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									NARHEX LIFE SCIENCES LIMITED
Index and Corporate Directory


INDEX

Chairman’s Address                                       1
Directors Report                                         2
Corporate Governance Statement                           13
Statement of Financial Performance                       15
Statement of Financial Position                          16
Statement of Cash Flow                                   17
Notes to the Accounts                                    18
Directors’ Declaration                                   33
Auditor’s Independence Declaration                       34
Independent Audit Report                                 35
ASX Additional Information                               36



CORPORATE DIRECTORY

Directors
Dr Michael Cohen – Executive Chairman       Professor John Mills (Managing Director)
Mr John Majewski (CEO)                      Mr Ron Hodge (Non-Executive Director)
Mr Peter Nash (Executive Director – China
Operations)


Company Secretary
Bryan Dulhunty (CoSA Pty Ltd)


Registered and Principal Office             Auditors
141 Osbourne St (cnr Toorak Rd)             Renshaw Dawson Lang Pty Ltd
South Yarra, Vic 3141                       60-64 Railway Road
Australia                                   Blackburn Vic 3130


Share Registry & Register                   Contact Information
ASX Perpetual Registrars Ltd                Ph: 03-9279-3966
300 Queen Street                            Fax: 03-9279-3955
Brisbane Qld 4000                           Web site: www.narhex.com
Ph: (07) 3228 4219
NARHEX LIFE SCIENCES LIMITED
Chairman’s Address



Dear Investor,

The year just finished has been a time of great significance for your company.

Following a successful capital raising the company was listed on the Australian Stock Exchange
and with its increased financial resources assured, began the exciting task of bringing its anti-HIV
drug to market.

The drug development process is now a process that is well understood both by regulators in
many countries and by the many drug development start-up companies that have been created as
a result of the biotech revolution.

During the year, it became apparent to the Board that the project had reached a stage that
required it to interact in a much more technical and professional way with a variety of Australian
and International authorities involved with both HIV medicine and with the approval of new
drugs in this field.

After careful deliberation the Board decided that whilst our founder Mr John Majewski had been
involved with the project since its inception in the early 1990’s, it was time to pass the project on
to a management team who had the networks, experience and credibility to deal effectively with
the key people in the international HIV medical and drug development scene if the drug was to
achieve the approvals which are needed to allow it to be sold to patients and their governments.

After discussions with Mr Majewski about the strategic imperatives of the company going
forward, your Board agreed to accept the resignation of John Majewski from his role as Chief
Executive of your company. In his place the Board has resolved that Prof John Mills should
take up the role of Managing Director and that my role should be expanded from that of
Chairman to Executive Chairman of Narhex. Professor Mills has extensive clinical experience
treating HIV infections and also a long and distinguished history of involvement with research in
infectious diseases including HIV. Both Professor Mills and I have also had extensive experience
with both executive and non-executive directorships of significant listed Australian
biotechnology companies. It is our intention that this experience will be used to hasten the
progress of Narhex’s drug development programme including both the design and
implementation of its clinical trial, to ensure that our lead candidate drug DG 35/17 gets to
market as soon as possible.

Since the change in management, a number of important steps in the process of getting
regulatory approval for Narhex’s DG35/17 anti HIV compound have been initiated and/or
achieved and these are described in the report of operations.

Your Board remains both optimistic and excited about the prospect of our lead compound
DG35/17 as a protease inhibitor which will find an important place in the drugs used to treat the
global “HIV epidemic” and we look forward to the coming year which we believe will be one in
which your Company achieves some very important milestones on its journey to commercialising
DG35/17 for HIV and HIV-AIDS infected patients.


Dr Michael Cohen
Executive Chairman


                                                 1
NARHEX LIFE SCIENCES LIMITED
Directors’ Report


Your directors present their report on the Company for the financial year ended 30 June 2005.

DIRECTORS
The names of the directors of the company in office during the year and until the date of this
report are:

Dr Michael Cohen (Executive Chairman)
Prof John Mills (Managing Director)
Mr John Majewski (CEO)
Mr Peter Nash (Executive Director - China Operations) Appointed 7 October 2004
Mr Ron Hodge (Non-Executive - Director) Appointed 7 October 2004
Mr Harold Seeley Resigned 7 October 2004
Mr Mark Smith Resigned 7 October 2004

Directors have been in office since the start of the financial year to the date of this report unless
otherwise stated.

COMPANY SECRETARY

Bryan Dulhunty (appointed 7 October 2004)

PRINCIPAL ACTIVITIES
The principal activities of the company during the year were the quoting of the Company on the
Australian Stock Exchange (ASX) and the subsequent development of the Company’s
Intellectual Property.

OPERATING RESULTS AND DIVIDENDS

The Loss after tax of the company for the year ended 30 June 2005 was $706,467 (2004: Loss
$1,180,530)

No dividend was proposed or paid.

REVIEW OF OPERATIONS

In the first six months since listing on the ASX Narhex management have been very busy
negotiating key issues relating to the manufacture and testing of its candidate HIV protease
inhibitor, DG35. Now that key arrangements have been largely completed we anticipate
achieving several major development milestones in the coming fiscal year.

Drug supply:
On the drug supply side, we have contracted with a European fine chemical company to
phosphorylate (add a phosphate group) to our existing 0.5kg supply of DG35, thereby
converting it to the orally-absorbed prodrug, DG17. As larger amounts of DG35/17 will be
required for the clinical trials anticipated in 2006, we have also contracted with a distinguished




                                                 2
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Polish chemist, Prof Mieczysław Makosza, at the Institute of Organic Chemistry, to improve the
efficiency and economies of large-scale synthesis of DG35. Professor Makosza has a long
history of working with Narhex to develop DG35/17 and his involvement with the Company
has already resulted in substantial improvements in the synthetic processes. We are presently
negotiating with several companies who specialize in industrial-scale synthesis of drugs to
manufacture the required quantities of pharmaceutical-grade DG35 and to convert it to the
DG17 prodrug using the GMP (Good Manufacturing Practice) protocols required for material to
be given to humans.

Formulation:
Several experienced clinical investigators have reviewed the existing Phase 1 and Phase 2a clinical
data on DG17/35. Although there is clear evidence of drug absorption (in the Phase 1 studies)
and efficacy (in the Phase 2a studies), there is also evidence of variable absorption and variable
efficacy. This problem is almost certainly due to the physical structure of the drug used for these
previous studies – reflecting variation in its form from a finely-dispersed, highly-soluble powder
to poorly-soluble, large amorphous particles. We have therefore contracted with Dr James Rowe
of Technical Consultancy Services Pty Ltd, an expert in drug formulation, to improve the
solubility of DG17 and to thereby increase the consistency of its absorption.

Dr Rowe has also been commissioned to establish and validate an existing assay for DG35 and
DG17 in plasma, which will be essential for conducting any clinical trials with DG17/35.

Dosage design:
Once Dr Rowe has completed his work on improving dissolution of DG17 by appropriate
formulation of the compound and has established validated assays for DG35 and 17 in plasma,
we intend to conduct another small, Phase 1 pharmacokinetic study. This study is not designed
to replicate the previous one, but rather to answer some pharmacokinetic questions that are
particularly relevant to the use of the protease inhibitor class of drugs in contemporary HIV
medical treatment. These issues were unknown at the time that the original Phase 1 study was
performed. We anticipate announcing the details of this trial in the near future.

The Phase 1 study is intended to provide critical information about the optimal dose of DG35,
the best dosing interval, and the effects of food and/or other medications that are often taken by
patients with HIV infection on DG35 drug levels.

Clinical Trials:
As soon as this Phase 1 information is available we intend to move on to the Phase 2 efficacy
study that was foreshadowed in the Prospectus.

China:
Peter Nash, the Executive Director of Narhex in charge of our Chinese operations, has made
several trips to China and has established excellent relationships with CMC Dacheng, as
mentioned in the Prospectus, as well as with Shaanxi Hanjiang Pharmaceuticals Ltd and the
Chinese Food and Drug Administration (SFDA). Hanjiang Pharmaceuticals has excellent
contacts within the SFDA, and may also be in a position to provide inexpensive, large-scale
synthesis of DG17/35 for either clinical trials or treatment when and if the drug is licenced. The
Board is of the view that our ability to work successfully in China is absolutely dependent on
having a full and transparent understanding of the number and timing of the approval processes
we will be required to undertake to obtain SFDA registration for DG35 so that it can be sold in
China. As a consequence of knowing exactly what is expected, we and our Chinese


                                                3
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


partners can precisely cost the process of bringing the drug to market to ensure it is within the
financial framework we have previously calculated. Although we do not yet have signed
agreements with the necessary companies in China I consider it essential that these be completed
early in the 4th quarter of this calendar year at the latest.

Other Less Developed Markets:
In addition to our activities in China we have also been approached by a pharmaceutical
company in another developing country with an established HIV epidemic. This company has
expressed interest in the possibility of a joint venture in which they would fund the cost of the
clinical approval process for their domestic and regional markets. Negotiations are continuing
with them to see if this approach can be made into a real opportunity for your Company.

World Registration:
Looking forward, the Board and I are strongly of the opinion that a strategy to develop
DG17/35 for first-world markets, by an efficient but relatively conventional drug development
pathway, is possible and within our current resources, and therefore should be considered in
parallel with our plans to develop the drug for the Chinese or other third-world markets. We are
actively reviewing the cost and difficulty of undertaking such a strategy in parallel with our other
activities and will be able to announce our decision in the near future.

Conclusion:
The new executives of Narhex remain excited about the potential of DG35/17. This is a
compound that has been shown to be a highly-effective inhibitor of HIV replication in the test
tube and has also been taken by experimental animals and humans without undue side effects.
These are all highly encouraging achievements.

The challenge for Narhex going forward is to design a formulation that is well absorbed, gives
predictable drug levels in HIV-infected patients, demonstrates clinical efficacy at a cost that less
developed countries will be able to afford, and at which Narhex and its shareholders will be able
to make generous profits.

Your Directors are focused on these objectives and the coming year should see many of these
issues resolved.

FINANCIAL POSITION

On the 8 January 2005 the Company raised $8m via a prospectus and listing on the ASX to fund
the development of its Intellectual Property. At 30 June 2005 the Net Assets of the Company
were $7,991,990 (2004:Net Liabilities $2,721,652). Cash comprised $7,356,293 of the net
assets.(2004: $87).

The directors believe the Company has sufficient resources to fund the objectives set out in the
Prospectus.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

On the 16 July 2004 the Company appointed a voluntary administrator. Subsequently a Deed of
Company Arrangement was entered into and was completed by 30 September 2004.




                                                 4
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


The Deed provided for the financial restructure of the Company, settlement of outstanding
creditors and an injection of funds by way of convertible note. This enabled the Company to be
quoted on the ASX on 12 January 2005 by the issue of a prospectus which raised $8m.

On the 8 September 2005 the Company announced changes to the management of the Company
with Dr Michael Cohen taking on the role of Executive Chairman and Professor John Mills
taking on the role of Managing Director following the resignation of Mr John Majewski as CEO.

FUTURE DEVELOPMENTS

The Company will continue to develop the strategies for the development of its Intellectual
Property in overseas markets as set out in the Prospectus.

ENVIRONMENTAL ISSUES

The Company’s operations are not subject to significant environmental regulation under the law
of the Commonwealth and State.

DIRECTORS’ MEETINGS

The number of meetings of directors held during the period and the number of meetings
attended by each director were as follows

Directors’ Meetings               Number eligible to attend           Number attended
Dr Michael Cohen                             12                              12
Prof John Mills                              12                              12
Mr John Majewski                             12                              12
Mr Peter Nash                                 8                               8
Mr Ron Hodge                                  8                               8
Mr Harold Seeley                              4                               4
Mr Mark Smith                                 4                               4

DIRECTORS’ QUALIFICATIONS AND EXPERIENCE

Dr Michael Cohen (Executive Chairman)

Dr Michael Cohen has over thirty years experience in the medical profession. He was founder of
Scientific Services Ltd, which was listed as a public company in 1987 and subsequently sold to
Security Generale de Survellience.

Dr Cohen has been a director of several listed Australian biotechnology companies, most recently
Peptech Limited.

Dr Cohen is a member of several national and international associations including being a Fellow
of the Royal College of Pathologists Australasia.



                                               5
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Professor John Mills (Managing Director)

Professor Mills has a long and distinguished career in medical research, clinical medicine and
biomedical business. Professor Mills is based in Melbourne, where he was formally the Managing
Director of the Macfarlane Burnet Centre for Medical Research in Victoria, Head of the
Children’s Virology Research Unit and director of the National Centre in HIV Virology
Research. He is currently a Professor of Microbiology at Monash University.

Professor Mills is currently Managing Director of Advanced Diagnostic Concepts Pty Ltd and its
wholly owned subsidiary, TissuPath Pty Ltd. Apart from Professor’s Mills non-executive role on
the Board of Narhex, he is currently a non-executive director of Phosphagenics Ltd and GBS
Venture Partners Pty Ltd and has previously been a non-executive director and Chairman of
AMRAD Corporation.

Wojciech Kazimierz Zbigniew (John) Majewski (CEO)

John Majewski founded Narhex Australia. Narhex Australia, a company which developed
dermatological products and used the proceeds to embark on the development of a Protease
inhibitor to treat HIV infection. This development program resulted in the DG35 protease
inhibitor and its better-absorbed prodrug DG 17.

The HIV protease inhibitor project was begun in 1990, and Mr Majewski organised all clinical
trials to date for the Nar DG 35 prodrug. He has also driven the patent process to protect the
Company’s and Narhex Limited’s Intellectual property rights.

Mr Majewski initiated and organized Narhex Life Sciences entry into China, and signed
an agreement between CMC and Narhex Life Sciences for the development and organising
clinical trials for NLS protease inhibitor "DG 35 Prodrug" for the treatment of HIV/AIDS.

Peter Nash (Executive Director for China)

Peter Nash has advised Australian businesses in relation to mergers, acquisitions and financing in
China and has a network of contacts in China.

Mr Nash was largely responsible for Moody International’s foray into China through introducing
it to CCIS State Inspection Authority.

Recently Mr Nash has been instrumental in setting up manufacturing plants in China for C.E.M.
International Ltd, a cryogenic vessel manufacturer and Garwood International a supplier of
garbage compactor trucks.

Peter Ronald (Ron) Hodge (non-executive director)

Mr Hodge is an investment banking specialist and founding director of InvestSMART Financial
Services Pty Ltd. Mr Hodge has several years experience in the finance industry, working with
UBS Warburg (formally Swiss Bank Corporation) in both London and Singapore.

In Singapore Mr Hodge was an Associate Director of UBS Warburg and managed a risk control
group throughout Asia Pacific. Prior to working at UBS Warburg Mr Hodge was a Registered
Representative of the Sydney Futures Exchange working for Bell Commodities Pty Ltd as a
futures broker.

                                                6
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Mr Hodge has a Bachelor of Economics, Bachelor of Commerce and holds a Graduate Diploma
in Applied Finance and Investment from the Securities Institute of Australia. In September 2002
Mr Hodge completed his MSc at the University of Wales.

COMPANY SECRETARY
Mr Bryan Dulhunty (BEc CA)
Company Secretarial Services for Narhex are provided by CoSA Pty Ltd, an independent
Company Secretarial firm specialising in the biotechnology industry.

Mr Bryan Dulhunty founded CoSa Pty Ltd in 2001 after extensive experience in a major
international accounting firm and both large and small publicly list entries. Mr Bryan Dulhunty is
a director and company secretary of a number of listed and unlisted biotechnology companies.

CORPORATE STRUCTURE

Narhex Life Sciences Limited is a company limited by shares that is incorporated and domiciled
in Australia. It’s wholly owned subsidiary, Narhex Ltd, is incorporated in Hong Kong.

REMUNERATION REPORT
This report outlines the nature and amount of remuneration for directors and executives of the
Company.

The performance of the Company depends upon the quality of its directors and executives. It is
imperative that the Company attract and retain appropriately experienced and qualified directors
and executives.

In accordance with best practice corporate governance, the structure of non-executive directors
and executive management remuneration is separate and distinct.

Non- executive Director remuneration:

The board policy is to remunerate non-executive directors at a level which provides the Company
with the ability to attract and retain directors with the experience and qualification appropriate to
the development strategy of the Company’s Intellectual Property.

The maximum aggregate amount of fees that can be paid to non-executive directors is subject to
approval by shareholders at the Annual General Meeting. This was set at $200,000 pa by
shareholders on 7th October 2004. Subsequent to this meeting Directors set individual directors
fees as follows: Chairman’s Fee $45,000 pa plus statutory superannuation, non-executive
directors fees are $25,000 pa plus statutory superannuation. Directors’ fees are reviewed annually.

Non-executive directors fees are not linked to the performance of the Company. However to
align directors interests with shareholder interests, the directors are encouraged to hold shares in
the company.




                                                 7
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Executive Directors Remuneration

The board policy is to remunerate executive directors at a level that provides the Company with
the ability to attract and retain executives with the experience and qualification appropriate to the
development strategy of the Company’s Intellectual Property.

The executive directors Mr John Majewski (Founding Managing Director and CEO) and Mr
Peter Nash (Director China Operations) are employed on contracts that run for a minimum of 3
years effective from 19 October 2004. Termination is upon 60 days notice by either party. Their
salary package has been set at $150,000 pa plus statutory superannuation.

Dr Michael Cohen and Professor John Mills on assuming their executive roles have taken on
their roles on the same contractual bases as the other executive directors.

The Company at this time does not provide any bonus or incentive scheme, although previous
and current directors have significant equity holdings.

Company Executives: There were no specified executives at any time during the financial year.
All executive functions have been out by the executive directors Dr Michael Cohen, Professor
John Mills, Mr. John Majewski and Mr. Peter Nash. The role of Company Secretary has been
outsourced to CoSA Pty Ltd, an independent firm specializing in this field.

Set out below are details relating to director’s remuneration and equity interests. Refer to Note 13
for related party transactions with Directors and Company Executives.

 Directors’ Remuneration:
 2005                                                 Post
                      Primary Benefit              Employment            Equity             Total
                                                                        Shares and
                        Salary and    Directors          Super           Options
                        allowance       Fees           annuation          (1a,1b)
                             $            $                $                 $                $
 Dr Michael Cohen                 -      22,483                    -              8,750      31,233
 Professor John
 Mills                            -      11,458              1,031                8,750      21,239
 Mr John Majewski           68,750             -             6,188                8,750      83,688
 Mr Peter Nash              68,750             -             6,188               30,000     104,938
 Mr Ron Hodge                     -       6,250              6,242                     -     12,492
 Mr Harold Seeley                 -            -                   -              8,750       8,750
 Mr Mark Smith                    -            -                   -              8,750       8,750
 Total                    137,500        40,191             19,649               73,750     271,090




                                                   8
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


 2004                                                  Post
                            Primary Benefit         Employment            Equity           Total
                                    Directors            Super          Shares and
                           Salary     Fees             annuation       Options(1a, 1b)
                             $          4                  $                 $               $
 Dr Michael Cohen                 -           -                    -            91,250      91,250
 Professor John Mills             -             -                  -           91,250       91,250
 Mr John Majewski                 -             -                  -           91,250       91,250
 Mr Harold Seeley                 -             -                  -           91,250       91,250
 Mr Mark Smith                    -             -                  -           91,250       91,250
 Total                            -             -                  -          456,250      456,250

(1a) Shares: A total of 2,500,000 shares were issued on 7 October 2004 to directors for the
period prior to 7 October 2004 for current and prior year services. Dr Michael Cohen, Professor
John Mills, Mr John Majewski, Mr Harold Seeley and Mr Mark Smith each received 500,000
shares at a deemed value of 20 cents per share. (see Note 11b). The value of these shares has
been allocated over the period of time directors fees were due and payable.

In addition Mr Peter Nash was also allotted 500,000 shares at a deemed value of 20 cents per
share on 7 October 2004 for services to the Company prior to 7 October 2004. (see Note 11b)

(1b) Options: On the 7th October 2004, 2,225,000 options were issued to current and former
directors. Dr Michael Cohen received 525,000 options, Professor John Mills, Mr Ron Hodge, Mr
Peter Nash and Mr John Majewski each received 300,000 options, Mr Harold Seeley and Mr
Mark Smith each received 100,000 options. (See note 11). These options have a 5-year life and an
exercise price of 50 cents. It was deemed that these options had no value given the uncertainty of
the company at the time and expected listing price. As such no value has been recorded for these
options.

Other than the shares and options disclosed above, Directors have not received any equity
incentive package.

Equity Interests of Directors and Director Related Entities

Shares                   Balance 30       Acquired      Acquired        Acquired       Balance
                            June          7 October     8 January         (1) /        30 June
                         2004 or on          2004          2005        (Disposed)     2005 or on
                            date                                                     date ceasing
                         becoming                                                       to be a
                         a director                                                    director
Dr Michael Cohen             950,000         500,000               -               -     1,450,000
Professor John Mills                  -      500,000               -               -       500,000
Mr. John Majewski         15,375,001         500,000      300,000          425,700       16,600,701



                                                9
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Equity Interests of Directors and Director Related Entities continued

Shares                    Balance 30     Acquired        Acquired     Acquired          Balance
                             June        7 October       8 January      (1) /           30 June
                          2004 or on        2004            2005     (Disposed)        2005 or on
                             date                                                     date ceasing
                          becoming                                                       to be a
                          a director                                                    director
Nar Distributions Pty
Ltd (an entity
associated with John
Majewski)                            -               -           -          116,765        116,765
Mr. Peter Nash                       -       500,000             -                -        500,000
Mr. Peter Nash (joint
holding)                             -               -     500,000                -        500,000
InvestSmart (an entity
related to Mr Ron
Hodge)                               -               -           -      6,988,032        6,988,032
Total                     16,325,001       2,000,000       800,000      7,530,497       26,538,733


Directors Ceasing to
hold office during
they year
Mr Harold Seeley            6,400,000        500,000             -                -      6,900,000
Ebling Pty Ltd (an
entity related to Mr
Harold Seeley)             44,000,000              -             -   (22,000,000)       22,000,000
Mr Mark Smith                       -        500,000             -              -          500,000
Total (Note 11b)                           3,000,000

(1) These shares were acquired by the issue of shares in full payment of;

   a) amounts due to Mr John Majewski at 30 June 2004
   b) InvestSMART (a related entity of Mr Ron Hodge) for investment services relating to the
      listing of the Company. (Refer to Note 14 related party transactions)




                                               10
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


Options                     Balance             Acquired         Disposed         Balance
                          30 June 2004       7 October 2004                       30 June
                           or on date                                            2005 or on
                          becoming a                                            date ceasing
                            director                                               to be a
                                                                                  director
Dr Michael Cohen                         -            525,000               -          525,000
Professor John Mills                     -            300,000               -          300,000
Mr John Majewski                         -            300,000               -          300,000
Mr Peter Nash                            -            300,000               -          300,000
Mr Ron Hodge                             -            300,000               -          300,000
Total                                    -           1,725,000              -        1,725,000


Directors Ceasing to hold office during they year
Mr Harold Seeley                         -            100,000               -          100,000
Mr Mark Smith                            -            100,000               -          500,000
Mr Chris Wilkinson
(director prior to June
2004)                                    -            300,000               -                 -
Total (see Note
11b)                                     -           2,225,000              -        2,225,000


INDEMNITY
In accordance with the constitution of Narhex Life Sciences Limited:
Every Director, Secretary, Manager, Accountant, Trustee or other person employed in the
business of the Company shall be indemnified by the Company against, and it shall be the duty
of the Directors out of the funds of the Company to pay, all costs, losses and expenses for which
any such Director, Secretary, Manager, Accountant, Auditor, Trustee or other person as
aforesaid may become liable by reason of any contract entered into or act or deed done by him
as such Director, Secretary, Manager, Accountant, Auditor, Trustee or servant in any way in the
proper discharge of his duties, unless such costs, losses and expenses shall be caused or
contributed to by his own negligence, default, breach of duty or breach of trust.
PROCEEDINGS ON BEHALF OF THE COMPANY
No person has applied for leave of Court to bring proceedings on behalf of the Company or
intervene in any proceedings to which the Company is a party for the purpose of taking
responsibility on behalf of the Company for all or any part of those proceedings.

The Company was not a party to any such proceedings during the year.




                                                11
NARHEX LIFE SCIENCES LIMITED
Directors’ Report continued


AUDITORS DECLARATION

A copy of the auditors’ independence declaration as required under section 307C of the
Corporations Act 2001 is set out on page 35.

NON-AUDIT SERVICES

The Board of Directors is satisfied that the provision of non-audit services during the year is
compatible with the general standard of independence for auditors imposed by the Corporations
Act 2001.

$1,320 fees were charged in the current year for tax services. The directors are satisfied that the
provisions of these services did not compromise the auditors independence due to the materiality
of this fee in relation to the total fees earned by the auditors.


Signed in accordance with a resolution of directors.




Dr Michael Cohen
Chairman


Sydney
Date: 12 September 2005




                                                12
NARHEX LIFE SCIENCES LIMITED
Corporate Governance Statement


Best practice recommendations of the ASX Corporate Governance Council have been applicable
to the Company since its listing on 12 January 2005. It is noted that the Company was under the
control of the external administrator for the period 1 July to 30 September 2004. The current
Board was established on 7 October 2004.

Board Role: The Board is responsible for the oversight of the Company, including its control
and accountability systems, input and approval of corporate strategy and performance objectives,
reviewing and approving systems of risk management, internal compliance and control and
ensuring appropriate resources are available, monitoring senior managements performance and
implementation of strategy and approving and monitoring financial and other reporting.

Board Composition: The skills, experience and expertise relevant to the position of each
director who is in office at the date of the annual report and their term of office are detailed in
the director’s report.

The Company’s only independent director is Mr R Hodge.

The remaining 4 directors, Dr Michael Cohen (Executive Chairman) Professor John Mills
(Managing Director) Mr J Majewski (CEO) and Mr P Nash are executive directors and hence do
not qualify as independent directors.

When determining whether a non-executive-director is independent the director must not fail
any of the following materiality thresholds:
        Less than 10% of the Company’s shares are held by the director and any entity or
        individual directly or indirectly associated with the director
        No purchases are made form any entity or any entity or individual directly or indirectly
        associated with the director and
        None of the directors income or the income of an individual or entity or individual
        directly or indirectly associated with the director is derived from a contract with any
        member of the Company other than income derived as a director of the Company.

Independent directors have the right to seek independent professional advice at the Company’s
expense in the furtherance of their duties as directors. Written approval must be obtained from
the chairman prior to incurring any expense on behalf of the Company.

The Board has not established a nomination committee. The Board has formed the view, given
its size and structure that it is more efficient for the board as a whole to deal with matters that
would otherwise be dealt with by a nomination committee.

Trading policy: The Company’s policy regarding directors and employees trading in its
securities is set by the Board. The policy restricts directors and employees from acting on
material information until it has been released to the market and adequate time has been given
for this to be reflected in the securities price.

Audit Committee: The Board has not established an audit committee. The Board has formed
the view, given its size an structure that it is more efficient for the board as a whole to deal with
matters that would otherwise be dealt with by an audit committee. The Board has however
taken steps to safeguard the integrity of its financial reports.




                                                 13
NARHEX LIFE SCIENCES LIMITED
Corporate Governance Statement


        The Board reviews regular periodic management reports and has the opportunity to
        discuss these reports at regular board meetings,
        The Chairman and independent director discuss the annual financial report with the
        auditors to provide an open and frank discussion of any issue or concern the auditors
        may have.

Risk oversight and management: The Company is a small biotechnology entity at the initial
stages of intellectual property development. The investment risk profile of the Company is high
and investments in this Company are considered speculative.

The Company does not have formal written policies on risk oversight and management.
However, as a matter of practice, the board is responsible for risk oversight and management.
Day to day responsibility is delegated to the Managing Director.

The Managing Director is responsible for
      Identification and Monitoring of risk
      Communication of risk events to the board; and
      Responding to risk events, with board authority

The Board defines risk to be any event that, if it occurs, will have a material impact on the ability
of the Company to achieve its objectives. Risk is considered across the financial, operational and
organisational aspects of the Company’s affairs.

Given its early stage of development, the financial and organisational risks are considered low, as
there are simple financial and organisational structures in place. Success of the Company is
dependent upon successful development of the company’s Intellectual Property.

Performance Evaluation: The Board has not conducted a formal annual performance review
this financial year. As the Board has been restructured during the year in preparation of its listing
on the ASX in January 2005, it was not deemed appropriate to conduct a formal review at this
time. The Board is aware that the success of the Company is dependent of the performance of
the board and key executives as such the Chairman has regular contact with directors on an
individual and group bases to discuss and revise the goals and objectives of the Company.

Remuneration Policies: The Board has not established a remuneration committee. The Board
has formed the view, given its size an structure that it is more efficient for the board as a whole
to deal with matters that would otherwise be dealt with by a remuneration committee.

The amount of remuneration paid to all directors and executives including all monetary and non-
monetary components are detailed in the Remuneration Report section of the Directors Report.

The Board expects that the remuneration structure implemented will result in the Company
being able to attract and retain the best executives. The company has not established long term
incentive programs for the current executives as the Board believes the executive directors
current equity holdings are sufficient to provide the necessary incentive to work to grow long-
term shareholder value. There are no schemes for retirement benefits other than statutory
superannuation for non-executive directors.

Other Information: Further information relating to the company’s corporate governance
practices and policies has been made available on the company’s website.


                                                 14
NARHEX LIFE SCIENCES LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
for the year ended 30 June 2005



                                                       30 June         30 June
                                               Notes    2005            2004
                                                          $               $


Revenues from Ordinary Activities
Interest income from third parties                      199,910                  -
                                                        199,910                  -


Expenses from Ordinary Activities
Research and development                                 91,900                  -
Intellectual Property costs                     2       166,503          150,254
Employment related costs                                338,478          525,355
Compliance and legal costs                              126,381           40,701
Administration and travel expenses              2       157,749          116,377
Interest Expense                                        259,068          347,843
Deed of Company Arrangement Debt
Forgiven                                               (233,702)                 -
Profit/(loss) from ordinary activities
before income tax expense                              (706,467)      (1,180,530)
Income tax expense relating to ordinary
activities                                      3                 -
Profit/(loss) from ordinary activities
after income tax expense                               (706,467)      (1,180,530)
Changes in equity reserves during the                             -              -
period
Total changes in equity other than
those resulting from transactions with
owners as owners                                       (706,467)      (1,180,530)


Basic earnings/(loss) per share (cents per
share)                                          17      (0.006)           (0.014)

Diluted earnings/(loss) per share (cents per
share)                                          17      (0.006)           (0.014)




                                               15
NARHEX LIFE SCIENCES LIMITED
STATEMENT OF FINANCIAL POSITION
for the year ended 30 June 2005


                                         30 June        30 June
                               Notes      2005           2004
                                            $              $
CURRENT ASSETS
Cash assets                         4    7,356,293             87
Receivables                         5       54,397          5,056
TOTAL CURRENT ASSETS                     7,410,690          5,143


NON-CURRENT ASSETS
Plant and equipment                 6       32,096          3,671
Intellectual Property               7      724,965        791,374
TOTAL NON-CURRENT ASSETS                   757,061        795,045


TOTAL ASSETS                             8,167,751        800,188


CURRENT LIABILITIES
Payables                            8      155,204        988,008
Provisions                          9       20,557                -
Interest bearing liabilities    10                 -    2,533,832
TOTAL CURRENT LIABILITIES                  175,761      3,521,840


TOTAL LIABILITES                           175,761      3,521,840


NET ASSETS                               7,991,990     (2,721,652)


EQUITY
Contributed equity              11      11,620,111        200,002
Accumulated losses              12      (3,628,121)    (2,921,654)
TOTAL EQUITY                             7,991,990     (2,721,652)




                               16
NARHEX LIFE SCIENCES LIMITED
STATEMENT OF CASH FLOWS
for the year ended 30 June 2005



                                                    30 June       30 June
                                           Notes     2005          2004
                                                       $             $


CASH FLOWS FROM OPERATING
ACTIVITIES
Receipts from loans                                           -     43,000
Other                                                         -     82,663
Payments to suppliers and employees                 (756,380)     (130,515)
Interest received                                     182,904               -
NET CASH FLOWS USED IN
OPERATING ACTIVITIES                                (573,476)       (4,863)


NET CASH FLOWS USED IN
INVESTING ACTIVITIES
Purchase of plant and equipment                      (33,766)               -
Other                                                  (8,680)              -
NET CASH FLOWS USED IN
INVESTING ACTIVITIES                                 (42,446)               -


CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES
Proceeds from Initial Public Offering               8,000,367               -
Proceeds from issue of Convertible Notes            1,347,070               -
Payment of share issue costs                       (1,375,241)              -
NET CASH FLOWS FROM
FINANCING ACTIVITIES                                7,972,128               -


NET INCREASE/(DECREASE) IN
CASH HELD                                           7,356,206       (4,863)
CASH AT BEGINNING OF THE
FINANCIAL PERIOD                                           87        4,950
CLOSING CASH CARRIED                                                    87
FORWARD                                             7,356,293


                                           17
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The financial report is a general-purpose financial report, which has been prepared in accordance
with Accounting Standards, Urgent Issues Group Consensus Views, other authoritative
pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001.

The financial report has been prepared on an accrual basis and is based on historical costs. Cost
in relation to assets represents the cash amount paid or the fair value of the assets given in
exchange.

The financial report is prepared on a going concern basis.

Narhex Limited is a listed public company and domiciled in Australia

a) Cash

Cash on hand and in banks and short term deposits are stated at the lower of cost and net
realisable value.

For the purpose of the Statement of Cash Flow, cash includes cash on hand and in banks, and
money market investments readily convertible to cash.

b) Receivables

Receivables are recognised and carried at their nominal amount less a provision for any
uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is
no longer probable. Bad debts are written off as incurred.

Receivables from related parties are recognised and carried at the nominal amount due. Interest
is taken up as income on an accrual basis.

c) Plant and Equipment

Cost
Items of plant and equipment are carried at cost less accumulated depreciation.

Depreciation
Depreciation is provided on a straight line basis on all property, plant and equipment.

The major depreciation periods are:
  Computer Equipment:                        2-3 years
  Furniture & Fittings                       5 years

d) Intangibles

Intellectual Property: Amounts incurred in acquiring and extending patents are expensed as
incurred, except to the extent that such costs are expected beyond any reasonable doubt to be
recoverable.


                                                18
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued

e) Recoverable Amount

Non-current assets are not re-valued to an amount above their recoverable amount, and where
carrying values exceed this recoverable amount assets are written down. In determining
recoverable amount the expected net cash flows have not been discounted to their present value.

f) Trade and Other Payables

Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the
consideration to be paid in the future for goods and services, whether or not billed to the
consolidated entity.

Payables to related parties are carried at the principal amount. Interest, when charged by the
lender, is recognised as an expense on an accrual basis.

g) Employee Benefits

Provision is made for employee benefits accumulated as a result of employees rendering services
up to the reporting date. These benefits include wages and salaries and annual leave.

Liabilities arising in respect of wages and salaries and annual leave expected to be settled within
12 months of the reporting date are measured at their nominal amount based on remuneration
which are expected to be paid when the liability is settled. All other employee benefit liabilities
are measured at the present value of estimated future cash flow to be made in respect of services
provided by the employees up to the reporting date.

Employee benefit expenses and revenues arising in respect of the following categories:
        Wages and salaries; and
        Annual leave
are recognised against profits on a net basis in their respective categories

h) Contributed equity

Ordinary share capital is recognised at the fair value of the consideration received by the
company. Any transaction costs arising on the issue of ordinary shares are recognised directly in
equity as a reduction of the share proceeds received.

i) Revenue Recognition

Revenue from the sale of goods is recognised when goods are delivered to customers. Interest
revenue is recognised on a proportional basis taking into account the interest rates applicable to
the financial assets. Dividend revenue is recognised when the right to receive a dividend has been
established. Revenue from the rendering of a service is recognised upon the delivery of services




                                                19
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued

j) Research and Development Expenditure

Amounts incurred on research and development activities are expensed as incurred, except to the
extent that such costs are expected beyond any reasonable doubt to be recoverable.

k) Taxes

Tax-effect accounting is applied using the liability method whereby income tax is regarded as an
expense and is calculated on the accounting profit after allowing for permanent differences. To
the extent timing differences occur between the time items are recognised in the accounts and
when items are taken into account in determining taxable income, the net related taxation benefit
or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision
for deferred income tax. The net future income tax benefit relating to tax losses and timing
differences are not carried forward as an asset unless the benefit is virtually certain of being
realised.

l) Goods and Services Tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST)
except where the amount of GST incurred is not recoverable from the taxation authority, it is
recognised as part of the cost of acquisition of an asset or as part of an item of expense.

Cash flows are included in the Statement of Cash Flows 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.

m) Impact of Adoption of Australian Equivalents to International Financial Reporting
   Standards

The Company is in the process of transitioning its accounting policies and financial reporting
from current Australian Accounting Standards (AGAAP) to Australian equivalents of
International Financial Reporting Standards (AIFRS) which will be applicable for the financial
year ended 30 June 2006.

Set out below are the key areas where accounting policies are expected to change on adoption of
AIFRS and our best estimate of the quantitative impact of the changes on total equity as at the
date of transition and 30 June 2005 and on Net Profit for the year ended 30 June 2005.

The figures disclosed are management’s best estimates of the quantitative impact of the changes
as at the date of preparing the 30 June 2005 financial report.

The actual effects of the transition to AIFRS may differ from the estimates disclosed due to (a)
ongoing work being undertaken to determine precise numbers (b) emerging accepted practice in
the interpretation and application of AIFRS and UIG interpretations



                                                 20
   NARHEX LIFE SCIENCES LIMITED
   Notes to the financial statements


1) Estimate of effect on Net Equity: Adoption of AIFRS is not expected to have any material
   effect on the recorded value of Net Equity;

2) Estimate of effect on Net Profit/(Loss): Adoption of AIFRS is not expected to have any
   material effect on the recorded value of Net Profit/(Loss);

   n) Comparative Figures

   Where required by Accounting Standards comparative information has been adjusted to confirm
   with changes in presentation for the current year.

                                                                30 June             30 June
                                                                 2005                2004
                                                                   $                   $
    2. LOSS FROM ORDINARY
    ACTIVITIES
    Loss from ordinary activities has been
    determined after:
    Amortisation of Intellectual Property                          66,409              66,409

    Depreciation of plant and equipment                             3,928               2,200


    3. INCOME TAX EXPENSE
    The prima facie tax on loss from ordinary
    activities before income tax is reconciled
    to the income tax expense as follows:

    Prima facie tax payable on loss from
    ordinary activities before income tax at
    30% (2004:30%)                                              (211,940)           (354,159)
    Add: Tax effect of non deductible items
    - Amortisation of Intellectual Property                        19,923              19,923
    - Future income tax benefits arising from
      tax losses are not brought to account at
      balance date, as realisation of the benefit
      is not regarded as virtually certain                        192,017             334,235
    Income Tax expense attributable to loss
    from ordinary activities before income tax                            -                   -

    In addition at 30 June 2004 the Company has revenue tax losses of $2,254,000. These will be
    available to the Company if the Company is able to meet the Continuity of Ownership and
    Same Business Test as set in the income tax legislation. This is not virtually certain.

    The Company had no franking credits available to it.


                                                    21
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


                                                   30 June     30 June
                                                    2005        2004
                                                      $           $
4. CASH ASSETS
Cash at Bank                                        315,388          87
Term deposit (maturity date 15 July)               7,040,905             -
                                                   7,356,293         87


5. RECEIVABLES
Other debtors                                        49,341              -
Related party loan – Narhex Ltd                       5,056       5,056
                                                     54,397       5,056


6. PLANT AND EQUIPMENT
Plant and Equipment
 At cost                                             39,410       9,122
 Accumulated depreciation                            (7,314)     (5,451)
                                                     32,096       3,671


Movement in carrying value
Carrying value at the beginning of the year           3,671       5,871
 Additions                                           33,766              -
 Disposals                                           (3,478)             -
 Depreciation                                        (3,927)     (2,200)
 Depreciation written back on disposal                2,064              -
Carrying value at the end of the year                32,096       3,671


7. INTANGIBLE ASSETS
Intellectual Property                               996,135     996,135
Accumulated amortisation                           (271,170)   (204,761)
                                                    724,965     791,374




                                              22
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


                                                          30 June       30 June
                                                           2005          2004
                                                             $             $
8. PAYABLES
Trade creditors                                            155,204        988,008
                                                           155,204        988,008


9. PROVISIONS
Employee Entitlements                                       10,557                -
Audit                                                       10,000                -
                                                            20,557                -


10. INTEREST BEARING
LIABILITY.
Loan – Ebling Pty Ltd                                               -    2,533,832


11. CONTRIBUTED EQUITY
a) Issued and paid up capital
Ordinary shares fully paid - $                    11b    11,620,111       200,002


Ordinary shares fully paid: Number            11b,f     161,376,664     85,518,000
Options Unlisted: Number                      11c,f       2,225,000               -


                                                         Number
11b) Movements in shares on issue
                                                         of shares          $
Opening balance at the start of the year                 85,518,000       200,002
Issued to InvestSMART as approved by
shareholders on 7 October 2004 as
consideration for services rendered to the
Company at 4 cents per share                      (1)     6,988,032       280,000
Issued to Peter Nash on 7 October 2004 as
approved by shareholders at 6 cents per
share                                             (1)      500,000         30,000




                                             23
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


11. CONTRIBUTED EQUITY continued

 11b) Movements in shares on issue                                Number of
 continued                                                           shares                          $
 Issued to current and former directors on 7
 October 2004 as approved by shareholders
 at 20 cents per share                                  (1)         2,500,000                  500,000
 Issued to creditors in respect of debts
 owed by the Company on 14 October
 2004 at 20 cents per share                             (1)          625,060                   125,012
 Conversion of Convertible Notes on 8
 January 2005 at 16.4 cents per share               11e            25,243,736                4,139,970
 Shares issued under prospectus at on 8
 January 2005 at 20 cents per share                                40,001,836                8,000,367
 Prospectus fund raising costs                                                -             (1,655,240)
 Closing balance at the end of the year                           161,376,664               11,620,111

(1) Details of these transaction are set out in the Directors Remuneration Report and Note 13
Related Party transaction

 11c OPTIONS - Unlisted                                           Number of             Number of
                                                                   options               options
                                                                    2005                  2004
 Options on issue at the start of the year                                 -                          -
 Options issued on 7 October 2004               11d                 2,225,000                         -
 Options on issue at the end of the year                            2,225,000                         -

 Each option will provide the right to each Option holder to subscribe for one Ordinary Share.

 11d) Movements in options on issue
                         Issued Exercise Expired
             Opening during         during   during Closing                       Expiry     Exercise
             Balance       Year      year     year   Balance                       Date       Price
 M Cohen              - 525,000            -       - 525,000                      7-10-09         0.50
 R Hodge                   - 300,000                -         -     300,000       7-10-09          0.50
 M Majewski                - 300,000                -               300,000       7-10-09          0.50
 J Mills                   - 300,000                -         -     300,000       7-10-09          0.50
 P Nash                    - 300,000                -         -     300,000       7-10-09          0.50
 H Seeley                  - 100,000                -         -     100,000       6-10-09          0.50




                                               24
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


11. CONTRIBUTED EQUITY continued
11d) Movements in options on issue

                               Issued      Exercise        Expired
                 Opening       during       during         during     Closing      Expiry       Exercise
                 Balance        Year         year           year      Balance       Date         Price
 M Smith                  -     100,000               -          -     100,000     6-10-09             0.50
 C Wilkinson              -     100,000               -          -     100,000     6-10-09             0.50
                                                                 -     2,225,00
                          -   2,225,000               -                       0

In 2002 the Company had issued the Chairman of the Board with 525,000 options and non-
executive directors 350,000 options on various terms and conditions. At a shareholders meeting
the terms and conditions of these options were varied. For disclosure purposes these are shown
as being issued on 7 October 2004. Additional details of these transactions are set out in the
Directors Remuneration Report.

                                                                     30 June                 30 June
                                                                      2005                    2004
                                                                        $                       $
 11e. CONVERTIBLE NOTES
 Convertible Notes                                                             -            -


 Notes issued in respect of pre-IPO raising           13             1,347,070                         -
 Notes issue in respect of related party loan
 at 30 June 2004                                      13             2,533,832                         -
 Notes issued in respect of additional
 related party loan from 1 July 2004 to 15
 September 2004                                       13              259,068                          -
 Convertible Notes converted on 8 January
 2005                                                11b         (4,139,970)
 Balance at 31 December 2004                                                   -                       -

 (i) The convertible notes are issued at $1.00 with interest payable on the notes at 8% per annum.
Interest was payable from 1 July 2005 until the note was converted or redeemed. The notes were
convertible at the option of the Note holders and will automatically convert immediately before
the minimum subscriptions are allotted under the IPO. The notes were secured by a fixed and
floating charge over the assets of the Company in favour of the Note Holders. Additional details
of these transaction are set out in Note 13 Related Party Transactions.

All Notes were converted into ordinary shares on 8 January 2005.




                                                25
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


11f. ASX ESCROW RESTRICTIONS

At the date of listing the Australian Stock Exchange, placed escrow restrictions on Shares and
Options held by a number of the original shareholders of the Company. Of the total issued
capital of the Company the following number of securities have had trading restrictions placed
on them.

Ordinary Shares: Total Issued capital                                  11a           161,376,664


Shares under 12 month escrow until 12 January 2006                                    17,670,628
Shares under 12 month escrow until 12 January 2007                                    94,438,035
Unrestricted shares                                                                  49, 268,001
Total                                                                                161,376,664


Options Unlisted: Total on issue                                       11a             2,225,000
Options under 12 month escrow (unable to be traded until 12
January 2007)                                                                          2,225,000

11g Terms and Conditions of Ordinary shares:

Ordinary shares have the right to receive dividends as declared and, in the event of winding up of
the Company, to participate in the proceeds from the sale of all surplus assets in proportion to
the number and amounts paid up on shares held.


 12. ACCUMULATED LOSSES                                         30 June               30 June
                                                                 2005                  2004
                                                                   $                     $
 Reconciliation of accumulated losses
 Balance at beginning of the year                             (2,921,654)            (1,741,124)
 Net (loss) for the year                                        (706,467)            (1,180,530)
 Balance at end of the year                                   (3,628,121)            (2,921,654)




                                               26
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


13. RELATED PARTY TRANSACTIONS

Transactions with related parties are on normal commercial terms and conditions and are no
more favourable than those available to other parties unless otherwise stated

a) Related Party Loan and Creditors payments at 30 June 2004

The following related party loans were outstanding at 30 June 2004.

Ebling Pty Ltd ( a related party to Mr Harold Seeley)                                 $2,533,832

The loan from Ebling Pty Ltd provided working capital and general funding for Narhex Life
Sciences Ltd. The initial advance of $457,307 in the 2000 financial year attracted an interest rate
of 12% per annum. Subsequent amounts loaned attracted an interest rate of 17% per annum. The
loan was secured by a fixed and floating charge over the Company. This loan was acquired by
investors on arms length terms and conditions. Refer to the Convertible Note transaction section
below at 14 b).

Nar Distributions Pty Ltd ( a related entity of John Majewski)                            $23,352

A loan was provided to fund some expenses of the Company. The loan is unsecured, repayable
upon demand and did not attract any interest. Subsequent to 30 June 2004 the loan was repaid in
full through the issuance of 116,765 shares in the Company.

John Majewski                                                                              $85,140

A creditors payments outstanding at 30 June 2004 was repaid in full by the issue of 425,700
shares on 7 October 2004.

b) Convertible Notes

The following transaction took place with Red Tiger Investments Pty Ltd (a related entity of Ron
Hodge).

The original loan due to Ebling Pty Ltd (see section 14a above) was assigned to Red Tiger
Investments Pty Ltd. This was then converted into $1.00 Convertible Notes equal to the total
debt owing plus interest capitalised for the period 1 July 2004 to 15 September 2004 amounting
to $2,792,900.

Red Tiger Investments Pty Ltd acquired further notes amounting to $1,347,070 that were issued
to help fund the IPO. The Convertible Notes were subsequently converted into ordinary shares
on 8 January 2005.

c) IPO transactions with InvestSMART Pty Ltd (an entity related to Mr Ron Hodge)

InvestSMART, an entity related to Mr Ron Hodge entered into an arrangement with Narhex to
provide investment advice and assistance relating to the Offer of Shares, the Prospectus and the
listing of Narhex. Full details of this agreement were set out in the prospectus.




                                                27
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


13. RELATED PARTY TRANSACTIONS continued
c) IPO transactions with InvestSMART Pty Ltd continued

In consideration of the services provided, InvestSMART.

     was paid $285,907 on October 7 on completion of the Deed of Company Arrangement, and
     the issuance of Convertible Notes.

     was issued 6,988,032 fully paid ordinary shares, of which          2,660,351 were issued in
     consideration of InvestSMART providing a serviced office,          use of infrastructure and
     balance sheet support. The balance of 4,327,681 were issued        in anticipation of Narhex
     successfully completing its listing on the ASX.
     was paid a total of $84,000 retainer at the rated of $12,000 per   month for 7 months from
     June 2004 until the quotation of Narhex’s shares.

     was paid $19,710 rent of offices for 9 months from June 2004 until the end of February
     2005.

     was paid $300,982 being 5% commission on gross funds raised under the prospectus by
     InvestSMART.

     was paid $18,300 for investor relations for the period January 2005 to June 2005.

 d) Consulting Fee:

     Three Guardians Pty Ltd, an entity related to Mr John Majewski was paid a consulting fee of
     $60,000 for assistance in the IPO. This fee was payable only on the successful listing of the
     Company.

 e) Directors Fees:

     All payments to directors are set out in the Remuneration Note in the Directors Report.

 f) Directors Equity Interests:

     These are set out in the Remuneration Note in the Directors Report.


                                                                  30 June                30 June
 14.AUDITORS REMUNERATION
                                                                   2005                   2004
                                                                     $                      $
 Remuneration of the auditor for
 - auditing or reviewing the financial report                        6,500                         -
 - other services                                                    1,320                         -




                                                28
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


                                                       30 June      30 June
15. CAPITAL AND LEASING                                 2005         2004
    COMMITMENTS                                           $            $
Non-cancellable operating leases not
capitalised in the financial statements
payable
- Not later than 1 year                                 22,445              -
- Later than 1 year but not later than 5
  years                                                 40,280              -
The property lease is a non cancellable
lease with a three year term, with rent
payable monthly in advance


16. CASH FLOWS
(a) Reconciliation of cash
For the purposes of the statement of cash
flows, cash includes cash on hand and in
banks and investments in money market
instruments, net of outstanding bank
overdrafts. Cash at the end of the financial
period as shown in the statement of cash
flows is reconciled to the related items in
the balance sheet as follows:
Cash at Bank                                    4     7,356,293           87


(b) Reconciliation of net cash flows
from operating activities to operating
loss after income tax for the year ended
30 June 2005
Operating profit/(loss) after taxation         12     (706,467)   (1,180,530)
Non Cash items
Depreciation                                             3,928         2,200
Amortisation of Intellectual Property                   66,409        66,409
Loss on asset disposal                                   1,413              -
Shares allotted on conversion of               11e,
convertible note                               13b    2,792,900             -
Shares allotted for debt forgiveness by
creditors                                      11b     655,012              -




                                               29
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements



 16. CASH FLOWS                                                    30 June               30 June
                                                                    2005                  2004
                                                                      $                     $
 (b) Reconciliation of net cash flows
    from operating activities to
    operating loss after income tax for
    the year ended 30 June 2005
    continued
 Change in assets and liabilities
 (Increase)/decrease in current receivables                        (40,662)                      -
 Increase/(decrease) in payables                                (3,366,566)             1,107,058
 Increase/(decrease) in provisions                                   20,557                      -
 Net cash flows from operating activities                         (573,476)               (4,863)


 17. EARNINGS PER SHARE
 Earnings used in the calculation of EPS                          (706,467)           (1,180,530)
 Weighted average number of ordinary
 shares used in calculation of basic EPS                        124,372,931           85,518,000
 Weighted average number of options
 outstanding                                                      1,627,603                      -
 Weighted average number of ordinary
 shares used in calculation of diluted EPS                     126,000,533            85,518,000

18. FINANCIAL INSTRUMENTS

a) Credit Risk
The company’s maximum exposure to credit risk at balance date in relation to each class of
recognised financial asset is the carrying amount of those assets as indicated in the balance sheet.

b) Net Fair Values
The aggregate net fair values and carrying amounts of financial assets and financial liabilities are
disclosed in the balance sheet and in the notes to and forming part of the financial report.
c) Interest Rate Risk
The Company’s exposure to interest rate risk, which is the risk that a financial instrument’s value
will fluctuate as a result of changes in market interest rates and the effective weighted average
interest rate on those financial assets and financial liabilities is as follows:




                                                30
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


18. FINANCIAL INSTRUMENTS continued

2005                                             Fixed           Fixed
                                                Interest       Interest
                               Floating         maturing       maturing     Non-
                    Weighted   Interest         within 1        within     Interest
                    Average      rate             year         1-2 years   Bearing     Total
Financial Assets
Cash                  3%        315,388                    -           -          -    315,388
Cash term deposit    5.51%     7,040,905                                              7,040,905
Receivables            -               -                   -           -     54,398     54,398
Total Financial
Assets                         7,356,293                   -           -     54,398   7,410,691


Financial
Liabilities
Trade and other
payables               -               -                   -           -    155,204    155,204
Provisions             -               -                   -                 20,557     20,557
Total Financial
Liabilities                            -                   -           -    175,761    175,761


2004
Financial Assets
Cash                   -             87                    -           -          -         87
Receivables            -               -                   -           -      5,056      5,056
Total Financial
Assets                               87                    -           -      5,056      5,143


Financial
Liabilities
Trade and other
payables               -        988,008                    -           -          -    988,008
Loan                  17%              -         2,533,832             -          -   2,533,832
Total Financial
Liabilities                      988,008         2,533,832             -          -   3,521,840




                                           31
NARHEX LIFE SCIENCES LIMITED
Notes to the financial statements


19. SUBSEQUENT EVENTS

Subsequent to the end of the financial year the founding director and CEO, Mr John Majewski
has announced his resignation from the Company as CEO. Simultaneously the Chairman has
announced that he will take on the role of Executive Chairman and Professor John Mills will
move from being a non-executive director to Managing Director.

Subsequent to the end of the financial year the Company has also been successful in converting
its inventory of DG35 to its prodrug DG17, in preparation for its use in formulation studies and
clinical trials.

Other than these items there have not been any matters or circumstances that have arisen since
the end of the year, that have significantly affected, or may significantly affect, the operations of
the company, the results of those operations, or the state of affairs of the company in financial
years after the end of the year.

20. INVESTMENT IN SUBSIDIARY COMPANIES

The Company owns 100% of Narhex Limited. Narhex Limited is incorporated in Hong Kong
and holds the Intellectual Property for the group. The Company has not prepared consolidated
financial statements as the Company has no assets or liabilities other than intellectual property
that is carried at no cost. Narhex Limited has not traded. Therefore, the consolidated figures
would be the same as those of the parent entity.

21. SEGMENT AND EMPLOYEE INFORMATION

The Company operates in Australia, and has 3 full time employees.

22. CONTIGENT LIABILITIES AND ASSETS

The Company is not aware of any contingent liabilities or asset at the date of this report.




                                                 32
NARHEX LIFE SCIENCES LIMITED
ABN 51 094 468 318
Directors’ Declaration



The Directors of the Company declare that:

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

   a) comply with Accounting Standards and Corporations Regulations 2001; and

   b) give a true and fair view of the company’s financial position as at 30 June 2005 and of
      their performance for the year ended 30 June 2005.

2. the Managing Director and the Company Secretary have each declared that

   a) The financial records of the Company for the financial year have been properly
      maintained in accordance with section 286 of the Corporations Act 2001;

   b) The financial statements, and notes for the financial year comply with the accounting
      standards; and

   c) The financial statements and notes for the financial year give a true and fair view.

3. In the directors’ opinion there are reasonable grounds to believe that the Company will be
   able to pay its debts as and when they become due and payable.



This declaration is made in accordance with a resolution of the Board of Directors.



M Cohen
Chairman
Sydney
Date: 12 September 2005




                                               33
NARHEX LIFE SCIENCES LIMITED

ASX ADDITIONAL INFORMATION
for the year ended 30 June 2005


Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere
in this report is as follows. The information is current as at 23 September 2005.

a)      Twenty largest shareholders
        The names of the twenty largest holders of quoted shares are:

                                                             Listed ordinary shares
                                                   Number of shares         % of ordinary
                                                                               shares
     Ebling PtyLtd                                           22,000,000                 13.6
     Mr John Majewski                                        16,300,701                 10.1
     Sueto Eguchi                                            14,606,251                     9.1
     InvestSmart Financial Services                           6,988,032                     4.3
     Mr Harold Seeley                                         6,900,000                     4.3
     Bradley Gowenlock                                        4,309,481                     2.7
     Mr Keith Beattie                                         4,109,480                     2.6
     Mr Mike Pieri                                            3,287,583                     2.0
     Mr Andrew Veale                                          3,287,583                     2.0
     Craig Bannister                                          3,251,310                     2.0
     Mr Glenn Smith                                           2,760,588                     1.7
     Stephen Greenall                                         2,540,686                     1.6
     Mr Gideon Hymans                                         2,465,686                     1.5
     Fortis Clearing Nominees                                 2,000,000                     1.4
     Mr Damien Grobelny                                       2,000,000                     1.4
     Mr Craig Marran                                          1,893,795                     1.2
     Mr Peter Surma                                           1,831,350                     1.1
     Simon Perkins                                            1,793,795                     1.1
     Richard Houghton                                         1,793,397                     1.1
     Mr Adam Djockovic                                        1,643,795                     1.0
     Total                                                  105,763,513                 65.8




                                                 36
NARHEX LIFE SCIENCES LIMITED

ASX ADDITIONAL INFORMATION continued
for the year ended 30 June 2005


b) Securities under escrow
At the date of listing the Australian Stock Exchange, placed escrow restrictions on Shares and
Options held by a number of the original shareholders of the Company. Of the total issued
capital of the Company the following number of securities have had trading restrictions placed
on them.

 Ordinary Shares: Total Issued capital                                                161,376,664

 Shares under 12 month escrow until 12 January 2006                                   17,670,628
 Shares under 12 month escrow until 12 January 2007                                   94,438,035
 Unrestricted shares                                                                 49, 268,001
 Total                                                                               161,376,664

c)     Distribution of equity securities
The number of shareholders, by size of holding, in each class of shares are:
                                                              Ordinary Shares
                                                       Number of         Number of
                                                        holders             shares
       1 - 1,000                                           4                     202
  1,001 - 5,000                                           44                 178,882
  5,001 - 10,000                                          283              2,784,856
 10,001 - 100,000                                         537             17,151,105
 100,001 and over                                         108            141,281,619
 Total                                                    976            161,376,664
 The number of shareholders holding less than a
 marketable parcel of shares are:                           50                     189,667

d) Substantial shareholders
     The names of substantial shareholders who have notified the Company in accordance with
     section 671B of the Corporations Act 2001 are:
     - Ebling Pty Ltd 28,900,000 ordinary shares (15.76% of the issued capital).
     - Mr John Majewski 16,417,461 ordinary shares (8.95% of the issued capital)
     - Sueto Eguchi 14,723,001 ordinary shares (8.0% of the issued capital)

e) Voting Rights
   All ordinary shares carry one vote per share without restriction.

f) Use of Cash since listing:
   The Company states that it has used the cash it had at the time of listing in a way consistent
   with its objectives.


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