voting stock, investors that hold the ordinary shares or warrants as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction, and U.S. holders whose functional currency is not the U.S. dollar) may be subject to special tax rules.

 

As used below, a “U.S. Holder” is a beneficial owner of an ordinary share or warrant that is, for U.S. federal income tax purposes, (i) a citizen or resident alien individual of the United States, (ii) a corporation (or an entity taxable as a corporation) created or organized under the law of the United States, any State thereof or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax without regard to its source, or (iv) a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust, and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. For purposes of this discussion, a “Non-U.S. Holder” is a beneficial owner of an ordinary share or warrant that is (i) a non-resident alien individual, (ii) a corporation (or an entity taxable as a corporation) created or organized in or under the law of a country other than the United States or a political subdivision thereof or (iii) an estate or trust that is not a U.S. holder. This discussion does not address any aspect of U.S. federal gift or estate tax, or state, local or non-U.S. tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold ordinary shares through such entities. If a partnership (including for this purpose any entity treated as a partnership for U.S. federal tax purposes) is a beneficial owner of ordinary shares or warrants, the U.S. federal tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. A holder of ordinary 

 

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shares or warrants that is a partnership and partners in that partnership are urged to consult their own tax advisers regarding the U.S. federal income tax consequences of purchasing, holding and disposing of ordinary shares or warrants.

 

We have not sought a ruling from the IRS or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court.

 

**GIVEN THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES OR WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.**

 

**TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS UNDER TREASURY CIRCULAR 230, WE INFORM YOU THAT (1) ANY DISCUSSION OF U.S. FEDERAL INCOME TAX ISSUES CONTAINED HEREIN (INCLUDING ANY ATTACHMENTS), UNLESS OTHERWISE SPECIFICALLY STATED, WAS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES UNDER THE UNITED STATES INTERNAL REVENUE CODE, AND (2) EACH U.S. HOLDER SHOULD SEEK ADVICE BASED UPON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.**

 

**Allocation of Purchase Price Between Ordinary Shares and Warrants**

 

A U.S. Holder that purchased our ordinary shares and warrants as a unit on their initial issuance generally will be required to allocate the purchase price of such unit between each ordinary share and each warrant that comprise the unit based on the relative fair market value of each. Of the purchase price for any unit that we offered, we allocated a portion to each ordinary share and to each warrant comprising part of such unit, as described in the prospectus supplement relating thereto. For U.S. Holders that purchased our ordinary shares and warrants as a unit on their initial issuance, the price allocated to each ordinary share and each warrant generally will be such U.S. Holder’s tax basis in such share or warrant, as the case may be. While uncertain, the IRS, by analogy to the rules relating to the allocation of the purchase price to components of a unit consisting of debt and equity, may take the position that our allocation of the purchase price will be binding on a U.S. Holder of a unit, unless the U.S. Holder explicitly discloses in a statement attached to the U.S. Holder’s timely filed U.S. federal income tax return for the taxable year that includes the acquisition date of the unit that the U.S. Holder’s allocation of the purchase price between each ordinary share and each warrant that comprise the unit is different than our allocation. Our allocation would not, however, be binding on the IRS.

 

Each U.S. Holder that purchased our ordinary shares and warrants as a unit on their initial issuance is urged to consult their own tax advisor with respect to the risks associated with an allocation of the purchase price between the ordinary shares and each warrant that comprise a unit that is inconsistent with our allocation of the purchase price.

 

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***Taxation of Distributions***

 

*U.S. Holders.*In general, subject to the passive foreign investment company (“PFIC”) rules discussed below, a distribution on an ordinary share will constitute a dividend for U.S. federal income tax purposes to the extent that it is made from our current or accumulated earnings and profits as determined under U.S. federal income tax principles. If a distribution exceeds the amount of our current and accumulated earnings and profits, it will be treated as a non-taxable reduction of basis to the extent of the U.S. Holder’s tax basis in the ordinary share on which it is paid, and to the extent it exceeds that basis it will be treated as a capital gain. For purposes of this discussion, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes.

 

The gross amount of any dividend on an ordinary share (which will include the amount of any Australian taxes withheld) generally will be subject to U.S. federal income tax as foreign source dividend income and will not be eligible for the corporate dividends received deduction. The amount of a dividend paid in Australian currency will be its value in U.S. dollars based on the prevailing spot market exchange rate in effect on the day that the U.S. Holder receives the dividend, whether or not the dividend is converted into U.S. dollars. A U.S. holder will have a tax basis in any distributed Australian currency equal to its U.S. dollar amount on the date of receipt, and any gain or loss realized on a subsequent conversion or other disposition of the Australian currency generally will be treated as U.S. source ordinary income or loss. If dividends paid in Australian currency are converted into U.S. dollars on the date they are received by a U.S. Holder, the U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. Holders are urged to consult their own tax advisers regarding the treatment of any foreign currency gain or loss if any Australian currency received by the U.S. Holder is not converted into U.S. dollars on the date of receipt.

 

Subject to certain exceptions for short-term and hedged positions, any dividend that a non-corporate holder receives on an ordinary share in a taxable year beginning before January 1, 2013 will be subject to a maximum tax rate of 15% if the dividend is a “qualified dividend.” A dividend on an ordinary share will be a qualified dividend if (i) either (a) the ordinary shares are readily tradable on an established securities market in the U.S. or (b) we are eligible for the benefits of a comprehensive income tax treaty with the U.S. that the U.S. Secretary of the Treasury determines is satisfactory for purposes of these rules and that includes an exchange of information program, and (ii) we were not, in the year prior to the year the dividend was paid, and are not, in the year the dividend is paid, a PFIC. The ordinary shares were listed on the Nasdaq Capital Market until July 2, 2010, and are now tradable on the OTC QB Market, which should qualify them as readily tradable on an established securities market in the United States. In any event, the double tax treaty between Australia and the U.S. (the “Treaty”) satisfies the requirements of clause (i)(b), and, although the matter is not free from doubt, we believe that we should be a resident of Australia entitled to the benefits of the Treaty. However, because the facts relating to our entitlement to the benefits of the Treaty can change over time, there can be no assurance that we will be entitled to the benefits of the Treaty for any taxable year. Based on our audited financial statements and relevant market and shareholder data, we believe we were a PFIC for U.S. federal income tax purposes for our June 30, 2011 taxable year. Based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, it is possible that we could be classified as a PFIC for our June 30, 2012 taxable year.  Given that the determination of PFIC status involves the application of complex tax rules, and that it is based on the nature of our income and assets from time to time, no assurances can be 

 

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provided that we will not be considered a PFIC for the current (or any past or future) taxable year. In addition, as described in the section below entitled “Passive Foreign Investment Company Rules,” if we were a PFIC in a year while a U.S. Holder held an ordinary share, and if the U.S. Holder has not made a qualified electing fund election effective for the first year the U.S. Holder held the ordinary share, the ordinary share remains an interest in a PFIC for all future years or until such an election is made. The IRS takes the position that that rule will apply for purposes of determining whether an ordinary share is an interest in a PFIC in the year a dividend is paid or in the prior year, even if the Company does not satisfy the tests to be a PFIC in either of those years.

 

Even if dividends on the ordinary shares would otherwise be eligible for qualified dividend treatment, in order to qualify for the reduced qualified dividend tax rates, a non-corporate holder must hold the ordinary share on which a dividend is paid for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date, disregarding for this purpose any period during which the non-corporate holder has an option to sell, is under a contractual obligation to sell or has made (and not closed) a short sale of substantially identical stock or securities, is the grantor of an option to buy substantially identical stock or securities or, pursuant to Treasury regulations, has diminished their risk of loss by holding one or more other positions with respect to substantially similar or related property. In addition, to qualify for the reduced qualified dividend tax rates, the non-corporate holder must not be obligated to make related payments with respect to positions in substantially similar or related property. Payments in lieu of dividends from short sales or other similar transactions will not qualify for the reduced qualified dividend tax rates. A non-corporate holder that receives an extraordinary dividend eligible for the reduced qualified dividend rates must treat any loss on the sale of the stock as a long-term capital loss to the extent of the dividend. For purposes of determining the amount of a non-corporate holder’s deductible investment interest expense, a dividend is treated as investment income only if the non-corporate holder elects to treat the dividend as not eligible for the reduced qualified dividend tax rates. Special limitations on foreign tax credits with respect to dividends subject to the reduced qualified dividend tax rates apply to reflect the reduced rates of tax.

 

The U.S. Treasury has announced its intention to promulgate rules pursuant to which non-corporate holders of stock of non-U.S. corporations, and intermediaries though whom the stock is held, will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because those procedures have not yet been issued, it is not clear whether we will be able to comply with them.

 

Non-corporate holders of ordinary shares are urged to consult their own tax advisers regarding the availability of the reduced qualified dividend tax rates in the light of their own particular circumstances.

 

Any Australian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability, subject to generally applicable limitations under U.S. federal income tax law. For purposes of computing those limitations separately under current law for specific categories of income, a dividend generally will constitute foreign source “passive category income” or, in the case of certain holders, “general category income.” A U.S. Holder will be denied a foreign tax credit with respect to Australian income tax withheld from dividends received with respect to the ordinary shares to the extent the U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent the U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. 

 

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Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and U.S. Holders are urged to consult with their own tax advisers to determine whether and to what extent they will be entitled to foreign tax credits as well as with respect to the determination of the foreign tax credit limitation. Alternatively, any Australian withholding tax may be taken as a deduction against taxable income, provided the U.S. Holder takes a deduction and not a credit for all foreign income taxes paid or accrued in the same taxable year. In general, special rules will apply to the calculation of foreign tax credits in respect of dividend income that is subject to preferential rates of U.S. federal income tax.

 

*Non-U.S. Holders.*   A dividend paid to a Non-U.S. Holder on an ordinary share will not be subject to U.S. federal income tax unless the dividend is effectively connected with the conduct of trade or business by the non-U.S. Holder within the United States (and is attributable to a permanent establishment or fixed base the Non-U.S. Holder maintains in the United States if an applicable income tax treaty so requires as a condition for the Non-U.S. Holder to be subject to U.S. taxation on a net income basis on income from the ordinary share). A Non-U.S. Holder generally will be subject to tax on an effectively connected dividend in the same manner as a U.S. Holder. A corporate Non-U.S. Holder may also be subject under certain circumstances to an additional “branch profits tax,” the rate of which may be reduced pursuant to an applicable income tax treaty.

 

***Taxation of Capital Gains***

 

*U.S. Holders.*   Subject to the passive foreign investment company rules discussed below, on a sale or other taxable disposition of an ordinary share or warrant, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between the U.S. Holder’s adjusted basis in the ordinary share or warrant and the amount realized on the sale or other disposition, each determined in U.S. dollars.  See “Exercise or Lapse of a Warrant” below for a discussion regarding a U.S. Holder’s basis in an ordinary share acquired pursuant to the exercise of a warrant.

 

Such capital gain or loss will be long-term capital gain or loss if at the time of the sale or other taxable disposition the ordinary share or warrant has been held for more than one year. In general, any adjusted net capital gain of an individual for a taxable year beginning before January 1, 2013 is subject to a maximum tax rate of 15% (for tax years beginning January 1, 2013 and after, the maximum tax rate on the net capital gain of an individual may increase to 20%, unless tax law changes are implemented in the interim). Capital gains recognized by corporate U.S. Holders generally are subject to U.S. federal income tax at the same rate as ordinary income. The deductibility of capital losses is subject to various limitations.

 

Any gain a U.S. Holder recognizes generally will be U.S. source income for U.S. foreign tax credit purposes, and, subject to certain exceptions, any loss will generally be a U.S. source loss. If an Australian tax is withheld on a sale or other disposition of an ordinary share or warrant, the amount realized will include the gross amount of the proceeds of that sale or disposition before deduction of the Australian tax. The generally applicable limitations under U.S. federal income tax law on crediting foreign income taxes may preclude a U.S. Holder from obtaining a foreign tax credit for any Australian tax withheld on a sale of an ordinary share or warrant. The rules relating to the determination of the foreign tax credit are complex, and U.S. Holders are urged to consult with their own tax advisers regarding the application of such rules. Alternatively, any Australian withholding tax may be taken as a deduction against taxable income, provided the U.S. Holder takes a deduction and not a credit for all foreign income taxes paid or accrued in the same taxable year.

 

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*Non-U.S. Holders.*   A Non-U.S. Holder will not be subject to U.S. federal income tax on a gain recognized on a sale or other disposition of an ordinary share or warrant unless (i) the gain is effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States (and is attributable to a permanent establishment or fixed base that the Non-U.S. Holder maintains in the United States if an applicable income tax treaty so requires as a condition for the Non-U.S. Holder to be subject to U.S. taxation on a net income basis on income from the ordinary share or warrant), or (ii) in the case of a Non-U.S. Holder who is an individual, the Non-U.S. Holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions apply. Any effectively connected gain of a corporate Non-U.S. Holder may also be subject under certain circumstances to an additional “branch profits tax”, the rate of which may be reduced pursuant to an applicable income tax treaty.

 

***Exercise or Lapse of a Warrant***

 

Subject to the discussion of the PFIC rules below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant. Ordinary shares acquired pursuant to the exercise of a warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the warrant, increased by the amount paid to exercise the warrant. The holding period of such ordinary shares generally would begin on the day after the date of exercise of the warrant. If the terms of a warrant provide for any adjustment to the number of shares of ordinary shares for which the warrant may be exercised or to the exercise price of the warrant, such adjustment may, under certain circumstances, result in constructive distributions that could be taxable to a U.S. Holder of the warrant. Conversely, the absence of an appropriate adjustment similarly may result in a constructive distribution that could be taxable to a U.S. Holder of the warrant. A constructive distribution to a U.S. Holder of a warrant generally will be taxed in the manner described above under “U.S. Federal Income Tax Considerations-Taxation of Distributions,” although it is unclear whether a constructive distribution on a warrant that is taxed as a dividend to a non-corporate holder of the warrant would be eligible for the reduced qualified dividend tax rates. If a warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the warrant. U.S. Holders who exercise a warrant other than by paying the exercise price in cash are urged to consult their own tax advisors regarding the tax treatment of such an exercise, which may vary from that described above.

 

***Passive Foreign Investment Company Rules***

 

A special set of U.S. federal income tax rules applies to a foreign corporation that is a PFIC for U.S. federal income tax purposes. As noted above, based on our audited financial statements and relevant market and shareholder data, we believe we were a PFIC for U.S. federal income tax purposes for our June 30, 2011 taxable year. Moreover, given that the determination of PFIC status involves the application of complex tax rules, and that it is based on the nature of our income and assets from time to time, no assurances can be provided that we will not be considered a PFIC for the current (or any future) taxable year.

 

In general, a foreign corporation is a PFIC if at least 75% of its gross income for the taxable year is passive income or if at least 50% of its assets for the taxable year produce passive income or are held for the production of passive income. In general, passive income for this purpose means, with certain designated exceptions, dividends, interest, rents, royalties (other than certain rents and royalties derived in the active conduct of trade or business), annuities, net gains from dispositions of 

 

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certain assets, net foreign currency gains, income equivalent to interest, income from notional principal contracts and payments in lieu of dividends. The determination of whether a foreign corporation is a PFIC is a factual determination made annually and is therefore subject to change. Subject to exceptions pursuant to certain elections that generally require the payment of tax, once stock or a warrant in a foreign corporation is classified as stock in a PFIC in the hands of a particular shareholder that is a U.S. person, it remains stock or a warrant in a PFIC in the hands of that shareholder.

 

Unfavorable tax consequences for a U.S. Holder can occur if we are treated as a PFIC for any year while a U.S. Holder owns ordinary shares or warrants. These tax consequences can be mitigated with respect to a U.S. Holder’s ordinary shares (but not a U.S. Holder’s warrants) if the U.S. Holder makes, or has made, a timely qualified electing fund election or election to mark to market the holder’s ordinary shares, and such election is in effect for the first taxable year during which the U.S. Holder owns ordinary shares that we are a PFIC. If we are treated as a PFIC, and neither election is made, then contrary to the tax consequences described in “U.S. Federal Income Tax Considerations-Taxation of Distributions” and “U.S. Federal Income Tax Considerations-Taxation of Capital Gains” above, in any year in which the U.S. Holder either disposes of an ordinary share or a warrant at a gain or receives one or more “excess distributions” in respect of our ordinary shares, special rules apply to the taxation of the gain or the excess distributions. For purposes of these rules, a U.S. Holder will be treated as receiving an “excess distribution” to the extent that actual or constructive distributions received in the current taxable year exceed 125% of the average distributions (whether actual or constructive and whether or not out of earnings and profits) received by such U.S. Holder in respect of our ordinary shares during the three preceding years or, if shorter, the U.S. Holder’s holding period. A disposition of an ordinary share or a warrant, for purposes of these rules, includes many transactions on which gain or loss is not realized under general U.S. federal income tax rules (but generally should not include the exercise of a warrant, as discussed below). The gain or the excess distributions must be allocated ratably to each day the U.S. Holder has held the ordinary share or the warrant, as the case may be. Amounts allocated to each year are taxable as ordinary income in their entirety (and are not eligible for the reduced qualified dividend rates) and not as capital gain, and amounts allocable to prior years may not be offset by any deductions or losses. Amounts allocated to each such prior year are taxable at the highest rate in effect for that year and are subject to an interest charge at the rates applicable to deficiencies for income tax for those periods. In addition, a U.S. Holder’s tax basis in an ordinary share or a warrant that is acquired from a decedent would not receive a step-up to fair market value as of the date of the decedent’s death but instead would be equal to the decedent’s basis, if lower.

 

The special PFIC rules described above will not apply to a U.S. Holder’s ordinary shares if the U.S. Holder makes a timely election, which remains in effect, to treat us as a qualified electing fund, or QEF, for the first taxable year in which the U.S. Holder owns an ordinary share and in which we are classified as a PFIC, provided that we comply with certain reporting requirements. Instead, a U.S. Holder that has made a QEF election is required for each taxable year to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of its net capital gain as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. In order for such a QEF election to be valid, we must provide U.S. Holders either (1) a statement showing such U.S. Holder’s pro rata share of our ordinary earnings and net capital gain (calculated for U.S. tax purposes) for the Company’s taxable year, (2) sufficient information to enable the U.S. Holder to calculate its pro rata share for such year, or (3) a statement that the Company has permitted the U.S. Holder to inspect and copy its permanent

 

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books of account, records, and such other documents as may be maintained by us that are necessary to establish that PFIC ordinary earnings and net capital gain are computed in accordance with U.S. income tax principles. We have not yet determined whether, in years in which we are classified as a PFIC, we will make the computations necessary to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election. It is, therefore, possible that U.S. Holders would not be able to make or retain that election in any year we are a PFIC. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the tax year to which the election relates. Retroactive QEF elections may only be made by filing a protective statement with such return or with the consent of the IRS. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.

 

If a U.S. Holder has elected the application of the QEF rules to the U.S. Holder’s ordinary shares, and the special tax and interest charge rules described in the second preceding paragraph do not apply to such shares (because of a timely QEF election for the first tax year of the U.S. Holder’s holding period for such shares, or, as described below, a purge of the PFIC taint pursuant to a special purging election), any gain realized on the disposition of an ordinary share generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, U.S. Holders of a QEF are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally will not be taxable as a dividend. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under applicable attribution rules as owning shares in a QEF.

 

A U.S. Holder may not make a QEF election with respect to a warrant. As a result, if a U.S. Holder sells or otherwise disposes of a warrant (other than upon exercise of a warrant), any gain recognized generally will be subject to the special tax and interest charge rules applicable to gains and excess distributions, as described in the third preceding paragraph, if we were classified as a PFIC at any time during the period the U.S. Holder held the warrants. If a U.S. Holder that exercises such warrants properly makes a QEF election with respect to the newly acquired ordinary shares (or has previously made a QEF election with respect to any ordinary shares already held), the QEF election will apply to the newly acquired shares, but the adverse tax consequences of the PFIC rules described in the third preceding paragraph will continue to apply to such shares (which generally will be deemed to have a holding period for the purposes of such PFIC rules that includes the period the U.S. Holder held the warrants), unless the holder makes a purging election. The purging election creates a deemed sale of such shares at their fair market value. The gain recognized by the purging election will be subject to the special tax and interest charge rules described in the third preceding paragraph. As a result of the purging election, the U.S. Holder will have a new basis and holding period in the ordinary shares acquired upon the exercise of the warrants for purposes of the PFIC rules.

 

If a QEF election is not made for the first taxable year in which the U.S. Holder owns an ordinary share and in which we are a PFIC, certain elections can be made while we continue to satisfy the definition of a PFIC that, combined with a QEF election, can cause the QEF election to be 

 

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treated as having been made for that first taxable year. Those elections may require the electing shareholder to recognize gain on a constructive sale or to be taxable on the shareholder’s share of certain undistributed profits of the foreign corporation. If gain or income is recognized pursuant to one of those elections, the special PFIC rules set forth in the fourth preceding paragraph would apply to that gain or income. Even if a QEF election ceases to apply because in a later taxable year we cease to satisfy the tests to be a PFIC, the QEF election will apply again in any subsequent year in which the Company again satisfies the tests to be a PFIC. Moreover, if a U.S. Holder sells all of the ordinary shares they own and later reacquires other ordinary shares, any QEF election the U.S. Holder has made that remains in effect will apply to the ordinary shares acquired later. The applicable Treasury regulations provide that the Commissioner of the IRS has the discretion to invalidate or terminate a QEF election if the U.S. Holder or we, or an intermediary, fails to satisfy the requirements for the QEF election.

 

The special PFIC rules described in the fifth preceding paragraph will not apply to a U.S. Holder’s ordinary shares if the U.S. Holder elects to mark the U.S. Holder’s ordinary shares to market each year, provided that the ordinary shares are considered “marketable stock” within the meaning of the applicable Treasury regulations. A U.S. Holder that makes this election will recognize as ordinary income or loss each year an amount equal to the difference, if any, as of the close of the taxable year between the fair market value of the U.S. Holder’s ordinary shares and the U.S. Holder’s adjusted tax basis in the ordinary shares. Losses would be allowed only to the extent of net mark-to-market gain previously included in income by the U.S. Holder under the election for prior taxable years, reduced by losses allowed in prior taxable years. If the mark-to-market election were made, then the special PFIC rules set forth in the fifth preceding paragraph would not apply for periods covered by the election. In general, the ordinary shares will be marketable stock within the meaning of the applicable Treasury regulations if they are traded, other than in de minimis quantities, on at least 15 days during each calendar quarter on a “qualified exchange or other market” within the meaning of the applicable Treasury regulations and certain other requirements are met. The Australian Securities Exchange is a qualified exchange within the meaning of the applicable Treasury regulations. Thus, the ordinary shares should be “marketable stock” within the meaning of the applicable Treasury regulations. If a U.S. Holder makes a mark-to-market election, but does not make that election for the first taxable year in which the U.S. Holder owns an ordinary share and in which the Company is classified as a PFIC, and if the U.S. Holder had not made a QEF election for that first such taxable year, the rules set forth in the fifth preceding paragraph will apply to any distributions on an ordinary share in the year of the mark-to-market election, to any gain recognized on an actual sale of an ordinary share in that year, and to any gain recognized in that year pursuant to the mark-to-market election. The mark-to-market rules generally continue to apply to a U.S. Holder who makes the mark-to-market election, even in years we do not satisfy the tests to be a PFIC. A mark-to-market election will not be available with respect to a U.S. Holder’s warrants.

 

A U.S. Holder who owns ordinary shares during a year in which we are classified as a PFIC generally will remain subject to the rules set forth in the sixth preceding paragraph for all taxable years if the U.S. Holder has not made a QEF election or a mark-to-market election for the first taxable year in which the U.S. Holder owns an ordinary share and in which we are classified as a PFIC. In that event, those rules will apply to any gains on dispositions of ordinary shares and to any “excess distributions.”  It is, however, possible for a U.S. Holder to avoid this “once a PFIC, always a PFIC” result by electing to treat all of the U.S. Holder’s ordinary shares as sold for their fair market value as of the last day of the last taxable year we satisfy the tests to be a PFIC, provided the 

 

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statute of limitations has not run for that year. If a gain is recognized on that constructive sale, the rules set forth in the sixth preceding paragraph would apply to that gain.

 

If we are classified as a PFIC for a taxable year, and, at any time during such taxable year, has a non-U.S. subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described in the seventh preceding paragraph, if we receive a distribution from, or dispose of all or part of its interest in, the lower-tier PFIC. We have not yet determined whether, if we are classified as a PFIC, we would make the computations necessary to supply U.S. Holders with the information needed to make or maintain a QEF election with respect to the lower-tier PFIC. It is, therefore, possible that U.S. Holders would not be able to make or retain that election in any taxable year that we are classified as a PFIC and has a non-U.S. subsidiary that is also classified as a PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.

 

A dividend from a foreign corporation that otherwise would qualify for reduced qualified dividend rates does not qualify for that rate if the foreign corporation is a PFIC in either the taxable year of the dividend or the preceding taxable year.

 

A U.S. Holder who owns (or is deemed to own) shares in a PFIC during any taxable year, such U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF or mark-to-market election is made).

 

**GIVEN THE COMPLEXITIES OF THE PFIC RULES AND THEIR POTENTIALLY ADVERSE TAX CONSEQUENCES, U.S. HOLDERS OF ORDINARY SHARES OR WARRANTS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT THE PFIC RULES, INCLUDING THE CONSEQUENCES TO THEM OF MAKING A QEF ELECTION OR A MARK-TO-MARKET ELECTION WITH RESPECT TO THE ORDINARY SHARES IN THE EVENT THAT THE COMPANY QUALIFIES AS A PFIC FOR ANY TAXABLE YEAR.**

 

**Information Reporting and Backup Withholding**

 

*U.S. Holders.*   Dividends paid on, and proceeds from the sale or other disposition of, an ordinary share or warrant generally may be subject to information reporting requirements and may be subject to backup withholding at the rate of 28% unless a U.S. Holder provides an accurate taxpayer identification number or otherwise demonstrates that they are exempt. The amount of any backup withholding collected from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is submitted to the Internal Revenue Service. Under U.S. federal income tax law and U.S. Treasury Regulations, certain categories of U.S. holders must file information returns with respect to their investment in, or involvement in, a foreign corporation.  For example, pursuant to recently enacted legislation, beginning in 2011, all U.S. holders of PFIC stock will generally be required to make annual return filings reporting their PFIC ownership and certain other information that the IRS may require.  U.S. holders are urged to consult with their own tax advisors concerning such reporting requirements.

 

*Non-U.S. Holders.  *Non-U.S. Holders generally will be exempt from these information reporting requirements and backup withholding tax but may be required to comply with certain certification and identification procedures in order to establish their eligibility for exemption.

 

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**THE DISCUSSION ABOVE IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO AN INVESTMENT IN ORDINARY SHARES OR WARRANTS. HOLDERS AND POTENTIAL HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISER(S) CONCERNING THE TAX CONSEQUENCES RELEVANT TO THEM IN THEIR PARTICULAR SITUATION.**

 

**ITEM 11.****                                        ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The primary objective of our investment activities is to preserve principal and, at the same time, maximize income without significantly increasing risk. At June 30, 2011, our cash and cash equivalents and short-term investments consisted primarily of highly liquid investments with maturities of four months or less. We believe that these investments do not constitute any material market risk exposure.

 

In fiscal 2011, the majority of our operating expenses were denominated in Australian dollars, however there were expenses incurred in U.S. dollars in relation to the funding of our U.S. subsidiary Progen Pharmaceuticals, Inc. From time to time, in order to reduce our exposure to foreign currency exchange rate risks, we buy and hold foreign currencies to cover our operating expenses denominated in those currencies. We also, from time to time, attempt to hedge our currency exchange risk.

 

The main risks arising from the Company’s financial instruments are cash flow interest rate risk, foreign currency risk and credit risk. The Company uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange rates and assessments of market forecasts for interest rate and foreign exchange. Ageing analyses is undertaken to manage credit risk.

 

The Board reviews and agrees policies for managing each of these risks which are summarized below.

 

**Credit risk**

 

The Company trades only with recognized, creditworthy third parties. All receivables, including other receivables and intercompany receivable, are current (i.e. none are contractually overdue).

 

Receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant. All the Company’s material cash balances are with a large national Australian bank and are not exposed to the U.S. banking market risks. There are no significant concentrations of credit risk.

 

**Liquidity risk**

 

The Company’s objective is to maintain a balance between continuity of project research utilizing an optimal combination of equity funding and available credit lines. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities. The Company has no financial assets/liabilities due after twelve months.

 

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Liquid non-derivative assets comprising cash and receivables and short-term investments are considered in the Company’s overall liquidity risk. The Company ensures that sufficient liquid assets are available to meet all the required short-term cash payments.

 

All of the Company’s short-term investments are Level 2 financial instruments as per IFRS 7 Financial Instruments: Disclosures.

 

The table below reflects all financial liabilities as of June 30, 2011 and 2010. For derivative financial instruments, the market value is presented, whereas for the other obligations the respective undiscounted cash flows for the respective upcoming fiscal years are presented. Cash flows for financial assets and liabilities without fixed amounts or timing are based on the conditions existing at June 30, 2011. The Company had no derivative financial instruments as at June 30, 2011.

 

The remaining contractual maturities of the Company’s and parent entity’s financial liabilities are (in AUD thousands):

 
| ** **         | ** ** | **June 30,** | ** ** |
|--------------------|------------|-------------------|------------|
| ** **         | ** ** | **2011**          | ** ** | **2010** | ** ** |
| 6   months or less |       | 4,013             |       | 3,195 |   |

 

**Foreign currency risk**

 

At June 30, 2011 and 2010, the Company had the following exposure to US$ currency that is not designated in cash flow hedges (in AUD thousands):

 
| ** **                | ** ** | **June 30,** | ** ** |
|---------------------------|------------|-------------------|------------|
| ** **                | ** ** | **2011**          | ** ** | **2010** | ** ** |
| **Financial assets**      |       |              |       |   |   |
| Cash and cash equivalents |       | 2,295             |       | 172 |   |
|                      |       | 2,295             |       | 172 |   |
| **Financial liabilities** |       |              |       |   |   |
| Trade and other payables  |       | 968               |       | 787 |   |
| Unearned revenue          |       | 832               |       |   |   |
|                      |       | 1,800             |       | 787 |   |
| Net exposure              |       | 495               |       | (615 | ) |

 

At June 30, 2011 and 2010, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows (in AUD thousands):

 
| ** **       | ** ** | **Post tax loss    (Higher)/Lower** | ** ** | **Equity    Higher/(Lower)** | ** ** |
|------------------|------------|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **2011**                                           | ** ** | **2010**                          | ** ** | **2011** | ** ** | **2010** | ** ** |
| **Consolidated** |       |                                               |       |                              |       |   |   |   |   |
| AUD/USD   + 15%  |       | 68                                                 |       | 56                                |       | — |   | — |   |
| AUD/USD   - 15%  |       | (92                                                | )          | (68                               | )          | — |   | — |   |

 

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The sensitivity is greater in 2011 than 2010 due to increase in US placement deposits but was mitigated by stronger Australian dollar against the US Dollar. The sensitivity analysis for the foreign currency exposure was determined based on historical movements over the past two years.

 

**Interest rate risk**

 

The Group’s exposure to market interest rates relates primarily to the Group’s cash and short-term deposits. These deposits are held to fund the Group’s ongoing and future drug development activities. Cash at bank of $1.753 million earns interest at floating rates based on daily and “at call” bank deposit rates. Short term deposits and short term investments of $8.695 million are made for varying periods of between one to six months, depending on the immediate cash requirements of the Group, and earn interest at the respective term deposit rates. Refer to Note 9 of the financial statements for details on the Group’s cash and cash equivalents at June 30, 2011.

 

The following sensitivity analysis is based on the weighted average interest rates applicable to the Group’s cash and short-term deposits in existence at the reporting date.

 

At June 30, 2011, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax loss and equity would have been affected as follows:

 
| ** **                               | ** ** | **Post tax loss    (Higher)/Lower** | ** ** | **Equity    Higher/(Lower)** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **2011**                                           | ** ** | **2010**                          | ** ** | **2011** | ** ** | **2010** | ** ** |
|                                     |       |                                               |       |                              |       |   |   |   |   |
| **Consolidated**                         |       |                                               |       |                              |       |   |   |   |   |
| +   1.0% (100 basis points) (2010 +2.0%) |       | 104                                                |       | 30                                |       | — |   | — |   |
| -   0.5% (50 basis points) (2010: -1.0%) |       | (52                                                | )          | (15                               | )          | — |   | — |   |

 

The 2011 sensitivity is based on a significantly lower cash balance due primarily to significant reduction in cash and cash equivalents in 2010.  Following the rise in interest rates during 2010-11, the potential upside in interest rates has been reduced over the prior year analysis, thereby decreasing sensitivity.  The sensitivity in interest rates were determined based on historical movements over the past two years and management expectations of reasonable movements.

 

**ITEM 12.****                                        ****DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

 

Not applicable.

 

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**PART II**

 

**ITEM 13.****                                        ****DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**

 

None.

 

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

 

None.

 

**ITEM 15.****                                        ****CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Management of the Company maintain disclosure controls and procedures as such term is defined in Rules 13 a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”), as amended, that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the General Manager of Finance, as appropriate, to allow timely decisions regarding required disclosure.  Disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives.

 

Management has carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the General Manager of Finance, of the effectiveness of the disclosure controls and procedures as of June 30, 2011.  Based on that evaluation, the General Manager of Finance concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011.

 

**Management’s Annual Report on Internal Control over Financial Reporting**

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of our Board of 

 

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Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In particular, the design of a control system must be considered relative to their costs. Additionally, the design of a control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements to the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2011 based on the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

No material weaknesses were identified as at June 30, 2011.  Based upon its assessment, management has concluded that, as of June 30, 2011, the internal control over financial reporting is effective based upon the above-mentioned criteria.

 

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to amendments made by the enactment of the Dodd-Frank bill that permit the Company to provide only management’s annual report on internal control over financial reporting in this Annual Report.

 

**Changes in Internal Control over Financial Reporting**

 

Except as described above, there have been no other significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect internal control over financial reporting during the period covered by this Annual Report.

 

**ITEM 16.****                                        ****[RESERVED]**

 

**ITEM 16A.****                               ****AUDIT COMMITTEE FINANCIAL EXPERT**

 

The Company’s board of directors has determined that audit committee member Mr. S. James is an audit committee financial expert as defined under the rules and regulations of the Securities and Exchange Commission.

 

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**ITEM 16B.****                               ****CODE OF ETHICS**

 

We have adopted a code of ethics that applies to our executive directors and chief financial officer. A copy of this Code of Ethics is available on the Company’s website at www.progen-pharma.com.

 

No waivers to this Code of Ethics were granted to our executive directors or chief financial officer during the fiscal year ended June 30, 2011.

 

**ITEM 16C.****                               ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The aggregate fees and expenses for professional services rendered by our independent registered public accounting firm, Ernst & Young, for the audit of our annual financial statements for the years ended June 30, 2011 and 2010 and for other listed services rendered in those years are set forth in the following table:

 
| ** **                     | ** ** | **2011** | ** **  | **2010**   | ** ** |
|--------------------------------|------------|----------|-------------|------------|------------|
| Audit Fees                     |       | $        | 167,477     |       | $          | 209,500 |   |
| Audit-Related Fees (1)         |       | —   |        | 54,000     |       |
| Other non-audit services   (2) |       | 4,898    | ** **  | **—** | ** ** |
| **Total Fees**                 | ** ** | **$**    | **172,375** | ** ** | **$**      | **263,500** | ** ** |

 

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(1)                                 Audit-related services rendered by our principal accountant were in relation to Sarbanes-Oxley internal control audit procedures.

 

(2)                                 During the year, the Company received non-audit services from Ernst & Young Taiwan in relation to the tax treatment of payments made by the Company’s licensee, Medigen.

 

***Audit Committee Pre-Approval Policies and Procedures***

 

All audit and non-audit services performed by our independent auditors must be specifically pre-approved by our audit committee. During fiscal 2011, the Company received non-audit services from Ernst & Young Taiwan in relation to the tax treatment of payments made by the Company’s licensee, Medigen.

 

**ITEM 16D.****                               ****EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

 

Not applicable.

 

**ITEM 16E.****                               ****PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**

 

Not applicable.

 

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**ITEM 16G.****                              ****CORPORATE GOVERNANCE**

 

Progen Pharmaceuticals Limited (the Company) is a dual listed Australian company. Our primary listing is on the Australian Securities Exchange (ASX) and securities are also traded on the U.S. OTCQB Market (OTCQB).

 

The Board has the ultimate responsibility for the strategy and performance of the Company on behalf of the shareholders to whom they are accountable. The Board is committed to achieving and demonstrating the highest standard of corporate governance through setting values and policies which underlie business activities ensuring transparency and protecting stakeholders’ interests.

 

In setting these values and policies, the Company has considered the ASX Corporate Governance Council’s Principles and Recommendations (2nd Edition) (ASX Recommendations) and relevant U.S. requirements arising from our SEC registration and continuously strives to develop and improve corporate governance processes and standards.

 

Formal written policies and/or disclosure practices have been disseminated throughout the organization and measures are in place to achieve compliance.  Further information concerning our corporate governance practices and compliance with the ASX recommendations is available on the Company’s website.

 

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**PART III**

 

**ITEM 17.****                                        ****FINANCIAL STATEMENTS**

 

Not Applicable.

 

**ITEM 18.****                                        ****FINANCIAL STATEMENTS**

 

**Financial Statements - Index to Financial Statements**

 
| Report of Independent Registered Public Accounting   Firm                                 | F-1              |
|-------------------------------------------------------------------------------------------|------------------|
| Statement of Comprehensive Income for the years ended   June 30, 2009, 2010 and 2011 | F-2              |
| Statement of Financial Position as of June 30,   2010 and 2011                       | F-3              |
| Statement of Change in Equity for the years ended   June 30, 2009, 2010 and 2011     | F-4              |
| Statement of Cash Flows for the years ended   June 30, 2009, 2010 and 2011           | F-6              |
| Notes to Financial Statements                                                             | F-7 through F-43 |

 

**ITEM 19.****                                        ****EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                        |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | ** **                                                                                                                                                                                                                                                             |
| 4(a)(1)                 |       | Global TransBiotech Inc. License agreement with PharmaSynth (+)                                                                                                                                                                                                        |
| 4(a)(2)                 |       | License and Collaboration Agreement between Medigen Biotechnology   Corp. and Progen Pharmaceuticals Limited (*)                                                                                                                                                       |
| 4(d)                    |       | 2008 Lease 16 Benson Street Toowong ~                                                                                                                                                                                                                                  |
| 6(e)                    |       | Progen Pharmaceuticals Limited Directors and Employee Option   Incentive Plan Rules for the directors and employees incentive scheme   approved by a resolution of shareholders at the annual general meeting of the   Company held on November 16, 2010 (*) |
| 7(a)                    |       | Deeds of Settlement and Release — Section 606 litigation (+)                                                                                                                                                                                                 |
| 10(a)                   |       | ASA Termination Agreement #                                                                                                                                                                                                                                            |
| 12.1                    |       | Certification of Chairman and Acting Chief Executive Officer pursuant   to Section 302 of the Sarbanes-Oxley Act of 2002 (1)                                                                                                                                      |
| 12.2                    |       | Certification of General Manager of Finance pursuant to Section 302   of the Sarbanes-Oxley Act of 2002 (1)                                                                                                                                                       |
| 13                      |       | Certification of Stuart James and Paul G. E. J. Dixon under   Section 1350 of Chapter 63 of Title 18 of the United States Code (1), as   adopted, pursuant to Section 906 of the Sarbanes—Oxley Act of 2002                                             |

 

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| (1) |   | Filed herewith.                                                                                                          |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------|
| #   |   | Incorporated by reference to exhibits filed with the Annual Report on   Form 20-F, filed on December 18, 2007. |
| ~   |   | Incorporated by reference to exhibits filed with the Annual Report on   Form 20-F, filed on January 9, 2009.   |
| (+) |   | Incorporated by reference to exhibits filed with the Annual Report on   Form 20-F, filed on December 30, 2009. |
| (*) |   | Incorporated by reference to exhibits filed with the Annual Report on   Form 20-F, filed on December 30, 2010. |

 

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**SIGNATURES**

 

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.

 
|   | **PROGEN PHARMACEUTICALS LIMITED**                      |
|--------|---------------------------------------------------------|
|   |                                                    |   |
|   | By:                                                     | /s/ Paul G.E.J Dixon |
|   |                                                    |   |
|   | Paul Dixon                                              |
|   | General Manager of Finance & Company Secretary |

 

Dated:  November 29, 2011

 

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**Report of Independent Registered Public Accounting Firm**

 

**The Board of Directors and Shareholders of Progen Pharmaceuticals Limited**

 

We have audited the accompanying consolidated statement of financial position of Progen Pharmaceuticals Limited as of June 30, 2011 and 2010, and the related consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for each of the three years in the period ended June 30, 2011. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Progen Pharmaceuticals Limited at June 30, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2011, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

As discussed in Note 2 to the financial statements, the Company’s recurring losses from operations and net capital deficiency raise substantial doubt about its ability to continue as a going concern. The June 30, 2011 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Ernst & Young

Brisbane, Australia

November 29, 2011

 

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**Progen Pharmaceuticals Limited**

**Statement of Comprehensive Income**

**For the year ended 30 June 2011**

 
| ** **                                         | ** ** | ** ** | ** ** | **2011**   | ** ** | **2010**   | ** ** | **2009** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                         | ** ** | **Note**   | ** ** | **$000**   | ** ** | **$000**   | ** ** | **$000** | ** ** |
| **REVENUE**                                        |       | 4   (a)    | ** ** | **3,611**  |       | 2,712      |       | 4,940    |       |
|                                               |       |       |       |       |       |       |       |     |       |
| Other income from ordinary activities              |       | 4   (b)    | ** ** | **56**     |       | 150        |       | 7,021    |       |
|                                               |       |       |       |       |       |       |       |     |       |
| Research and development expenses                  |       |       | ** ** | **2,883**  |       | 5,092      |       | 7,049    |       |
| Manufacturing facility expenses                    |       |       | ** ** | **2,506**  |       | 2,026      |       | 1,683    |       |
| Administrative and corporate expenses              |       |       | ** ** | **4,179**  |       | 7,053      |       | 8,689    |       |
| Finance costs                                      |       | 4   (c)    | ** ** | **4**      |       | 3          |       | 7        |       |
| Impairment loss                                    |       |       | ** ** | **54**     |       | 2,644      |       | —   |       |
| Other expenses                                     |       | 4   (g)    | ** ** | **139**    |       | 1,883      |       | —   |       |
|                                               |       |       |       |       |       |       |       |     |       |
| **NET LOSS FROM OPERATIONS**                       |       |       | ** ** | **(6,098** | **)**      | (15,839    | )          | (5,467   | )          |
|                                               |       |       |       |       |       |       |       |     |       |
| **INCOME TAX EXPENSE**                             |       | 6          |       | —     |       | —     |       | —   |       |
|                                               |       |       |       |       |       |       |       |     |       |
| **NET LOSS FOR THE PERIOD**                        |       |       | ** ** | **(6,098** | **)**      | (15,839    | )          | (5,467   | )          |
| OTHER COMPREHENSIVE INCOME (LOSS)                  |       |       | ** ** | ** ** |       |       |       |     |       |
| Foreign currency translation                       |       |       | ** ** | **(12**    | **)**      | 44         |       | 100      |       |
|                                               |       |       | ** ** | ** ** | ** ** |       |       |     |       |
| **TOTAL COMPREHENSIVE LOSS FOR THE PERIOD**        |       |       | ** ** | **(6,110** | **)**      | (15,795    | )          | (5,367   | )          |
| Basic and diluted loss per share (cents per share) |       | 7          | ** ** | **(24.7**  | **)**      | (64.1      | )          | (10.0    | )          |
|                                               |       |       |       |       |       |       |       |     |       |
| Dividends per share (cents per share)              |       |       |       | —     | ** ** | **—** |       | —   |       |

 

The above statement of comprehensive income should be read in conjunction with the accompanying notes

 

The functional and presentation currency of Progen Pharmaceuticals Limited is Australian dollars ($)

 

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**Progen Pharmaceuticals Limited**

**Statement of Financial Position**

**As at 30 June 2011**

 
| ** **                        | ** ** | ** ** | ** ** | **2011**     | ** ** | **2010** | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|----------|------------|
| ** **                        | ** ** | **Note**   | ** ** | **$000**     | ** ** | **$000** | ** ** |
| **ASSETS**                        |       |       |       |         |       |     |       |
| **Current Assets**                |       |       | ** ** | ** **   |       |     |       |
| Cash and cash equivalents         |       | 9          | ** ** | **6,333**    |       | 3,893    |       |
| Short-term investments            |       | 9          | ** ** | **4,115**    |       | 11,250   |       |
| Trade and other receivables       |       | 10         | ** ** | **1,014**    |       | 1,002    |       |
| Prepayments                       |       |       | ** ** | **103**      |       | 121      |       |
| Restricted term deposit           |       |       | ** ** | **74**       |       | 74       |       |
| **Total Current Assets**          | ** ** | ** ** | ** ** | **11,639**   |       | 16,340   |       |
|                              |       |       |       |         |       |     |       |
| **Non-current Assets**            |       |       | ** ** | ** **   |       |     |       |
| Short-term deposits               |       |       | ** ** | **13**       |       | 20       |       |
| Prepayments                       |       |       | ** ** | **130**      |       | 164      |       |
| Plant and equipment               |       | 11         | ** ** | **398**      |       | 660      |       |
| **Total Non-current Assets**      | ** ** | ** ** | ** ** | **541**      |       | 844      |       |
|                              |       |       |       |         |       |     |       |
| **TOTAL ASSETS**                  | ** ** | ** ** | ** ** | **12,180**   |       | 17,184   |       |
|                              |       |       |       |         |       |     |       |
| **LIABILITIES**                   |       |       | ** ** | ** **   |       |     |       |
| **Current Liabilities**           |       |       | ** ** | ** **   |       |     |       |
| Trade and other payables          |       | 14         | ** ** | **2,733**    |       | 1,683    |       |
| Provisions                        |       | 15         | ** ** | **276**      |       | 280      |       |
| **Total Current Liabilities**     | ** ** | ** ** | ** ** | **3,009**    |       | 1,963    |       |
|                              |       |       |       |         |       |     |       |
| **Non-current Liabilities**       |       |       | ** ** | ** **   |       |     |       |
| Provisions                        |       | 15         | ** ** | **180**      |       | 204      |       |
| **Total Non-current Liabilities** | ** ** | ** ** | ** ** | **180**      |       | 204      |       |
|                              |       |       |       |         |       |     |       |
| **TOTAL LIABILITIES**             | ** ** | ** ** | ** ** | **3,189**    |       | 2,167    |       |
|                              |       |       |       |         |       |     |       |
| **NET ASSETS**                    | ** ** | ** ** | ** ** | **8,991**    |       | 15,017   |       |
|                              |       |       |       |         |       |     |       |
| **EQUITY**                        |       |       | ** ** | ** **   |       |     |       |
| Contributed equity                |       | 16         | ** ** | **152,217**  |       | 152,217  |       |
| Reserves                          |       | 17         | ** ** | **3,438**    |       | 3,366    |       |
| Accumulated losses                |       | 17         | ** ** | **(146,664** | **)**      | (140,566 | )          |
|                              |       |       | ** ** | ** **   | ** ** |     |       |
| **TOTAL EQUITY**                  | ** ** | ** ** | ** ** | **8,991**    |       | 15,017   |       |

 

The above statement of financial position should be read in conjunction with the accompanying notes

 

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**Progen Pharmaceuticals Limited**

**Statement of Changes in Equity**

**For the year ended 30 June 2011**

 
| ** **                                                         | ** ** | **Number of    ordinary    shares** | ** ** | **Contributed    equity********$000** | ** ** | **Accumulated    losses********$000** | ** ** | **Employee    reserve******** $000** | ** ** | **Foreign    currency    translation    reserve********$000** | ** ** | **Total********$000** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                               |       |                                               |       |                                       |       |                                       |       |                                           |       |                                                                         |       |                  |       |
| **At   1 July 2008**                                          | ** ** | **60,393,891**                                     | ** ** | **191,357**                                | ** ** | **(119,260**                               | **)**      | **3,223**                                      | ** ** | **(61**                                                                      | **)**      | **75,259**            | ** ** |
| Loss of the period                                                 |       | —                                             |       | —                                     |       | (5,467                                     | )          | —                                         |       | —                                                                       |       | (5,467                | )          |
| Other comprehensive   income                                       |       | —                                             |       | —                                     |       | —                                     |       | —                                         |       | 100                                                                          |       | 100                   |       |
| **Total   comprehensive loss**                                     |       | —                                             |       | —                                     | ** ** | **(5,467**                                 | **)**      | **—**                                     | ** ** | **100**                                                                      | ** ** | **(5,367**            | **)**      |
| Ordinary shares   issued as part of Cellgate acquisition agreement |       | 151,240                                            |       | 280                                        |       | —                                     |       | —                                         |       | —                                                                       |       | 280                   |       |
| Off market share   buy-back                                        |       | (35,836,034                                        | )          | (39,420                                    | )          | —                                     |       | —                                         |       | —                                                                       |       | (39,420               | )          |
| Share-based   payments to employees                                |       | —                                             |       | —                                     |       | —                                     |       | 38                                             |       | —                                                                       |       | 38                    |       |
| **At   30 June 2009**                                         | ** ** | **24,709,097**                                     | ** ** | **152,217**                                | ** ** | **(124,727**                               | **)**      | **3,261**                                      | ** ** | **39**                                                                       | ** ** | **30,790**            | ** ** |

 
| ** **                          | ** ** | **Number of    ordinary    shares** | ** ** | **Contributed    equity********$000** | ** ** | **Accumulated    losses********$000** | ** ** | **Employee    reserve******** $000** | ** ** | **Foreign    currency    translation    reserve********$000** | ** ** | **Total********$000** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                |       |                                               |       |                                       |       |                                       |       |                                           |       |                                                                         |       |                  |       |
| **At   1 July 2009**           | ** ** | **24,709,097**                                     | ** ** | **152,217**                                | ** ** | **(124,727**                               | **)**      | **3,261**                                      | ** ** | **39**                                                                       | ** ** | **30,790**            | ** ** |
| Loss of the period                  |       | —                                             |       | —                                     |       | (15,839                                    | )          | —                                         |       | —                                                                       |       | (15,839               | )          |
| Other comprehensive   income        |       | —                                             |       | —                                     |       | —                                     |       | —                                         |       | 44                                                                           |       | 44                    |       |
| **Total   comprehensive loss**      |       | —                                             |       | —                                     | ** ** | **(15,839**                                | **)**      | **—**                                     | ** ** | **44**                                                                       | ** ** | **(15,795**           | **)**      |
| Share-based   payments to employees |       | —                                             |       | —                                     |       | —                                     |       | 22                                             |       | —                                                                       |       | 22                    |       |
| **At   30 June 2010**          | ** ** | **24,709,097**                                     | ** ** | **152,217**                                | ** ** | **(140,566**                               | **)**      | **3,283**                                      | ** ** | **83**                                                                       | ** ** | **15,017**            | ** ** |

 

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**Progen Pharmaceuticals Limited**

**Statement of Changes in Equity**

**For the year ended 30 June 2011**

 
| ** **                          | ** ** | **Number of    ordinary    shares** | ** ** | **Contributed    equity********$000** | ** ** | **Accumulated    losses********$000** | ** ** | **Employee    reserve******** $000** | ** ** | **Foreign    currency    translation    reserve********$000** | ** ** | **Total********$000** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                |       |                                               |       |                                       |       |                                       |       |                                           |       |                                                                         |       |                  |       |
| **At   1 July 2010**           | ** ** | **24,709,097**                                     | ** ** | **152,217**                                | ** ** | **(140,566**                               | **)**      | **3,283**                                      | ** ** | **83**                                                                       | ** ** | **15,017**            | ** ** |
| Loss of the period                  |       | —                                             |       | —                                     |       | (6,098                                     | )          | —                                         |       | —                                                                       |       | (6,098                | )          |
| Other comprehensive   loss          |       | —                                             |       | —                                     |       | —                                     |       | —                                         |       | (12                                                                          | )          | (12                   | )          |
| **Total   comprehensive loss**      |       | —                                             |       | —                                     | ** ** | **(6,098**                                 | **)**      | **—**                                     | ** ** | **(12**                                                                      | **)**      | **(6,110**            | **)**      |
| Share-based   payments to employees |       | —                                             |       | —                                     |       | —                                     |       | 84                                             |       | —                                                                       |       | 84                    |       |
| **At   30 June 2011**          | ** ** | **24,709,097**                                     | ** ** | **152,217**                                | ** ** | **(146,664**                               | **)**      | **3,367**                                      | ** ** | **71**                                                                       | ** ** | **(8,991**            | **)**      |

 

The above statement of changes in equity should be read in conjunction with the accompanying notes

 

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**Progen Pharmaceuticals Limited**

**Statement of Cash Flows**

**For the year ended 30 June 2011**

 
| ** **                                                  | ** ** | ** ** | ** ** | **2011**   | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                  | ** ** | **Note**   | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| **CASH FLOWS FROM OPERATING   ACTIVITIES**                  | ** ** | ** ** | ** ** | ** ** |       |     |       |     |       |
| Receipts from customers                                     |       |       | ** ** | **3,854**  |       | 1,412    |       | 1,767    |       |
| Payments to suppliers, employees and others                 |       |       | ** ** | **(9,047** | **)**      | (15,015  | )          | (15,494  | )          |
| Receipt of government grants                                |       |       | ** ** | **—** |       | —   |       | 376      |       |
| Interest received                                           |       |       | ** ** | **551**    |       | 739      |       | 3,833    |       |
| Finance costs                                               |       |       | ** ** | **(9**     | **)**      | (9       | )          | (8       | )          |
| NET CASH FLOWS USED IN OPERATING ACTIVITIES                 |       | 9          | ** ** | **(4,651** | **)**      | (12,873  | )          | (9,526   | )          |
|                                                        |       |       |       |       |       |     |       |     |       |
| **CASH FLOWS FROM INVESTING   ACTIVITIES**                  | ** ** | ** ** | ** ** | ** ** |       |     |       |     |       |
| Proceeds from (purchase of) short-term investments          |       |       | ** ** | **7,135**  |       | (11,250  | )          | —   |       |
| Purchase of plant & equipment                      |       | 11         | ** ** | **(63**    | **)**      | (74      | )          | (109     | )          |
| Proceeds from sale of plant & equipment            |       |       | ** ** | **26**     |       | —   |       | 1        |       |
| Proceeds from settlement of derivative                      |       |       | ** ** | **—** |       | —   |       | 259      |       |
| NET CASH FLOWS PROVIDED BY / (USED IN) INVESTING ACTIVITIES |       |       | ** ** | **7,098**  |       | (11,324  | )          | 151      |       |
|                                                        |       |       |       |       |       |     |       |     |       |
| **CASH FLOWS FROM FINANCING   ACTIVITIES**                  | ** ** | ** ** |       |       |       |     |       |     |       |
| Off-market share buy-back                                   |       |       | ** ** | **—** |       | —   |       | (39,420  | )          |
| NET CASH FLOWS USED IN FINANCING ACTIVITIES                 |       |       | ** ** | **—** |       | —   |       | (39,420  | )          |
| NET INCREASE / (DECREASE) IN CASH HELD                      |       |       | ** ** | **2,447**  |       | (24,197  | )          | (48,795  | )          |
| Net foreign exchange differences                            |       |       | ** ** | **(7**     | **)**      | 45       |       | 92       |       |
| Cash and cash equivalents at beginning of period            |       |       | ** ** | **3,893**  |       | 28,045   |       | 76,748   |       |
| **CASH AND CASH EQUIVALENTS AT END   OF THE PERIOD**        |       | 9          | ** ** | **6,333**  |       | 3,893    |       | 28,045   |       |

 

The above statement of cash flows should be read in conjunction with the accompanying notes

 

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**1. CORPORATE INFORMATION**

 

The consolidated financial report of Progen Pharmaceuticals Limited (the Group) for the year ended 30 June 2011 was authorised for issue in accordance with a resolution of the directors on 28 November 2011.

 

Progen Pharmaceuticals Limited (the parent, or the Company) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX) and the United States OTCQB Market.

 

The nature of the operations and principal activities of the Group are described in Note 3.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of preparation**

 

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000) unless otherwise stated under the option available to the Group under ASIC Class Order 98/100. The Group is an entity to which the class order applies.

 

**Going Concern**

 

The Group has net assets of $8.991 million (30 June 2010: $15.017 million) and realised a loss after income tax of $6.110 million (30 June 2010: $15.795 million).  The Group is currently active in the discovery, research and development of biopharmaceutical therapeutics for the treatment of human diseases. In order to continue as a going concern and meet its debts as and when it falls due is dependent on its ability to:

 

(a) raise additional capital funding in the form of equity and/or government sponsored research;

(b) continue to receive the support of the current shareholders; and

(c) successfully develop and commercialise it projects under development.

 

However, if these efforts are unsuccessful, there is a significant risk that the Group may be unable to continue as a going concern.

 

The directors believe the use of the going concern basis of accounting is appropriate. To date the Group has funded its activities through issuance of equity securities.  The directors believe that there is sufficient cash available for the Group to continue operating until it can raise sufficient further capital to enable it to fund its ongoing activities.  On this basis, it is the directors’ opinion that there are reasonable grounds to believe that such funding will continue to be available and that the Group will be able to generate the needed funding to continue operating and to pay its debts as and when due in the ordinary course of business.

 

No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Group not continue as a going concern.

 

**Statement of compliance**

 

The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Boards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

 

**New accounting standards and interpretations**

 

(i)                                     Changes in accounting policy and disclosures

 

The accounting policies adopted are consistent with those of the previous financial year.  Accounting standards amended through the AASB’s Annual Improvements Project include AASB 3 (IFRS 3), AASB 7 (IFRS 7), AASB 121 (IAS 21), AASB 128 (IAS 28), AASB 131, (IAS 31), AASB 132 (IAS 32) and AASB 139 (IAS 39).  The adoption of these amendments did not have any impact on the financial position or performance of the Group.

 

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**New standards and interpretations issued but not yet effective**

 

International Financial Reporting Standards that have recently been issued or amended but are not yet effective have not been adopted for the annual reporting period ended 30 June 2011.

 

**IFRS 7 Financial Instruments: Disclosures — Enhanced De-recognition Disclosure Requirements**

 

The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Group’s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those derecognized assets. The amendment becomes effective for annual periods beginning on or after July 1, 2011, and would be mandatory at this time.  The amendment affects disclosure only and the Group expects there to be no impact on the Group’s financial position or performance.

 

**IFRS 9 Financial Instruments: Classification and Measurement**

 

IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The completion of this project is expected over the course of 2011.  Where the amendments to IFRS 9 would otherwise become mandatory for the Group’s fiscal 2013 consolidated financial statements, the Group is unaware the impact these standards will have on their financial results.

 

**IFRS 10 — Consolidated Financial Statements**

 

IFRS 10 establishes a new control model that applies to all entities.  It replaces parts of IAS 27 *Consolidated and Separate Financial Statements*dealing with the accounting for consolidated financial statements and SIC-12 *Consolidation - Special Purpose Entities.*

 

The new control model broadens the situations when an entity is considered to be controlled by another entity and includes new guidance for applying the model to specific situations, including when acting as a manager may give control, the impact of potential voting rights and when holding less than a majority of voting rights may give control.  The standard becomes effective on financial years commencing on or after 1 January 2013. This may impact the Company’s treatment of Epi Pharmaceuticals Inc given the Group’s representation on the board and senior management, causing it to be consolidated rather an equity accounted.

 

**IFRS 11 — Joint Arrangements**

 

IFRS 11 replaces IAS 31 *Interests in Joint Ventures*and SIC-13*Jointly Controlled Entities — Non-monetary Contributions by Ventures. *IFRS 11 uses the principle of control in IFRS10 to define joint control, and therefore the determination of whether joint control exists may change.  In addition, IFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation.

 

Instead, accounting for a joint arrangement is dependent on the nature of the rights and obligations arising from the arrangement.  Joint operations that give the venturers a right to the underlying assets and obligations themselves is accounted for by recognising the share of those assets and obligations.  Joint ventures that give the venturers a tight to the net assets are accounted for using the equity method.  The standard becomes effective on financial years commencing on or after 1 January 2013.  The Group does not currently have any joint arrangements and therefore will not be impacted by this standard.

 

**IFRS 12 — Disclosure of Interests in Other Entities**

 

IFRS 12 includes all disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates, and structured entities.  New disclosures have been introduced about the judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associates, structured entities and subsidiaries with non-controlling interests.  The standard becomes effective on financial years commencing on or after 1 January 2013.  The standard will not have a financial impact on the Group, however it is expected that additional disclosure will be required around the Group’s interests in subsidiaries and associates.

 

**IAS 12 Income Taxes — Recovery of Underlying Assets**

 

The amendment introduces the requirement to calculate deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16, to always be measured on a sale basis of the asset. The amendment becomes effective for annual periods beginning on or after January 1, 2012.  This amendment is not expected to have any impact on the financial results of the Group.

 

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**IFRS 13 — Fair Value Measurement**

 

IFRS 13 establishes a single source of guidance under IFRS for determining the fair value of assets and liabilities.  IFRS 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to determine fair value under IFRS when fair value is required or permitted by IFRS.  Application of this definition may result in different fair values being recorded for the relevant assets.  IFRS 13 also expands the disclosure requirements for all assets or liabilities carried at fair value.  This includes information about the assumptions made and the qualitative impact of those assumptions on the fair value determined.  The standard becomes effective on financial years commencing on or after 1 January 2013.  As this standard outlines a process to determine fair value measurement it may have an impact on any fair value measurements undertaken after the standard is adopted by the Group, as well as increased disclosure requirements around assets and liabilities carried at fair value.

 

**Basis of consolidation**

 

The consolidated financial statements comprise the financial statements of Progen Pharmaceuticals Limited and its subsidiaries for each year.

 

Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable are considered when assessing whether a group controls another entity.

 

In preparing the financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full.

 

Subsidiaries are fully consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is transferred out of the Group.

 

Investments in subsidiaries held by Progen Pharmaceuticals Limited are accounted for at cost in the separate financial statements of the parent entity.

 

The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition.

 

**Business combinations and asset acquisitions**

 

The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the combination. Where equity instruments are issued in a business combination, the fair value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity.

 

All identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of the business combination over the net fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the Group’s share of the net fair value of the identifiable net assets of the subsidiary, the difference is recognised as a gain in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired.

 

Acquisitions of entities that do not meet the definition of a business contained in AASB 3 *Business Combinations*(IFRS 3) are not accounted for as business combinations. In such cases the Group identifies and recognises the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in AASB 138 *Intangible Assets*(IAS 38)) and liabilities assumed. The cost of the group of net assets is then allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.

 

**Significant accounting judgements, estimates and assumptions**

 

The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are:

 

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*(i) Share based payments*

 

The costs of equity-settled transactions are measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of rights over shares is determined using a binomial model, further details of which are given in note 13.  The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

 

*(ii) Impairment of intangibles with definite useful lives (patents)*

 

The Group assesses impairment of intangibles with definite useful lives at each reporting date by evaluating conditions specific to the Group and to the particular intangibles that may lead to impairment.  If an impairment trigger exists, the recoverable amount of the asset is determined.

 

**Revenue recognition — refer note 4**

 

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

 

*(i) Rendering of services*

 

Revenue from the provision of contract manufacturing services is recognised by reference to the stage of completion. Stage of completion is measured by reference to the outcome achieved to date as a percentage of the total outcome required for each contract.

 

Licensing revenue from milestone payments are recognised when the milestone has been achieved by the licensee.

 

*(ii) Interest income*

 

Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

 

**Leases — refer note 4 and note 19**

 

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

 

Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term. Lease incentives are recognised in the statement of comprehensive income as an integral part of the total lease expense. There are no finance leases.

 

**Cash and cash equivalents— refer note 9**

 

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

 

For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above.

 

**Short-term investments — refer to note 9**

 

Short-term investments in the statement of financial position include a term deposit with an original maturity between 3 and 12 months.

 

**Restricted short-term deposits**

 

As at 30 June 2011 restricted term deposits totalling $87,000 (2010: $94,000) were held under bank guarantees relating to the Group’s leased premises.

 

**Trade and other receivables — refer note 10**

 

Trade receivables, which generally have 30-90 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts.

 

An allowance for doubtful debts is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when identified.

 

Intercompany receivables that are not expected to be recovered are fully provided for.

 

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**Investment and other financial assets**

 

Investments and financial assets in the scope of AASB 139 (IAS 39) *Financial instruments: Recognition and Measurement* and AASB 7 (IFRS 7) *Financial instruments: Disclosure* are categorised as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Designation is re-evaluated at each financial year end, but there are restrictions on reclassifying to other categories.

 

When financial assets are recognised initially, they are measured at fair value, plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs. The only financial assets are receivables, which are subsequently measured at amortised cost, and derivatives, which are subsequently measured at fair value through profit or loss.

 

*Recognition and derecognition*

 

All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or been transferred.

 

**Foreign currency translation**

 

*(i) Functional and presentation currency*

 

The functional and presentation currency of Progen Pharmaceuticals Limited is Australian dollars ($). The United States subsidiaries’ functional currency is United States dollars which is translated to presentation currency (see below).

 

*(ii) Transactions and balances*

 

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date.

 

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

 

*(iii) Translation of Group companies functional currency to presentation currency*

 

The results of the United States subsidiary are translated into Australian dollars as at a rate that approximates the exchange rate at the dates of the transactions, for example an average rate for the monthly period. Assets and liabilities are translated at exchange rates prevailing at balance date.

 

Exchange variations resulting from the translation are recognised in the foreign currency translation reserve in equity.

 

**Income tax — refer note 6**

 

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.

 

Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

 

Deferred income tax liabilities are recognised for all taxable temporary differences except:

 

·        when the deferred income tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit or loss nor taxable profit or loss; or

·        when the taxable temporary difference is associated with investments in subsidiaries, and the timing or the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

 

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Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except:

 

·        when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or

·        when the deductible temporary difference is associated with investments in subsidiaries, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

 

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

 

Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

 

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

 

**Other taxes**

 

Revenues, expenses and assets are recognised net of the amount of GST except:

 

·        when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

·        receivables and payables, which are stated with the amount of GST included.

 

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

 

Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows.

 

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

 

**Plant and equipment — refer note 11**

 

Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.

 

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows:

 
| Plant and equipment      |   | 5 to 10 years |   |
|--------------------------|--------|---------------|--------|
| Office equipment         |   | 3 to 10 years |   |
| Leasehold   improvements |   | 3 to 6 years  |   |

 

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

 

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Table of Contents

 

*(i) Impairment*

 

The carrying values of plant and equipment are reviewed for impairment at each reporting date, with recoverable amount being estimated when events or changes in circumstances indicate that the carrying value may be impaired.

 

The recoverable amount of plant and equipment is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

For an asset that does not generate largely independent cash inflows, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value.

 

An impairment exists when the carrying value of an asset or cash-generating units exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount.

 

*(ii) Derecognition and disposal*

 

An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised.

 

**Intangible assets — refer note 12**

 

Intangible assets acquired separately or in a business combinations are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the period in which the expenditure is incurred.

 

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible assets with a finite useful life is reviewed at least each financial year-end. Changes in the expected useful life of the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.

 

A summary of the policy applied to the Group’s intangible assets is as follows:

** **
| **Intellectual Property Rights**                                                                                   |
|--------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                         |
| *Useful life*                                                                                                      |
| Finite                                                                                                             |
| *Amortisation method used*                                                                                         |
| Amortised over the   period of expected future benefit from the related project on a straight-line   basis         |
| *Internally generated or   acquired*                                                                               |
| Acquired                                                                                                           |
| *Impairment testing*                                                                                               |
| Conducted when an   impairment indicator arises. The amortisation method is reviewed at each   financial year-end. |

 

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**Trade and other payables — refer note 14**

 

Trade and other payables are carried at amortised cost and their fair value approximates their carrying value due to their short-term nature. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services.

 

**Provisions — refer note 15**

 

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement.

 

If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability.

 

When discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost.

 

**Make good provision**

 

Provision is made for the anticipated costs of future restoration of our leased manufacturing and corporate premises.  The provision includes future cost estimates associated with the restoration of these premises to their original condition at the end of the lease term.  These future cost estimates are discounted to their present value.

 

**Employee leave benefits**

 

*(i) Wages, salaries, annual leave and sick leave*

 

Liabilities for wages and salaries, including non-monetary benefits expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date. Annual leave accrued and expected to be settled within 12 months of the reporting date is recognised in current provisions. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

 

*(ii) Long service leave*

 

The liability for long service leave is recognised 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 reporting date 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 reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows.

 

**Share-based payment transactions — refer note 13**

 

*(i) Equity-settled transactions:*

 

The Group provides benefits to employees (including senior executives) and consultants of the Group in the form of share-based payments, whereby employees and consultants render services in exchange for shares or rights over shares (equity-settled transactions).

 

The cost of these equity-settled transactions is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value of rights over shares is determined using a binomial, or other appropriate model, further details of which are given in note 13. The fair value of shares is determined by the market value of the Group’s shares at grant date.

 

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Group (market conditions) if applicable.

 

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting period).

 

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The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects

 

(i) the extent to which the vesting period has expired; and

(ii) the Group’s best estimate of the number of equity instruments that will ultimately vest.

 

No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

 

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is only conditional upon a market condition.

 

If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification.

 

If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

 

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share.

 

**Contributed equity — refer note 16**

 

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

 

**Earnings per share — refer note 7**

 

Basic earnings per share is calculated as net profit attributable to members of the Group, adjusted to exclude any costs of servicing equity, divided by the weighted average number of ordinary shares, adjusted for any bonus element.

 

Diluted earnings per share is calculated as net profit attributable to members of the Group, adjusted for:

 

·        costs of servicing equity;

·        the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and

·        other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

 

**Segment reporting — refer note 3**

 

A business segment is a distinguishable component of the entity that is engaged in providing products or services that are subject to risks and returns that are different to those of other operating business segments and is regularly reviewed by the chief operating decision maker.

 

**Research and development costs**

 

Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability or resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. There are no capitalised development costs.

 

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**3. OPERATING SEGMENTS**

 

The Group operates in the biotechnology industry.  The Group’s activities comprise the research, development, and manufacture of biopharmaceuticals. The operating segments are identified by executive management (chief operating decision makers) based on the nature of the activity.

 

The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. There are no intersegment transactions.

 
| **Operating segments********2011**                                               | ** ** | **Research &   Development   $000** | ** ** | **Manufacturing   $000** | ** ** | **Total   $000** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **                                   | ** ** | ** **               | ** ** | ** **       | ** ** |
| **Operating   revenue**                                                               |       |                                         |       |                     |       |             |       |
| Sales to external   customers                                                         |       | —                                       |       | 2,585                    |       | 2,585            |       |
| Total segment   revenue                                                               |       | —                                       |       | 2,585                    |       | 2,585            |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| Unallocated   revenues                                                                |       |                                         |       |                     |       |             |       |
| License fee income                                                                    |       | —                                       |       | —                   |       | 475              |       |
| Interest income                                                                       |       |                                         |       |                     |       | 551              |       |
| Total revenues                                                                        |       |                                         |       |                     |       | 3,611            |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| **Segment   result**                                                                  | ** ** | **(2,883**                                   | **)**      | **75**                   | ** ** | **(2,808**       | **)**      |
|                                                                                  |       |                                         |       |                     |       |             |       |
| Corporate and   administrative costs (includes unallocated other income)              |       | —                                       |       | —                   |       | (3,236           | )          |
| Impairment loss                                                                       |       | —                                       |       | —                   |       | (54              | )          |
| Operating loss                                                                        |       |                                         |       |                     | ** ** | **(6,098**       | **)**      |
| ** **                                                                            | ** ** | ** **                                   | ** ** | ** **               | ** ** | ** **       | ** ** |
| **2011**                                                                              |       |                                         |       |                     | ** ** | ** **       | ** ** |
| **Assets**                                                                            |       |                                         |       |                     | ** ** | ** **       | ** ** |
| Segment assets                                                                        |       | 148                                          |       | 1,145                    |       | 1,293            |       |
| Cash and cash   equivalents and short-term investments                                |       | —                                       |       | —                   |       | 10,448           |       |
| Other assets                                                                          |       | —                                       |       | —                   |       | 439              |       |
| Total assets                                                                          |       |                                         |       |                     |       | 12,180           |       |
| ** **                                                                            |       |                                         |       |                     |       |             |       |
| **Liabilities**                                                                       |       |                                         |       |                     |       |             |       |
| Segment liabilities                                                                   |       | 243                                          |       | 708                      |       | 951              |       |
| Unallocated   liabilities                                                             |       | —                                       |       | —                   |       | 2,238            |       |
| Total liabilities                                                                     |       |                                         |       |                     |       | 3,189            |       |
| ** **                                                                            |       |                                         |       |                     |       |             |       |
| **Other   segment information**                                                       |       |                                         |       |                     |       |             |       |
| Acquisition of   plant & equipment, and other non-current assets             |       | 35                                           |       | 6                        |       | 41               |       |
| Unallocated   acquisition of plant & equipment, and other non-current assets |       | —                                       |       | —                   |       | 22               |       |
| Depreciation                                                                          |       | 52                                           |       | 142                      |       | 194              |       |
| Unallocated depreciation   and amortisation                                           |       | —                                       |       | —                   |       | 44               |       |

 

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Table of Contents

 
| **Operating segments********2010**                                               | ** ** | **Research &   Development   $000** | ** ** | **Manufacturing   $000** | ** ** | **Total   $000** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **                                   | ** ** | ** **               | ** ** | ** **       | ** ** |
| **Operating   revenue**                                                               |       |                                         |       |                     |       |             |       |
| Sales to external   customers                                                         |       | —                                       |       | 1,973                    |       | 1,973            |       |
| Total segment   revenue                                                               |       | —                                       |       | 1,973                    |       | 1,973            |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| Unallocated revenue   (interest income)                                               |       | —                                       |       | —                   |       | 739              |       |
| Total revenue                                                                         |       |                                         |       |                     |       | 2,712            |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| **Segment   result**                                                                  | ** ** | **(5,092**                                   | **)**      | **(53**                  | **)**      | **(5,145**       | **)**      |
|                                                                                  |       |                                         |       |                     |       |             |       |
| Corporate and   administrative costs (includes unallocated other income)              |       | —                                       |       | —                   |       | (8,006           | )          |
| Impairment loss                                                                       |       | (2,644                                       | )          | —                   |       | (2,644           | )          |
| Other expenses                                                                        |       | —                                       |       | —                   |       | (44              | )          |
| Operating loss                                                                        |       |                                         |       |                     | ** ** | **(15,839**      | **)**      |
| ** **                                                                            | ** ** | ** **                                   | ** ** | ** **               | ** ** | ** **       | ** ** |
| **2010**                                                                              |       |                                         |       |                     |       |             |       |
| **Assets**                                                                            |       |                                         |       |                     |       |             |       |
| Segment assets                                                                        |       | 170                                          |       | 380                      |       | 550              |       |
| Cash and cash   equivalents and short-term investments                                |       | —                                       |       | —                   |       | 15,143           |       |
| Other assets                                                                          |       | —                                       |       | —                   |       | 1,491            |       |
| Total assets                                                                          |       |                                         |       |                     |       | 17,184           |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| **Liabilities**                                                                       |       |                                         |       |                     |       |             |       |
| Segment liabilities                                                                   |       | 619                                          |       | 168                      |       | 787              |       |
| Unallocated   liabilities                                                             |       | —                                       |       | —                   |       | 1,380            |       |
| Total liabilities                                                                     |       |                                         |       |                     |       | 2,167            |       |
|                                                                                  |       |                                         |       |                     |       |             |       |
| **Other   segment information**                                                       |       |                                         |       |                     |       |             |       |
| Acquisition of   plant & equipment, and other non-current assets             |       | 3                                            |       | 56                       |       | 59               |       |
| Unallocated   acquisition of plant & equipment, and other non-current assets |       | —                                       |       | —                   |       | 15               |       |
| Depreciation                                                                          |       | 57                                           |       | 163                      |       | 220              |       |
| Unallocated   depreciation and amortisation                                           |       | —                                       |       | —                   |       | 432              |       |

 

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| **Operating segments********2009**                                               | ** ** | **Research &********Development   $000** | ** ** | **Manufacturing   $000** | ** ** | **Total   $000** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **                                        | ** ** | ** **               | ** ** | ** **       | ** ** |
| **Operating   revenue**                                                               |       |                                              |       |                     |       |             |       |
| Sales to external   customers                                                         |       | —                                            |       | 1,724                    |       | 1,724            |       |
| Total segment   revenue                                                               |       | —                                            |       | 1,724                    |       | 1,724            |       |
|                                                                                  |       |                                              |       |                     |       |             |       |
| Unallocated revenue                                                                   |       | —                                            |       | —                   |       | 3,216            |       |
| Total revenue                                                                         |       |                                              |       |                     |       | 4,940            |       |
|                                                                                  |       |                                              |       |                     |       |             |       |
| **Segment   result**                                                                  | ** ** | **(6,966**                                        | **)**      | **41**                   | ** ** | **(6,925**       | **)**      |
|                                                                                  |       |                                              |       |                     |       |             |       |
| Unallocated   revenues & expenses                                            |       | —                                            |       | —                   |       | 1,458            |       |
| **Operating   loss**                                                                  |       |                                              |       |                     | ** ** | **(5,467**       | **)**      |
|                                                                                  |       |                                              |       |                     |       |             |       |
| **2009**                                                                              |       |                                              |       |                     |       |             |       |
| **Assets**                                                                            |       |                                              |       |                     |       |             |       |
| Segment assets                                                                        |       | 3,273                                             |       | 498                      |       | 3,771            |       |
| Cash and cash   equivalents and short term investments                                |       | —                                            |       | —                   |       | 28,045           |       |
| Other assets                                                                          |       | —                                            |       | —                   |       | 846              |       |
| Total assets                                                                          |       |                                              |       |                     |       | 32,662           |       |
|                                                                                  |       |                                              |       |                     |       |             |       |
| **Liabilities**                                                                       |       |                                              |       |                     |       |             |       |
| Segment liabilities                                                                   |       | 870                                               |       | 142                      |       | 1,012            |       |
| Unallocated   liabilities                                                             |       | —                                            |       | —                   |       | 860              |       |
| Total liabilities                                                                     |       |                                              |       |                     |       | 1,872            |       |
|                                                                                  |       |                                              |       |                     |       |             |       |
| **Other   segment information**                                                       |       |                                              |       |                     |       |             |       |
| Acquisition of plant &   equipment, and other non-current assets             |       | 6                                                 |       | 98                       |       | 104              |       |
| Unallocated   acquisition of plant & equipment, and other non-current assets |       | —                                            |       | —                   |       | 5                |       |
| Depreciation                                                                          |       | 440                                               |       | 240                      |       | 680              |       |
| Unallocated   depreciation and amortisation                                           |       | —                                            |       | —                   |       | 80               |       |

 

**4.  REVENUE AND EXPENSES**

 
| ** **                                                                                                                                 | ** ** | **2011   $000** | ** ** | **2010   $000** | ** ** | **2009   $000** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                                                                                                 | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** |
| **(a) Revenue**                                                                                                                       |       |            |       |            |       |            |       |
| Manufacturing services revenue                                                                                                             | ** ** | **2,585**       |       | 1,973           |       | 1,724           |       |
| License fee revenue                                                                                                                        | ** ** | **475**         |       | —          |       | —          |       |
| Interest revenue                                                                                                                           | ** ** | **551**         |       | 739             |       | 3,216           |       |
| Total revenue from continuing operations                                                                                                   | ** ** | **3,611**       |       | 2,712           |       | 4,940           |       |
|                                                                                                                                       |       |            |       |            |       |            |       |
| **(b) Other income**                                                                                                                  |       |            |       |            |       |            |       |
| Government grants                                                                                                                          | ** ** | **—**      |       | —          |       | 83              |       |
| Gain on derivative                                                                                                                         | ** ** | **—**      |       | —          |       | 508             |       |
| Net foreign exchange gain                                                                                                                  | ** ** | **—**      |       | —          |       | 6,319           |       |
| Other                                                                                                                                      | ** ** | **56**          |       | 150             |       | 111             |       |
| Total other income                                                                                                                         | ** ** | **56**          |       | 150             |       | 7,021           |       |
|                                                                                                                                       |       |            |       |            |       |            |       |
| **(c) Finance cost**                                                                                                                  | ** ** | ** **      |       |            |       |            |       |
| Other loans                                                                                                                                | ** ** | **—**      |       | —          |       | 4               |       |
| Make good provision discount adjustment                                                                                                    | ** ** | **4**           |       | 3               |       | 3               |       |
| Total finance costs                                                                                                                        | ** ** | **4**           |       | 3               |       | 7               |       |
|                                                                                                                                       |       |            |       |            |       |            |       |
| **(d) Depreciation,   amortisation, impairment and foreign exchange differences included in the   statement of comprehensive income** | ** ** | ** **      |       |            |       |            |       |
| Depreciation                                                                                                                               | ** ** | **238**         |       | 292             |       | 401             |       |
| Impairment of leasehold improvements                                                                                                       | ** ** | **54**          |       | —          |       | —          |       |
| Amortisation of intellectual property rights                                                                                               | ** ** | **—**      |       | 360             |       | 359             |       |
| Net foreign exchange loss                                                                                                                  | ** ** | **71**          |       | 498             |       | 169             |       |
|                                                                                                                                       | ** ** | **363**         |       | 1,150           |       | 929             |       |

 

F-18

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Table of Contents

 
| ** **                                                                                            | ** ** | **2011   $000** | ** ** | **2010   $000** | ** ** | **2009   $000** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                                                            | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** |
| **(e) Lease payments and   other expenses included in the statement****of comprehensive income** |       |            |       |            |       |            |       |
| Minimum lease payments — operating leases                                                        | ** ** | **679**         |       | 495             |       | 552             |       |
|                                                                                                  |       |            |       |            |       |            |       |
| **(f) Employee benefit   expenses**                                                              |       |            |       |            |       |            |       |
| Wages and salaries                                                                                    | ** ** | **2,762**       |       | 2,837           |       | 3,370           |       |
| Long service leave provision                                                                          | ** ** | **9**           |       | 22              |       | 88              |       |
| Share-based payments expenses                                                                         | ** ** | **84**          |       | 22              |       | 38              |       |
|                                                                                                  | ** ** | **2,855**       |       | 2,881           |       | 3,496           |       |
|                                                                                                  |       |            |       |            |       |            |       |
| **(g) Other expenses**                                                                           | ** ** | ** **      |       |            |       |            |       |
| Bad debt expense                                                                                      | ** ** | **108**         |       | 83              |       | —          |       |
| Royalty fee expense                                                                                   | ** ** | **31**          |       | —          |       | —          |       |
| Payment to Medigen — legal settlement                                                            | ** ** | **—**      |       | 1,800           |       | —          |       |
|                                                                                                  | ** ** | **139**         |       | 1,883           |       | —          |       |

 

**5.****        ****PARENT ENTITY DISCLOSURE**

 

Pursuant to Schedule 1 Amendments of the Corporations Amendment regulations 201 (No. 6), below is a summary of the parent entity’s operations as of and for the year ended 30 June 2011:

** **
| ** **                    | ** ** | **Parent**   | ** ** |
|-------------------------------|------------|--------------|------------|
| ** **                    | ** ** | **2011**     | ** ** | **2010** | ** ** |
| ** **                    | ** ** | **$000**     | ** ** | **$000** | ** ** |
|                          |       |         |       |   |   |
| Current assets                | ** ** | **11,247**   |       | 15,650 |   |
| Total assets                  | ** ** | **11,938**   |       | 16,723 |   |
| Current liabilities           | ** ** | **3,151**    |       | 1,577 |   |
| Total liabilities             | ** ** | **3,447**    |       | 1,762 |   |
| **Shareholders’ equity** | ** ** | ** **   |       |   |   |
| Contributed equity            | ** ** | **152,217**  |       | 152,217 |   |
| Options reserve               | ** ** | **3,365**    |       | 3,281 |   |
| Accumulated losses            | ** ** | **(147,091** | **)**      | (140,537 | ) |
|                          | ** ** | **8,491**    |       | 14,961 |   |
|                          |       |         |       |   |   |
| Comprehensive income          | ** ** | **(6,281**   | **)**      | (15,834 | ) |
| Contingent liabilities (i)    | ** ** | **2,972**    |       | 29,979 |   |
| Contractual commitments       | ** ** | **1,174**    |       | 878 |   |

 

----

(i) Contingent liabilities relating to CellGate asset development were extinguished during 2011 upon the creating of Epi Pharmaceuticals Inc.

 

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Table of Contents

 

**6.  INCOME TAX**

 
| ** **                                                                                                                                                                      | ** ** | **2011**   | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                                      | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| The prima facie tax, using tax rates applicable in the country of   operation, on operating loss differs from the income tax provided in the   financial statements as follows: |       |       |       |     |       |     |       |
| Prima facie tax benefit on loss from operating activities @ 30%                                                                                                                 | ** ** | **(1,829** | **)**      | (4,752   | )          | (1,640   | )          |
| Tax effect of amounts which are not deductible (taxable) in   calculating taxable income:                                                                                       | ** ** | ** ** |       |     |       |     |       |
| - Non deductible items                                                                                                                                                          | ** ** | **45**     |       | 1,352    |       | 22       |       |
| - Temporary differences                                                                                                                                                         | ** ** | **(244**   | **)**      | (127     | )          | 483      |       |
| - Foreign currency gain / (loss)                                                                                                                                                | ** ** | **(129**   | **)**      | 2,042    |       | (3,051   | )          |
| - External doubtful debt                                                                                                                                                        | ** ** | **32**     |       | 25       |       | —   |       |
| - Additional deduction for research and development expenditure                                                                                                                 | ** ** | **—** |       | —   |       | (458     | )          |
| Prior year R&D true-up                                                                                                                                                      | ** ** | **866**    |       | (265     | )          | (663     | )          |
| Foreign tax rate adjustment                                                                                                                                                     | ** ** | **(200**   | **)**      | (288     | )          | (462     | )          |
| Income tax benefit attributable to net loss from operations as   reported in the Statement of Comprehensive Income                                                              | ** ** | **(1,459** | **)**      | (2,013   | )          | (5,769   | )          |
| Deferred tax asset not brought to account as realisation of the asset   is not regarded as probable                                                                             | ** ** | **1,459**  |       | 2,013    |       | 5,769    |       |
| Income tax attributable to net loss from operations                                                                                                                             | ** ** | **—** |       | —   |       | —   |       |

 
| ** **                                                    | ** ** | **2011**    | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                                                    | ** ** | **$000**    | ** ** | **$000** | ** ** | **$000** | ** ** |
| **Deferred income tax**                                       | ** ** | ** **  |       |     |       |     |       |
| Deferred income tax at 30 June relates to the following: |       |        |       |     |       |     |       |
| *Deferred tax liabilities*                                    | * *   | * *    | * *   | * * | * *   | * * | * *   |
| Interest on short-term investments                            | ** ** | **(24**     | **)**      | (22      | )          | (5       | )          |
|                                                          |       |        |       |     |       |     |       |
| *Deferred tax assets*                                         | ** ** | ** **  |       |     |       |     |       |
| Unrealised foreign currency loss                              | ** ** | **19**      |       | 146      |       | (1,896   | )          |
| Bad debt provision                                            | ** ** | **57**      |       | 25       |       | —   |       |
| Sundry creditors and accruals                                 | ** ** | **245**     |       | 272      |       | 78       |       |
| Depreciation                                                  | ** ** | **200**     |       | 200      |       | 188      |       |
| Employee entitlements                                         | ** ** | **83**      |       | 104      |       | 95       |       |
| Make good obligation                                          | ** ** | **49**      |       | 48       |       | 47       |       |
| Share issue transaction costs                                 | ** ** | **306**     |       | 745      |       | 1,274    |       |
| Patent costs                                                  | ** ** | **323**     |       | 373      |       | 304      |       |
| Other costs not yet deductible                                | ** ** | **1,240**   |       | 1,152    |       | —   |       |
| Losses available for offset against future taxable income     | ** ** | **50,287**  |       | 45,639   |       | 43,556   |       |
| Deferred tax asset                                            | ** ** | **52,785**  |       | 48,682   |       | 43,641   |       |
| Net deferred tax asset not recognised                         | ** ** | **(52,785** | **)**      | (48,682  | )          | (43,641  | )          |
| Net deferred income tax assets                                | ** ** | **—**  |       | —   |       | —   |       |

 

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Table of Contents

 

The benefit of the deferred tax asset will only be obtained if:

 

(i)                                     future assessable income of a nature and of an amount sufficient to enable the benefit to be realised is generated;

(ii)                                  the conditions for deductibility imposed by tax legislation continue to be complied with;  and

(iii)                               no changes in tax legislation adversely affect the Group in realising the benefit.

 

The Group has tax losses arising in Australia of $147,554,000 (2009: $142,672,000) that are available indefinitely for offset against future taxable profits of the companies in which the losses arose, subject to satisfying the relevant income tax loss carry-forward rules.

 

The Company has US federal and state net operating loss carry-forwards of US$8,296,000 and US$63,000, respectively, which have a carry-forward period between 2028 — 2029 are available a maximum of 20 years, subject to a continuity of ownership test.

 

**7. EARNINGS/(LOSS) PER SHARE**

 

The following reflects the income and share data used in the basic and diluted earnings per share computations:

 
| ** **                                                                                                        | ** ** | **2011**                    | ** ** | **2010**                    | ** ** | **2009**                    | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                        | ** ** | **$000**                    | ** ** | **$000**                    | ** ** | **$000**                    | ** ** |
|                                                                                                              |       |                        |       |                        |       |                        |       |
| Loss used in calculating basic and diluted loss per share                                                         | ** ** | **(6,098**                  | **)**      | (15,839                     | )          | (5,467                      | )          |
| ** **                                                                                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| ** **                                                                                                        | ** ** | **Number of   shares** | ** ** | **Number of   shares** | ** ** | **Number of   shares** | ** ** |
| Weighted average number of ordinary shares on issue used in the   calculation of basic and diluted loss per share | ** ** | **24,709,097**              |       | 24,709,097                  |       | 54,481,888                  |       |
|                                                                                                              |       |                        |       |                        |       |                        |       |
| Basic and diluted loss per share (cents per share)                                                                | ** ** | **(24.7**                   | **)**      | (64.1                       | )          | (10.0                       | )          |

 

Basic loss per share amounts are calculated by dividing the net loss for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted loss per share amounts are calculated by dividing the net loss attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all dilutive potential ordinary shares into ordinary shares.

 

There are 1,441,333 options that have been excluded because the loss position makes any potential ordinary share anti-dilutive**.**

 

**8. DIVIDENDS PAID AND PROPOSED**

 

The entity has not declared or paid dividends and does not anticipate declaring or paying any dividends in the immediate term.

 

**9. CURRENT ASSETS - CASH AND CASH EQUIVALENTS / SHORT-TERM INVESTMENTS**

 
| ** **                      | ** ** | **2011**   | ** ** | **2010** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|
| ** **                      | ** ** | **$000**   | ** ** | **$000** | ** ** |
| **Cash   and cash equivalents** | ** ** | ** ** |       |     |       |
| Cash at bank and in   hand      | ** ** | **1,753**  |       | 3,893    |       |
| Short-term deposits             | ** ** | **4,580**  |       | —   |       |
| Cash and cash   equivalents     | ** ** | **6,333**  |       | 3,893    |       |

 

F-21

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Table of Contents

 
| ** **                              | ** ** | **2011**   | ** ** | **2010** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|
| ** **                              | ** ** | **$000**   | ** ** | **$000** | ** ** |
| **Short-term   investments**            | ** ** | ** ** |       |     |       |
| Term deposit (>   3 months maturity) | ** ** | **4,115**  |       | 11,250   |       |
| Short-term   investments                | ** ** | **4,115**  |       | 11,250   |       |

 

Cash at bank earns interest at floating rates based on daily bank deposit rates.

 

Short-term deposits are made for varying periods of between one month and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

 

Short-term investments are made for periods of 4 to 12 months depending on the cash requirements of the Group and consideration of term deposit rates.

 
| ** **                                                                   | ** ** | **2011********$000** | ** ** | **2010********$000** | ** ** | **2009********$000** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| **Reconciliation of net loss after   tax to net cash flows from operations** | ** ** | ** **           | ** ** | ** **           |       |                 |       |
| Net loss                                                                     | ** ** | **(6,098**           | **)**      | (15,839              | )          | (5,467               | )          |
| Adjustments for:                                                             | ** ** | ** **           |       |                 |       |                 |       |
| Depreciation                                                                 | ** ** | **238**              |       | 292                  |       | 401                  |       |
| Impairment loss                                                              | ** ** | **54**               |       | 2,644                |       | —               |       |
| Make good provision                                                          | ** ** | **4**                |       | 3                    |       | 3                    |       |
| Amortisation of intellectual property rights                                 | ** ** | **—**           |       | 361                  |       | 359                  |       |
| Share options expensed                                                       | ** ** | **84**               |       | 22                   |       | 38                   |       |
| Net book value of plant and equipment written-off                            | ** ** | **10**               |       | —               |       | —               |       |
| Net fair value change on derivatives                                         | ** ** | **—**           |       | —               |       | (508                 | )          |
| (Gain) / loss on disposal of plant and equipment                             | ** ** | **(8**               | **)**      | 1                    |       | 3                    |       |
|                                                                         |       |                 |       |                 |       |                 |       |
| **Changes in assets and liabilities**                                        | ** ** | ** **           |       |                 |       |                 |       |
| (Increase)/decrease in trade and other receivables                           | ** ** | **(12**              | **)**      | (709                 | )          | 428                  |       |
| (Increase)/decrease in prepayments                                           | ** ** | **59**               |       | 57                   |       | (150                 | )          |
| (Decrease)/increase in trade and other payables                              | ** ** | **1,050**            |       | 250                  |       | (4,816               | )          |
| (Decrease)/increase in provisions                                            | ** ** | **(32**              | **)**      | 45                   |       | (110                 | )          |
| Increase in government grants                                                | ** ** | **—**           |       | —               |       | 293                  |       |
| Net cash used in operating activities                                        | ** ** | **(4,651**           | **)**      | (12,873              | )          | (9,526               | )          |

 

**10. TRADE AND OTHER RECEIVABLES**

** **
| ** **                        | ** ** | **2011**  | ** ** | **2010** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|
| ** **                        | ** ** | **$000**  | ** ** | **$000** | ** ** |
| Trade receivables                 | ** ** | **59**    |       | 189      |       |
| Other receivables (i)             | ** ** | **955**   |       | 813      |       |
| Total trade and other receivables | ** ** | **1,014** |       | 1,002    |       |

 

----

(i) Other receivables are non-interest bearing and are generally on 30-90 day terms. Balance also includes accrued sales not yet billed which account for $834,000 (2010: $786,000). It also includes receivable for expenses paid on behalf of Epi Pharmaceuticals Inc for $13,000 (2010: nil).

 

F-22

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Table of Contents

 

**11. NON-CURRENT ASSETS - PLANT & EQUIPMENT**

 
| ** **                     | ** ** | **1 July 2010** | ** ** | **Translation   Adjustment** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Depreciation** | ** ** | **Impairment** | ** ** | **30 June   2011** | ** ** |
|--------------------------------|------------|---------------------------|------------|------------------------------|------------|---------------|------------|---------------|------------|------------------|------------|----------------|------------|-------------------------|------------|
| ** **                     | ** ** | **$000**                  | ** ** | **$000**                     | ** ** | **$000**      | ** ** | **$000**      | ** ** | **$000**         | ** ** | **$000**       | ** ** | **$000**                | ** ** |
| **Plant & equipment** |       |                      |       |                         |       |          |       |          |       |             |       |           |       |                    |       |
| At cost                        |       | 4,781                     |       | —                       |       | 29            |       | (342          | )          | —           |       | —         |       | 4,468                   |       |
| Accumulated depreciation       |       | (4,289                    | )          | —                       |       | —        |       | 342           |       | (174             | )          | —         |       | (4,121                  | )          |
|                           |       | 492                       |       | —                       |       | 29            |       | —        |       | (174             | )          | —         |       | 347                     |       |
| ** **                     | ** ** | ** **                | ** ** | ** **                   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **              | ** ** |
| **Office equipment**           | ** ** | ** **                |       |                         | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **              | ** ** |
| At cost                        |       | 227                       |       | —                       |       | 34            |       | (90           | )          | —           |       | —         |       | 171                     |       |
| Acquisition of assets          |       | 27                        |       | —                       |       | —        |       | —        |       | —           |       | —         |       | 27                      |       |
| Translation adjustment         |       | 5                         |       | (3                           | )          | —        |       | —        |       | —           |       | —         |       | 2                       |       |
| Accumulated depreciation       |       | (181                      | )          | —                       |       | —        |       | 60            |       | (32              | )          | —         |       | (153                    | )          |
|                           |       | 78                        |       | (3                           | )          | 34            |       | (30           | )          | (32              | )          | —         |       | 47                      |       |
|                           |       |                      |       |                         |       |          |       |          |       |             |       |           |       |                    |       |
| **Leasehold improvements**     |       |                      |       |                         |       |          |       |          |       |             |       |           |       |                    |       |
| At cost                        |       | 852                       |       | —                       |       | —        |       | —        |       | —           |       | —         |       | 852                     |       |
| Accumulated depreciation       |       | (762                      | )          | —                       |       | —        |       | —        |       | (32              | )          | —         |       | (794                    | )          |
| Impairment                     |       | —                    |       | —                       |       | —        |       | —        |       | —           |       | (54            | )          | (54                     | )          |
|                           |       | 90                        |       | —                       |       | —        |       | —        |       | (32              | )          | (54            | )          | 4                       |       |
| **TOTAL**                      | ** ** | **660**                   | ** ** | **(3**                       | **)**      | **63**        | ** ** | **(30**       | **)**      | **(238**         | **)**      | **(54**        | **)**      | **398**                 | ** ** |

 

F-23

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Table of Contents

 
| ** **                     | ** ** | **1 July 2009** | ** ** | **Translation********Adjustment** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Depreciation** | ** ** | **Impairment** | ** ** | **30 June 2010** | ** ** |
|--------------------------------|------------|---------------------------|------------|-----------------------------------|------------|---------------|------------|---------------|------------|------------------|------------|----------------|------------|----------------------------|------------|
| ** **                     | ** ** | **$000**                  | ** ** | **$000**                          | ** ** | **$000**      | ** ** | **$000**      | ** ** | **$000**         | ** ** | **$000**       | ** ** | **$000**                   | ** ** |
| **Plant & equipment** |       |                      |       |                              |       |          |       |          |       |             |       |           |       |                       |       |
| At cost                        |       | 4,733                     |       | —                            |       | 48            |       | —        |       | —           |       | —         |       | 4,781                      |       |
| Accumulated depreciation       |       | (4,092                    | )          | —                            |       | —        |       | —        |       | (197             | )          | —         |       | (4,289                     | )          |
|                           |       | 641                       |       | —                            |       | 48            |       | —        |       | (197             | )          | —         |       | 492                        |       |
| ** **                     | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **                 | ** ** |
| **Office equipment**           | ** ** | ** **                |       |                              | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **                 | ** ** |
| At cost                        |       | 554                       |       | —                            |       | 26            |       | (353          | )          | —           |       | —         |       | 227                        |       |
| Acquisition of assets          |       | 27                        |       | —                            |       | —        |       | —        |       | —           |       | —         |       | 27                         |       |
| Translation adjustment         |       | 7                         |       | (2                                | )          | —        |       | —        |       | —           |       | —         |       | 5                          |       |
| Accumulated depreciation       |       | (471                      | )          | —                            |       | —        |       | 352           |       | (62              | )          | —         |       | (181                       | )          |
|                           |       | 117                       |       | (2                                | )          | 26            |       | (1            | )          | (62              | )          | —         |       | 78                         |       |
|                           |       |                      |       |                              |       |          |       |          |       |             |       |           |       |                       |       |
| **Leasehold improvements**     |       |                      |       |                              |       |          |       |          |       |             |       |           |       |                       |       |
| At cost                        |       | 852                       |       | —                            |       | —        |       | —        |       | —           |       | —         |       | 852                        |       |
| Accumulated depreciation       |       | (729                      | )          | —                            |       | —        |       | —        |       | (33              | )          | —         |       | (762                       | )          |
|                           |       | 123                       |       | —                            |       | —        |       | —        |       | (33              | )          | —         |       | 90                         |       |
| **TOTAL**                      | ** ** | **881**                   | ** ** | **(2**                            | **)**      | **74**        | ** ** | **(1**        | **)**      | **(292**         | **)**      | **—**     | ** ** | **660**                    | ** ** |

 

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Table of Contents

 

**12. NON-CURRENT ASSETS - INTANGIBLE ASSETS**

 

**Intellectual property rights**

 

Reconciliation of carrying amount at the beginning and end of the period:

 
| ** **                                      | ** ** | **2011**   | ** ** | **2010** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|
| **Year end 30 June**             | ** ** | **$000**   | ** ** | **$000** | ** ** |
| Opening balance net of accumulated amortisation | ** ** | **—** |       | 3,005    |       |
| Amortisation                                    | ** ** | **—** |       | (361     | )          |
| Impairment loss                                 | ** ** | **—** |       | (2,644   | )          |
| At 30 June net of accumulated amortisation      | ** ** | **—** |       | —   |       |

 
| ** **                          | ** ** | **2011**   | ** ** | **2010** | ** ** |
|-------------------------------------|------------|------------|------------|----------|------------|
| **Year end 30 June** | ** ** | **$000**   | ** ** | **$000** | ** ** |
| Cost (gross carrying amount)        | ** ** | **—** |       | 3,515    |       |
| Accumulated amortisation            | ** ** | **—** |       | (871     | )          |
| Impairment loss                     | ** ** | **—** |       | (2,644   | )          |
| Net carrying amount                 | ** ** | **—** |       | —   |       |

 

Intellectual property rights were acquired through a business combination and are carried at cost less accumulated amortisation. This intangible asset had been determined to have a useful life until 15 October 2017, which is the patent expiry of the lead compound acquired through the acquisition of CellGate, Inc. and has been amortised using the straight-line method since the date of acquisition. The amortisation has been recognised in the statement of comprehensive income within the line item “administrative and corporate expenses”.

 

During the second half of the 2010 financial year, the Company undertook a strategic review of its assets and the decision was made to divest the Cellgate assets to focus on its core competencies — dual mechanism oncology products. Following the decision to divest these assets, the Company impaired the full value of the intangible asset due to uncertainty surrounding the realisation amount. The assets have been divested into Epi Pharmaceuticals, Inc.

 

**13. SHARE BASED PAYMENTS**

 

**(a) Employee option plan**

 

The Company’s Directors and Employee Option Incentive Plan (“the Employee Plan”) was last approved by shareholders at the 2010 annual general meeting.

 

During 2011, the Company granted 331,000 new options to existing employees who were with the Company for at least a year. The options vest upon completion of one year of service with the Company from the grant date. Options granted to Company employees are issued under the Employee Plan.  Options are granted under the Employee Plan for no consideration and once capable of exercise entitle the holder to subscribe for one fully-paid ordinary share upon exercise at the exercise price.  The exercise price, except for the 1,000,000 options granted to the CEO, is based on the weighted average closing price at which the Group’s shares traded on the Australian Securities Exchange during the five trading days immediately before they are granted. The remaining share options of 583,333 are subject to cancellation on 26 February 2012 following the termination of the CEO position, as per the rules of the Employee Share Option Plan.

 

Options granted under the Employee Plan that have not vested at the time an option holder becomes ineligible (i.e. no longer an employee) are forfeited and not capable of exercise.  When an option holder becomes ineligible and the options have already vested then the option holder has 3 months to exercise or they expire.  Options must be exercised by the expiry dates or they lapse. The vesting period is 12 months of service from the grant date.

 

F-25

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Table of Contents

 

**(b) Options issued to the Chief Executive Officer**

 

During 2010, the Company issued 1,000,000 new options to the Chief Executive Officer.  The options vest upon fulfilment of the following share market price conditions:

 

·                  166,667 options vest if the 30 day volume weighted average price (VWAP) exceeds the share price of $0.65 at the first anniversary of the employment commencement date (this tranche of options expired during fiscal 2011 as these options did not meet the market condition);

·                  166,667 options vest if the 30 day VWAP exceeds the share price of $0.80 at the second anniversary of the employment commencement date;

·                  166,667 options vest if the 30 day VWAP exceeds the share price of $0.95 at the third anniversary of the employment commencement date;

·                  250,000 options vest at the end of four years of service if the 30 day VWAP exceeds the share price of $1.05 at the first anniversary of the employment commencement date (this tranche of options expired during fiscal 2011 as these options did not meet the market condition); and

·                  250,000 options vest at the end of five years of service if the 30 day VWAP exceeds the share price of $1.15 at the second anniversary of the employment commencement date.

 

The target 30 day VWAP for each of the conditions above is equal to the exercise price for each of the tranches.

 

**(c) Consultant option plan**

 

On 16 February 2005 the Directors approved the Progen Consultants and Advisors Option Incentive Plan (“the Consultant Plan”).  The Consultant Plan rules are consistent with the Employee Plan rules in that the consultants provide similar services to employees so the awards are accounted for in the same way as employee awards and the options vest over 12 months.

 

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Table of Contents

 

**(d) Summary of option movements**

 

Information with respect to the number of all options granted is as follows:

 
| ** **                        | ** ** | **2011**                     | ** ** | **2010**                                           | ** ** | **2009**                     | ** ** |
|-----------------------------------|------------|------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Number   of options** | ** ** | **Weighted   average   exercise   price********$** | ** ** | **Number of   options** | ** ** | **Weighted   average   exercise   price********$** | ** ** | **Number of   options** | ** ** | **Weighted   average   exercise   price********$** | ** ** |
| Beginning of the   financial year |       | 1,459,000                    |       | 2.56                                               |       | 1,115,000                    |       | 3.54 |   | 2,669,000 |   | 5.39 |   |
| - granted(1)                      |       | 331,000                      |       | 0.29                                               |       | 1,000,000                    |       | 0.95 |   | — |   | — |   |
| - forfeited                       |       | (4,000                       | )          | 0.29                                               |       | —                       |       | — |   | (127,500 | ) | 3.61 |   |
| - expired                         |       | (594,667                     | )          | 1.77                                               |       | (656,000                     | )          | 3.82 |   | (1,426,500 | ) | 6.05 |   |
| - exercised                       |       | —                       |       | —                                             |       | —                       |       | — |   | — |   | — |   |
| Balance at end of   year          |       | 1,191,333                    |       | 2.23                                               |       | 1,459,000                    |       | 2.56 |   | 1,115,000 |   | 3.54 |   |
| Exercisable at end   of year      |       | 281,000                      |       | 3.35                                               |       | 459,000                      |       | 6.08 |   | 1,085,000 |   | 3.56 |   |

 

----

(1)The weighted average fair value at grant date in 2011 financial year was $0.09 (2010: $0.20).

 

The following table summarises information about all options outstanding at 30 June 2011:

 
| ** **          | ** ** | ** **           | ** ** | **Balance beginning of year** | ** ** | **Balance end of year**              | ** ** |
|---------------------|------------|----------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| **Grant date** | ** ** | **Expiry date** | ** ** | **Number of   options**                 | ** ** | **Average   option   exercise price********$** | ** ** | **Number of********options** | ** ** | **Average********option   exercise   price********$** | ** ** |
| 29 August 2006      |       | 29 August 2011(1)    |       | 24,000                                       |       | 2.79                                                |       | 21,000 |   | 2.79 |   |
| 14 September 2007   |       | 13 September 2012(2) |       | 310,000                                      |       | 3.61                                                |       | 235,000 |   | 3.61 |   |
| 1 February 2008     |       | 1 February 2013(3)   |       | 100,000                                      |       | 2.22                                                |       | — |   | — |   |
| 10 March 2008       |       | 10 March 2013        |       | 25,000                                       |       | 1.42                                                |       | 25,000 |   | 1.42 |   |
| 29 March 2010       |       | 29 March 2015(4)     |       | 166,667                                      |       | 0.65                                                | (4)        | — |   | — |   |
| 29 March 2010       |       | 29 March 2015(4)     |       | 166,667                                      |       | 0.80                                                | (4)        | 166,667 |   | 0.80 | (4) |
| 29 March 2010       |       | 29 March 2015(4)     |       | 166,666                                      |       | 0.95                                                | (4)        | 166,666 |   | 0.95 | (4) |
| 29 March 2010       |       | 29 March 2015(5)     |       | 250,000                                      |       | 1.05                                                | (5)        | — |   | — |   |
| 29 March 2010       |       | 29 March 2015(5)     |       | 250,000                                      |       | 1.15                                                | (5)        | 250,000 |   | 1.15 | (5) |
| 1 January 2011      |       | 1 January 2016       |       | —                                       |       | —                                              |       | 327,000 |   | 0.29 |   |
|                |       |                 |       | 1,459,000                                    |       |                                                |       | 1,191,333 |   |   |   |

 

----

(1) 3,000 options expired during the year. For this tranche of options, when an employee resigns the non-vested options immediately vest and then expire 3 months from the resignation date.

(2) 75,000 options expired during the year. When an employee resigns the vested options expire 3 months from the resignation date.

(3) 100,000 options expired during the year. When an employee resigns the vested options expire 3 months from the resignation date.

(4) Options vest upon fulfilment of a service period and share market price conditions; i.e., if 30 day VWAP exceeds the share prices of $0.65 in Year 1, $0.80 in Year 2, $0.95 in Year 3. The first tranche of 166,667 options expired due to non-satisfaction of a market condition.

(5) Options vest upon fulfilment of a service period and share market price conditions; i.e., if 30 day VWAP exceeds the share price of $1.05 in Year 1 and the completion of four years of service; and if 30 day VWAP exceeds the share price of $1.15 in Year 2 and the completion of five years of service. The first tranche of 250,000 options expired due to non-satisfaction of a market condition.

 

The fair value of the equity-settled share options granted under the option plans is estimated as at the date of grant using a binomial or other appropriate model taking into account the terms and conditions upon which the options were granted.

 

Fair value of shares issued on exercise of options is estimated to be the market price of shares of Progen Pharmaceuticals Limited on the ASX as at the close of trading on their respective issue dates.

 

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The following table lists the weighted average inputs to the model used for the year ended 30 June 2011.

 
| ** **                        | ** ** | **2011** | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected volatility               |       | 54.0     | %          | 63       | %          | —   |       |
| Risk-free rate   average          |       | 5.4      | %          | 5.5      | %          | —   |       |
| Expected life   average (years)   |       | 5 yrs    |       | 5 yrs    |       | —   |       |
| Dividend yield                    |       | —   |       | —   |       | —   |       |
| Weighted average   exercise price |       | $        | 0.29       |     | $          | 0.95     |       | — |   |
| Share price at   grant date       |       | $        | 0.32       |     | $          | 0.52     |       | — |   |

 

The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options granted were incorporated into the measurement of fair value.

 

**14. CURRENT LIABILITIES - TRADE AND OTHER PAYABLES**

 
| ** **              | ** ** | **2011**  | ** ** | **2010** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
| ** **              | ** ** | **$000**  | ** ** | **$000** | ** ** |
| Trade creditors (i)     | ** ** | **233**   |       | 260      |       |
| Unearned revenue   (ii) | ** ** | **832**   |       | —   |       |
| Other creditors   (iii) | ** ** | **1,668** |       | 1,423    |       |
|                    | ** ** | **2,733** |       | 1,683    |       |

 

**Australian dollar equivalents**

 

Australian dollar equivalent of amounts payable in foreign currencies - $1,759,000 (2010: $787,000).

 

----

**Terms and conditions**

 

Terms and conditions relating to the above financial instruments:

 
| (i)   | Trade creditors are non-interest bearing and   are normally settled on 30 day terms.                                                                                                                                                                                           |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | The unearned income of $0.832 million (2010:   $nil) represents payments in advance from Medigen Biotechnology Corp   (Medigen) to commence the manufacture of PI-88 in accordance with the   Exclusive License and Collaboration Agreement between Medigen and the   Company. |
| (iii) | Other creditors are non-interest bearing and   have a term between 30 days and 12 months. Balance includes   abandonment/obligation fee of $377,000 (2010: $467,000) for the divestment   transaction dealings.                                                                |

 

As part of the major company restructure announced on 16 June 2011, restructuring costs for lease termination of Toowong office for $255,122 and office relocation cost for $2,000 were recognised and payable at 30 June 2011 (2010: nil). Also following the management restructure, termination payments for $184,118 were recognised and payable at 30 June 2011 for the termination of employment services of the Chief Executive Officer and the Director of Clinical Operations — US (2010: nil).

 

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**15. PROVISIONS**

 

In accordance with the lease agreement terms, the parent must restore its leased premises situated at Darra, Brisbane and Toowong, Brisbane to their original condition at the end of the lease term.  For the Darra premises the parent provided nil in the year 2010 as the provision has reached the full estimated cost to restore the facility, i.e. $128,668 (fully provided in 2007).  Given the scheduled office move in August 2011, the provision for Toowong premises has been fully recognised to its total estimated restoration cost of $34,348, of which $3,635 was amortised during the financial year ending 30 June 2011 (2010: $3,000).

 

Due to the long-term nature of the Darra premises make good liability, the greatest uncertainty in estimating the provision is the costs that will ultimately be incurred. The provision has been calculated using a risk free discount rate.

 

**Long service leave provision**

 

Refer to note 2 for the relevant accounting policy and a discussion of the significant estimations and assumptions applied in the measurement of this provision.

 
| ** **                      | ** ** | **2011**   | ** ** | **2010** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|
| ** **                      | ** ** | **$000**   | ** ** | **$000** | ** ** |
|                            |       |       |       |     |       |
| Make good provision             | ** ** | **164**    |       | 160      |       |
|                            |       |       |       |     |       |
| **Employee benefits provision** | ** ** | ** ** |       |     |       |
| Long service leave              | ** ** | **125**    |       | 120      |       |
| Annual leave                    | ** ** | **167**    |       | 204      |       |
|                            | ** ** | **292**    |       | 324      |       |
|                            | ** ** | **456**    |       | 484      |       |

 

**Movement in provision**

 
| ** **              | ** ** | **Make   good   provision** | ** ** | **Long   service   leave** | ** ** | **Annual leave** | ** ** | **Total**  | ** ** |
|-------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------|------------|------------|------------|
| ** **              | ** ** | **$000**                    | ** ** | **$000**                   | ** ** | **$000**              | ** ** | **$000**   | ** ** |
| ** **              | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| At 1 July 2010          |       | 160                         |       | 120                        |       | 204                   |       | 484        |       |
| Arising during the year |       | —                      |       | 9                          |       | 186                   |       | 195        |       |
| Amortised               |       | 4                           |       | —                     |       | —                |       | 4          |       |
| Utilised                |       | —                      |       | (4                         | )          | (223                  | )          | (227       | )          |
| At 30 June 2011         | ** ** | **164**                     | ** ** | **125**                    | ** ** | **167**               | ** ** | **456**    | ** ** |
|                    |       |                        |       |                       |       |                  |       |       |       |
| Current 2011            |       | 35                          |       | 74                         |       | 167                   |       | 276        |       |
| Non-current 2011        |       | 129                         |       | 51                         |       | —                |       | 180        |       |
|                    |       | 164                         |       | 125                        |       | 167                   |       | 456        |       |
|                    |       |                        |       |                       |       |                  |       |       |       |
| Current 2010            |       | —                      |       | 76                         |       | 204                   |       | 280        |       |
| Non-current 2010        |       | 160                         |       | 44                         |       | —                |       | 204        |       |
|                    |       | 160                         |       | 120                        |       | 204                   |       | 484        |       |

 

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**16. CONTRIBUTED EQUITY**

 
| ** **                        | ** ** | **2011**    | ** ** | **2010** | ** ** |
|-----------------------------------|------------|-------------|------------|----------|------------|
| ** **                        | ** ** | **$000**    | ** ** | **$000** | ** ** |
| **a) Issued and paid up capital** |       |        |       |     |       |
| Ordinary shares fully paid        | ** ** | **152,217** |       | 152,217  |       |

 
| ** **                               | ** ** | **2011**               | ** ** | **2010**    | ** ** |
|------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                               | ** ** | **Number of   shares** | ** ** | **$000**    | ** ** | **Number of   shares** | ** ** | **$000** | ** ** |
| **b)****Movements in shares on   issue** | ** ** | ** **             | ** ** | ** **  |       |   |   |   |   |
| Beginning of the   financial year        | ** ** | **24,709,097**         | ** ** | **152,217** |       | 24,709,097 |   | 152,217 |   |
| Issued during the   year:                | ** ** | **—**             | ** ** | **—**  |       | — |   | — |   |
|                                     | ** ** | ** **             | ** ** | ** **  |       |   |   |   |   |
| End of the   financial year              | ** ** | **24,709,097**         | ** ** | **152,217** |       | 24,709,097 |   | 152,217 |   |

 

**c)  Share options**

 

At 30 June 2011 there were a total of 1,191,333 (2010: 1,459,000) unissued ordinary shares in respect of which options were outstanding, comprising:

 

*Unlisted Share Options*

 

*Employee and executive share incentive scheme:*

 

During the 2011 financial year, there were 331,000 ordinary share options granted to employees, of which 4,000 options were forfeited. Of the 1,000,000 ordinary shares granted to the Chief Executive Officer in 2010, the first tranche of 416,667 options expired due to share price conditions not being met.  There were a total of 1,191,333 options over ordinary shares outstanding under the employee incentive scheme (2010: 1,439,000).

 

Refer to note 13 for more details on unlisted options.

 

**17.****      ****ACCUMULATED LOSSES AND RESERVES**

 

**Accumulated losses**

 

Movement in accumulated losses were as follows:

 
| ** **                      | ** ** | **2011**     | ** ** | **2010** | ** ** |
|---------------------------------|------------|--------------|------------|----------|------------|
| ** **                      | ** ** | **$000**     | ** ** | **$000** | ** ** |
| Beginning of the financial year | ** ** | **(140,566** | **)**      | (124,727 | )          |
| Net loss                        | ** ** | **(6,098**   | **)**      | (15,839  | )          |
| End of the financial year       | ** ** | **(146,664** | **)**      | (140,566 | )          |

 

**Reserves**

 

**Employee reserve**

 

The employee reserve is used to record the value of share based payments provided to employees, including key management personnel, as part of their remuneration.

 

**Foreign currency translation reserve**

 

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

 

F-30

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| ** **                               | ** ** | **2011**   | ** ** | **2010** | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|
| **Employee reserve**                | ** ** | **$000**   | ** ** | **$000** | ** ** |
| Beginning of the financial year          | ** ** | **3,283**  |       | 3,261    |       |
| Employee option expense                  | ** ** | **84**     |       | 22       |       |
| End of the financial year                | ** ** | **3,367**  |       | 3,283    |       |
|                                     |       |       |       |     |       |
| **Foreign currency translation reserve** | ** ** | ** ** |       |     |       |
| Beginning of the financial year          | ** ** | **83**     |       | 39       |       |
| Foreign currency translation             | ** ** | **(12**    | **)**      | 44       |       |
| End of the financial year                | ** ** | **71**     |       | 83       |       |
| **Total reserves**                       | ** ** | **3,438**  |       | 3,366    |       |

 

**18.  FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES**

 

The Group’s principal financial instruments comprise cash and short-term investments and restricted term deposits.

 

The Group manages its exposure to key financial risks, including interest rate and currency risk in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting future financial security.

 

The Group enters into derivative transactions, principally forward currency contracts from time to time. The purpose is to manage the currency risk arising from the Group’s operation and its sources of finance. The main risks arising from the Group’s financial instruments are cash flow interest rate risk, foreign currency risk and credit risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange rates and assessments of market forecasts for interest rate and foreign exchange. Ageing analyses is undertaken to manage credit risk.

 

Alternatively, and depending on cash flow, the Group may also simply procure the required amount of foreign currency to mitigate the risk of future obligations.

 

The Board reviews and agrees policies for managing each of these risks which are summarised below.

 

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the financial statements.

 

**Credit risk**

 

The Group trades only with recognised, creditworthy third parties. All receivables, including other receivables and except for intercompany receivables, are current.

 

The Group’s exposure to external bad debts is not significant. All the Group’s material cash balances are with a large national Australian bank. Although there is a significant concentration of risk with one bank, this is a strong credit rated bank that is not exposed to the US banking market risks.

 

**Liquidity risk**

 

The Group’s objective is to maintain a balance between continuity of project research utilising an optimal combination of equity funding and available credit lines. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities. The Group has no financial liabilities due after twelve months.

 

Liquid non-derivative assets comprising cash and receivables are considered in the Group’s overall liquidity risk. The Group ensures that sufficient liquid assets are available to meet all the required short-term cash payments.

 

All of the Group’s short-term investments are Level 2 financial instruments as per AASB 7 (IFRS 7).

 

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The table below reflects all financial liabilities as of 30 June 2011. For derivative financial instruments the market value is presented, whereas for the other obligations the undiscounted cash flows are presented. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing at 30 June 2011.  The Group had no derivative financial instruments at 30 June 2011.

 

The remaining contractual maturities of the Group’s financial liabilities are:

 
| ** **       | ** ** | **2011**  | ** ** | **2010** | ** ** |
|------------------|------------|-----------|------------|----------|------------|
| ** **       | ** ** | **$000**  | ** ** | **$000** | ** ** |
| 6 months or less | ** ** | **4,013** |       | 3,195    |       |

 

**Foreign currency risk**

 

At 30 June 2011, the Group held US$2,432,000 (2010: US$185,000) in cash deposits.

 

At 30 June 2011, the Group had the following exposure to US$ currency:

 
| ** **                  | ** ** | **2011**   | ** ** | **2010** | ** ** |
|-----------------------------|------------|------------|------------|----------|------------|
| ** **                  | ** ** | **$000**   | ** ** | **$000** | ** ** |
| **Financial   assets**      | ** ** | ** ** |       |     |       |
| Cash and cash   equivalents | ** ** | **2,295**  |       | 172      |       |
|                        | ** ** | **2,295**  |       | 172      |       |
| **Financial   liabilities** | ** ** | ** ** |       |     |       |
| Trade and other   payables  | ** ** | **968**    |       | 787      |       |
| Unearned revenue            | ** ** | **832**    |       | —   |       |
|                        | ** ** | **1,800**  |       | 787      |       |
| Net exposure                | ** ** | **495**    |       | (615     | )          |

 

At 30 June 2011, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows:

 
| ** **                       | ** ** | **Post tax loss   (Higher)/Lower** | ** ** | **Equity   Higher/(Lower)** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2011**                                     | ** ** | **2010**                    | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                       | ** ** | **$000**                                     | ** ** | **$000**                    | ** ** | **$000** | ** ** | **$000** | ** ** |
| AUD/USD + 15% (2010: + 10%)      | ** ** | **68**                                       |       | 56                          | ** ** | **—** |   | — |   |
| AUD/USD – 15% (2010: - 10%) | ** ** | **(92**                                      | **)**      | (68                         | )          | **—** |   | — |   |

 

The sensitivity is greater in 2011 than 2010 due to an increase in US placement deposits but was mitigated by a stronger Australian dollar against the US Dollar. The sensitivity analysis for the foreign currency exposure was determined based on historical movements over the past two years.

 

**Interest rate risk**

 

The Group’s exposure to market interest rates relates primarily to the Group’s cash, short-term investments and short-term deposits. These deposits are held to fund the Group’s ongoing and future drug development activities. Cash at bank of $1.753 million earns interest at floating rates based on daily and “at call” bank deposit rates. Short-term deposits and short-term investments of $8.695 million are made for varying periods of between one to six months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. Refer note 9 for details on the Group’s cash and cash equivalents and short-term investments at 30 June 2011.

 

The following sensitivity analysis is based on the weighted average interest rates applicable to the Group’s cash and cash equivalents and short-term investments in existence at the reporting date.

 

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At 30 June 2011, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax loss and equity would have been affected as follows:

 
| ** **                               | ** ** | **Post tax loss   (Higher)/Lower** | ** ** | **Equity   Higher/(Lower)** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2011**                                     | ** ** | **2010**                    | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                               | ** ** | **$000**                                     | ** ** | **$000**                    | ** ** | **$000** | ** ** | **$000** | ** ** |
| + 1.0% (100 basis points) (2010: + 2.0%) | ** ** | **104**                                      |       | 30                          |       | — |   | — |   |
| - 0.5% 50 basis points) (2010: - 1.0%)   | ** ** | **(52**                                      | **)**      | (15                         | )          | — |   | — |   |

 

The 2011 sensitivity is based on a significantly lower cash balance due primarily to significant reduction in the aggregate of cash and cash equivalents and short-term investments in 2011.  Following the rise in interest rates during 2010-11, the potential upside in interest rates has been reduced over the prior year analysis, thereby decreasing sensitivity.  The sensitivity in interest rates were determined based on historical movements over the past two years and management expectations of reasonable movements.

 

**Investments**

 

Investments are made in accordance with a Board-approved Investment Policy. Investments are typically bills and investment-grade commercial paper. The Policy stipulates the types of investments able to be made.  The objective of the policy is to maximise interest income within agreed-upon credit worthiness criteria.

 

**Maturity analysis of financial assets and liabilities based on management’s expectation**

 

The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows. Trade payables and receivables are considered in the Group’s overall liquidity risk.

 
| ** **                               | ** ** | **6 months   or less** | ** ** | **6 to12   months** | ** ** | **More   than 12   months** | ** ** | **Total carrying   amount as per   the statement   of financial   position** | ** ** | **Weighted   average   effective   interest   rates** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Financial instruments 2011** | ** ** | **$000**                         | ** ** | **$000**                 | ** ** | **$000**                         | ** ** | **$000**                                                                                              | ** ** | **%**                                                 | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                            | ** ** | ** **                                            | ** ** |
| **Financial   assets**                   | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                            | ** ** | ** **                                            | ** ** |
| Cash and cash   equivalents              |       | 6,333                            | ** ** | **—**               | ** ** | **—**                       |       | 6,333                                                                                                 |       | 3.5                                                   |       |
| Short-term   investments                 |       | 4,115                            | ** ** | **—**               | ** ** | **—**                       |       | 4,115                                                                                                 |       | 6.0                                                   |       |
| Trade and other   receivables            |       | 1,014                            | ** ** | **—**               | ** ** | **—**                       |       | 1,014                                                                                                 |       | —                                                |       |
| Security deposit                         |       | 87                               | ** ** | **—**               | ** ** | **—**                       |       | 87                                                                                                    |       | 6.0                                                   |       |
|                                     |       | 11,549                           | ** ** | **—**               | ** ** | **—**                       |       | 11,549                                                                                                | ** ** | ** **                                            | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                            | ** ** | ** **                                            | ** ** |
| **Financial   liabilities**              | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                            | ** ** | ** **                                            | ** ** |
| Trade and other   payables               |       | 2,733                            |       | —                   | ** ** | **—**                       |       | 2,733                                                                                                 | ** ** | **—**                                            | ** ** |
|                                     |       | 2,733                            | ** ** | **—**               | ** ** | **—**                       |       | 2,733                                                                                                 | ** ** | ** **                                            | ** ** |
| Net maturity                             |       | 8,516                            |       | —                   | ** ** | **—**                       |       | 8,516                                                                                                 | ** ** | ** **                                            | ** ** |

 

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| ** **                               | ** ** | **6 months   or less** | ** ** | **6 to12   months** | ** ** | **More   than 12   months** | ** ** | **Total   carrying   amount as   per the   statement of   financial   position** | ** ** | **Weighted   average   effective   interest   rates** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Financial instruments 2010** | ** ** | **$000**                         | ** ** | **$000**                 | ** ** | **$000**                         | ** ** | **$000**                                                                                        | ** ** | **%**                                                 | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                      | ** ** | ** **                                            | ** ** |
| **Financial   assets**                   | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                      | ** ** | ** **                                            | ** ** |
| Cash and cash   equivalents              |       | 3,893                            | ** ** | **—**               | ** ** | **—**                       |       | 3,893                                                                                           |       | 5.6                                                   |       |
| Short-term   investments                 |       | 11,250                           | ** ** | **—**               | ** ** | **—**                       |       | 11,250                                                                                          |       | 5.6                                                   |       |
| Trade and other   receivables            |       | 1,002                            | ** ** | **—**               | ** ** | **—**                       |       | 1,002                                                                                           |       | —                                                |       |
| Security deposit                         |       | 94                               | ** ** | **—**               | ** ** | **—**                       |       | 94                                                                                              |       | 5.1                                                   |       |
|                                     |       | 16,239                           | ** ** | **—**               | ** ** | **—**                       |       | 16,239                                                                                          | ** ** | ** **                                            | ** ** |
| ** **                               | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                      | ** ** | ** **                                            | ** ** |
| **Financial   liabilities**              | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                       | ** ** | ** **                                                                                      | ** ** | ** **                                            | ** ** |
| Trade and other   payables               |       | 1,683                            |       | —                   | ** ** | **—**                       |       | 1,683                                                                                           | ** ** | **—**                                            | ** ** |
|                                     |       | 1,683                            | ** ** | **—**               | ** ** | **—**                       |       | 1,683                                                                                           | ** ** | ** **                                            | ** ** |
| Net maturity                             |       | 14,841                           |       | —                   | ** ** | **—**                       |       | 14,841                                                                                          | ** ** | ** **                                            | ** ** |

 

**19. EXPENDITURE COMMITMENTS**

 

The following expenditure commitments had been contracted but not provided:

 

*Preclinical research study agreements*

 

During the financial year 2011, the Group entered into various preclinical research study agreements. The committed value of these agreements for the next financial year is $289,000 (2010:$116,000 2009: $38,000).

 

*Insurance premium*

 

In June 2011, the Group committed to paying the Group’s comprehensive insurance premium for the year ended 30 June 2012. The total value of these premiums is $412,000 (2010: $391,000, 2009: $432,000).

 

*Consultant agreements*

 

During the 2011 financial year, the Group entered into various consultant agreements with a committed value of $87,000 for the next financial year (2010: $144,000, 2009: $48,000).

 

*Purchases and leases*

 

At the end of the 2011 financial year, the Group ordered goods and services and committed to operating leases with a total value of $67,000 which had not been used or delivered by 30 June 2011 (2010: $198,000, 2009: $256,000).

 

*License Agreements*

 

At the end of the 2010 financial year, the Group signed a license agreement with Medigen Biotechnology Corp to exclusively develop, manufacture, market, and sublease the PI-88 product.  A condition of the license is for Progen Pharmaceutical Limited to provide reasonable assistance to Medigen in relation to chemical, manufacturing or control (CMC) issues to a total value of $140,000 (2010: $150,000).

 

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| ** **                                                                                     | ** ** | **2011**   | ** ** | **2010**   | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                                                                     | ** ** | **$000**   | ** ** | **$000**   | ** ** | **$000** | ** ** |
| **a)****Expenditure commitments**                                                              |       |       |       |       |       |     |       |
| Future expenditure commitments not provided for in the financial   statements and payable:     |       |       |       |       |       |     |       |
| - not later than one year:                                                                     |       |       |       |       |       |     |       |
| Research agreements                                                                            | ** ** | **289**    |       | 116        |       | 38       |       |
| Consultant agreements                                                                          | ** ** | **87**     |       | 144        |       | 48       |       |
| Insurance premium                                                                              | ** ** | **412**    |       | 391        |       | 432      |       |
| Purchases                                                                                      | ** ** | **33**     |       | 12         |       | 33       |       |
| License agreements                                                                             | ** ** | **140**    |       | 150        |       | —   |       |
| Total not later than one year                                                                  | ** ** | **821**    |       | 813        |       | 551      |       |
| - later than one and not longer than five years                                                | ** ** | **—** |       | —     |       | —   |       |
| Total expenditure commitments                                                                  | ** ** | **821**    |       | 813        |       | 551      |       |
|                                                                                           |       |       |       |       |       |     |       |
| **(b) Non-cancellable   operating lease commitments**                                     | ** ** | ** ** | ** ** | ** ** |       |     |       |
| Future operating lease commitments not provided for in the financial   statements and payable: | ** ** | ** ** | ** ** | ** ** |       |     |       |
| Minimum lease payments                                                                         |       |       |       |       |       |     |       |
| - not later than one year                                                                      | ** ** | **34**     |       | 186        |       | 223      |       |
| - later than one and not longer than five years                                                | ** ** | **—** |       | —     |       | —   |       |
| Aggregate lease expenditure contracted for at statement of financial   position date           | ** ** | **34**     |       | 186        |       | 223      |       |

 

**(c) Clinical trials**

 
| ** **                                       | ** ** | **2011**   | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| Clinical trials                                  |       |       |       |     |       |     |       |
| - not later than one year:                       |       |       |       |     |       |     |       |
| PI-88 phase 2b Melanoma trial                    | ** ** | **—** |       | —   |       | 233      |       |
| PG-545                                           | ** ** | **350**    |       | —   |       | —   |       |
| PG11047 phase 1 trial                            | ** ** | **40**     | ** ** | **663**  |       | 1,349    |       |
|                                             | ** ** | **390**    | ** ** | **663**  |       | 1,582    |       |
| - later than one and not longer than five years: |       |       |       |     |       |     |       |
| PG11047 phase 1 trial                            | ** ** | **—** |       | —   |       | 90       |       |
|                                             | ** ** | **—** |       | —   |       | 90       |       |

 

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**20.  EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS**

 
| ** **                                                    | ** ** | **2011** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                    | ** ** | **$000** | ** ** | **$000** | ** ** | **$000** | ** ** |
| The aggregate employee entitlement liability is comprised of: |       |     |       |     |       |     |       |
| Accrued wages, salaries and on-costs                          | ** ** | **17**   |       | 35       |       | 54       |       |
| Provisions (current)                                          | ** ** | **241**  |       | 280      |       | 229      |       |
| Provisions (non-current)                                      | ** ** | **51**   |       | 204      |       | 210      |       |
|                                                          | ** ** | **309**  |       | 519      |       | 493      |       |

 

**Superannuation**

 

The parent makes no superannuation contributions other than the statutory superannuation guarantee levy. The Group does not operate a defined benefit plan on behalf of its employees.

 

The parent contributed $276,147 on behalf of employees to superannuation funds for the year ended 30 June 2011 (2010: $248,196; 2009: $228,397).

 

**21. CONTINGENT LIABILITIES AND ASSETS**

 

**License of muparfostat (formerly PI-88) to Medigen Biotechnology Corporation**

 

On 29 June 2010, the Company executed a binding agreement with Medigen Biotechnology Corporation for the global licensing of muparfostat, the Group’s lead anti-cancer product formerly known as PI-88.  The agreement is an exclusive worldwide License and Collaboration agreement with sub-license rights for the commercialisation of PI-88 for the therapeutic and prophylactic treatment of cancer. PharmaSynth, the Company’s subsidiary, will provide manufacturing support to Taiwan-based Medigen to develop muparfosfat with an initial focus on Taiwan and China.

 

The license agreement provides for royalty on muparfostat sales as well as milestone payments at certain points in the product’s development.

 

**22.  SUBSEQUENT EVENTS**

 

No significant events have occurred after the balance date.

 

**23.  AUDITORS’ REMUNERATION**

 
| ** **                                                              | ** ** | **2011**    | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                                                              | ** ** | **$**       | ** ** | **$**    | ** ** | **$**    | ** ** |
| Amounts received or   due and receivable by Ernst & Young for: |       |        |       |     |       |     |       |
| (a) Audit or   review of the financial reports of the entity       | ** ** | ** **  |       |     |       |     |       |
| - The Australian   financial report of the entity                       | ** ** | **117,477** |       | 149,500  |       | 175,500  |       |
| - The US financial   report of the entity                               | ** ** | **50,000**  |       | 60,000   |       | 80,000   |       |
| (b) Other   audit services in relation to the entity               | ** ** | ** **  |       |     |       |     |       |
| - Sarbanes-Oxley   internal control audit                               | ** ** | **—**  |       | 54,000   |       | 15,000   |       |
|                                                                    | ** ** | **167,477** |       | 263,500  |       | 270,500  |       |
| (c) Other non-audit   services in relation to the entity           | ** ** | ** **  |       |     |       |     |       |
| - other non-audit   services(2)                                         | ** ** | **4,898**   |       | —   |       | —   |       |
|                                                                    | ** ** | **4,898**   |       | —   |       | —   |       |
|                                                                    | ** ** | **172,375** |       | 263,500  |       | 270,500  |       |

 

----

(1) Based on the work performed prior to the passing of the Dodd-Frank Act which ceased the requirement for the Group’s auditors to attest to and report on the internal control environment s404(b) of the Sarbanes-Oxley Act.

(2) During the year, the Company received non-audit services from Ernst & Young Taiwan in relation to the tax treatment of payments made by the Company’s licensee, Medigen.

 

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**24.  DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES**

 

**(a) Details of the key management personnel (KMP) (including the five highest paid executives during the year)**

 

**(i)            Directors**

 
| S. James       | Chairman (non-executive)                                |
|----------------|---------------------------------------------------------|
| J. Chiplin     | Non-executive Director - resigned 22   August 2011 |
| J. Cherrington | Non-executive Director - resigned 22 August 2011   |
| T. Burt        | Non-executive Director                                  |
| H.H. Tang      | Non-executive Director                                  |
| P. Lin         | Non-executive Director - resigned 16   June 2011   |
| WJ Jiang       | Non-executive Director - appointed 16   June 2011  |

 

**(ii)           Executives**

 
| S. MacLeman(1) | Chief Executive Officer                                |
|----------------|--------------------------------------------------------|
| L. Marton      | Chief Scientific Officer(2)                            |
| M. Fitzgerald  | Director — Clinical Operations US                 |
| P. Dixon(3)    | General Manager — Finance and Company   Secretary |
| F. Lankesheer  | Director — Business Development and Legal         |

 

----

(1) CEO position to terminate 26 August 2011

(2) CSO position terminated 31 October 2010

(3) Changed from an employed executive to a consultant effective 15 July 2011

 

There have been no other changes to the KMP after the reporting date and before the date the financial report was authorised for issue.

 

**(b)  Remuneration of directors and key management personnel**

 
| ** **                                        | ** ** | **2011********$** | ** ** | **2010********$** | ** ** | **2009********$** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| Short-term employee   benefits                    | ** ** | **1,748,930**     |       | 1,583.436         |       | 1,687,790         |       |
| Post-employment   benefits                        | ** ** | **92,630**        |       | 162,075           |       | 149,973           |       |
| Share-based   payments                            | ** ** | **74,958**        |       | 19,133            |       | 86,890            |       |
| Termination payment                               | ** ** | **39,449**        |       | 245,000           |       | 122,019           |       |
| **Total   key management personnel compensation** | ** ** | **1,955,967**     |       | 2,009,644         |       | 2,046,672         |       |

 

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Table 1: Non-executive directors’ remuneration for the year ended 30 June 2011.

 
| ** **                        | ** ** | ** ** | ** ** | **Short-term**                      | ** ** | **Post-   employment**    | ** ** | ** **                                  | ** ** | **Share-   based********payment**    | ** ** | ** **                              | ** ** |
|-----------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **Directors**                     | ** ** | ** ** | ** ** | **Salary   and fees********$** | ** ** | **Cash   bonus********$** | ** ** | **Non********monetary   benefits********$** | ** ** | **Super-********annuation********$** | ** ** | **Termination********payment********$** | ** ** | **Options********$** | ** ** | **Total********$** | ** ** |
| Stuart James                      | ** ** | **2011**   | ** ** | **138,480**                         | ** ** | **—**                | ** ** | **—**                                  | ** ** | **12,463**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **150,943** | ** ** |
|                              |       | 2010       |       | 123,161                             |       | —                    |       | —                                      |       | 11,084                               |       | —                                  |       | — |   | 134,245 |   |
| Thomas JamesBurt                  | ** ** | **2011**   | ** ** | **75,470**                          | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **75,470** | ** ** |
|                              |       | 2010       |       | 68,718                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | 68,718 |   |
| John Chiplin(1)                   | ** ** | **2011**   | ** ** | **61,321**                          |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — | ** ** | **61,321** | ** ** |
|                              |       | 2010       |       | 30,400                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | 30,400 |   |
| JulieCherrington(1)               | ** ** | **2011**   | ** ** | **75,472**                          |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — | ** ** | **75,472** | ** ** |
|                              |       | 2010       |       | 71,667                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | 71,667 |   |
| GordonSchooley                    | ** ** | **2011**   |       | —                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | — |   |
|                              |       | 2010       |       | 45,000                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | 45,000 |   |
| Joe Lin                           | ** ** | **2011**   | ** ** | **—**                          | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **—** | ** ** |
|                              |       | 2010       |       | 20,568                              |       | —                    |       | —                                      |       | 1,852                                |       | —                                  |       | — |   | 22,420 |   |
| Heng Tang                         | ** ** | **2011**   | ** ** | **71,837**                          | ** ** | **—**                | ** ** | **—**                                  | ** ** | **3,635**                            | ** ** | **—**                              | ** ** | **—** | ** ** | **75,472** | ** ** |
|                              |       | 2010       |       | 63,035                              |       | —                    |       | —                                      |       | 5,673                                |       | —                                  |       | — |   | 68,708 |   |
| Paul Lin(2)                       | ** ** | **2011**   | ** ** | **59,106**                          | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **59,106** | ** ** |
|                              |       | 2010       |       | 37,610                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | 37,610 |   |
| Woei-Jia Jiang(3)                 | ** ** | **2011**   | ** ** | **—**                          | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **—** | ** ** |
|                              |       | 2010       |       | —                              |       | —                    |       | —                                      |       | —                               |       | —                                  |       | — |   | — |   |
| Total - Non-executive   Directors | ** ** | **2011**   | ** ** | **481,686**                         | ** ** | **—**                | ** ** | **—**                                  | ** ** | **16,098**                           | ** ** | **—**                              | ** ** | **—** | ** ** | **497,784** | ** ** |
|                              | 2010       |       | 460,159    |                                | —     |                      | —     |                                        | 18,609     |                                 | —     |                                    | —     |   | 478,768 |   |

 

----

(1) Resigned 22 August 2011

(2) Resigned 16 June 2011

(3) Commenced 16 June 2011

 

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Table 2: Remuneration for the other key management personnel for the year ended 30 June 2011.

 
| ** **                                     | ** ** | ** **                          | ** ** | **Short-term**            | ** ** | **Post-   employment**                      | ** ** | ** **                      | ** ** | **Share-   based********payment**  | ** ** | ** **           | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|----------------------|------------|
| **Other key management   personnel** | ** ** | **Salary and   fees********$** | ** ** | **Cash   bonus********$** | ** ** | **Non********monetary   benefits********$** | ** ** | **Super-********annuation   $** | ** ** | **Termination   payment********$** | ** ** | **Options********$** | ** ** | **Total********$** | ** ** |
| T Justus Homburg                               | ** ** | **2011**                            | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                      | ** ** | **—**                         | ** ** | **—**           | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |       | 2010                                |       | 150,803                   |       | —                                      |       | 13,417                          |       | 32,192                             |       | 245,000              |       | — |   | 441,412 |   |
| Laurence Marton(1)                             | ** ** | **2011**                            | ** ** | **218,621**               | ** ** | ** **                                  | ** ** | **18,645**                      | **(5)**    | **—**                         | ** ** | **39,449**           | ** ** | **—** | ** ** | **276,715** | ** ** |
|                                           |       | 2010                                |       | 369,493                   |       | —                                      |       | 36,613                          |       | —                             |       | —               |       | — |   | 406,106 |   |
| Michael Fitzgerald                             | ** ** | **2011**                            | ** ** | **151,467**               | ** ** | **—**                                  | ** ** | **28,161**                      | **(5)**    | **—**                         | ** ** | **—**           | ** ** | **—** | ** ** | **179,628** | ** ** |
|                                           |       | 2010                                |       | 149,513                   |       | —                                      |       | 22,588                          |       | —                             |       | —               |       | — |   | 172,101 |   |
| PaulDixon (2)                                  | ** ** | **2011**                            | ** ** | **149,350**               | ** ** | **4,500**                                   | ** ** | **—**                      | ** ** | **13,847**                         | ** ** | **—**           | ** ** | **3,511** | ** ** | **171,208** | ** ** |
| ** **                                     |       | 2010                                |       | 120,462                   |       | 43,500                                      |       | —                          |       | 14,757                             |       | —               |       | — |   | 178,719 |   |
| JohnChiplin(3)                                 | ** ** | **2011**                            | ** ** | **—**                | ** ** | **—**                                  | ** ** | **—**                      | ** ** | **—**                         | ** ** | **—**           | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |       | 2010                                |       | 240,000                   |       | —                                      |       | 19,442                          |       | —                             |       | —               |       | — |   | 259,442 |   |
| Darryn Bampton                                 | ** ** | **2011**                            | ** ** | **149,350**               | ** ** | **1,650**                                   | ** ** | **—**                      | ** ** | **13,590**                         | ** ** | **—**           | ** ** | **1,873** | ** ** | **166,463** | ** ** |
|                                           |       | 2010                                |       | 145,000                   |       | —                                      |       |                            |       | 13,050                             |       | —               |       | — |   | 158,050 |   |
| SusanMacLeman(4)                               | ** ** | **2011**                            | ** ** | **303,738**               | ** ** | **87,210**                                  | ** ** | **—**                      | ** ** | **35,185**                         | ** ** | **—**           | ** ** | **68,170** | ** ** | **494,303** | ** ** |
|                                           |       | 2010                                |       | 49,506                    |       | —                                      |       | —                          |       | 4,456                              |       | —               |       | 19,133 |   | 73,095 |   |
| FleurLankesheer                                | ** ** | **2011**                            | ** ** | **154,552**               | ** ** | **—**                                  | ** ** | **—**                      | ** ** | **13,910**                         | ** ** | **—**           | ** ** | **1,404** | ** ** | **169,866** | ** ** |
|                                           |       | 2010                                |       | —                    |       | —                                      |       | —                          |       | —                             |       | —               |       | — |   | — |   |
| Total - Other keymanagement personnel          | ** ** | **2011**                            | ** ** | **1,127,078**             | ** ** | **93,360**                                  | ** ** | **46,806**                      | ** ** | **76,532**                         | ** ** | **39,449**           | ** ** | **74,958** | ** ** | **1,458,183** | ** ** |
|                                           | 2010       |                                | 1,224,777  |                      | 43,500     |                                        | 92,060     |                            | 64,455     |                               | 245,000    |                 | 19,133     |   | 1,688,925 |   |

 

----

(1) CSO position terminated 31 October 2010

(2) Changed from an employed executive to a consultant effective 15 July 2011

(3) Appointed Interim CEO from 1 December 2009 to 31 May 2010

(4) CEO position to terminate 26 August 2011

(5) US based health plans

 

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**(c)****         ****Option holdings of key management personnel**

 

During the 2011 financial year the following options vested and expired with key management personnel of the Group under the terms of The Progen Directors and Employee Option Incentive Plan.

 

Of the 1,000,000 options granted to Sue MacLeman, the Chief Executive Officer during the 2010 financial year, the first tranche of 166,667 options expired due to market share price conditions not being met. The remaining tranches totalling 833,333 options are subject to cancellation following the termination of the CEO position on 26 August 2011.

 

331,000 options were granted to eligible Company employees and executives during the 2011 financial year.

 

**Number of options granted and expired during the year for KMP**

 
| ** **   | ** ** | **Grant   date** | ** ** | **Expiry****date** | ** ** | **No. of   options   non-   vested** | ** ** | **No. of   options   granted** | ** ** | **No. of   options   expired** | ** ** | **Exercise   price** | ** ** | **Fair Value   per option   at grant   date** | ** ** | **Date   exercisable** | ** ** |
|--------------|------------|------------------|------------|--------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|
| S MacLeman   |       | 29-Mar-2010      |       | —             |       | —                                    |       | —                              |       | 166,667                             | (1)        | $                    | 0.65       | (3)                                                          | $          | 0.14                   |       | N/A |   |
| S MacLeman   |       | 29-Mar-2010      |       | 29-Mar-2015        |       | 166,667                                   | (2)        | —                              |       | —                              |       | $                    | 0.80       | (3)                                                          | $          | 0.18                   |       | 29-Mar-2012 |   |
| S MacLeman   |       | 29-Mar-2010      |       | 29-Mar-2015        |       | 166,666                                   | (2)        | —                              |       | —                              |       | $                    | 0.95       | (3)                                                          | $          | 0.21                   |       | 29-Mar-2013 |   |
| S MacLeman   |       | 29-Mar-2010      |       | —             |       |                                      |       | —                              |       | 250,000                             | (1)        | $                    | 1.05       | (3)                                                          | $          | 0.23                   |       | N/A |   |
| S MacLeman   |       | 29-Mar-2010      |       | 29-Mar-2015        |       | 250,000                                   | (2)        | —                              |       | —                              |       | $                    | 1.15       | (3)                                                          | $          | 0.24                   |       | 29-Mar-2015 |   |
| P Dixon      |       | 01-Jan-2011      |       | 01-Jan-2016        |       | —                                    |       | 75,000                              |       | —                              |       | $                    | 0.29       |                                                         | $          | 0.09                   |       | 01-Jan-2012 |   |
| D Bampton    |       | 01-Jan-2011      |       | 01-Jan-2016        |       | —                                    |       | 40,000                              |       | —                              |       | $                    | 0.29       |                                                         | $          | 0.09                   |       | 01-Jan-2012 |   |
| F Lankesheer |       | 01-Jan-2011      |       | 01-Jan-2016        |       | —                                    |       | 30,000                              |       | —                              |       | $                    | 0.29       |                                                         | $          | 0.09                   |       | 01-Jan-2012 |   |

 

----

(1) Expired due to non-satisfaction of market share price condition

(2) Due for cancellation on 26 February 2012 following the termination of the CEO position

(3) Options vest upon fulfilment of share market price conditions; i.e., 30 day VWAP exceeds the share prices of $0.65 in Year 1, $0.80 in Year 2, $0.95 in Year 3, $1.05 in Year 4; and $1.15 in Year 5.

 

The following table summarises the value of options granted, exercised or expired during the 2011 financial year to directors and key management personnel.

 
| ** **   | ** ** | **Value of options   granted during   the year ^********$** | ** ** | **Value of options   exercised during   the year********$** | ** ** | **Value of options   expired during   the year********$** | ** ** | **Value of options   forfeited during   the year********$** | ** ** | **Remuneration   consisting of   options for the   year********%** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| S MacLeman   |       | —                                                                               |       | —                                                                          |       | 80,634                                                                        |       | —                                                                          |       | 13.8                                                                              |       |
| P Dixon      |       | 7,021                                                                                |       | —                                                                          |       | —                                                                        |       | —                                                                          |       | 2.1                                                                               |       |
| D Bampton    |       | 3,745                                                                                |       | —                                                                          |       | —                                                                        |       | —                                                                          |       | 1.1                                                                               |       |
| F Lankesheer |       | 2,808                                                                                |       | —                                                                          |       | —                                                                        |       | —                                                                          |       | 0.8                                                                               |       |

 

----

^ For details on the valuation of options, including models and assumptions used, please refer to note 13.

 

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Table of Contents

 
| ** **         | ** ** | **Balance at** | ** ** | ** **          | ** ** | ** **    | ** ** | ** **  | ** ** | **Balance at** | ** ** | ** **                         | ** ** | ** **          | ** ** |
|--------------------|------------|---------------------|------------|---------------------|------------|---------------|------------|-------------|------------|---------------------|------------|------------------------------------|------------|---------------------|------------|
| ** **         | ** ** | **beginning**       | ** ** | ** **          | ** ** | ** **    | ** ** | ** **  | ** ** | **end of**     | ** ** | ** **                         | ** ** | ** **          | ** ** |
| ** **         | ** ** | **of period**  | ** ** | ** **          | ** ** | ** **    | ** ** | ** **  | ** ** | **period**          | ** ** | **At 30 June 2011** | ** ** |
| ** **         | ** ** | **1 July**     | ** ** | **Granted as** | ** ** | **Options**   | ** ** | **Options** | ** ** | **30 June**    | ** ** | **Total**                          | ** ** | **Total Non-** | ** ** |
| ** **         | ** ** | **2010**            | ** ** | **remuneration**    | ** ** | **exercised** | ** ** | **expired** | ** ** | **2011**            | ** ** | **Vested**                         | ** ** | **Vested**          | ** ** |
| **Directors**      |       |                |       |                |       |          |       |        |       |                |       |                               |       |                |       |
| S. B. James        |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| J. Chiplin         |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| J. Cherrington     |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| T. J. Burt         |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| H. Tang            |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| Dr. P. Lin(1) |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
| WJ. Jiang(2)       |       | —              |       | —              |       | —        |       | —      |       | —              |       | —                             |       | —              |       |
|               |       |                |       |                |       |          |       |        |       |                |       |                               |       |                |       |
| **Executives**     |       |                |       |                |       |          |       |        |       |                |       |                               |       |                |       |
| L. Marton(3)       |       | 100,000             |       | —              |       | —        |       | (100,000    | )          | —              |       | —                             |       | —              |       |
| P. Dixon           |       | —              |       | 75,000              |       | —        |       | —      |       | 75,000              |       | —                             |       | 75,000              |       |
| S. MacLeman        |       | 1,000,000           |       | —              |       | —        |       | (416,667    | )          | 583,333             |       | —                             |       | 583,333             |       |
| D. Bampton         |       | —              |       | 40,000              |       | —        |       | —      |       | 40,000              |       | —                             |       | 40,000              |       |
| F. Lankesheer      |       | —              |       | 30,000              |       | —        |       | —      |       | 30,000              |       | —                             |       | 30,000              |       |
| Total              |       | 1,100,000           |       | 145,000             |       | —        |       | (516,667    | )          | 728,333             |       | —                             |       | 728,333             |       |

 

----

(1) Resigned 16 June 2011

(2) Appointed 16 June 2011

(3) Terminated 31 October 2010

 
| ** **         | ** ** | **Balance at** | ** ** | ** **          | ** ** | ** **    | ** ** | ** **           | ** ** | **Balance at** | ** ** | ** **                         | ** ** | ** **          | ** ** |
|--------------------|------------|---------------------|------------|---------------------|------------|---------------|------------|----------------------|------------|---------------------|------------|------------------------------------|------------|---------------------|------------|
| ** **         | ** ** | **beginning**       | ** ** | ** **          | ** ** | ** **    | ** ** | ** **           | ** ** | **end of**     | ** ** | ** **                         | ** ** | ** **          | ** ** |
| ** **         | ** ** | **of period**  | ** ** | ** **          | ** ** | ** **    | ** ** | **Options**          | ** ** | **period**          | ** ** | **At 30 June 2010** | ** ** |
| ** **         | ** ** | **1 July**     | ** ** | **Granted as** | ** ** | **Options**   | ** ** | **forfeited /** | ** ** | **30 June**    | ** ** | **Total**                          | ** ** | **Total Non-** | ** ** |
| ** **         | ** ** | **2009**            | ** ** | **remuneration**    | ** ** | **exercised** | ** ** | **expired**          | ** ** | **2010**            | ** ** | **Vested**                         | ** ** | **Vested**          | ** ** |
| **Directors**      |       |                |       |                |       |          |       |                 |       |                |       |                               |       |                |       |
| S. Chang(1)        |       | 41,014              |       | —              |       | —        |       | (41,014              | )          | —              |       | —                             |       | —              |       |
| T. J. Homburg(2)   |       | 501,389             |       | —              |       | —        |       | (501,389             | )          | —              |       | —                             |       | —              |       |
| S. B. James(3)     |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| J. Chiplin(3)      |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| J. Cherrington(3)  |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| T. J. Burt(4)      |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| H. Tang(4)         |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| Dr. P. Lin(5) |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| G. Schooley(6)     |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| J. Lin(7)          |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
|               |       |                |       |                |       |          |       |                 |       |                |       |                               |       |                |       |
| **Executives**     |       |                |       |                |       |          |       |                 |       |                |       |                               |       |                |       |
| L. Marton          |       | 100,000             |       | —              |       | —        |       | —               |       | 100,000             |       | 100,000                            |       | —              |       |
| P. Dixon           |       | —              |       | —              |       | —        |       | —               |       | —              |       | —                             |       | —              |       |
| S. MacLeman(8)     |       | —              |       | 1,000,000           |       | —        |       | —               |       | 1,000,000           |       | —                             |       | 1,000,000           |       |
| Total              |       | 642,403             |       | 1,000,000           |       | —        |       | (542,403             | )          | 1,100,000           |       | 100,000                            |       | 1,000,000           |       |

 

----

(1) Resigned 1 July 2009

(2) Terminated 18 November 2009

(3) Appointed 1 July 2009

(4) Appointed 17 July 2009

(5) Appointed 30 November 2009

(6) Appointed 1 July 2009 but resigned 30 November 2009

(7) Appointed 17 July 2009 but resigned 30 November 2009

(8)Appointed 6 April 2010

 

F-41

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Table of Contents

 

**(d)****         ****Shareholdings of key management personnel**

 
| **Ordinary shares held in    Progen Pharmaceuticals   Limited** | ** ** | **Balance********1 July 10** | ** ** | **On exercise of   options** | ** ** | **Net change   other** | ** ** | **Balance********30 June 11** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|
| ** **                                                                               |       |                                   |       |                                   |       |                        |       |                                    |       |
| **Directors**                                                                            |       |                                   |       |                                   |       |                        |       |                                    |       |
| S. B. James                                                                              |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| J. Chiplin                                                                               |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| J. Cherrington                                                                           |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| T. J. Burt                                                                               |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| H. Tang(1)                                                                               |       | 1,500                                  |       | —                                 |       | —                      |       | 1,500                                   |       |
| P. Lin(2)                                                                                |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| WJ Jiang(3)                                                                              |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
|                                                                                     |       |                                   |       |                                   |       |                        |       |                                    |       |
| **Executives**                                                                           |       |                                   |       |                                   |       |                        |       |                                    |       |
| L. Marton(4)                                                                             |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| P. Dixon                                                                                 |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| S. MacLeman                                                                              |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| D. Bampton                                                                               |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| F. Lankesheer                                                                            |       | —                                 |       | —                                 |       | —                      |       | —                                  |       |
| Total                                                                                    |       | 1,500                                  |       | —                                 |       | —                      |       | 1,500                                   |       |

 

----

(1) Changed from a salaried director to a consultant director effective 1 February 2011

(2) Resigned 16 June 2011

(3) Appointed 16 June 2011

(4) Terminated 31 October 2010

 
| **Ordinary shares held in   Progen Pharmaceuticals   Limited** | ** ** | **Balance********1 July 09** | ** ** | **On exercise of   options** | ** ** | **Net change   other(9)** | ** ** | **Balance********30 June 10** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         |       |                                   |       |                                   |       |                           |       |                                    |       |
| **Directors**                                                                      |       |                                   |       |                                   |       |                           |       |                                    |       |
| S. Chang(1)                                                                        |       | 220,300                                |       | —                                 |       | (220,300                       | )          | —                                  |       |
| T.J. Homburg(2)                                                                    |       | 52,778                                 |       | —                                 |       | (52,778                        | )          | —                                  |       |
| S. James(3)                                                                        |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| J. Chiplin(3)                                                                      |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| J. Cherrington(3)                                                                  |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| T. Burt(4)                                                                         |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| H. Tang(4)                                                                         |       | 1,500                                  |       | —                                 |       | —                         |       | 1,500                                   |       |
| P. Lin(5)                                                                          |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| G. Schooley(6)                                                                     |       | 7,434                                  |       | —                                 |       | (7,434                         | )          | —                                  |       |
| J. Lin(7)                                                                          |       | 5,923                                  |       | —                                 |       | (5,923                         | )          | —                                  |       |
|                                                                               |       |                                   |       |                                   |       |                           |       |                                    |       |
| **Executives**                                                                     |       |                                   |       |                                   |       |                           |       |                                    |       |
| L. Marton                                                                          |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| P. Dixon                                                                           |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| S. MacLeman(8)                                                                     |       | —                                 |       | —                                 |       | —                         |       | —                                  |       |
| Total                                                                              |       | 287,935                                |       | —                                 |       | (286,435                       | )          | 1,500                                   |       |

 

----

(1) Resigned 1 July 2009

(2) Terminated 18 November 2009

(3) Appointed 1 July 2009

(4) Appointed 17 July 2009

(5) Appointed 30 November 2009

(6) Appointed 1 July 2009, resigned 30 November 2009

(7) Appointed 17 July 2009, resigned 30 November 2009

(8) Appointed 6 April 2010

(9) Off-market transactions

 

F-42

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Table of Contents

 

**(e)****         ****Subsidiaries**

 

The consolidated financial statements include the financial statements of Progen Pharmaceuticals Limited and the subsidiary listed in the following table:

 
| ** **                  | ** ** | **Country of** | ** ** | **% Equity Interest** | ** ** | **Investment ($000)** | ** ** |
|-----------------------------|------------|---------------------|------------|---------------------------------|------------|----------------------------|------------|
| **Name**                    | ** ** | **Incorporation**   | ** ** | **2011**                        | ** ** | **2010**                   | ** ** | **2011** | ** ** | **2010** | ** ** |
|                        |       |                |       |                            |       |                       |       |   |   |   |   |
| Progen Pharmaceuticals Inc. |       | United   States     | ** ** | **100**                         |       | 100                        | ** ** | **3,278** |   | 3,278 |   |
|                        |       |                |       |                            |       |                       |       |   |   |   |   |
| PharmaSynth Pty Ltd         |       | Australia           | ** ** | **100**                         |       | 100                        | ** ** | **536** |   | 536 |   |

 

**Term and conditions of transactions with subsidiary**

 

The Company has intercompany receivables relating to the subsidiaries.  Intercompany receivables are loans funding intercompany operations with no specific repayment terms and are therefore unlikely to be repaid in 12 months. The loan is an interest bearing loan with 7.40% per annum interest.  Intercompany balances with Progen Pharmaceuticals Inc. have been fully provided for.

 

**(f)  Associates**

 

The Group has a 43% interest in Epi Pharmaceuticals Inc. (2010: 0%), a company incorporated in Delaware which was incorporated to hold the CellGate and other divested assets. The Company has not traded in the period and the investment is carried at a $nil carrying value in the Group.

 

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