Exhibit 99.2

























Merus Labs International Inc.



Annual Report Fiscal 2016



For the Years Ended September
30, 2016 and 2015







































Report of Independent Registered Public Accounting Firm







To the Board of Directors and Shareholders
of Merus Labs International Inc. and its subsidiaries:



We have audited the accompanying consolidated
financial statements of Merus Labs International Inc. and its subsidiaries, which comprise the consolidated statements of financial
position as at September 30, 2016 and 2015, and the consolidated statements of operations, consolidated statements of comprehensive
income (loss), consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended,
and a summary of significant accounting policies and other explanatory information.



Management’s Responsibility for
the Consolidated Financial Statements



Management is responsible for the preparation
and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards,
and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.



Auditors' Responsibility



Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards and the Standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.



We believe that the audit evidence we
have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.



Opinion



In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of Merus Labs International Inc. and its subsidiaries
as at September 30, 2016 and 2015 and their financial performance and their cash flows for the years then ended in accordance with
International Financial Reporting Standards.









|                  |                                   
|----------------- | ----------------------------------
|Toronto, Ontario  | Chartered Professional Accountants
|December 13, 2016 | Licensed Public Accountants       





| | ACCOUNTING
                                         › CONSULTING ›TAX
        111
        RICHMOND STREET W, SUITE 300, TORONTO, ON M5H 2G4
        1.877.251.2922
        P: 416.596.1711 F: 416.596.7894 mnp.ca
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

















|Merus
    Labs International Inc.                
|-------------------------------------------------
|Consolidated
    Statements of Financial Position
|(Expressed
    in Canadian dollars)              
|                                                 
|                                                 
|As
    at:                                       
|                                                 
|                                                 
|Assets                                           
|                                                 
|Current
    assets                               
|Cash
    and cash equivalents                    
|Short-term
    investments                       
|Trade
    and other receivables                  
|Inventories                                      
|Prepaid
    expenses                             
|                                                 
|Non-current
    assets                           
|Property
    and equipment                       
|Intangible
    assets                            
|Total
    assets                                 
|                                                 
|Liabilities and Equity                           
|                                                 
|Current
    liabilities                          
|Operating
    line                               
|Accounts
    payable and accrued liabilities     
|Income
    taxes payable                         
|Derivative
    liabilities                       
|Provisions                                       
|Long
    term debt due within one year           
|                                                 
|Non-current
    liabilities                      
|Provisions                                       
|Long
    term debt                               
|Preferred
    shares                             
|Total liabilities                                
|                                                 
|Equity                                           
|Share
    capital                                
|Equity
    reserve                               
|Accumulated
    deficit                          
|Accumulated
    other comprehensive income       
|Total equity                                     
|Total
    liabilities and equity                 
|                                                 
|Commitments and contingencies (note 14)          
|                                                 
|                                                 
|Approved on behalf of the Board:                 
|(signed)                                         
|Tim
    Sorensen,                                
|Director                                         



















The
accompanying notes are an integral part of these consolidated financial statements













|Merus
    Labs International Inc.                                 
|------------------------------------------------------------------
|Consolidated
    Statements of Operations                         
|(Expressed
    in Canadian dollars)                               
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Revenues                                                          
|Cost of goods sold                                                
|Gross margin                                                      
|                                                                  
|Operating expenses:                                               
|Selling
    and marketing                                         
|General
    and administrative                                    
|Share-based
    compensation                                      
|Acquisition
    costs                                             
|Amortization
    of intangible assets                             
|Depreciation                                                      
|Foreign
    exchange losses (gains)                               
|                                                                  
|                                                                  
|Operating income                                                  
|                                                                  
|Finance costs                                                     
|Derivative (gains) losses                                         
|Investment loss                                                   
|                                                                  
|Loss before income
    taxes                                      
|                                                                  
|Income tax expense (recovery)                                     
|                                                                  
|Net loss for the year                                             
|                                                                  
|                                                                  
|Loss per share                                                    
|Basic                                                             
|Diluted                                                           
|                                                                  
|                                                                  
|Weighted
    average number of common shares outstanding - basic  
|Weighted
    average number of common shares outstanding - diluted

























The
accompanying notes are an integral part of these consolidated financial statements













|Merus
    Labs International Inc.                         
|----------------------------------------------------------
|Consolidated
    Statements of Comprehensive Income (Loss)
|(Expressed
    in Canadian dollars)                       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|Loss for the year                                         
|                                                          
|Other comprehensive
    loss                              
|Items that may be reclassified to income:                 
|Currency
    translation differences                      
|Deferred
    tax expense                                  
|                                                          
|Other comprehensive
    (loss) income for the year        
|                                                          
|Total
    comprehensive (loss) income for the year        





















The
accompanying notes are an integral part of these consolidated financial statements

















|                                                             |  |  |                              |                 
|------------------------------------------------------------ |  |  | ---------------------------- | ----------------
|Merus
    Labs International Inc.                           
|Consolidated
    Statements of Cash Flows                   
|(Expressed
    in Canadian dollars)                         
|                                                             |  |  |                              |                 
|                                                             |  |  |                              |                 
|                                                             |  |  | Years
    ended September 30
|                                                             |  |  | 2016                         | 2015            
|                                                             |  |  |                              |                 
|Operating activities                                         |  |  |                              |                 
|                                                             |  |  |                              |                 
|Net loss for the year                                        |  |  | $   (9,459,044)              | $      (237,879)
|                                                             |  |  |                              |                 
|                                                             |  |  |                              |                 
|Adjustments for the
    following items:                     |  |  |                              |                 
|Amortization
    of intangible assets                        |  |  | 37,163,688                   | 25,184,970      
|Depreciation                                                 |  |  | 29,834                       | 15,591          
|Finance
    costs                                            |  |  | 8,925,860                    | 5,975,357       
|Income
    tax expense (recovery)                            |  |  | 884,772                      | (1,079,294)     
|Unrealized
    losses on foreign exchange                    |  |  | 1,092,163                    | 2,582,780       
|Share-based
    compensation                                 |  |  | 2,614,499                    | 2,512,459       
|Change
    in fair value of derivative financial instruments |  |  | (56,082)                     | 1,163,365       
|Interest
    paid                                            |  |  | (6,409,152)                  | (5,323,743)     
|Income
    taxes paid                                        |  |  | (1,032,045)                  | -               
|                                                             |  |  |                              |                 
|Net change in non-cash
    working capital balances:         |  |  |                              |                 
|Provisions                                                   |  |  | 89,701                       | (163,133)       
|Trade
    and other receivables                              |  |  | (14,394,595)                 | (10,130,320)    
|Prepaid
    expenses                                         |  |  | 30,264                       | (203,993)       
|Inventories                                                  |  |  | (4,254,038)                  | (4,193,237)     
|Accounts
    payable and accrued liabilities                 |  |  | 7,215,880                    | 4,145,212       
|Income
    taxes payable                                     |  |  | (356,298)                    | 102,194         
|Net cash provided by
    operating activities                |  |  | 22,085,407                   | 20,350,329      
|                                                             |  |  |                              |                 
|Financing activities                                         |  |  |                              |                 
|Proceeds
    from debt issuance, net of issuance costs       |  |  | 172,620,265                  | -               
|Repayment
    of long-term debt                              |  |  | (81,819,124)                 | (16,000,000)    
|Private
    placement proceeds                               |  |  | 25,289,411                   | -               
|Proceeds
    from prospectus offering                        |  |  | -                            | 59,562,323      
|Proceeds
    from exercise of stock options                  |  |  | 248,498                      | 733,665         
|Net cash provided by
    financing activities                |  |  | 116,339,050                  | 44,295,988      
|                                                             |  |  |                              |                 
|Investing activities:                                        |  |  |                              |                 
|Acquisition
    of businesses or products                    |  |  | (175,052,582)                | (36,439,154)    
|Purchase
    of property and equipment                       |  |  | (234,770)                    | -               
|Capitalized
    product and software development costs       |  |  | (910,797)                    | (1,580,321)     
|Short-term
    investments                                   |  |  | 79                           | 1,768           
|Net cash used in investing
    activities                    |  |  | (176,198,070)                | (38,017,707)    
|                                                             |  |  |                              |                 
|Net change in cash
    and cash equivalents                  |  |  | (37,773,613)                 | 26,628,610      
|                                                             |  |  |                              |                 
|Cash and cash equivalents,
    beginning of year             |  |  | 40,987,177                   | 14,358,567      
|                                                             |  |  |                              |                 
|Cash
    and cash equivalents, end of year                   |  |  | $    3,213,564               | $  40,987,177   





















The
accompanying notes are an integral part of these consolidated financial statements











|                                                 |                   |                    |                         |                                                   |                 
|------------------------------------------------ | ----------------- | ------------------ | ----------------------- | ------------------------------------------------- | ----------------
|Merus
    Labs International Inc.               
|Consolidated
    Statements of Changes in Equity
|(Expressed
    in Canadian dollars)             
|                                                 |                   |                    |                         |                                                   |                 
|                                                 | Share
    capital | Equity
    reserve | Accumulated
    deficit | Accumulated
    other comprehensive income (AOCI) | Total
    equity
|                                                 |                   |                    |                         |                                                   |                 
|Balance, September
    30, 2014                  | $   123,808,971   | $     35,132,914   | $   (61,033,735)        | $       6,780,105                                 | $   104,688,255 
|                                                 |                   |                    |                         |                                                   |                 
|Prospectus offering (note 12)                    | 59,562,323        | -                  | -                       | -                                                 | 59,562,323      
|                                                 |                   |                    |                         |                                                   |                 
|Share-based compensation (note 12)               | -                 | 2,512,459          | -                       | -                                                 | 2,512,459       
|                                                 |                   |                    |                         |                                                   |                 
|Stock option exercise (note 12)                  | 1,231,592         | (497,927)          | -                       | -                                                 | 733,665         
|                                                 |                   |                    |                         |                                                   |                 
|Cancellation of shares in escrow (note 12)       | (68,333)          | 68,333             | -                       | -                                                 | -               
|                                                 |                   |                    |                         |                                                   |                 
|Net loss for the period                          | -                 | -                  | (237,879)               | -                                                 | (237,879)       
|                                                 |                   |                    |                         |                                                   |                 
|Other comprehensive income                       | -                 | -                  | -                       | 13,538,627                                        | 13,538,627      
|                                                 |                   |                    |                         |                                                   |                 
|Balance,
    September 30, 2015                  | $   184,534,553   | $     37,215,779   | $   (61,271,614)        | $     20,318,732                                  | $   180,797,450 
|                                                 |                   |                    |                         |                                                   |                 
|                                                 |                   |                    |                         |                                                   |                 
|                                                 |                   |                    |                         |                                                   |                 
|Balance, September
    30, 2015                  | $   184,534,553   | $     37,215,779   | $   (61,271,614)        | $     20,318,732                                  | $   180,797,450 
|                                                 |                   |                    |                         |                                                   |                 
|Private placement (note 12)                      | 25,289,411        | -                  | -                       | -                                                 | 25,289,411      
|                                                 |                   |                    |                         |                                                   |                 
|Share-based compensation (note 12)               | 535,533           | 2,078,966          | -                       | -                                                 | 2,614,499       
|                                                 |                   |                    |                         |                                                   |                 
|Stock option exercise (note 12)                  | 397,088           | (148,590)          | -                       | -                                                 | 248,498         
|                                                 |                   |                    |                         |                                                   |                 
|Net loss for the period                          | -                 | -                  | (9,459,044)             | -                                                 | (9,459,044)     
|                                                 |                   |                    |                         |                                                   |                 
|Other comprehensive loss                         | -                 | -                  | -                       | (1,724,373)                                       | (1,724,373)     
|                                                 |                   |                    |                         |                                                   |                 
|Balance,
    September 30, 2016                  | $   210,756,585   | $     39,146,155   | $   (70,730,658)        | $     18,594,359                                  | $   197,766,441 





















The
accompanying notes are an integral part of these consolidated financial statements











| | 1. | Presentation
                                         of Financial Statements
| | -- | -----------------------------------------------------------------------------



Nature
of Business



Merus
Labs International Inc., incorporated under the Business Corporations Act (British Columbia), and its subsidiaries (the “Company”),
operate in Canada and Europe. The registered and head office of the Company is 100 Wellington St. West, Ste. 2110, Toronto, Ontario
M5K 1H1. The Company is a specialty pharmaceutical company engaged in the acquisition and licensing of branded prescription pharmaceutical
products.



Basis
of Preparation



These
consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board (IASB) (“IFRS”) for financial statements. The consolidated
financial statements have been prepared on a historical cost basis, except for items that are required to be accounted for at
fair value as described in note 2(c). The policies set out below have been consistently applied to all the periods presented.



The
consolidated financial statements were authorized for issue by the Company’s Board of Directors on December 13, 2016.





| | 2. | Significant
                                         Accounting Policies
| | -- | ------------------------------------------------------------------------



| | (a) | Principles
                                         of consolidation
| | --- | --------------------------------------------------------------------



The
consolidated financial statements include the accounts of the Company and its subsidiaries, collectively known as Merus Labs International
Inc. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and
continue to be consolidated until the date that such control ceases. Intercompany balances, transactions, and revenues and expenses
are eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same reporting period as the
Company, using consistent accounting policies.



Material
subsidiaries of the Company as at September 30, 2016 and 2015:





|                                 | September
    30 | September
    30 |                     
|-------------------------------- | ---------------- | ---------------- | --------------------
|                                 | 2016             | 2015             | Jurisdiction
    of 
|Company                          | %
    ownership  | %
    ownership  | incorporation       
|                                 |                  |                  |                     
|Merus
    Labs Luxco S.a R.L.    | 100.0            | 100.0            | Luxembourg          
|Merus
    Labs Luxco II S.a R.L. | 100.0            | 100.0            | Luxembourg          
|Merus
    Pharma Inc.            | 100.0            | 100.0            | British
    Columbia
|Merus
    Labs Netherlands BV    | 100.0            | 100.0            | Netherlands         
|ECG
    Holdings (US) Inc.       | 100.0            | 100.0            | Delaware            















| | (b) | Accounting
                                         judgments, estimates, and uncertainties
| | --- | -------------------------------------------------------------------------------------------



Critical
judgements



The
following are the critical judgements, apart from those involving estimations (see below), that have been made in the process
of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the consolidated
financial statements.



Acquisition
accounting



Management
exercised judgement in determining that the product acquisitions of Elantan, Isoket, and Deponit (the “Nitrates Portfolio”)
and Surgestone, Provames, Speciafoldine and Tredemine were business combinations. Management determined that the product acquisitions
of Salagen and Estraderm were asset acquisitions. Management considered the guidance and definitions per IFRS 3 and IAS 38 in
making these determinations. These transactions have been recorded in the consolidated financial statements based on management’s
assessment of fair value for the acquired assets and liabilities.



Functional
currency



Management
has exercised judgement in selecting the functional currency of each of the entities that it consolidates based on the primary
economic environment in which the entity operates and in reference to the various indicators as provided by IAS 21 - The effects
of changes in foreign exchange rates. The consolidated financial statements of the Company are presented in Canadian dollars
(“CAD”), which is the parent Company’s functional and presentation currency.



Use
of estimates



In
preparation of the Company’s consolidated financial statements in accordance with IFRS, management is required to make estimates
and assumptions that affect the reported amount of assets, liabilities, and the disclosure of contingent 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 those estimates used in the Company’s consolidated financial statements and such differences could be material.
Significant estimates include:





| | • | the
                                         allowance for inventory obsolescence;
| | - | ----------------------------------------------------------------------------------

| | • | estimate
                                         for product returns;
| | - | ----------------------------------------------------------------------

| | • | allocation
                                         of the purchase price and estimates of fair value for the acquired assets and liabilities;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | • | the
                                         estimated useful lives of property and equipment and intangible assets;
| | - | --------------------------------------------------------------------------------------------------------------------

| | • | impairment
                                         of financial and non-financial assets;
| | - | ------------------------------------------------------------------------------------------

| | • | the
                                         valuation of deferred tax assets and liabilities;
| | - | ----------------------------------------------------------------------------------------------

| | • | the
                                         valuation of warrants and share-based compensation expense; and
| | - | ------------------------------------------------------------------------------------------------------------

| | • | the
                                         calculation of effective interest on its long-term debt based on the most reliable estimates
                                         of required repayments
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











Significant
estimates



The
following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial year:



(i)       Inventory
obsolescence



The
Company reviews the net realizable value of its inventory. The Company has determined that there are adequate sales to support
the carrying amount for all inventories as at September 30, 2016. In addition, management reviews specific product and industry
experience with returns in assessing if a write-down is required.



(ii)       Estimated
product returns



Revenue
from product sales is recognized net of estimated sales discounts, credits, returns, rebates and allowances. The Company’s
return policy is limited to damaged or expired product. The return allowance is determined based on an analysis of the historical
rate of returns, industry return data, and current market conditions, which is applied directly against sales.



(iii)
	Allocation of the purchase price and estimates of fair value for the acquired assets 	and liabilities



The
Company as part of its business combinations and product acquisitions performs a preliminary assessment of the fair value of all
assets and liabilities acquired based on all current available information. As part of the measurement period to finalize the
purchase price allocation, management updates the estimated fair values as information becomes available, support from third party
market data becomes available, and where necessary, third party independent valuations are obtained. Management is ultimately
responsible for concluding on the allocation of purchase price and estimates of fair value for the acquired assets and liabilities.



(iv)       Impairment
of financial and non-financial assets



Financial
Assets



The
Company assesses at each statement of financial position date whether there is objective evidence that a financial asset or group
of financial assets is impaired.



If
there is objective evidence that an impairment loss has occurred on an unquoted or not actively traded equity instrument that
is not carried at fair value (because its fair value cannot be reliably measured), the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market
rate of return for a similar financial asset and is recognized in profit or loss for the period. Reversals of impairment losses
on assets carried at cost are not permitted.











For
financial assets carried at amortized cost, the amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted
at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition).



Objective
evidence of impairment of financial assets carried at amortized cost exists if the counterparty is experiencing significant financial
difficulty, there is a breach of contract, concessions are granted to the counterparty that would not normally be granted, or
it is probable the counterparty will enter into bankruptcy or a financial reorganization.



Non-Financial
Assets



Determining
whether goodwill is impaired requires an estimation of the recoverable amount of the cash generating units (“CGUs”)
or groups of CGUs to which goodwill has been allocated. The determination of recoverable amount requires the Company to estimate
the future cash flows expected to arise from these CGUs and a suitable discount rate in order to calculate the recoverable amount
of the CGUs. If the recoverable amount of the CGUs is less than its carrying amount, an impairment loss is recorded. The Company
currently has no goodwill.



The
Company reviews property and equipment and intangible assets for indicators of impairment at the end of each reporting period
and whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where
it is not possible to estimate the recoverable amount of an individual asset, the assets are then grouped together into a CGU
and a recoverable amount is estimated for that CGU. As at September 30, 2016 and 2015, no indicators of impairment were identified.



(v)       Useful
lives of property, equipment and intangible assets



The
Company reviews the estimated useful lives of property, equipment and intangible assets at the end of each year, with the effect
of any changes in estimates being accounted for on a prospective basis.



Depreciation
of property and equipment and amortization of intangible assets is calculated using the straight-line method to allocate their
cost to their residual values over their estimated useful lives, as follows:





|• | Furniture, fittings and computer equipment | 3 - 5 years                      
|- | ------------------------------------------ | ---------------------------------
|• | Leasehold improvements                     | Over the term of the lease       
|• | Manufacturing equipment                    | 5 - 10 years                     
|• | Computer software                          | 3 to 7 years                     
|• | Product rights                             | 2 - 15 years                     
|• | Product patents                            | Remaining economic life of patent



(vi)       Valuation
of deferred tax assets and liabilities



The
Company estimates the probability that taxable profits will be available against deductible temporary differences can be utilized
and thus give rise to deferred tax assets. The Company has reviewed the expected profitability and determined that no deferred
tax asset should be recognized at this time.











(vii)       Valuation
of warrants and share-based compensation expense



The
Company estimates the fair value of warrants and share options issued for employment services based on the Black Scholes option-pricing
model for warrants and share options with a service condition. These methods of valuation, which require management to use certain
assumptions regarding inputs used, were applied to the equity transactions during the year.



The
Company estimates the fair value of performance share units (PSUs) for employment services based on the market price of the shares
on the date of the grant.



(viii)       Estimation
of effective interest rate on debt



The
Company estimates the effective interest rate on any debt obligations based on the total financing costs incurred and the agreed
upon repayment schedule, including any repayments that may be contingent on future earnings (i.e. cash flow sweeps).



| | (c) | Financial
                                         instruments
| | --- | --------------------------------------------------------------



The
Company classifies all financial instruments as either fair value through profit or loss (“FVTPL”), available-for-sale
(“AFS”), held-to-maturity (“HTM”), loans and receivables or other financial liabilities. Financial instruments
are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on the financial instruments’
classification. Financial instruments classified as FVTPL are measured at fair value with unrealized gains and losses recognized
in the statements of operations. AFS instruments are measured at fair value with unrealized gains and losses recognized in other
comprehensive income. HTM instruments, loans and receivables, and other financial liabilities are measured at amortized cost.
Transaction costs for FVTPL financial instruments are expensed as incurred, whereas transaction costs for AFS, HTM, and other
financial liability instruments are capitalized upon initial recognition of the instrument.



The
Company has classified its financial instruments as follows:





|Cash and cash equivalents                | Loans and receivables            
|---------------------------------------- | ---------------------------------
|Short-term investments                   | Fair value through profit or loss
|Publicly-traded investments              | Fair value through profit or loss
|Privately-held investments               | Available-for-sale at cost       
|Trade and other receivables              | Loans and receivables            
|Accounts payable and accrued liabilities | Other financial liability        
|Derivative assets/liabilities            | Fair value through profit or loss
|Operating line                           | Other financial liabilities      
|Long term debt                           | Other financial liabilities      
|Preferred shares                         | Other financial liabilities      

















At
each financial reporting period, the Company’s management estimates the fair value of investments based on the criteria
below and reflects such valuations in the consolidated financial statements.



(i)
Publicly-traded investments:



Securities
which are traded on a recognized securities exchange and for which no sales restrictions apply are recorded at fair values based
on quoted market prices at the consolidated statement of financial position dates or the closing price on the last day the security
traded if there were no trades at the consolidated statement of financial position dates.



Securities
which are traded on a recognized securities exchange but which are escrowed or otherwise restricted as to sale or transfer may
be recorded at amounts discounted from market value. In determining whether a discount is appropriate for such investments, the
Company considers the nature and length of the restriction, the business risk of the investee company, its stage of development,
market potential, relative trading volume and price volatility and any other factors that may be relevant to the ongoing and realizable
value of the investments.



(ii)
Privately-held investments:



Securities
in privately-held companies that are not considered equity investments are recorded at fair value upon acquisition and subsequently
measured at their initial cost less impairment.



(iii)
Other financial liabilities



Other
financial liabilities (including debt and accounts payables and accrued liabilities) are initially recorded at fair value less
transaction costs and subsequently measured at amortized costs using the effective interest method. The effective interest method
is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid
or received that form an integral part of the effective interest rate, transaction cost and other premiums or discounts) through
the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.



| | (d) | Derivative
                                         financial instruments and hedging activities
| | --- | ------------------------------------------------------------------------------------------------



Derivatives
are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their
fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging
instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as one of the following:



| | i) | Hedges
                                         of the fair value of recognized assets or liabilities or a firm commitment (fair value
                                         hedge);
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii) | Hedges
                                         of a particular risk associated with a recognized asset or liability or a highly probable
                                         forecast transaction (cash flow hedge); or
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii) | Hedges
                                         of a net investment in a foreign operation (net investment hedge).
| | ---- | ------------------------------------------------------------------------------------------------------------------











The
effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized
in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the statement
of operations.



Amounts
accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.



When
a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized
in the statement of operations. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was
reported in equity is immediately transferred to the statement of operations within foreign exchange (gains) losses.



The
Company has not designated any of its derivatives as hedges as at September 30, 2016 and 2015.



| | (e) | Cash
                                         and cash equivalents
| | --- | ------------------------------------------------------------------



Cash
includes demand deposits with financial institutions of $3,213,564 and $40,987,177, at September 30, 2016 and 2015, respectively.
Cash equivalents may consist of short-term, highly liquid investments purchased with original maturities of three months or less
and were $nil and $nil, at September 30, 2016 and 2015, respectively. Interest earned on cash and cash equivalents was $nil and
$813, for the years ended September 30, 2016 and 2015, respectively.



| | (f) | Inventories
| | --- | -----------



Inventories
are comprised of raw materials, work-in-progress and finished goods of pharmaceutical products and are recorded at the lower of
cost and net realizable value on a first-in first-out basis. Costs are comprised of raw materials (active pharmaceutical ingredient),
conversion costs (contract manufacturing and packaging), and batch-specific stability testing. Net realizable value is the estimated
selling price in the ordinary course of business less estimated costs of completion and applicable selling expenses. The Company
writes down inventory to its estimated net realizable value based upon assumptions about future and market conditions when necessary.



| | (g) | Trade
                                         and other receivables
| | --- | --------------------------------------------------------------------



Trade
and other receivables are stated at their amortized cost and are non-interest bearing and unsecured. Management conducts a periodic
review of the collectability of trade receivables. The Company records an allowance for doubtful accounts if any uncertainty exists
with respect to the recoverability of certain amounts based on historical experience or economic climate.















| | (h) | Intangible
                                         assets
| | --- | ----------------------------------------------------------



Intangible
assets include all costs incurred to acquire licensing and distribution agreements, product rights and patents. Intangible assets
are recorded at cost less accumulated amortization and accumulated impairment losses and are amortized on a straight-line basis
over their estimated useful life of 2 to 15 years. Costs incurred with respect to the transfer of manufacturing know-how, methods,
and technology from the original manufacturer to the Company’s own manufacturing partner are capitalized as incurred under
the criteria of internally generated intangible assets as defined by IAS 38 - Intangible assets. Such costs are only amortized
once commercial production with the new manufacturing partner commences. Management has estimated the useful life based on industry
data of similar products and patents. The Company conducts an annual assessment of the residual balances, useful lives and amortization
methods being used for intangible assets and any changes arising from the assessment are applied by the Company prospectively.



| | (i) | Business
                                         combinations and goodwill
| | --- | ---------------------------------------------------------------------------



Business
combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred, measured at the acquisition date fair value. Acquisition costs incurred are expensed and included in acquisition
costs.



Goodwill
represents the price paid for acquisitions in excess of the fair market value of net tangible and identifiable intangible assets
acquired. Goodwill is carried at cost, less impairment losses if any. Goodwill is tested for impairment at the end of each fiscal
year or if events or changes in circumstances indicate a potential impairment. Determining whether goodwill is impaired requires
an estimation of the recoverable amount of the cash generating units (“CGUs”) to which goodwill has been allocated.



For
the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or groups of
CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is
allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.



| | (j) | Impairment
                                         of non-financial assets
| | --- | ---------------------------------------------------------------------------



At
the end of each reporting period, the Company reviews the carrying amounts of its property and equipment, intangible assets and
goodwill to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. In addition,
goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use, if any, are tested for
impairment annually.



An
impairment loss is recognized when the carrying amount of an asset, or its CGU, exceeds its recoverable amount. A CGU is the smallest
identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or
groups of assets. The Company has identified its CGU’s at a product level.



The
recoverable amount is the greater of the asset’s or CGU’s fair value less costs to sell (“FVLCTS”) and
value in use (“VIU”). In assessing VIU, the estimated future cash flows are discounted to their present value using
a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset
or CGU. In determining FVLCTS, a post-tax discounted cash flow model is used. For an asset that does not generate largely independent
cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. If the recoverable amount of the asset
or CGU is less than its carrying amount, an impairment loss is recognized immediately in the statement of operations.











Other
than goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate
of its recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have
been determined had no impairment loss been recognized for the asset in prior years. Goodwill impairment losses are not reversed.



| | (k) | Provisions
| | --- | ----------



Provisions
are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the
obligation can be made.



The
amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement
of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured
using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the
receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable
can be measured reliably.



| | (l) | Income
                                         taxes
| | --- | -----------------------------------------------------



Provision
for income taxes consists of current and deferred tax expense. Tax is recognized in the statement of operations, except to the
extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also
recognized in other comprehensive income or directly in equity, respectively.



Current
tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at
period end in the countries where the Company and its subsidiaries operate and generate taxable income, adjusted for amendments
to tax payable with regards to previous years.



Deferred
tax is recognized, using the liability method, on temporary differences between the carrying amounts of assets and liabilities
on the consolidated statement of financial position and their corresponding tax values, using the enacted or substantively enacted,
as applicable, income tax rates at each statement of financial position date.



Deferred
tax assets also result from unused losses and other deductions carried forward. An assessment of the probability that a deferred
tax asset will be recovered is made prior to any deferred tax asset being recognized. The valuation of deferred tax assets is
reviewed on a quarterly basis and adjusted, if necessary, to reflect the estimated realizable amount.



Deferred
tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either
the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.











| | (m) | Foreign
                                         currency translation
| | --- | ---------------------------------------------------------------------



| | (i) | Functional
                                         and presentation currency
| | --- | -----------------------------------------------------------------------------



Items
included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic
environment in which the entity operates (the “functional currency”). The consolidated financial statements of the
Company are presented in Canadian dollars (“CAD”), which is the parent Company’s functional and presentation
currency. The functional currency of Merus Labs Luxco S.a R.L., Merus Labs Luxco II S.a R.L., and Merus Labs Netherlands BV is
Euros. The functional currency of Merus Pharma Inc. and ECG Holdings (US) Inc. is Canadian dollars.



| | (ii) | Transactions
                                         and balances
| | ---- | ------------------------------------------------------------------



Foreign
currency transactions are initiated by the Company’s entities at their respective functional currency using the exchange
rates prevailing at the date of the transaction. At each statement of financial position date, monetary assets and liabilities
are translated using the period-end foreign exchange rate. Non-monetary items that are measured in terms of historical cost in
a foreign currency are translated using exchange rates as at the dates of the initial transactions. Non-monetary items measured
at fair value in a foreign currency are translated using the exchange rates at the date when acquired. All gains and losses on
translation of these foreign currency transactions are included in the statement of operations.



| | (iii) | Company’s
                                         subsidiaries
| | ----- | ---------------------------------------------------------------



On
consolidation the assets and liabilities of foreign operations are translated into CAD at the rate of exchange prevailing at the
reporting date and their statement of operations are translated at the average exchange rates prevailing during the period. The
exchange differences arising on translation for consolidation are recognized in other comprehensive income. On disposal of a foreign
operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated
statement of operations.



| | (n) | Revenue
                                         recognition and estimated product returns
| | --- | ------------------------------------------------------------------------------------------



Revenue
from product sales, including shipments to distributors, is recognized when the Company has transferred to the customer the significant
risks and benefits of ownership or future obligations with respect to the product, it is probable that the economic benefits associated
with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue from product sales is
recognized net of estimated sales discounts, credits, returns, rebates and allowances.











In
connection with its acquisition of Salagen and Estraderm (note 3) and Sintrom, the Company entered into transition services and
supply agreements with the vendor (Novartis Pharma AG, or “Novartis”) to facilitate the seamless and efficient transfer
of these products to the Company. The agreement required that Novartis continue to distribute and promote the product until the
Company obtained the necessary marketing authorizations to allow it to take over these functions as principal. Novartis provided
the Company with a monthly reconciliation of revenues, cost of goods, and marketing and selling expenses for which the Company
then billed Novartis for the net amount receivable. Based on the terms of this arrangement and the guidance per IAS 18 regarding
agency relationships, for the period of this arrangement the Company recorded revenues relating these products on a net basis
in the statement of operations, net of cost of goods and marketing and selling expenses. During the fiscal years ended September
30, 2016 and 2015, the marketing authorization and commercial operations for these products were transferred on a territory by
territory basis and the Company began selling directly to third parties, incurred the inventory risk, and took over all other
responsibilities for the purchase and sale of the product. As a result, management determined the Company was acting as the principal
in the sales of these products on a territory by territory basis. As such, revenues for the sale of these products in the territories
where commercial responsibilities had been transferred and the Company was acting as principal were accounted for on a gross basis,
in the same manner as its other products described above.



In
connection with the acquisition of the Nitrates Portfolio (note 3), the Company entered into a transitional services agreement
with the vendor (UCB Pharma GmBH, or “UCB”) to facilitate the seamless and efficient transfer of these products to
the Company. The agreement required that UCB continue to distribute and promote the product until the Company obtained the necessary
marketing authorizations to allow it to take over these functions as principal. UCB provided the Company with a monthly reconciliation
of revenues, cost of goods, and marketing and selling expenses for which the Company then billed UCB for the net amount receivable.
Based on the terms of this arrangement and the guidance per IAS 18 regarding agency relationships, for the period of this arrangement
the Company recorded revenues relating these products on a net basis in the statement of operations, net of cost of goods and
marketing and selling expenses. During the fiscal year ended September 30, 2016, the marketing authorization and commercial operations
for these products were partially transferred on a territory by territory basis and the Company began selling directly to third
parties, incurred the inventory risk, and took over all other responsibilities for the purchase and sale of the product. As a
result, management determined the Company was acting as the principal in the sales of these products on a territory by territory
basis. As such, revenues for the sale of these products in the territories where commercial responsibilities had been transferred
and the Company was acting as principal were accounted for on a gross basis, in the same manner as its other products described
above.



The
Company’s return policy is limited to damaged or expired product in certain territories. The return allowance is determined
based on analysis of the historical rate of returns and current market conditions, which is applied directly against sales.



| | (o) | Share-based
                                         compensation
| | --- | -----------------------------------------------------------------



From
time to time, the Company grants options and performance share units (PSU’s) to directors, officers, employees and non-employees
to purchase common shares. The Company accounts for its stock options using the fair-value method. Share-based payments, equal
to the fair value of the options on the date of grant, are recognized in the statement of operations, with an offsetting credit
to equity reserves, for stock options granted to employees, officers and directors over the period during which the related options
vest. Share-based payments are recognized in the statement of operations, with an offsetting credit to equity reserves, for options
granted to non-employees based on the fair value of the services received. Consideration paid upon exercise of stock options,
along with the applicable amount of equity reserves, is credited to share capital.











| | (p) | Comprehensive
                                         income or loss
| | --- | ---------------------------------------------------------------------



Comprehensive
income or loss is the change in net assets arising from transactions and other events and circumstances from non-owner sources,
and comprises net income or loss and other comprehensive income or loss. Financial assets that are classified as available for
sale will have revaluation gains and losses included in other comprehensive income or loss until the asset is removed from the
statement of financial position. The translation and consolidation of foreign subsidiaries will result in translation gains and
losses included in other comprehensive income or loss until the subsidiary is disposed of.



| | (q) | Basic
                                         and diluted net loss per share
| | --- | -----------------------------------------------------------------------------



Basic
loss per share is computed using the weighted average number of common shares outstanding during the period. The treasury stock
method is used to compute the dilutive effect of equity instruments. Stock options, share purchase warrants, and other equity
instruments are dilutive when the average market price of the common shares during the period exceeds the exercise price of the
options, warrants and other equity instruments. The diluted loss per share is equal to the basic loss per share if the effects
of the outstanding options and warrants are anti-dilutive.



| | (r) | Related
                                         parties
| | --- | --------------------------------------------------------



Parties
are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operating decisions. Parties are also considered to be related if they
are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between related parties.



| | (s) | Changes
                                         in accounting standards
| | --- | ------------------------------------------------------------------------



The
International Accounting Standards Board has not issued any significant new accounting standards that impact the Company for the
year ended September 30, 2016.



Future
changes in accounting standards:



| | • | IFRS
                                         9 Financial Instruments. The IASB issued IFRS 9, “Financial Instruments”
                                         to replace IAS 39, “Financial Instruments: Recognition and Measurement”.
                                         IFRS 9 uses as a single approach to determine whether a financial asset is measured at
                                         amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach
                                         in IFRS 9 focuses on how an entity manages its financial instruments in the context of
                                         its business model, as well as the contractual cash and cash equivalents flow characteristics
                                         of the financial assets. The new standard also requires a single impairment method to
                                         be used, replacing the multiple impairment methods currently provided in IAS 39. In November
                                         2013, the IASB has removed the mandatory effective date for IFRS 9. The effective date
                                         is for annual periods beginning on or after January 1, 2018. The Company is currently
                                         assessing the impact of this standard.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











| | • | IFRS
                                         15 Revenue from Contracts with Customers. The IASB issued IFRS 15 to establish
                                         principles for reporting the nature, amount, timing and uncertainty of revenue and cash
                                         flows arising from an entity’s contracts with customers. The core principle of
                                         IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods
                                         or services to customers in an amount that reflects the consideration to which the entity
                                         expects to be entitled in exchange for those goods and services. IFRS 15 also includes
                                         a cohesive set of disclosure requirements that would result in an entity providing comprehensive
                                         information about the nature, amount, timing and uncertainty of revenue and cash flows
                                         arising from the entity’s contracts with customers. This standard is effective
                                         for annual periods beginning on or after January 1, 2018 with earlier adoption permitted.
                                         The Company is currently assessing the impact of this standard.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | IFRS
                                         16 Leases - In January 2016 the International Accounting Standards Board
                                         issued IFRS 16, which specifies how to recognize, measure, present and disclose leases.
                                         The standard provides a single lessee accounting model, requiring lessees to recognize
                                         assets and liabilities for all leases unless the lease term is 12 months or less or the
                                         underlying asset has a low value.  Consistent with its predecessor, IAS 17 the new
                                         lease standard continues to require lessors to classify leases as operating or finance.
                                         IFRS 16 is to be applied retrospectively for annual periods beginning on or after January
                                         1, 2019. Earlier application is permitted if IFRS 15 Revenue from Contracts with Customers
                                         has also been applied.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 3. | Acquisitions
| | -- | ------------



Surgestone,
Provames, Speciafoldine and Tredemine



On
March 7, 2016, the Company acquired the rights to manufacture, market and sell Surgestone®, Provames®, Speciafoldine®,
and Tredemine® pharmaceutical products (“Sanofi Portfolio”) in France from Sanofi S.A. (“Sanofi”)
for a purchase price of €22,500,000 plus inventory on hand at closing. Surgestone® and Provames® are used in a variety
of women's health indications, Speciafoldine® is used to treat macrocytic anemia and Tredemine® is a World Health Organization
recognized essential medicine to treat tapeworm.

The
acquisition of the Sanofi Products pursuant to the Sanofi Purchase Agreement was funded by (i) the proceeds of the special warrants
(note 12), together with (ii) an additional advance under the Company’s credit facility (note 10).



The
acquisition was determined to be a business combination under IFRS 3 with the Company as the acquirer and the Sanofi Portfolio
as the acquiree. Accordingly, the purchase price calculations and the purchase price allocations are dependent upon fair value
estimates and assumptions as at the acquisition date.











Costs
incurred to complete the acquisition were approximately $1,885,000, which were expensed during the period. The fair value of the
acquired identifiable net assets was $33,639,383 (€22,984,000). The purchase price allocation to the following identifiable
assets is based on their estimated fair values:





|                               |              
|------------------------------ | -------------
|Inventory                      | $   1,646,550
|Product rights - Surgestone    | 18,293,536   
|Product rights - Provames      | 1,369,930    
|Product rights - Speciafoldine | 11,585,858   
|Product rights - Tredemine     | 743,509      
|                               |              
|Net assets acquired            | $ 33,639,383 







Elantan,
Isoket, and Deponit



On
February 4, 2016, the Company completed the acquisition from UCB Pharma GmbH (“UCB”) of the nitrates business of UCB
comprised of the rights to the Elantan®, Isoket® and Deponit® pharmaceutical products (the "Nitrates
Portfolio") in Europe and select other markets. The Nitrates Portfolio were purchased pursuant to a purchase agreement entered
into among the Company and one of its wholly owned subsidiaries.

The
Nitrates Portfolio acquired include a variety of formats, including tablet, spray, patch and injectable presentations. The Nitrates
Portfolio belong to a category of pharmaceuticals called nitrates, and are used to treat both acute and chronic coronary
artery disease.

The
Company acquired the exclusive rights to manufacture, market and sell the products in twenty European countries, Mexico, Turkey
and South Korea. The European countries include France, Germany, Italy, Spain and the United Kingdom.

The
UCB Products acquisition was structured as an all cash transaction pursuant to which the Company’s wholly owned subsidiary
paid a purchase price of €92,000,000 on closing. In addition, the Company has agreed to purchase existing UCB Product inventory
subsequent to the closing date. The Company funded the acquisition with a combination of cash-on-hand and proceeds from a new
Euro-denominated debt facility (see note 10).



The
acquisition was determined to be a business combination under IFRS 3 with the Company as the acquirer and the Nitrates Portfolio
as the acquiree. Accordingly, the purchase price calculations and the purchase price allocations are dependent upon fair value
estimates and assumptions as at the acquisition date.



Costs
incurred to complete the acquisition were approximately $532,000, which were expensed during the period. The fair value of the
acquired identifiable net assets was $141,413,200 (€92,000,000). The purchase price allocation to the following identifiable
assets is based on their estimated fair values:





|                         |             
|------------------------ | ------------
|Product rights - Elantan | $ 73,073,734
|Product rights - Isoket  | 38,458,242  
|Product rights - Deponit | 29,881,224  
|                         |             
|Net assets acquired      | $141,413,200













Salagen
and Estraderm



On
May 21, 2015, the Company acquired the rights to manufacture, market, and sell two established specialty pharmaceutical products
in certain European and other markets.



Salagen® (pilocarpine hydrochloride)
is indicated for xerostomia following radiation therapy, in addition to Sjogren's syndrome. Estraderm
MX® is a transdermal delivery format of estradiol used for symptomatic treatment of menopause.



Pursuant
to the acquisition, the Company acquired the product rights, certain related intellectual property, and other information and
materials required to continue marketing and selling the brands in the territories acquired. Total consideration for the product
acquisition was US$29,500,000 funded from cash on hand. The transaction was accounted for as an acquisition of assets.



Costs
incurred to complete the acquisition were approximately $73,000, which were capitalized to the cost of the assets acquired. The
fair value of the acquired identifiable net assets was $36,439,154 (US$29,500,000 plus transaction costs) and was allocated as
follows:





|                           |             
|-------------------------- | ------------
|Product rights - Salagen   | $ 27,818,515
|Product rights - Estraderm | 8,620,639   
|                           |             
|Net assets acquired        | $ 36,439,154



| | 4. | Trade
                                         and other receivables
| | -- | --------------------------------------------------------------------



|                                          | September
                                         30
        2016 | September
                                         30
        2015
|----------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|                                          |                                                                    |                                                                   
|Trade
    receivables                     | $	27,332,713                                                       | $	13,645,981                                                      
|Less:
    provision for doubtful accounts | -                                                                  | -                                                                 
|Trade
    receivables - net               | 27,332,713                                                         | 13,645,981                                                        
|Other
    receivables                     | 1,264,506                                                          | 556,643                                                           
|Trade
    and other receivables           | $	28,597,219                                                       | $	14,202,624                                                      













The
aging analysis of trade receivables is as follows:



|                                 | September
                                         30
        2016 | September
                                         30
        2015
|-------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Current                          | $	18,237,213                                                       | $	13,307,306                                                      
|1
    to 30 days overdue         | 5,407,737                                                          | 279,926                                                           
|31
    to 60 days overdue        | 532,330                                                            | 6,046                                                             
|61
    to 90 days overdue        | 448,011                                                            | 52,703                                                            
|Greater
    than 90 days overdue | 2,617,422                                                          | -                                                                 
|Total
    trade receivables      | $	27,332,713                                                       | $	13,645,981                                                      





| | 5. | Inventories
| | -- | -----------



|                      | September
                                         30
        2016 | September
                                         30
        2015
|--------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Raw
    materials     | $         4,035,814                                                | $         809,650                                                 
|Work-in-progress      | 2,711,808                                                          | 429,554                                                           
|Finished
    goods    | 5,952,771                                                          | 5,560,601                                                         
|Total
    inventories | $      12,700,393                                                  | $      6,799,805                                                  



The
amount of inventories expensed in cost of goods sold during the year ended September 30, 2016 amounted to $27,482,421 (2015: $6,307,322).
During the year ended September 30, 2016, the Company recorded inventory impairments of $406,057 (2015: $88,291).













| | 6. | Property
                                         and equipment
| | -- | ---------------------------------------------------------------



Continuity
of property and equipment as at September 30, 2016 was as follows:





|                                                       | Computer
    Equipment | Leasehold
    Improve-
ments | Furniture
    and Fixtures | Manufac-
turing
    Equipment | Total        
|------------------------------------------------------ | ---------------------- | ---------------------------- | -------------------------- | ----------------------------- | -------------
|Cost
    at September 30, 2015                         | $   2,762              | $             -              | $   11,891                 | $  127,566                    | $  142,219   
|Additions                                              | 46,199                 | 122,917                      | 65,654                     | -                             | 234,770      
|Disposals                                              | -                      | -                            | (10,000)                   | -                             | (10,000)     
|Foreign
    exchange differences                       | (39)                   | -                            | (26)                       | (1,791)                       | (1,856)      
|                                                       |                        |                              |                            |                               |              
|Cost
    at September 30, 2016                         | $  48,922              | $  122,917                   | $  67,519                  | $  125,775                    | $  365,133   
|Accumulated
        Depreciation at September 30, 2015 | $
    2,762            | $          -                 | $    7,496                 | $   12,756                    | $   23,014   
|Depreciation
    charge                                | 3,681                  | 5,122                        | 8,480                      | 12,551                        | 29,834       
|Disposals                                              | -                      | -                            | (10,000)                   | -                             | (10,000)     
|Foreign
    exchange differences                       | (39)                   | -                            | (9)                        | (152)                         | (200)        
|Accumulated
    Depreciation at September 30, 2016     | $
    6,404            | $  5,122                     | $    5,967                 | $   25,155                    | $   42,648   
|Carrying
    amount atSeptember 30, 2015               | $          -           | $
                 -         | $
       4,395             | $
    114,810                 | $
    119,205
|Carrying
    amount atSeptember 30, 2016               | $
    42,518           | $
    117,795                | $  61,552                  | $
    100,620                 | $
    322,485





Continuity
of property and equipment for the year ended September 30, 2015 was as follows:



|                                                       | Computer
    Equipment | Furniture
    and Fixtures | Manufacturing
    Equipment | Total        
|------------------------------------------------------ | ---------------------- | -------------------------- | --------------------------- | -------------
|Cost
    at September 30, 2014                         | $  2,615               | $
    11,790               | $  120,758                  | $  135,163   
|Foreign
    exchange differences                       | 147                    | 101                        | 6,808                       | 7,056        
|                                                       |                        |                            |                             |              
|Cost
    at September 30, 2015                         | $  2,762               | $  11,891                  | $  127,566                  | $  142,219   
|Accumulated
        Depreciation at September 30, 2014 | $
    1,786            | $  4,784                   | $             -             | $     6,570  
|Depreciation
    charge                                | 830                    | 2,678                      | 12,083                      | 15,591       
|Foreign
    exchange differences                       | 146                    | 34                         | 673                         | 853          
|Accumulated
    Depreciation at September 30, 2015     | $
    2,762            | $  7,496                   | $   12,756                  | $   23,014   
|Carrying
amount at September 30, 2014                  | $    829               | $   7,006                  | $
    120,758               | $
    128,593
|Carrying
amount at September 30, 2015                  | $         -            | $   4,395                  | $
    114,810               | $
    119,205













| | 7. | Intangible
                                         assets
| | -- | ----------------------------------------------------------



Continuity
of intangible assets as at September 30, 2016 was as follows:



|                                                   | Product
    Rights | Patents          | Computer
    Software | Total            
|-------------------------------------------------- | ------------------ | ---------------- | --------------------- | -----------------
|Cost
    at September 30, 2015                     | $
    244,406,192  | $
    23,200,220 | $                -    | $
    267,606,412
|Additions
    arising from acquisitions (note 3)   | 173,406,032        | -                | -                     | 173,406,032      
|Additions
    arising from internal development    | 409,555            | -                | 501,242               | 910,797          
|Foreign
    exchange differences                   | (8,721,812)        | (325,868)        | 160                   | (9,047,520)      
|                                                   |                    |                  |                       |                  
|Cost
    at September 30, 2016                     | $
    409,499,967  | $
    22,874,352 | $   501,402           | $
    432,875,721
|Accumulated
    Amortization at September 30, 2015 | $   49,479,172     | $  16,587,950    | $                -    | $   66,067,122   
|Amortization
    charge                            | 32,073,869         | 5,089,819        | -                     | 37,163,688       
|Foreign
    exchange differences                   | (375,160)          | (225,821)        | -                     | (600,981)        
|Accumulated
amortization at September 30, 2016     | $   81,177,881     | $  21,451,948    | $                -    | $
    102,629,829
|Carrying
amount at September 30, 2015              | $
    194,927,020  | $
    6,612,270  | $                -    | $
    201,539,290
|Carrying
amount at September 30, 2016              | $
    328,322,086  | $
    1,422,404  | $   501,402           | $
    330,245,892





Computer
software is not yet available for use and accordingly amortization has not yet commenced.











Continuity
of intangible assets for the year ended September 30, 2015 was as follows:



|                                                   | Product
    Rights | Patents          | Total            
|-------------------------------------------------- | ------------------ | ---------------- | -----------------
|Cost
    at September 30, 2014                     | $
    192,808,581  | $
    21,961,923 | $   214,770,504  
|Product
    acquisitions (note 3)                  | 36,439,154         | -                | 36,439,154       
|Additions
    arising from internal development    | 1,580,321          | -                | 1,580,321        
|Foreign
    exchange differences                   | 13,578,136         | 1,238,297        | 14,816,433       
|                                                   |                    |                  |                  
|Cost
at September 30, 2015                         | $
    244,406,192  | $
    23,200,220 | $
267,606,412    
|Accumulated
    Amortization at September 30, 2014 | $   27,324,473     | $   10,821,679   | $   38,146,152   
|Amortization
    charge                            | 20,330,260         | 4,854,710        | 25,184,970       
|Foreign
    exchange differences                   | 1,824,439          | 911,561          | 2,736,000        
|Accumulated
amortization at September 30, 2015     | $   49,479,172     | $  16,587,950    | $   66,067,122   
|Carrying
amount at September 30, 2014              | $
    165,484,108  | $
    11,140,244 | $
    176,624,352
|Carrying
amount at September 30, 2015              | $
    194,927,020  | $
    6,612,270  | $
    201,539,290





| | 8. | Derivative
                                         liabilities
| | -- | ---------------------------------------------------------------





|                                       |  | September
                                         30
        2016 | September
                                         30
        2015
|-------------------------------------- |  | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Forward
    foreign exchange contracts |  | $               -                                                  | $    648,326                                                      
|Interest
    rate swap                 |  | 837,584                                                            | 245,340                                                           
|Total
        derivative liabilities   |  | $    837,584                                                       | $    893,666                                                      





In
connection with its European operations, the Company uses foreign currency contracts in order to partially hedge the risk associated
with its Euro currency source revenue. At September 30, 2016, the Company had forward foreign exchange contracts outstanding with
a notional principal amount of $nil (2015: $23,330,400). For the year ended September 30, 2016, gains of $384,926 (2015: losses
of $1,238,117) were recognized in derivative (gains) losses in the statements of operations in connection with these contracts.



In
accordance with the terms of the Company’s long-term debt (note 10), during the third quarter of fiscal 2016 the Company
entered into an interest rate swap for approximately 50% of the outstanding balance (€50,400,000 notional principal value at
September 30, 2016), effectively fixing the maximum rate on that portion of the loan at 4.99% until maturity.



During
the second quarter of fiscal 2015 the Company had entered into an interest rate swap for 50% of the outstanding balance of the
previous senior secured facility, effectively fixing the rate on that portion of the loan at 5.72% until maturity. On January
22, 2016, the Company terminated the old interest rate swap contract resulting in a payment of $296,100, which represented the
fair value of the liability on the settlement date.











| | 9. | Provisions
| | -- | ----------



|                                        | Year
                                         ended
        September
        30, 2016 | Year
                                         ended
        September
        30, 2015
|--------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|Balance
    at beginning of year        | $       167,656                                                                        | $       330,789                                                                       
|Charges                                 | 497,760                                                                                | 189,227                                                                               
|Utilization                             | (407,150)                                                                              | (363,409)                                                                             
|Foreign
    exchange                    | (909)                                                                                  | 11,049                                                                                
|Balance
    at end of year              | $       257,357                                                                        | $       167,656                                                                       
|Less:
    current portion of provisions | 128,678                                                                                | -                                                                                     
|Non-current
    portion of provisions   | $       128,679                                                                        | $       167,656                                                                       



The
Company’s provisions are comprised of the following product-related liabilities:



Product
Returns Liability:



The
Company accepts all product returns relating to North American and certain European product sales. Management estimates the fair
value of the product returns liability by taking into consideration the amount of units previously sold, returns experience to
date, expiry of product currently in inventory, forecast sales volumes, and changes in the marketplace.





| | 10. | Long-term
                                         debt
| | --- | -------------------------------------------------------



|                                                                                            | September
                                         30
        2016 | September
                                         30
        2015
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Current                                                                                     |                                                                    |                                                                   
|                                                                                            |                                                                    |                                                                   
|Operating
    line                                                                          | $    5,000,000                                                     | $                   -                                             
|Senior
    secured facility, €25,280,668 net of unamortized transaction costs of $1,196,137 | 36,070,095                                                         | 15,463,595                                                        
|Total                                                                                       | $  41,070,095                                                      | $   
    15,463,595                                               
|                                                                                            |                                                                    |                                                                   



|Non-Current                                                                                     |                |               
|----------------------------------------------------------------------------------------------- | -------------- | --------------
|Senior
        secured facility, €75,211,942 net of unamortized transaction costs of $1,875,798 | $  108,994,126 | $   47,248,414
|Total                                                                                           | $  108,994,126 | $   47,248,414















Euro
Facility



On
February 1, 2016, in connection with the acquisition of the Nitrates Portfolio and Sanofi Portfolio, the Company refinanced its
existing senior secured debt facility with a new Euro-denominated facility (“Euro Facility”). The Euro Facility was
advanced under an amendment and restatement to the Company's existing credit agreement. Pursuant to the terms of the amended credit
agreement, the lenders agreed to provide senior secured credit facilities in the aggregate amount of $180,000,000, comprising
of a senior secured revolving credit facility in the principal amount of $10,000,000 and senior secured term facilities in the
aggregate principal amount of $170,000,000, which were committed in Euros upon closing of the facility at a EUR:CAD exchange rate
of 1.5225.



The
proceeds from the senior secured term facility were used as follows: 1) €39,408,867 ($60,000,000) was used to refinance the
Old Debt Facility (see below) on close; 2) €65,681,445 ($100,000,000) was used towards the acquisition of the Nitrates Portfolio
on February 4, 2016; and 3) €6,568,144 ($10,000,000) was used towards the acquisition of the Sanofi Portfolio on March 7, 2016.
In addition, $6,575,609 was drawn from the senior secured revolving credit facility upon closing of the Nitrates Portfolio acquisition
on February 4, 2016, which was partially repaid prior to the year end.



The
senior secured term facility has a five year term at an initial coupon rate of EURIBOR (0% floor) plus 4.5% per annum, decreasing
as the Company de-leverages, and quarterly principal repayments starting with June 30, 2016. As at September 30, 2016, this rate
has reduced to EURIBOR (0% floor) plus 4.0% as a result of deleveraging. The senior secured revolving credit facilities are due
on demand and have an interest rate of Prime Rate plus 3.0% per annum, decreasing as the Company de-leverages.



Finance
costs of $3,955,344 were capitalized to the loan balance and will be amortized over the term of the loan using the effective interest
rate method. The unamortized portion of finance costs relating to the Old Debt Facility of $1,096,102 were written off during
the period as the refinancing of the Old Debt Facility was determined to be an extinguishment of debt. The effective interest
rate on the senior secured term facility at September 30, 2016 is 5.0%.



The
senior secured term facility has an annual cash flow sweep feature, whereby 120 days after the fiscal year-end, commencing September
30, 2016, the lender is entitled to 50% of excess cash flow as defined in the credit agreement. As at September 30, 2016, the
Company has included an estimate of this cash flow sweep entitlement amount pertaining to the current fiscal year end under the
current portion of long-term debt.



In
accordance with the terms of the Euro Facility, during the third quarter of fiscal 2016, the Company entered into an interest
rate swap for approximately 50% of the outstanding balance, effectively fixing the maximum rate on that portion of the loan at
4.99% until maturity.



All
of the Company's obligations under the amended facility are guaranteed by all material subsidiaries of the Company and are secured
by the material assets of the Company and the assets of, and all equity interests in its material subsidiaries. The Euro Facility
contains affirmative and negative covenants including compliance with laws and restrictions on additional debt, as well as financial
covenants such as debt to EBITDA and fixed charge coverage ratios. The Company was in compliance with all covenants of the senior
secured credit facility during the year and at September 30, 2016.













Old
Debt Facility



On
September 5, 2014, the Company entered into a renegotiated secured debt facility (“Old Debt Facility”) with a syndicate
of Canadian lenders. The Old Debt Facility provided additional funds for the purchase of Sintrom and refinanced the Company's
then-existing senior secured debt at a lower rate and extended term. The facility matures on September 5, 2019 and provided for
an $80,000,000 term loan at the Canadian BA rate plus 4.5%, or 5.3% effective rate, with principal repayments of $4,000,000 per
quarter and monthly interest payments. Finance costs of $1,986,786 were capitalized to the loan balance and were amortized over
the term of the loan.



In
accordance with the terms of the Old Debt Facility, during the second quarter of fiscal 2015, the Company entered into an interest
rate swap for 50% of the outstanding balance, effectively fixing the rate on that portion of the loan at 5.72% until maturity.
The swap was unwound prior to the commencement of the new Euro Facility and all costs relating the unwinding were expensed.





| | 11. | Preferred
                                         shares
| | --- | ---------------------------------------------------------



On
July 11, 2014, the Company completed a private placement subscription agreement to issue $10,000,000 of Series A convertible preferred
shares (the “Series A Preferred Shares”) to a large Canadian institutional investor.



The
Series A Preferred Shares pay a dividend of 8% per annum, subject to adjustment if the Company does not redeem after October 31,
2019. After October 31, 2019 the dividend rate is set to increase to LIBOR plus 10% for one year. Thereafter, the dividend rate
will increase to LIBOR plus 12% into perpetuity. At any time at the option of the holder, the Series A Preferred Shares may be
converted into the Company’s common shares at a conversion price of $2.20 per share. The Series A Preferred Shares are redeemable
at the option of the Company at any time after October 31, 2019. The Series A Preferred Shares are also redeemable by the Company
at any time in the event of a change of control subject to payment of a change of control premium. Costs associated with this
transaction were approximately $52,000.



Based
on management’s assessment of the various components of the Preferred Shares it was determined that the entire instrument
should be recorded as a liability. Accordingly, dividends of $800,000 for the year ended September 30, 2016 (2015: $800,000) paid
on the Preferred Shares are included in the finance costs in the statements of operations.















| | 12. | Share capital
| | --- | -------------





| | (a) | Authorized:
| | --- | -----------





Unlimited
common shares without par value.



Issued:



|                                                                  | Year
                                         ended
        September
        30, 2016 | Year
                                         ended
        September
        30, 2015
|----------------------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|                                                                  | Number
    of shares                                                                   | Amount                                                                                
|Balance,beginning of year                                         | 102,301,641                                                                            | $
    184,534,553                                                                     
|Common
    shares issued pursuant to prospectus offerings (b) (c) | 14,250,000                                                                             | 25,289,411                                                                            
|Common
    shares cancelled pursuant to escrow agreement (d)      | -                                                                                      | -                                                                                     
|Common
    shares issued pursuant to performance share units (e)  | 298,265                                                                                | 535,533                                                                               
|Common
    shares issued pursuant to options exercise (f)         | 150,000                                                                                | 397,088                                                                               
|Balance,end of year                                               | 116,999,906                                                                            | $
    210,756,585                                                                     





| | (b) | Special
                                         warrants
| | --- | ---------------------------------------------------------





On
March 1, 2016, the Company completed, on a private placement basis, an offering of 14,250,000 subscription receipts of
the Company (the “Subscription Receipts”), at a price of $1.90 per Subscription Receipt, for aggregate gross
proceeds of $27,075,000 (the “Offering”). The proceeds of the Subscription Receipts were held in escrow and released
to the Company upon the completion of the Sanofi French Products acquisition.  Upon closing of the acquisition, each Subscription
Receipt was converted into one special warrant of the Company (the “Special Warrants”), with each Special Warrant
being convertible into one common share of the Company. On May 18, 2016, the Special Warrants were converted into common shares
under the Company's existing Base Shelf Prospectus, resulting in the issuance of 14,250,000 shares.



Transaction
costs of $1,785,589 were incurred and have been capitalized against the proceeds from the Subscription Receipts.



On
March 7, 2016, upon completion of the Sanofi French Products acquisition, the proceeds of the Offering, together with an advance
under the Company’s amended and restated credit facility announced on February 1, 2016, were used to fund the acquisition.





| | (c) | Prospectus
                                         offerings
| | --- | -------------------------------------------------------------





On
April 30, 2015, the Company completed a prospectus offering of 20,672,750 shares, including the underwriter over-allotment option,
at a price of $3.05 per share for gross proceeds of $63,051,888. Proceeds were used for acquisitions and general corporate purposes.
Costs of the offering were approximately $3,489,000.













| | (d) | Escrow
                                         shares
| | --- | ------------------------------------------------------





On
December 4, 2014, the Company cancelled 33,333 shares still held in escrow pursuant to the acquisition of Orbis Pharma, Inc. As
per the terms of the agreement, any shares remaining in escrow were cancelled upon termination of employment of the Company's
former Chief Executive Officer in October 2014.





| | (e) | Performance
                                         Share Unit Plan
| | --- | --------------------------------------------------------------------





In
December 2014, the Company granted 800,000 Performance Share Units to an executive officer in connection with his employment agreement.
The grant was subject to the Performance Share Unit Plan (the "Plan") being approved by the Board of Directors as well
as regulatory and shareholder approval.

In
January 2015, the Board approved the Plan, subject to ratification by the shareholders, in addition to approving the grant of
150,000 Units to two other executive officers. The plan was approved by the Company's shareholders on March 26, 2015. During the
prior fiscal year, 90,000 Units were forfeited in connection with a resignation, while 100,000 new Units were issued to a new
executive.



During
the current fiscal period, a total of 347,500 Units were issued to several executives as part of their ongoing compensation. Share
based compensation expense in the amount of $782,613 was recognized for the year ended September 30, 2016 (2015: $481,980), respectively,
in connection with these grants. The purpose of the plan is to provide the Company with greater flexibility with respect to equity
compensation arrangements.



On
December 10, 2015, the Company determined that performance conditions with respect to fiscal 2015 metrics had been met and, as
such, authorized the issuance of a total of 298,265 shares pursuant to the grants in satisfaction of those amounts earned under
the Performance Share Unit plan.





| | (f) | Stock
                                         option plan
| | --- | ----------------------------------------------------------



The
Company has reserved 11,699,990 common shares under a 10% rolling reloading stock option plan. Under the plan, the options are
exercisable for one common share and the exercise price of the option must equal the market price of the underlying share at the
grant date. The options have vesting periods ranging from the date of grant up to three years. Once vested, options are exercisable
at any time until expiry.



During
the year ended September 30, 2016, the Company granted 2,015,000 options (2015: 1,935,000 options) to management, staff and directors,
with exercise prices ranging from $1.64 to $1.71 per share (2015: $1.69 to $2.92 per share). The options have a term of five years
and vest over a period of two years from the date of grant.



The
estimated fair value of the options granted during the year ended September 30, 2016, using the Black-Scholes option pricing model,
was $1,935,668 (2015: $2,233,406). $1,831,886 was expensed in the financial statements during the year ended September 30, 2016
(2015: $2,030,479), respectively, relating to current and prior period grants and has been included in share-based compensation
in the statements of operations and in equity as equity reserves. The remaining expense will be recognized over the balance of
the vesting periods.











| | (g) | Stock
                                         option details
| | --- | -------------------------------------------------------------





The
fair value of each option granted was estimated on the date of the grant using the Black-Scholes fair value option pricing model
with the following assumptions:





|                                                  | Year
    ended September 30
|------------------------------------------------- | ---------------------------
|                                                  | 2016                       
|                                                  |                            
|Weighted-average fair
    value of options        | $0.96                      
|                                                  |                            
|Risk-free interest rate                           | 0.78%                      
|                                                  |                            
|Volatility of the Company's
    common shares     | 68%                        
|                                                  |                            
|Weighted average expected
    life of the options | 5
    years                
|                                                  |                            
|Forfeiture rate                                   | 8.7%                       
|                                                  |                            
|Expected
    dividends                            | Nil                        



Volatility
was determined based on daily observations of the historical stock price over a period consistent with the expected life of the
options at the date of grant.



Details
of the options are as follows:





|                                            | Number
    of | Weighted
    average
|------------------------------------------- | ------------- | --------------------
|                                            | options       | price per option    
|                                            | outstanding   | outstanding         
|                                            |               |                     
|Options outstanding, September 30, 2014     | 3,465,667     | $
    1.82          
|                                            |               |                     
|Options granted                             | 1,935,000     | 1.97                
|Options expired                             | (1,006,667)   | 2.01                
|Options forfeited                           | (150,000)     | 1.73                
|Options
    exercised                       | (416,500)     | 1.76                
|Options outstanding, September 30, 2015     | 3,818,500     | $
    1.86          
|                                            |               |                     
|Options granted                             | 2,015,000     | 1.70                
|Options expired                             | (525,000)     | 1.95                
|Options
    exercised                       | (150,000)     | 1.66                
|                                            |               |                     
|Options
    outstanding, September 30, 2016 | 5,158,500     | $
    1.79          











The
range of exercise prices for outstanding and exercisable options at September 30, 2016 are as follows:



|Exercise
        Price | NumberOutstanding | Weighted
                                         Average
        Contractual
        Life | Number
        Exercisable | Weighted
    Average Exercisable Strike Price
|---------------------- | ----------------- | ------------------------------------------------------------------------------------------ | -------------------------- | ---------------------------------------------
|$0.50
    - $1.00      | 158,500           | 1.76                                                                                       | 158,500                    | $0.89                                        
|$1.01
    - $1.50      | 50,000            | 0.87                                                                                       | 50,000                     | $1.19                                        
|$1.51
    - $2.00      | 4,375,000         | 3.35                                                                                       | 3,081,667                  | $1.75                                        
|$2.01
    - $2.50      | 200,000           | 0.30                                                                                       | 200,000                    | $2.02                                        
|$2.51
    - $3.00      | 375,000           | 3.55                                                                                       | 250,001                    | $2.81                                        
|$0.50
    - $3.00      | 5,158,500         | 3.17                                                                                       | 3,820,178                  | $1.79                                        



The
range of exercise prices for outstanding and exercisable options at September 30, 2015 are as follows:



|Exercise
        Price | NumberOutstanding | Weighted
                                         Average
        Contractual
        Life | Number
        Exercisable | Weighted
    Average Exercisable Strike Price
|---------------------- | ----------------- | ------------------------------------------------------------------------------------------ | -------------------------- | ---------------------------------------------
|$0.50
    - $1.00      | 158,500           | 2.76                                                                                       | 158,500                    | $0.89                                        
|$1.01
    - $1.50      | 125,000           | 2.71                                                                                       | 75,000                     | $1.29                                        
|$1.51
    - $2.00      | 2,960,000         | 3.34                                                                                       | 2,054,999                  | $1.81                                        
|$2.01
    - $2.50      | 200,000           | 1.31                                                                                       | 200,000                    | $2.02                                        
|$2.51
    - $3.00      | 375,000           | 4.55                                                                                       | 125,001                    | $2.81                                        
|$0.50
    - $3.00      | 3,818,500         | 3.31                                                                                       | 2,613,500                  | $1.80                                        





| | 13. | Accumulated other comprehensive income
| | --- | --------------------------------------





|                                     | Translation      | Deferred
    Tax      | Total           
|------------------------------------ | ---------------- | --------------------- | ----------------
|At
        September 30, 2014        | $   6,780,105    | $                   - | $   6,780,105   
|Deferred
    taxes                   |                  | (1,142,118)           | (1,142,118)     
|Currency
    translation differences | 14,680,745       | -                     | 14,680,745      
|At
        September 30, 2015        | 21,460,850       | (1,142,118)           | 20,318,732      
|Currency
    translation differences | (1,724,373)      | -                     | (1,724,373)     
|                                     |                  |                       |                 
|At
    September 30, 2016            | $
    19,736,477 | $
    (1,142,118)     | $
    18,594,359













| | 14. | Commitments
                                         and contingencies
| | --- | ----------------------------------------------------------------------



(a)
Operating lease commitments



The
Company has entered into non-cancellable operating lease agreements for office premises and equipment with minimum annual lease
payments to expiry as follows:



|                     | September
                                         30
        2016 | September
                                         30
        2015
|-------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Less
    than 1 year | $     300,540                                                      | $   105,576                                                       
|1
    to 2 years     | 300,540                                                            | 105,576                                                           
|2
    to 3 years     | 300,540                                                            | 26,394                                                            
|3
    to 4 years     | 300,540                                                            | -                                                                 
|Thereafter           | 175,315                                                            | -                                                                 
|Total                | $  1,377,475                                                       | $   237,546                                                       



Lease
expense recognized during the year ended September 30, 2016 was $353,068 (2015: $193,746), which has been included in general
and administrative expenses in the consolidated statements of operations.



(b)
Legal proceedings



Arbitration
Proceeding



In
August 2014, the Company received notice of a request for arbitration from LG Life Sciences (“LGLS”), the original
owner of the Company’s former Factive® product. This request for arbitration was based on the original license agreement
entered into by LGLS and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The request for arbitration named the Company
as a respondent together with Chiesi and Vansen Pharma, Inc. The request for arbitration included the allegation that Cornerstone
did not have the legal right to transfer the Factive product to the Company. LGLS sought an award for damages relating to an alleged
breach of contract, as well as disgorgement of revenue and other benefits derived by us from sales of Factive. The Company has
successfully defended this claim. Additionally, the Company and Chiesi have each asserted claims against one another, seeking
indemnity and damages related to LGLS’s claim. These claims have also been resolved. The Company had a contingent liability
in the form of the cost of damages incurred by LGLS resulting from Vansen’s failure to return the license to sell Factive
to LGLS. Subsequent to year end, the Company has successfully defended this claim.



The
Company has contingent liabilities remaining however in the form of the Company’s indemnification of Cornerstone’s
liability under the Factive asset purchase agreement that may include the cost of reimbursing wholesalers for expired goods on
behalf of Cornerstone, the cost of paying for government reimbursement programs on behalf of Cornerstone, and legal costs incurred
by Cornerstone to defend themselves against LGLS’s original claim. The Company is assessing its legal options relative to
these claims and will challenge the merit of each claim, the amounts claimed, and the Company’s responsibility under each
claim as appropriate.



(c)
Revenue based commitments



Pursuant
to the Company’s exclusive license agreement with EISAI, the Company is subject to a royalty fee of 20% based on the net
sales of Salagen.











Pursuant
to the Company’s technology transfer and manufacturing agreement with a contract manufacturer, the Company is subject to
a royalty fee based on the capsule volume of Vancocin sold.



(d)
Purchase commitments



Pursuant
to the Company’s raw materials supply agreement with a contract manufacturer, the Company is committed to purchasing approximately
$2,500,000 of product per calendar year from 2017 to 2023.





| | 15. | Related party transactions
| | --- | --------------------------





At
September 30, 2016 and 2015, there were no amounts owing to or from related parties. The remuneration of directors and other members
of key management personnel recorded in the general and administrative line of operating expenses are as follows:





|                             | Year
    ended September 30
|---------------------------- | ---------------------------
|                             | 2016                       
|                             |                            
|Salaries                     | $
     3,076,898           
|Share
    based compensation | 2,393,428                  
|                             | $  5,470,326               



| | 16. | Finance
                                         costs
| | --- | ------------------------------------------------------



Finance
costs for the years ended September 30, 2016 and 2015 are comprised of:



|                                                                           | September
                                         30
        2016 | September
                                         30
        2015
|-------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Interest
    expense                                                       | $     6,754,460                                                    | $   5,324,555                                                     
|Interest
    income                                                        | -                                                                  | (812)                                                             
|Amortization
    of transaction costs                                      | 1,075,298                                                          | 651,614                                                           
|Write-off
    of old transaction costs on extinguishment of debt (note 10) | 1,096,102                                                          | -                                                                 
|Total                                                                      | $  8,925,860                                                       | $   5,975,357                                                     













| | 17. | Income
                                         taxes
| | --- | -----------------------------------------------------



The
major components of income tax (recovery) expense for the period ended September 30, 2016 and 2015 are:

|                                            | Year
    ended September 30
|------------------------------------------- | ---------------------------
|Income
    tax recognized in profit or loss | 2016                       
|Current
    tax                             |                            
|Current
    period tax expense              | $         884,772          
|Deferred
    tax:                           |                            
|Deferred
    tax recovery                   | -                          
|Provision
    for income taxes              | $
            884,772      



A
reconciliation between income tax expense and the product of accounting income multiplied by Canada’s domestic tax rate
(26.5% for Merus) for the period ended September 30, 2016 and 2015 is as follows:

|                                                                                                              | Year
                                         ended September 30
|------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------
|                                                                                                              | 2016                                                            
|Loss
        before recovery of income taxes                                                                  | $
        (8,574,272)                                           
|                                                                                                              |                                                                 
|Income
    tax benefit at the statutory income tax rate of 26.5% (2015: 26.47%)                               | (2,272,182)                                                     
|Non-deductible
    expenses for tax purposes                                                                  | (5,975,392)                                                     
|Deductible
    temporary differences and unused tax losses not recognized, including impact of change in rate | 9,632,616                                                       
|Effect
    of income taxes recorded at rates different from the Canadian tax rate                             | (500,270)                                                       
|Income
    tax expense (recovery)                                                                             | $         884,772                                               



The
following table summarizes the components of deferred tax:



|                                       |      | Year
    ended September 30
|-------------------------------------- | ---- | ---------------------------
|2016                                   | 2015
|Deferred
    Tax Assets                |      |                            
|Non-capital
    losses carried forward |      | $      825,768             
|                                       |      |                            
|Deferred
    Tax Liabilities           |      |                            
|Related
    party debt                 |      | (825,768)                  
|Net
    deferred tax liabilities       |      | $                   -      











Deferred
tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company
has the legal right and intent to offset:





|                                             | Year
    ended September 30
|-------------------------------------------- | ---------------------------
|Movement
    in net deferred tax liabilities | 2016                       
|                                             |                            
|Balance
    at the beginning of the year     | $                    -     
|Recognized
    in profit/loss                | -                          
|Recognized
    in OCI                        | -                          
|Balance
    at end of the year               | $                    -     





Deferred
taxes are provided as a result of temporary differences that arise due to the differences between the income tax values and the
carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the following deductible
temporary differences:





|                                                     | Year
    ended September 30
|---------------------------------------------------- | ---------------------------
|                                                     | 2016                       
|                                                     |                            
|Unrecognized
    deferred tax assets in relation to: |                            
|                                                     |                            
|Non-capital
    losses carried forward               | $   53,206,986             
|Non-capital
    losses carried forward - Luxembourg  | 26,308,587                 
|Net
    capital losses carried forward               | 8,986,115                  
|Intangible
    assets                                | 8,636,489                  
|Share
    issuance costs                             | 9,115,179                  
|Long
    term debt                                   | 2,823,014                  
|Property,
    plant and equipment                    | 8,852                      
|                                                     | $
    109,085,222          







Share
and debt issue costs will be fully amortized in 2020. The net capital loss carryforward may be carried forward indefinitely, but
can only be used to reduce capital gains. Luxembourg non-capital losses carry forward indefinitely. The remaining deductible temporary
differences may be carried forward indefinitely. Deferred tax assets have not been recognized in respect of these items because
it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.



The
aggregate amount of temporary differences associated with investments in subsidiaries, branches, associates and interest in joint
arrangements is approximately $5,971,514. As the Company can control the dividend policies, it is able to control the timing of
the reversal of the temporary differences associated with the investments noted above. It is also probable that the temporary
difference will not reverse in the foreseeable future. Therefore, the deferred tax liabilities associated with the investments
have not been recognized.











The
Company has unused non-capital tax losses that may be applied against future taxable income for Canadian federal and provincial
income tax purposes, which expire as follows:





|Non-capital
    losses | Federal
    and provincial
|---------------------- | --------------------------
|Expires
    in         |                           
|2026
    to 2030       | $
    15,092,270          
|2031
    to 2036       | 38,114,720                
|Total                  | $
    53,206,990          





| | 18. | Earnings per share
| | --- | ------------------







(a)       Basic



Basic
earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average
number of ordinary shares in issue during the year.



|                                                        | Year
                                         ended September 30
|------------------------------------------------------- | ----------------------------------------------------------------
|                                                        | 2016                                                            
|Income
    (loss)                                       |                                                                 
|Loss
    attributable to equity holders of the Company  | $
    (9,459,044)                                               
|Total                                                   | $
    (9,459,044)                                               
|Weighted
    average number of ordinary shares in issue | 110,937,123                                                     



(b)       Diluted



Diluted
earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion
of all dilutive potential ordinary shares. The Company presently has two categories of dilutive potential ordinary shares: stock
options and preferred shares. As the Company recorded a net loss for the years ended September 30, 2016 and 2015, these items
were considered anti-dilutive and have therefore been excluded from the calculation of diluted earnings per share.



|                                                                              | Year
                                         ended September 30
|----------------------------------------------------------------------------- | ----------------------------------------------------------------
|                                                                              | 2016                                                            
|Income
    (loss)                                                             |                                                                 
|Loss
    attributable to equity holders of the Company                        | $
    (9,459,044)                                               
|Total                                                                         | $
    (9,459,044)                                               
|Weighted
    average number of ordinary shares in issue                       | 110,937,123                                                     
|Weighted
    average number of ordinary shares for diluted earnings per share | 110,937,123                                                     













| | 19. | Management
                                         of capital
| | --- | --------------------------------------------------------------



The
Company includes the following in its definition of capital:



|                            | September 30   | September 30   
|--------------------------- | -------------- | ---------------
|                            | 2016           | 2015           
|Debt
    comprised of:      |                |                
|Senior
    secured facility | $  150,064,221 | $    62,712,009
|Preferred
    shares        | 9,947,730      | 9,947,730      
|                            |                |                
|Equity
    comprised of:    |                |                
|Share
    capital           | 210,756,585    | 184,534,553    
|Equity
    reserve          | 39,146,155     | 37,215,779     
|Deficit
    and AOCI        | (52,136,299)   | (40,952,882)   
|                            | $  357,778,392 | $  253,457,189 



The
Company’s objectives when managing capital are:



| | (a) | to
                                         allow the Company to respond to changes in economic and/or marketplace conditions;
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | (b) | to
                                         give shareholders sustained growth in shareholder value by increasing shareholders’
                                         equity;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | to
                                         ensure that the Company maintains the level of capital necessary to meet the requirements
                                         of its long-term debt;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | to
                                         comply with financial covenants required under its debt facilities; and
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (e) | to
                                         maintain a flexible capital structure which optimizes the cost of capital at acceptable
                                         levels of risk
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





The
Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics
of its underlying assets. The Company maintains or adjusts its capital level to enable it to meet its objectives by:



| | (a) | raising
                                         capital through equity financings;
| | --- | -----------------------------------------------------------------------------------



| | (b) | utilizing
                                         leverage in the form of third party debt; and
| | --- | ------------------------------------------------------------------------------------------------



| | (c) | realizing
                                         proceeds from the disposition of its investments
| | --- | ---------------------------------------------------------------------------------------------------



The
Company is not subject to any capital requirements imposed by a regulator. The Company is subject to certain capital requirements
and negative covenants with respect to its Senior Secured Facility (refer to note 10). There were no changes in the Company’s
approach to capital management during the year. To date, the Company has not declared any cash dividends to its common shareholders
as part of its capital management program. The Company’s management is responsible for the management of capital and monitors
the Company’s use of various forms of leverage on a regular basis.













| | 20. | Financial
                                         instruments and financial risk management
| | --- | --------------------------------------------------------------------------------------------



a)
Fair Value Estimation



The
Company’s carrying value of cash and cash equivalents, short-term investments, trade and other receivables, and accounts
payable and accrued liabilities approximate their fair values due to the immediate or short term maturity of these instruments.
The fair value of other financial liabilities such as the Company’ s operating line, long term debt, and preferred shares
is not materially different than its carrying value due to the recent issuance of these liabilities.



Carrying
value and fair value of financial assets and liabilities are summarized as follows:





|September
    30, 2016                        
|----------------------------------------------
|Classification                                
|Financial
    assets at FVTPL                 
|-
    Short-term investments                  
|Loans
    and receivables                     
|-
    Cash and cash equivalents               
|-
    Trade and other receivables             
|Other
    financial liabilities               
|-
    Accounts payable and accrued liabilities
|-
    Operating line                          
|-
    Long term debt                          
|-
    Preferred shares                        
|Financial
    liabilities at FVTPL            
|-
    Derivative liabilities                  





|September
    30, 2015                        
|----------------------------------------------
|Classification                                
|Financial
    assets at FVTPL                 
|-
    Short-term investments                  
|Loans
    and receivables                     
|-
    Cash and cash equivalents               
|-
    Trade and other receivables             
|Other
    financial liabilities               
|-
    Accounts payable and accrued liabilities
|-
    Long term debt                          
|-
    Preferred shares                        
|Financial
    liabilities at FVTPL            
|-
    Derivative liabilities                  



The
Company is required to present information about its financial assets and liabilities with respect to the hierarchy of the valuation
techniques the Company utilized to determine fair value. The different levels have been defined as follows:











| | • | Level
                                         1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
                                         liabilities
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Level
                                         2 inputs utilize data points that are observable such as quoted prices, interest rates
                                         and yield curves
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | Level
                                         3 inputs are unobservable data points for the asset or liability, and includes situations
                                         where there is little, if any, market activity for the asset or liability.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At
September 30, 2016, the Company’s financial assets and liabilities would be classified as follows:





|                       |                    | Significant       | Significant Other    | Significant    
|---------------------- | ------------------ | ----------------- | -------------------- | ---------------
|                       |                    | Observable        | Observable           | Unobservable   
|                       |                    | Inputs            | Inputs               | Inputs         
|                       | September 30, 2016 | (Level 1)         | (Level 2)            | (Level 3)      
|                       |                    |                   |                      |                
|Assets:                |                    |                   |                      |                
|Short-term investments | $         3,155    | $       3,155     | $                  - | $             -
|                       | $         3,155    | $       3,155     | $                  - | $             -
|                       |                    |                   |                      |                
|Liabilities:           |                    |                   |                      |                
|Derivative liabilities | $     837,584      | $               - | $      837,584       | $             -
|                       | $      837,584     | $               - | $      837,584       | $-             



At
September 30, 2015, the Company’s financial assets and liabilities would be classified as follows:





|                       |                    | Significant       | Significant Other    | Significant    
|---------------------- | ------------------ | ----------------- | -------------------- | ---------------
|                       |                    | Observable        | Observable           | Unobservable   
|                       |                    | Inputs            | Inputs               | Inputs         
|                       | September 30, 2015 | (Level 1)         | (Level 2)            | (Level 3)      
|                       |                    |                   |                      |                
|Assets:                |                    |                   |                      |                
|Short-term investments | $         3,234    | $       3,234     | $                  - | $             -
|                       | $         3,234    | $       3,234     | $                  - | $             -
|                       |                    |                   |                      |                
|Liabilities:           |                    |                   |                      |                
|Derivative liabilities | $     893,666      | $               - | $      893,666       | $             -
|                       | $     893,666      | $               - | $      893,666       | $             -



The
fair value of financial instruments traded in active markets is based on quoted market prices at the statement of financial position
date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry
group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on
an arm’s length basis.



The
fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined
by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and
rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable,
the instrument is included in Level 2.









If
one or more significant inputs are not based on observable market data, the instrument is included in Level 3.



b)
Financial Risk Factors



The
use of financial instruments can expose the Company to several risks, including market, credit and liquidity risks. Apart from
the risks listed below, management is of the opinion that they are not exposed to any other significant risks. A discussion of
the Company’s use of financial instruments and its risk management is provided below.



(i)
Liquidity risk



Liquidity
risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due.
The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital markets
is hindered, whether as a result of a downturn in stock market conditions generally or related to matters specific to the Company.
In order to mitigate this risk, the Company maintains a sufficient cash balance in order to satisfy short-term liabilities as
they come due and actively pursues raising capital through various public and private financing mechanisms to satisfy longer term
needs.



The
table below analyzes the Company’s non-derivative financial liabilities into relevant maturity groupings based on the remaining
period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the
contractual undiscounted cash flows and do not include capitalized transaction costs.



|                                            | Year
    ended September 30
|------------------------------------------- | ---------------------------
|At
    September 30, 2016                   | 2017                       
|Operating
    line                          | $   5,000,000              
|Senior
    Secured Facility                 | 37,266,232                 
|Accounts
    payable andaccrued liabilities | 15,875,494                 
|Income
    taxes payable                    | 635,891                    
|Total                                       | $
    58,777,617           





|                                            | Year
    ended September 30
|------------------------------------------- | ---------------------------
|At
    September 30, 2015                   | 2016                       
|Debt                                        | $
    16,000,000           
|Accounts
    payable andaccrued liabilities | 8,314,307                  
|Income
    taxes payable                    | 1,150,791                  
|Total                                       | $
    25,465,098           



| | (ii) | Market
                                         risk:
| | ---- | -----------------------------------------------------



Market
risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly
fluctuate because of changes in market prices. The value of the financial instruments can be affected by changes in interest rates,
foreign exchange rates, and equity and commodity prices. The Company is not exposed to significant market risk given the low value
of its investments.











| | (iii) | Currency
                                         risk:
| | ----- | -------------------------------------------------------



The
Company is subject to currency risk through its sales of products and services denominated in foreign currencies, purchases of
inventory in US dollars and product acquisitions denominated in foreign currencies. As such, changes in the exchange rate affect
the operating results of the Company. Dependent on the nature, amount and timing of foreign currency receipts and payments, the
Company may from time to time enter into foreign currency derivative contracts to reduce its exposure to foreign currency risk
as discussed in note 8. In February 2016, the Company entered into a Euro Facility to establish a natural hedge against its Euro
sourced revenues, thus minimizing the need for foreign currency derivative contracts.



The
following significant monetary financial assets and liabilities were denominated in foreign currencies at September 30, 2016 (U.S.
dollar 1.3117, Euro 1.4741, British pound 1.7069, Swiss franc 1.3531) and September 30, 2015 (U.S. dollar 1.3345, Euro 1.4951,
British pound 2.0244, Swiss franc 1.3704):



|                                                               | September
                                         30
        2016 | September
                                         30
        2015
|-------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------
|Canadian
    Dollar Equivalent :                               |                                                                    |                                                                   
|Denominated
    in US dollars                                  | $     (1,631,182)                                                  | $    17,778,635                                                   
|Denominated
    in Euros                                       | (143,423,582)                                                      | 13,102,315                                                        
|Denominated
    in British pounds                              | 5,121,046                                                          | 732,432                                                           
|Denominated
    in Swiss francs                                | 431,128                                                            | (68,211)                                                          
|Hedge
    contracts denominated in Euros                       | -                                                                  | (23,921,600)                                                      
|Net
    (liabilities) assets denominated in foreign currencies | $
    (139,502,589)                                                | $      7,623,571                                                  



The
Company has a Euro denominated debt facility (included in the table above), which serves as a natural hedge against the Company’s
Euro-denominated investments in its European subsidiaries that are in the form of intercompany loans, which are eliminated upon
consolidation.



The
following table shows the estimated sensitivity of the Company’s total comprehensive gain (loss) for the year ended September
30, 2016 from a change in foreign currencies with all other variables held constant as at September 30, 2016:





|                     | Change in net after-tax | Change in net after-tax
|-------------------- | ----------------------- | -----------------------
|Percentage change in | gain from % increase    | loss from % decrease   
|foreign currencies   | in foreign currencies   | in foreign currencies  
|                     |                         |                        
|2%                   | $     (2,790,052)       | $    2,790,052         
|4%                   | (5,580,104)             | 5,580,104              
|6%                   | (8,370,155)             | 8,370,155              
|8%                   | (11,160,207)            | 11,160,207             
|10%                  | (13,950,259)            | 13,950,259             



















| | (iv) | Credit
                                         risk:
| | ---- | -----------------------------------------------------



Some
of the Company’s financial assets, including cash and cash equivalents and short-term investments are exposed to the risk
of financial loss occurring as a result of default of a counterparty on its obligations to the Company. The Company may, from
time to time, invest in debt obligations. The Company is also exposed, in the normal course of business, to credit risk from customer
receivables. These amounts are continually monitored by management for collectability, and, in general, are lower risk as they
are typically due from large institutions or multinational distributors.



| | (v) | Interest
                                         rate risk:
| | --- | ------------------------------------------------------------



Merus
has significant current and long-term debt in the form of senior secured debt which currently bears interest at a floating interest
rate of EURIBOR (0% floor) plus 4.0% and will incur greater interest expenses if the EURIBOR rate rises. Management has reduced
this risk by entering into an interest rate swap arrangement as allowed for through facilities in its credit agreement. Interest
rate swaps effectively fix the interest rate on the debt to which they are applied. At September 30, 2016, Merus had interest
rate swaps applied to approximately 50% of its senior secured debt facility.





| | 21. | Segment
                                         information
| | --- | ------------------------------------------------------------



The
Company operates in a single reportable segment focused on acquiring, in-licensing, marketing and distributing pharmaceutical
products in Canada and internationally. The Company carries out business principally in Canada and Europe.



Revenues
by geographic region are detailed as follows:



|              |  | Year
    ended September 30
|------------- |  | ---------------------------
|              |  |                            
|Canada        |  |                            
|International |  | 85,175,209                 
|              |  |                            

Other
than Canada, the Company derived more than 10% of its revenues in the year ended September 30, 2016 or year ended September 30,
2015 period from Germany, Spain, and the UK. Revenues in Germany of $14,450,732 (2015: $11,750,229) and Spain of $17,629,790 (2015:
$9,325,727) are included in International in the table above.



Long-term
assets by geographic region are comprised of product rights and patents and property and equipment, detailed as follows:



|              |  | September
    30  | September
    30 
|------------- |  | ----------------- | -----------------
|              |  | 2016              | 2015             
|Canada        |  | $       2,177,950 | $       2,979,402
|International |  | 328,390,427       | 198,679,093      
|              |  | $  330,568,377    | $  201,658,495   













| | 22. | Prior
                                         period reclassification
| | --- | ----------------------------------------------------------------------



Selling
and Marketing and General and Administrative Expenses



The
operating expense line item sales and marketing in the Company’s statements of operations has historically included any
direct marketing activities related to the Company’s products (e.g. sales force, marketing materials, conferences, etc.).
The operating expense line item general and administrative however has historically combined all other expenses related to the
Company’s products (i.e. distribution, customs, regulatory, IP maintenance, third-party logistics/warehousing, etc.) as
well as traditional general and administrative costs associated with the Company’s administrative operations (i.e. salaries
and benefits, professional and consulting fees, public company costs, travel, leases, share-based-compensation, etc.).



Based
on Management’s internal approach for analysing the Company’s financial performance as well as feedback from investors
and analysts, Management has determined that the relevance, reliability, and comparability of the Company’s consolidated
financial statements can be improved by reclassifying all costs directly related to the selling and marketing function for the
Company’s products from general and administrative to selling and marketing expenses. Further, the addition of a separate
line for share-based compensation in the statements of operations will further improve the relevance and reliability of the general
and administrative expense line item. There has been no impact to net income or (loss) as a result of this reclassification.



Thus,
certain amounts have been reclassified from general and administrative to selling and marketing and share-based compensation in
the prior year to conform to current year presentation.











Impact
of Reclassification



The
impact of the above reclassification adjustments have been summarized below. These reclassification adjustments have no impact
on net income (loss) and therefore only the statements of operations is disclosed.



|For
    the year endedSeptember 30, 2015 | As
    previously reported | Adjustment  | As
    restated 
|---------------------------------------- | -------------------------- | ----------- | ----------------
|Statement
    of Operations:             |                            |             |                 
|Revenues                                 | $   48,958,425             | -           | $   48,958,425  
|Cost
    of goods sold                   | 7,535,124                  | -           | 7,535,124       
|Gross
    margin                         | 41,423,301                 | -           | 41,423,301      
|                                         |                            |             |                 
|Operating
    expenses:                  |                            |             |                 
|Selling
    and marketing                | 926,758                    | 1,458,075   | 2,384,833       
|General
    and administrative           | 10,395,089                 | (3,970,534) | 6,424,555       
|Share-based
    compensation             | -                          | 2,512,459   | 2,512,459       
|Amortization
    of intangible assets    | 25,184,970                 | -           | 25,184,970      
|Depreciation                             | 15,591                     | -           | 15,591          
|Foreign
    exchange gains               | (1,294,980)                | -           | (1,294,980)     
|                                         | 35,227,428                 | -           | 35,227,428      
|                                         |                            |             |                 
|Operating
    income                     | 6,195,873                  | -           | 6,195,873       
|                                         |                            |             |                 
|Interest
    expense, net                | 5,975,357                  | -           | 5,975,357       
|Derivative
    losses (gains)            | 1,535,920                  | -           | 1,535,920       
|Investment
    income                    | 1,769                      | -           | 1,769           
|                                         |                            |             |                 
|Loss
    before income taxes             | (1,317,173)                | -           | (1,317,173)     
|                                         |                            |             |                 
|Income
    tax expense - current         | 62,824                     | -           | 62,824          
|-     deferred                           | (1,142,118)                | -           | (1,142,118)     
|                                         |                            |             |                 
|Net
    income for the year              | $        237,879           | -           | $        237,879





| | 23. | Net
                                         Investment in Foreign Operation
| | --- | ----------------------------------------------------------------------------



For
the years ended September 30, 2015 and prior, the Company recognized any foreign exchange gains and losses on its intercompany
loans in other comprehensive income as it considered these amounts as part of its net investment in a foreign operation. These
intercompany loans have since been started to be repaid and as such the Company expects that going forward they will be settled.
Accordingly, these loans no longer met the definition of a net investment in a foreign operation under IAS 21 during the year
ended September 30, 2016. Thus, any foreign exchange gains and losses on these loans recorded during the year ended September
30, 2016 and beyond will be recorded through net income (loss). Any historical amounts ($9,822,703 accumulated gain) recorded
will be recycled out of AOCI on the disposal of the foreign operations.