ProMetic Life Sciences Inc.
Annual Report 1998

Plain-text annual report

KPMG LLP Chartered Accountants 2000 McGill College Avenue Suite 1900 Montréal (Québec) H3A 3H8 Téléphone (514) 840-2100 Telefax (514) 840-2187 http://www.kpmg.ca AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of ProMetic Life Sciences Inc. (formerly Innovon Life Sciences Holdings Limited) as at December 31, 1998 and 1997 and as at September 30, 1997 and the consolidated statements of income and deficit and changes in financial position for each of the 12-month periods ended December 31, 1998 and 1997, for the transition year ended December 31, 1998 and for the year ended September 30, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and as at September 30, 1997 and the results of its operations and the changes in its financial position for the 12-month periods ended December 31, 1998 and 1997, for the transition year ended December 31, 1998 and for the year ended September 30, 1997 in accordance with generally accepted accounting principles. (signed) KPMG LLP Chartered Accountants Montreal, Canada February 26, 1999 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Consolidated Balance Sheets Assets Current assets: Cash Marketable securities (note 2) Accounts receivable (note 3) Tax credit receivable Scientific research and experimental development tax credit receivable Inventories (note 4) Prepaid expenses December 31, 1998 1997 September 30, 1997 $ 51,837 4,483,540 8,327,414 – $ 159,644 398,756 660,642 161,570 – 3,139,114 702,860 16,704,765 269,280 1,332,282 109,279 3,091,453 $ 817,614 1,075,765 701,688 162,204 269,280 1,202,420 21,489 4,250,460 Capital assets (note 5) 14,373,072 5,167,530 5,131,788 Deferred development costs (note 6) 2,430,271 1,185,073 814,416 Other assets (note 7) 2,866,263 1,986,193 1,919,547 $ 36,374,371 $ 11,430,249 $12,116,211 Liabilities and Shareholders' Equity Current liabilities: Bank indebtedness (note 8 (a)) Accounts payable and accrued liabilities Current portion of long-term debt (note 8) $ 3,644,200 6,239,114 1,070,832 10,954,146 Long-term debt (note 8) Non-controlling interest (note 9 (b) (iii) and (v)) 5,509,219 – $ 205,103 1,723,126 428,406 2,356,635 3,377,439 2,970,943 $ 642,392 1,524,728 378,146 2,545,266 3,517,971 3,350,296 Shareholders' equity: Share capital (note 9) Deficit Commitments (notes 5 (b), (c) and 10) Contingency (note 11) 36,211,229 (16,300,223) 19,911,006 10,054,207 (7,328,975) 2,725,232 8,879,206 (6,176,528) 2,702,678 $ 36,374,371 $ 11,430,249 $12,116,211 See accompanying notes to consolidated financial statements. On behalf of the Board: (signed) Pierre Laurin, Director (signed) Daniel Auclair, Director PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Consolidated Statements of Income and Deficit 12-month periods ended December 31, 1998 1997 Transition year ended December 31, 1998 (15 months) Year ended September 30, 1997 (12 months) Net sales Cost of goods sold $ 10,037,537 7,765,265 2,272,272 $ 2,153,345 3,062,340 (908,995) $ 10,585,852 8,597,761 1,988,091 $ 2,199,896 3,058,034 (858,138) Operating expenses: Administrative and marketing expenses Research and development expenses (note 6) Amortization of deferred start-up costs Operating loss before financial expenses 8,646,954 3,566,152 9,522,385 3,323,981 685,354 185,615 745,033 138,010 440,155 9,772,463 366,669 4,118,436 536,790 10,804,208 385,908 3,847,899 7,500,191 5,027,431 8,816,117 4,706,037 Financial expenses 448,363 280,648 534,472 222,141 Loss before tax credit on loss and non- controlling interest 7,948,554 5,308,079 9,350,589 4,928,178 Tax credit on loss – (164,438) – (164,438) Loss before non- controlling interest Non-controlling interest 7,948,554 5,143,641 9,350,589 4,763,740 (1,474,367) (1,640,452) (1,853,720) (1,581,804) Net loss 6,474,187 3,503,189 7,496,869 3,181,936 Deficit, beginning of year Share and warrant issue expenses 7,328,975 3,610,454 6,176,528 2,237,096 2,497,061 215,332 2,626,826 757,496 Deficit, end of year $ 16,300,223 $ 7,328,975 $ 16,300,223 $ 6,176,528 Loss per share 0.22 0.18 0.27 0.17 Weighted average number of outstanding shares (in thousands) 29,726 19,746 28,215 18,723 See accompanying notes to consolidated financial statements. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Consolidated Statements of Changes in Financial Position 12-month periods ended December 31, 1998 1997 Transition year ended December 31, 1998 (15 months) Year ended September 30, 1997 (12 months) $ (6,474,187) $ (3,503,189) $ (7,496,869) $ (3,181,936) Cash provided by (used in): Operations: Net loss Items not involving cash: Depreciation of capital assets Amortization of deferred start-up costs Amortization and write-off of deferred development costs Non-controlling interest Net change in non-cash ope- rating working capital items 501,964 440,155 199,506 (1,474,367) (4,722,743) (11,529,672) 385,701 366,669 153,669 (1,640,452) (1,304,070) (5,541,672) 594,636 536,790 224,934 (1,853,720) (4,700,317) (12,694,546) 398,383 385,908 13,496 (1,581,804) (1,302,524) (5,268,477) Financing: Proceeds from share and warrant issues Share and warrant issue expenses Increase in long-term debt Repayment of long-term debt Non-controlling interest Advances on royalties Investments: Additions to tangible capital assets Business acquisition (net of cash of $354), (note 17) Deferred development costs (note 6) Deferred start-up costs Acquisition of rights and licenses Increase (decrease) in cash position 26,157,022 1,747,164 27,332,023 6,177,656 (2,497,061) 3,124,376 (596,322) (1,496,576) 8,522 24,699,961 (215,332) 1,538,969 (269,517) – (195,932) 2,605,352 (2,626,826) 3,124,376 (686,594) (1,496,576) – 25,646,403 (757,496) 1,738,969 (211,614) 247,788 (187,410) 7,007,893 (7,073,992) (541,978) (7,202,406) (617,311) (2,784,966) (1,444,704) (1,328,747) – (12,632,409) – (2,784,966) – (763,646) (553,157) – (1,858,781) (1,840,789) (1,483,506) – (13,311,667) (459,000) (420,323) (207,788) (1,704,422) 537,880 (4,795,101) 359,810 34,994 Cash position, beginning of year 353,297 5,148,398 1,250,987 1,215,993 Cash position, end of year $ 891,177 $ 353,297 $ 891,177 $ 1,250,987 Cash is comprised of cash and marketable securities less bank indebtedness. See accompanying notes to consolidated financial statements. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 The Company, incorporated under the Canada Business Corporations Act, is an integrated pharmaceutical company which develops, manufactures and markets injectable and non- injectable generic products and pharmaceutical protein separation and purification media. 1. Significant accounting policies: (a) Basis of presentation: These consolidated financial statements have been prepared using accounting principles applicable to a going concern, which assume that the Company will continue its operations in the foreseeable future and be able to realize assets and satisfy liabilities in the normal course of business. However, an emerging company assumes that it can expect future profitability and the support of its shareholders and other external funding sources, if applicable. Management is of the opinion that adequate resources will be available to complete the projects under development as at December 31, 1998. (b) Consolidation basis: The consolidated financial statements include the accounts of ProMetic Life Sciences Inc. and its subsidiaries. (c) Use of estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. (d) Marketable securities: Marketable securities which represent highly liquid investments are carried at the lower of cost and market. (e) Inventories: Work in process and finished goods are valued at the lower of cost and net realizable value. Raw materials are valued at the lower of cost and replacement cost. Cost is established using the first in, first out method. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 2 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 1. Significant accountings policies (continued): (f) Capital assets: Tangible assets: Tangible assets are recorded at cost. Depreciation is provided over the estimated useful lives of tangible assets using the following methods and rates: Asset Method Rate/period Leasehold improvements Building Equipment and tools Equipment under capital leases Office equipment and furniture Computer equipment Intangible assets: Straight-line Declining balance Declining balance Declining balance Declining balance Declining balance Lease period 5% 10% to 30% 20% 20% 30% Rights and licenses include vested rights as well as fees and expenditures incurred to obtain licenses for product manufacturing and marketing. Depreciation is provided over the useful life of the asset, which varies from 5 to 15 years, using the straight-line method. (g) Deferred start-up costs: Expenditures incurred during the pre-operating period of a new commercial production facility, are deferred and amortized on a straight-line basis over a period not exceeding five years. (h) Deferred development costs: Development costs of new products and processes, which are considered technically and financially feasible, are stated at cost less related research and development tax credits and grants. These costs are amortized from the start-up date of commercial production, based on sales. Should the Company determine that the unamortized balance is in excess of recoverable amounts, the excess will be charged to income for the year. (i) Revenue recognition: Revenues are recorded at the time of shipment of product, and are presented net of a provision for estimated returns and rebates. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 3 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 1. Significant accounting policies (continued): (j) Scientific research and experimental development expenses: Research and development expenditures are charged to income in the year in which they are incurred, net of related tax credits. Research and development expenses include the costs related to customer paid research and development orders. The related revenue is included in sales. (k) Foreign currency translation: Foreign currency transactions are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates. Non-monetary items are translated at historical exchange rates. Expense items are translated at the exchange rate on the transaction date or at average rates of exchange prevailing during the period. Any resulting exchange gains or losses are included in the income statement. 2. Marketable securities: December 31, 1998 December 31, 1997 September 30, 1997 Cost Market Cost Market Cost Market Commercial paper (note 8 (a)) InvesNat Corporate Cash Manage- ment Fund Banker’s $4,478,790 $4,478,790 $ 398,756 $ 398,756 $ – $ – – – acceptances, Bank of Montreal Other – 4,750 – 4,750 – – – – 784,351 784,351 – – 291,414 – 291,414 – $4,483,540 $ 4,483,540 $ 398,756 $ 398,756 $1,075,765 $1,075,765 Commercial paper represents notes issued by Canadian corporations and rated R-1 High by Dominion Bond Rating Services. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 4 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 3. Accounts receivable: Trade Receivable - company under control of shareholders Sales taxes receivable Other 4. Inventories: December 31, 1998 1997 September 30, 1997 $ 7,749,541 $ 412,892 $ 499,200 95,363 398,604 83,906 95,363 74,841 77,546 79,676 88,528 34,284 $ 8,327,414 $ 660,642 $ 701,688 December 31, 1998 1997 September 30, 1997 Raw materials Work in progress and finished goods $ 1,362,997 1,776,117 $ 799,837 532,445 $ 838,342 364,078 $ 3,139,114 $ 1,332,282 $ 1,202,420 5. Capital assets: Land Leasehold improvements Building Equipment and tools Equipment under capital leases Office equipment and furniture Computer equipment Rights and licenses ((a), (b) and (c)) Construction in progress Cost Accumulated depreciation $ 129,019 845,056 5,971,758 5,123,709 48,663 213,749 680,745 2,580,610 144,033 $ – 53,039 262,298 776,379 22,126 46,991 178,592 24,845 – December 31, 1998 $ Net book value 129,019 792,017 5,709,460 4,347,330 26,537 166,758 502,153 2,555,765 144,033 $15,737,342 $ 1,364,270 $14,373,072 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 5 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 5. Capital assets (continued): Land Leasehold improvements Building Equipment and tools Equipment under capital leases Office equipment and furniture Computer equipment Rights and licenses ((a), (b) and (c)) Land Leasehold improvements Building Equipment and tools Equipment under capital leases Office equipment and furniture Computer equipment Rights and licenses ((a), (b) and (c)) December 31 1997 Cost Accumulated depreciation Net book value $ 73,621 97,407 2,170,594 2,738,076 $ – 26,530 178,117 519,266 $ 73,621 70,877 1,992,477 2,218,810 48,663 137,719 214,263 549,493 15,049 27,521 82,020 13,803 33,614 110,198 132,243 535,690 $ 6,029,836 $ 862,306 $ 5,167,530 September 30, 1997 Cost Accumulated depreciation Net book value $ 73,621 97,407 2,166,877 2,668,661 $ – 22,237 160,198 467,754 $ 73,621 75,170 2,006,679 2,200,907 48,663 89,639 207,061 549,493 13,280 20,398 74,725 11,042 35,383 69,241 132,336 538,451 $ 5,901,422 $ 769,634 $ 5,131,788 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 6 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 5. Capital assets (continued): The depreciation expense amounted to $501,964 and $385,701 respectively for the 12-month periods ended December 31, 1998 and 1997 and $594,636 and $398,383 respectively for the transition year ended December 31, 1998 and for the year ended September 30, 1997. (a) The Company owns an exclusive worldwide and perpetual royalty-free right to use the know- how, information, technology and patents relating to chromatographic separation media licensed by Cambridge University's to develop, manufacture, sell and market chromatographic separation media and extraction, separation and purification devices. Institute of Biotechnology ("IOB") (b) Pursuant to a license agreement dated January 31, 1996, Monogel AB granted to ProMetic Pharma Inc. (Pharma) the exclusive worldwide right to use certain know-how, information, technology and patents relating the development, manufacture and market of monodispersed Agarose. Pursuant to this agreement, Pharma has made an advance of $187,410, bearing interest to Monogel AB and is required to pay to Monogel AB an annual royalty based on sales of Agarose by Pharma. The advance will be reimbursed when the royalties payable will exceed US $150,000 annually. The excess of this amount, subject to an annual limit of US $75,000, will be applied to reduce the balance of the advance. The initial term of this license agreement is 15 years. to (c) Pursuant to a license agreement dated November 9, 1995, Bio-Technical Resources, L.P. (BTR Separations) ("BTR"), a subsidiary of DuPont/Conagra, granted to BioSciences the exclusive worldwide right to use the chromatographic patented technology relating to Teflon® (Teflon is a registered trademark of Dupont) owned or licensed by BTR, to manufacture or have manufactured by a third party and to sell Teflon® beads as part of the chromatography separation media developed by ACL. In addition, BTR granted to BioSciences the non-exclusive right to use the patented technology relating to Teflon® owned by or licensed to BTR to manufacture or have manufactured by a third party and to sell Teflon® beads for other separation processes. Pursuant to this agreement, BioSciences is required to make certain fixed payments to BTR and to pay to BTR a continuing royalty on net sales with respect to all Teflon® beads sold by BioSciences. BTR shall require BioSciences to maintain certain minimum net sales during each contract year, beginning in the fourth contract year, or to pay the equivalent royalty amount in order to maintain the license. This license agreement shall expire on the earlier of (i) November 8, 2010 and (ii) the date on which the last patent expires. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 7 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 5. Capital assets (continued): (d) ProMetic Pharma Inc. owns various license agreements under which it has obtained manufacturing rights for pharmaceutical products. 6. Deferred development costs: 12-month periods ended December 31, 1998 1997 $ 1,930,552 – 1,930,552 1,444,704 485,848 $ 795,592 – 795,592 763,646 31,946 Transition year ended December 31, 1998 (15 months) $ 2,360,888 – 2,360,888 1,840,789 520,099 Year ended September 30, 1997 (12 months) $ 987,724 (404,210) 583,514 459,000 124,514 (106,351) (13,496) (106,351) (13,496) (93,155) (140,173) (118,583) – Research and development Incurred during the period Tax credits and grants Less: Amount deferred Amortization of deferred development costs Write-off of deferred development costs Expense for the period $ 685,354 $ 185,615 $ 745,033 $ 138,010 Deferred development costs: Deferred development costs, beginning of period $ 1,185,073 $ 575,096 $ 814,416 $ 368,912 Deferred developments costs, for the period Amortization of deferred development costs Write-off for the period Deferred development costs, 1,444,704 763,646 1,840,789 (106,351) (93,155) (13,496) (140,173) (106,351) (118,583) 459,000 (13,496) – end of period $ 2,430,271 $ 1,185,073 $ 2,430,271 $ 814,416 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 8 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 7. Other assets: December 31, 1998 1997 September 30, 1997 Deferred start-up costs Advance on royalties (note 5 (b)) $ 2,678,853 187,410 $ 1,790,261 195,932 $ 1,732,137 187,410 $ 2,866,263 $ 1,986,193 $ 1,919,547 8. Long-term debt: December 31, 1998 1997 September 30, 1997 Bank loan, bearing interest at prime rate plus 2%, payable in 12 monthly capital in installments of $29,050 starting September 1998 and in 60 monthly capital installments of $35,000, with a final $1,050,000, secured by a first ranking hypothec of $4,200,000 on the building and by a first ranking moveable hypothec of $5,400,000 on all moveable assets, maturing in September 2004 installment of Due to shareholders, bearing no interest, payable from January 2000 Balance of sale due to Vétoquinol Canada Inc., bearing interest at 10% and payable in 39 monthly capital installments of $25,000, secured by a moveable hypothec on equipment and tools, maturing in March 2002 Balance on to Lorus sale due Therapeutics Inc., bearing no interest, payable capital installment of $30,500, beginning March 1, 1999, maturing in August 2000 18 monthly in $ 3,383,800 $ 2,000,000 $ 2,000,000 1,000,000 118,378 118,378 975,000 1,275,000 1,350,000 549,000 – – Balance to carry forward 5,907,800 3,393,378 3,468,378 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 9 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 8. Long-term debt (continued): Balance brought forward $ 5,907,800 $ 3,393,378 $ 3,468,378 December 31, 1998 1997 September 30, 1997 Bank loan, bearing interest at prime rate plus 2.5%, payable in 39 monthly capital and installments of $9,328, maturing in March 2002 interest Bank note payable, secured by Fonds d’aide aux entreprises, non-interest bearing during the exemption period ending in May 2001, thereafter bearing interest at prime plus 2.25%, payable in 60 monthly capital installments of $3,333 beginning June 15, 2001, maturing in May 2006 Loan to small businesses, bearing interest at prime rate plus 3%, payable in monthly capital installments of $4,263, secured by a moveable hypothec of $300,000 on equipment, maturing in July 2001 Obligations under capital leases, payable in of approximately $579, maturing at different dates until October 2000 installments monthly 321,528 – – 200,000 200,000 200,000 123,620 174,774 187,561 27,103 6,580,051 37,693 3,805,845 40,178 3,896,117 Current portion of long-term debt 1,070,832 428,406 378,146 $ 5,509,219 $ 3,377,439 $ 3,517,971 (a) The bank debt is secured by a moveable hypothec on accounts receivable and inventories (Section 427 of the Bank Act of Canada). As at December 31, 1998, the bank debt included a bank indebtedness in US dollars for a total of Cdn$3,012,162 secured by commercial paper of Cdn$3,000,000. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 10 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 8. Long-term debt (continued): (b) The principal repayments on capital leases and long-term debt for the next five years are as follows: 1999 2000 2001 2002 2003 December 31, 1998 Capital leases Long-term debt $ 11,699 15,404 – – – $ 1,070,832 2,189,785 870,517 560,844 459,996 9. Share capital: Authorized and without par value: Unlimited number of Subordinate voting shares, participating, carrying one vote per share 20,000,000 Multiple voting shares, participating, carrying ten votes per share, convertible at the option of the holders or automatically converted upon their sale to a third party by their holder into an equal number of Subordinate voting shares An unlimited number of Preferred shares, no par value, issuable in one or several series Issued and fully paid: 24,782,656 Subordinate voting shares (1997 - 4,059,622) 15,448,863 Multiple voting shares (1997 - 18,200,000) 391,667 warrants (b) (i) December 31, 1998 1997 September 30, 1997 $ 34,359,006 $ 6,177,656 $ 6,177,656 1,852,223 – 2,701,550 1,175,001 2,701,550 – $ 36,211,229 $10,054,207 $ 8,879,206 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 11 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 9. Share capital (continued): (a) Share capital reorganization: On May 19, 1998, the Company filed Articles of Amendment in order to modify its share capital as presented above by renaming its outstanding Class A and D shares as Subordinate voting and Multiple voting shares respectively and to create an unlimited number of preferred shares. (b) Share issuance: (i) As set forth in a prospectus dated August 14, 1998, 861,667 Subordinate voting shares have been issued following the exercise of the 391,667 special warrants by their holders. These special warrants were issued, on December 19, 1997, for a net proceeds of $1,082,751, net of agents’ fees and estimated issuance expenses. The Company has granted to the agents a non-assignable option to purchase up to 43,083 Subordinate voting shares at a price of $3 per share at any time until December 19, 1999. (ii) In August 1998, the shareholders of SPEQ ProMetic Pharma Inc., a non-controlling shareholder of ProMetic Pharma Inc., exercised their rights to exchange their shares of SPEQ ProMetic Pharma Inc. for 3,525,000 Subordinate voting shares of the Company. (iii) As set forth in a prospectus dated July 10, 1998, the Company issued 8,750,000 Subordinate voting shares at a price of $2 per share, for net proceeds of $15,462,500 after deducting underwriters fees and issuance expenses. (iv) On May 6, 1998, 9017-3618 Québec Inc., a non-controlling shareholder of ProMetic Pharma Inc., exercised its rights to exchange for one Subordinate voting share of the Company, one Class A share of 9017-3618 Québec Inc., for a total of 975,000 Subordinate voting shares. The same corporation also exercised its right to purchase 975,000 Subordinate voting shares of the Company at $1.10 per share on April 26, 1998. (v) During the year, certain shareholders exercised their rights to purchase 650,000 Subordinate voting shares of the Company at a price of $1.10 per share. (vi) During the year, the Company issued 1,035,250 Subordinate voting shares for a total consideration of $1,635,250. (vii) During the year, 2,751,137 Multiple voting shares were converted into Subordinate voting shares. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 12 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 9. Share capital (continued): (c) Share purchase options and warrants: The Company established a share option plan for its directors, officers and employees. The plan provides that the aggregate number of shares reserved for issuance at any time under the plan and any other employee incentive plans may not exceed 1,500,000 shares. The Board of Directors has approved that a maximum of 756,911 options be granted for the purchase of 756,911 Subordinate voting shares. 10. Commitments: The Company has commitments under various operating leases for warehouse space, office space and equipment. The minimum annual payments for the next five years are as follows: 1999 2000 2001 2002 2003 2004 and thereafter 11. Contingency: December 31, 1998 $ 714,740 715,215 646,149 409,928 208,608 54,058 $ 2,748,698 ProMetic Pharma Inc. has an outstanding claim from a former employee for an approximate amount of $180,000. In the opinion of management, this claim is without substantial merit and is not provided for in the financial statements. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 13 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 12. Financial instruments: (a) Fair values: The carrying amount of marketable securities, accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximates the fair value because of the near- term maturity of these instruments. The carrying amount of the Company’s floating rate long-term debt approximates its fair value because it bears interest at current market floating rates. The balance of sale has an estimated fair value of $1,486,000, $1,311,000 and $1,436,000, respectively as at December 31, 1998 and 1997 and as at September 30, 1997. These amounts have been estimated using discounted cash flow based on the Company’s current borrowing rates (prime rate plus 2%) available for similar type of borrowing arrangements with comparable terms and maturities. (b) Credit risk: The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. The Company generally does not require collateral, but may obtain, in many cases, credit insurance coverage from the Export Development Corporation (EDC). For the 12-month period and for the transition year ended December 31, 1998, approximately 45% and 43% respectively of the Company’s sales were derived from four American distributors. (d) Foreign currency rate risk: The Corporation receives a substantial part of its revenues in US dollars, whereas the majority of its expenses are incurred in Canadian dollars. The Corporation does not possess nor issue financial instruments for hedging or trading purposes. 13. Uncertainty due to the Year 2000 Issue: The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and , if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company’s ability to conduct normal business operations. It is not possible to ascertain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 14 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 14. Related party transactions: The Company entered into the following transactions with related parties: 12-month periods ended December 31, 1998 1997 Transition year ended December 31, 1998 (15 months) Year ended September 30, 1997 (12 months) $ – $ 561,835 $ – $ 561,835 207,171 147,503 108,651 35,912 – – – – – 9,596 60,000 150,000 207,171 296,764 108,651 63,853 – – – – – 9,596 60,000 150,000 Sales Research and development expenditures Deferred development costs Consultating fees Raw material purchases Rent Interest on long-term debt 15. Income taxes: The Company has unutilized tax loss carry forwards and unamortized share issue expenses for which no tax benefit has been reflected in the financial statements. These items may be used to reduce taxable income and income taxes in future years. As at December 31, 1998, amounts and expiry dates are as follows: Tax loss carry forwards expiring in 2002 Tax loss carry forwards expiring in 2003 Tax loss carry forwards expiring in 2004 Tax loss carry forwards expiring in 2005 Tax loss carry forwards expiring in 2006 Share issue expenses to be amortized over 2 years Share issue expenses to be amortized over 3 years Share issue expenses to be amortized over 4 years Federal Provincial $ 200,529 2,370,307 5,422,184 7,479,293 1,799,712 62,268 454,497 1,764,964 $ 200,529 831,844 1,976,035 7,479,293 1,799,712 62,268 454,497 1,764,964 $19,553,754 $14,569,142 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 15 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 16. Segmented information: The Company is an integrated pharmaceutical company which develops, manufactures and markets injectable and non-injectable generic products (Pharmaceutical) and pharmaceutical protein separation and purification media (Biotechnology). The Company manages the pharmaceutical and biotechnology segments separately, since each one requires different technology, production and marketing practices and strategies. The Company evaluates its operation segments’ performance based on operating income or loss before financial expenses. The accounting policies of each segment are the same as those described in the summary of significant accounting policies. 12-month periods ended December 31, 1998 1997 $ 8,058,841 1,795,992 182,704 10,037,537 $ 1,985,279 118,016 50,050 2,153,345 Transition year ended December 31, 1998 (15 months) $ 8,568,124 1,830,863 186,865 10,585,852 Year ended September 30, 1997 (12 months) $ 2,035,937 103,683 60,276 2,199,896 4,944,758 1,545,231 1,010,202 7,500,191 27,083,951 3,734,369 5,556,051 36,374,371 6,791,752 2,806,398 109,356 9,707,506 459,672 27,787 14,505 501,964 3,120,955 1,388,779 517,697 5,027,431 9,913,487 999,659 517,103 11,430,249 503,287 9,326 29,365 541,978 380,518 4,223 960 385,701 5,759,655 1,891,488 1,164,974 8,816,117 27,083,951 3,734,369 5,556,051 36,374,371 6,881,906 2,836,775 117,239 9,835,920 549,736 28,890 16,010 594,636 3,073,296 1,261,935 370,806 4,706,037 9,484,771 2,631,440 – 12,116,211 583,472 7,585 26,254 617,311 394,303 3,120 960 398,383 Net sales: Pharmaceutical Biotechnology Other Operating loss before financial expenses: Pharmaceutical Biotechnology Corporate and other Assets: Pharmaceutical Biotechnology Corporate and other Addition to capital assets: Pharmaceutical Biotechnology Corporate and other Depreciation: Pharmaceutical Biotechnology Corporate and other PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 16 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 16. Segmented information (continued): Sales by geographic segment are as follows: 12-month periods ended December 31, 1998 1997 Transition year ended December 31, 1998 (15 months) Year ended September 30, 1997 (12 months) United States Canada $ 8,130,405 1,907,132 $ 732,137 1,421,208 $ 8,256,965 2,328,887 $ 681,968 1,517,928 $10,037,537 $ 2,153,345 $10,585,852 $ 2,199,896 Assets by geographic segment are as follows: Canada United States United Kingdom December 31, 1998 1997 September 30, 1997 (12 months) $23,487,660 9,508,674 3,378,037 $10,799,009 631,240 – $11,774,161 342,050 – $36,374,371 $11,430,249 $12,116,211 PROMETIC LIFE SCIENCES INC. (Formerly Innovon Life Sciences Holdings Limited) Notes to Consolidated Financial Statements, page 17 12-month periods ended December 31, 1998 and 1997 and the transition year ended December 31, 1998, with comparative figures for the year ended September 30, 1997 17. Business acquisition: Effective November 1, 1998, the Company acquired all the outstanding shares of Affinity Chromatography Limited, the non-controlling shareholder of ProMetic BioSciences Inc., by the issuance of 1,200,000 Subordinate Voting Shares. The Company now owns the worldwide rights to the proprietary protein purification technology. The Company completed this transaction in January 1999. The acquisition was accounted for using the purchase method. Operating results from the effective date of acquisition are included in these financial statements. Details of the acquisition are as follows: Fair value of net assets acquired: Current assets Capital assets Current liabilities Long-term debt Cash consideration Issuance of shares Total consideration 18. Comparative figures: $ 1,313,898 2,633,514 (915,940) (246,152) $ 2,785,320 $ 385,320 2,400,000 $ 2,785,320 Comparative figures have been reclassified in order to conform with the current year’s presentation. 

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