Exhibit 99.2













Merus Labs International Inc.



Annual Report 2015





For the Years Ended September 30, 2015 and 2014






































Report of Independent Registered Public Accounting Firm








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



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, 2015 and 2014, and the consolidated statements of operations, consolidated statements of comprehensive
income (loss), statements of changes in equity and consolidated statements of cash flows for the years ended September 30, 2015
and 2014, and a summary of significant accounting policies and other explanatory information.



Management’s Responsibility for Consolidated Financial
Statements



Management is responsible for the preparation
and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board, and for such internal control as management determines 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 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 auditor’s 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 evaluation of 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 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, 2015 and 2014 and their financial performance and their cash flows for the years ended September 30, 2015 and
2014 in accordance with International Financial Reporting Standards.



Emphasis of Matter



Without modifying our opinion, we draw
attention to Note 21 to the consolidated financial statements, which explains that the consolidated financial statements for the
year ended September 30, 2014 have been restated from those which we originally reported on December 18, 2014.





|                 |                                   
|---------------- | ----------------------------------
|                 |                                   
|December 3, 2015 | Chartered Professional Accountants
|Toronto, Ontario | 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:                                   |  |             |  | September 30 |             |   | September 30         |  
|---------------------------------------- |  | ----------- |  | ------------ | ----------- | - | -------------------- | -
|                                         |  |             |  | 2015         |             |   | 2014                 |  
|                                         |  |             |  |              |             |   | (restated - note 21) |  
|                                         |  |             |  |              |             |   |                      |  
|Assets                                   |  |             |  |              |             |   |                      |  
|                                         |  |             |  |              |             |   |                      |  
|Current assets                           |  |             |  |              |             |   |                      |  
|Cash and cash equivalents                |  | note 2      |  | $            | 40,987,177  |   |                      | $
|Short-term investments                   |  |             |  |              | 3,234       |   |                      |  
|Trade and other receivables              |  | note 4      |  |              | 14,202,624  |   |                      |  
|Inventories                              |  | note 5      |  |              | 6,799,805   |   |                      |  
|Derivative assets                        |  | note 6      |  |              | -           |   |                      |  
|Prepaid expenses                         |  |             |  |              | 332,274     |   |                      |  
|                                         |  |             |  |              | 62,325,114  |   |                      |  
|Non-current assets                       |  |             |  |              |             |   |                      |  
|Property and equipment                   |  | note 7      |  |              | 119,205     |   |                      |  
|Intangible assets                        |  | note 3, 8   |  |              | 201,539,290 |   |                      |  
|Total assets                             |  |             |  | $            | 263,983,609 |   |                      | $
|                                         |  |             |  |              |             |   |                      |  
|Liabilities and Equity                   |  |             |  |              |             |   |                      |  
|                                         |  |             |  |              |             |   |                      |  
|Current liabilities                      |  |             |  |              |             |   |                      |  
|Accounts payable and accrued liabilities |  |             |  |              | 8,314,307   |   |                      |  
|Income taxes payable                     |  |             |  |              | 1,150,791   |   |                      |  
|Derivative liabilities                   |  | note 6      |  |              | 893,666     |   |                      |  
|Long term debt due within one year       |  | note 10     |  |              | 15,463,595  |   |                      |  
|                                         |  |             |  |              | 25,822,359  |   |                      |  
|Non-current liabilities                  |  |             |  |              |             |   |                      |  
|Provisions                               |  | note 9      |  |              | 167,656     |   |                      |  
|Long term debt                           |  | note 10     |  |              | 47,248,414  |   |                      |  
|Preferred shares                         |  | note 12, 21 |  |              | 9,947,730   |   |                      |  
|Total liabilities                        |  |             |  |              | 83,186,159  |   |                      |  
|                                         |  |             |  |              |             |   |                      |  
|Equity                                   |  |             |  |              |             |   |                      |  
|Share capital                            |  | note 11     |  |              | 184,534,553 |   |                      |  
|Equity reserve                           |  | note 11     |  |              | 37,215,779  |   |                      |  
|Accumulated deficit                      |  |             |  |              | (61,271,614 | ) |                      |  
|Accumulated other comprehensive income   |  | note 13     |  |              | 20,318,732  |   |                      |  
|Total equity                             |  |             |  |              | 180,797,450 |   |                      |  
|Total liabilities and equity             |  |             |  | $            | 263,983,609 |   |                      | $



Commitments and contingencies (note 14)



|Approved on behalf of the Board: |              
|-------------------------------- | -------------
|(signed)                         | (signed)     
|Tim Sorensen,                    | Dave Guebert,
|Director                         | 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)      



|                                                               |  |                 |  | Years ended September 30 |           
|-------------------------------------------------------------- |  | --------------- |  | ------------------------ | ----------
|                                                               |  |                 |  | 2015                     |           
|                                                               |  |                 |  |                          |           
|                                                               |  |                 |  |                          |           
|Revenues                                                       |  |                 |  | $                        | 48,958,425
|Cost of goods sold                                             |  | note 5          |  |                          | 7,535,124 
|Gross margin                                                   |  |                 |  |                          | 41,423,301
|                                                               |  |                 |  |                          |           
|Operating expenses:                                            |  |                 |  |                          |           
|Sales and marketing                                            |  |                 |  |                          | 926,758   
|General and administrative                                     |  | note 11, 14, 15 |  |                          | 10,395,089
|Amortization of intangible assets                              |  | note 8          |  |                          | 25,184,970
|Depreciation                                                   |  | note 7          |  |                          | 15,591    
|Intangible assets impairment charge                            |  | note 8          |  |                          | -         
|Foreign exchange gains                                         |  |                 |  |                          | (1,294,980
|                                                               |  |                 |  |                          | 35,227,428
|                                                               |  |                 |  |                          |           
|Operating income (loss)                                        |  |                 |  |                          | 6,195,873 
|                                                               |  |                 |  |                          |           
|Interest expense, net                                          |  |                 |  |                          | 5,975,357 
|Derivative losses (gains)                                      |  | note 6, 10      |  |                          | 1,535,920 
|Investment expense                                             |  |                 |  |                          | 1,769     
|                                                               |  |                 |  |                          |           
|Loss before income taxes                                       |  |                 |  |                          | (1,317,173
|                                                               |  |                 |  |                          |           
|Income tax expense (recovery)     - current                    |  | note 16         |  |                          | 62,824    
|- deferred                                                     |  |                 |  |                          | (1,142,118
|                                                               |  |                 |  |                          |           
|Net loss for the year                                          |  |                 |  | $                        | (237,879  
|                                                               |  |                 |  |                          |           
|Loss per share                                                 |  |                 |  |                          |           
|Basic                                                          |  | note 17         |  | $                        | -         
|Diluted                                                        |  | note 17         |  | $                        | -         
|                                                               |  |                 |  |                          |           
|Weighted average number of common shares outstanding - basic   |  |                 |  |                          | 90,060,403
|Weighted average number of common shares outstanding - diluted |  |                 |  |                          | 90,060,403



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)                       



|                                          |  | Years ended September 30 |           
|----------------------------------------- |  | ------------------------ | ----------
|                                          |  | 2015                     |           
|                                          |  |                          |           
|Net loss for the year                     |  | $                        | (237,879  
|                                          |  |                          |           
|Other comprehensive income                |  |                          |           
|Items that may be reclassified to income: |  |                          |           
|Currency translation differences          |  |                          | 14,680,745
|Deferred tax expense                      |  |                          | (1,142,118
|                                          |  |                          |           
|Other comprehensive income for the year   |  |                          | 13,538,627
|                                          |  |                          |           
|Total comprehensive income (loss)         |  | $                        | 13,300,748



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 |            
|-------------------------------------------------------- |  | ------------------------ | -----------
|                                                         |  | 2015                     |            
|                                                         |  |                          |            
|Operating activities                                     |  |                          |            
|                                                         |  |                          |            
|Net loss for the year                                    |  | $                        | (237,879   
|                                                         |  |                          |            
|Adjustments for the following items:                     |  |                          |            
|Amortization of intangible assets                        |  |                          | 25,184,970 
|Depreciation                                             |  |                          | 15,591     
|Impairment of intangible assets                          |  |                          | -          
|Interest expense                                         |  |                          | 5,975,357  
|Income tax (recovery) expense                            |  |                          | (1,079,294 
|Unrealized losses (gains) on foreign exchange            |  |                          | 2,582,780  
|Share-based compensation                                 |  |                          | 2,512,459  
|Writedown of investments                                 |  |                          | -          
|Change in fair value of derivative financial instruments |  |                          | 1,163,365  
|Interest paid                                            |  |                          | (5,323,743 
|                                                         |  |                          |            
|Net change in non-cash working capital balances:         |  |                          |            
|Provisions                                               |  |                          | (163,133   
|Trade and other receivables                              |  |                          | (10,130,320
|Prepaid expenses                                         |  |                          | (203,993   
|Inventories                                              |  |                          | (4,193,237 
|Accounts payable and accrued liabilities                 |  |                          | 4,145,212  
|Income taxes payable                                     |  |                          | 102,194    
|Net cash provided by operating activities                |  |                          | 20,350,329 
|                                                         |  |                          |            
|Financing activities                                     |  |                          |            
|Proceeds from debt issuance, net of issuance costs       |  |                          | -          
|Repayment of long-term debt                              |  |                          | (16,000,000
|Proceeds from prospectus offering                        |  |                          | 59,562,323 
|Proceeds from issuance of preferred shares, net          |  |                          | -          
|Proceeds from exercise of stock options                  |  |                          | 733,665    
|Net cash provided by financing activities                |  |                          | 44,295,988 
|                                                         |  |                          |            
|Investing activities:                                    |  |                          |            
|Product acquisitions                                     |  |                          | (36,439,154
|Capitalized development costs                            |  |                          | (1,580,321 
|Cash acquired on acquisition                             |  |                          | -          
|Short-term investments                                   |  |                          | 1,768      
|Loan receivable repayments                               |  |                          | -          
|Purchase of property and equipment                       |  |                          | -          
|Net cash used in investing activities                    |  |                          | (38,017,707
|                                                         |  |                          |            
|Net change in cash and cash equivalents                  |  |                          | 26,628,610 
|                                                         |  |                          |            
|Cash and cash equivalents, beginning of year             |  |                          | 14,358,567 
|                                                         |  |                          |            
|Cash and cash equivalents, end of
    year               |  | $                        | 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 |   |            | Convertible debt - equity component |  |   | Accumulated deficit |   |  | Accumulated other comprehensive income (AOCI) |             |   | Total equity |  
|------------------------------------------ |  | ------------- | ----------- | - | -------------- | - | ---------- | ----------------------------------- |  | - | ------------------- | - |  | --------------------------------------------- | ----------- | - | ------------ | -
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Balance, September 30, 2013                |  | $             | 56,014,232  |   |                | $ | 33,881,330 |                                     |  | $ | 1,313,550           |   |  | $                                             | (52,972,037 | ) |              | $
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Share-based compensation (note 11)         |  |               | -           |   |                |   | 1,251,584  |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Prospectus offering (note 11)              |  |               | 50,846,979  |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Acquisition (note 11)                      |  |               | 6,807,162   |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Issuance of preferred shares (note 12)     |  |               | -           |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Conversion of convertible debt (notes 11)  |  |               | 10,140,598  |   |                |   | -          |                                     |  |   | (1,313,550          | ) |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Net loss for the year                      |  |               | -           |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | (8,061,698  | ) |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Other comprehensive income                 |  |               | -           |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Balance, September 30, 2014                |  | $             | 123,808,971 |   |                | $ | 35,132,914 |                                     |  | $ | -                   |   |  | $                                             | (61,033,735 | ) |              | $
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Balance, September 30, 2014                |  | $             | 123,808,971 |   |                | $ | 35,132,914 |                                     |  | $ | -                   |   |  | $                                             | (61,033,735 | ) |              | $
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Prospectus offering (note 13)              |  |               | 59,562,323  |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Share-based compensation (note 11)         |  |               | -           |   |                |   | 2,512,459  |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Cancellation of shares in escrow (note 11) |  |               | (68,333     | ) |                |   | 68,333     |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Stock option exercise (note 11)            |  |               | 1,231,592   |   |                |   | (497,927   | )                                   |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Net loss for the year                      |  |               | -           |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | (237,879    | ) |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Other comprehensive income                 |  |               | -           |   |                |   | -          |                                     |  |   | -                   |   |  |                                               | -           |   |              |  
|                                           |  |               |             |   |                |   |            |                                     |  |   |                     |   |  |                                               |             |   |              |  
|Balance, September 30, 2015                |  | $             | 184,534,553 |   |                | $ | 37,215,779 |                                     |  | $ | -                   |   |  | $                                             | (61,271,614 | ) |              | $



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










|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | 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 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. 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 3, 2015.





| | 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, 2015 and 2014:



|Company                      |  | September 30
    
    2015 % ownership |       |  | September
                                         30
                                         2014 % ownership |  |       | Jurisdiction of 
    incorporation
|---------------------------- |  | -------------------------------------- | ----- |  | --------------------------------------------------------------------------------------------------------------- |  | ----- | ----------------------------------
|                             |  |                                        |       |  |                                                                                                                 |  |       |                                   
|Merus Labs Luxco S.a R.L.    |  |                                        | 100.0 |  |                                                                                                                 |  | 100.0 |                                   
|Merus Labs Luxco II S.a R.L. |  |                                        | 100.0 |  |                                                                                                                 |  | n/a   |                                   
|Merus Pharma Inc.            |  |                                        | 100.0 |  |                                                                                                                 |  | n/a   |                                   
|Merus Labs Netherlands BV    |  |                                        | 100.0 |  |                                                                                                                 |  | 100.0 |                                   
|ECG Holdings (US) Inc.       |  |                                        | 100.0 |  |                                                                                                                 |  | 100.0 |                                   














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (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 Salagen, Estraderm, and Sintrom 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; and
| | - | --------------------------------------------------------------------------------------------------

| | · | the
                                         valuation of warrants and share-based compensation expense
| | - | -------------------------------------------------------------------------------------------------------












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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, 2015. 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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014





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.



At the end of each reporting
period, the Company reviews property, plant and equipment and intangible assets for indicators of impairment. 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, 2015, no indicators of impairment were identified.



During the fourth quarter of
2014, the Company’s Vancocin and Enablex intangible assets exhibited indicators of impairment, requiring the Company to
assess these intangible assets for impairment. The Company carried out a review of the recoverable amount of the assets of each
of its cash generating units (“CGUs”), which are defined at the product line level (Vancocin and Enablex). The carrying
values of the CGUs at the impairment evaluation date of September 30, 2014 are included below:



|                   |  | Enablex |            |  | Vancocin |  
|------------------ |  | ------- | ---------- |  | -------- | -
|                   |  |         |            |  |          |  
|September 30, 2014 |  | $       | 56,351,000 |  |          | $



The recoverable amount was calculated
based on the CGUs’ fair value less costs to sell, determined using a discounted cash flow model. The assumptions in the
discounted cash flow model that have the greatest estimation uncertainty include forecasted revenue and the discount rate which
was based on the factors specific to each CGU, including risks inherent in the discounted cash flow models. The rates applied
were as follows:












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



|Vancocin |  |  | 13 | %
|-------- |  |  | -- | -
|Enablex  |  |  | 15 | %



As a result of the review, the
Company concluded that an impairment loss of approximately $4,212,000 was required for Vancocin, but no impairment loss was required
for Enablex.



| | (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 on property, equipment,
and 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
    equipment | 3 – 5 years                      
|- | ------------------------------------- | ---------------------------------
|· | Leasehold improvements                | Over the term of the lease       
|· | Product rights                        | 2 – 10 years                     
|· | Product patents                       | Remaining economic life of patent
|· | Manufacturing equipment               | 5 – 10 years                     



During the year ended September
30, 2015, the useful lives were considered reasonable.



| | (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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (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 results 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            
|-------------------------------------------- |  | ---------------------------------
|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
|Long term debt                               |  | Other financial liability        



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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (iii) | Other financial
                                         liabilities
| | ----- | --------------------------------------------------------------------



Other financial
liabilities (including debt and trade and other payables) 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, 2015 and 2014.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014





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



Cash includes demand deposits
with financial institutions of $40,987,177 and $14,358,567, at September 30, 2015 and 2014, 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, 2015 and 2014, respectively. Interest earned on cash and cash equivalents was $813 and $46,781, for the
years ended September 30, 2015 and 2014, 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 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 and amortized on a straight-line basis over their estimated useful life of 2 to 10 years. 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 depreciation 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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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 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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (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), the Company entered into a transition services and supply agreement 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.
The Company relied on the financial information provided by Novartis to estimate the amounts due under this agreement. 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 to Salagen and Estraderm on a net basis in the statement of operations, net of cost of goods
and marketing and selling expenses.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014





In connection with its acquisition
of Sintrom (note 3), the Company entered into a transition services and supply agreement with the vendor (Novartis Pharma AG,
or “Novartis”) to facilitate the seamless and efficient transfer of the product to the Company. The agreement required
that Novartis continue to manufacture, 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.
The Company relied on the financial information provided by Novartis to estimate the amounts due under this agreement. 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 to Sintrom on a net basis in the statement of operations, net of cost of goods and marketing
and selling expenses. During September 2015, the marketing authorization and commercial operations for Sintrom in Spain were transferred
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 Sintrom in Spain as opposed to an agent. As such, revenues for the sale of Sintrom in Spain made by the Company 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. 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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (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 earnings per share is equal to the basic earnings 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
| | --- | -------------------------------



During the period ended September
30, 2015 the following new or amended standards were issued and are effective for annual periods beginning on or after January
1, 2014 (October 1, 2014 for the Company), unless otherwise noted.



Accounting standards implemented
during the period ended September 30, 2015:



| | · | On
                                         October 1, 2014, the Company adopted the amendment to IAS 32, Financial Instruments:
                                         presentation ("IAS 32"). The amendment clarifies the meaning of 'currently
                                         has a legally enforceable right to set-off'. There was no impact to the consolidated
                                         Financial Statements as a result of adopting this standard.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                         October 1, 2014, the Company adopted the amendment to IAS 36, Impairment of Assets("IAS 36"). The amendment reduces the circumstances in which the recoverable
                                         amount of assets or cash-generating units are required to be disclosed, clarifies the
                                         disclosures required, and introduces an explicit requirement to disclose the discount
                                         rate used in determining impairment. The impact to the consolidated Financial Statements
                                         as a result of adopting this standard resulted in additional disclosures in notes 2 and
                                         8 of the consolidated financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                         October 1, 2014, the Company adopted the amendment to IAS 39, Financial Instruments:
                                         recognition ("IAS 39"). The amendment clarifies that there is no need to discontinue
                                         hedge accounting if a hedging derivative is novated, provided certain criteria are met.
                                         A novation indicates an event where the original parties to a derivative agree that one
                                         or more clearing counterparties replace their original counterparty to become the new
                                         counterparty to each of the parties. There was no impact to the consolidated Financial
                                         Statements as a result of adopting this standard.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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 | 



Sintrom



On
September 8, 2014, the Company acquired the European rights to manufacture, market, and sell the branded prescription medicine
product Sintrom.



Pursuant
to the acquisition, the Company acquired the Sintrom product rights, certain related intellectual property, and other information
and materials required to continue marketing and selling the brand in the territories acquired. Total consideration for the product
acquisition was US$111,000,000. Approximately US$53,000,000 of the upfront cash payment was funded through a new $80,000,000 debt
facility from a syndicate of Canadian commercial lenders, with the remainder funded from cash on hand (note 10). The transaction
was accounted for as an acquisition of assets.



Costs
incurred to complete the acquisition were approximately $157,000, which were capitalized to the cost of the assets acquired. The
fair value of the acquired identifiable net assets was $121,512,827 (US$111,000,000 plus transaction costs) and was allocated
as follows:



|                    |  |   |            
|------------------- |  | - | -----------
|Product rights      |  | $ | 121,512,827
|                    |  |   |            
|Net assets acquired |  | $ | 121,512,827












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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



|                                      |  | September
                                         30 2015 |            |  | September 30
    2014 |  
|------------------------------------- |  | ---------------------------------------------------------- | ---------- |  | --------------------- | -
|                                      |  |                                                            |            |  |                       |  
|Trade receivables                     |  | $                                                          | 13,645,981 |  |                       | $
|Less: provision for doubtful accounts |  |                                                            | -          |  |                       |  
|Trade receivables – net               |  |                                                            | 13,645,981 |  |                       |  
|Other receivables                     |  |                                                            | 556,643    |  |                       |  
|Trade and other receivables           |  | $                                                          | 14,202,624 |  |                       | $



The
aging analysis of trade receivables is as follows:



|                             |  | September
                                         30 2015 |            |  | September 30
    2014 |  
|---------------------------- |  | ---------------------------------------------------------- | ---------- |  | --------------------- | -
|Current                      |  | $                                                          | 13,307,306 |  |                       | $
|1 to 30 days overdue         |  |                                                            | 279,926    |  |                       |  
|31 to 60 days overdue        |  |                                                            | 6,046      |  |                       |  
|61 to 90 days overdue        |  |                                                            | 52,703     |  |                       |  
|Greater than 90 days overdue |  |                                                            | -          |  |                       |  
|Total trade receivables      |  | $                                                          | 13,645,981 |  |                       | $



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



|                  |  | September
                                         30 2015 |           |  | September 30
    2014 |  
|----------------- |  | ---------------------------------------------------------- | --------- |  | --------------------- | -
|Raw materials     |  | $                                                          | 809,650   |  |                       | $
|Work-in-progress  |  |                                                            | 429,554   |  |                       |  
|Finished goods    |  |                                                            | 5,560,601 |  |                       |  
|Total inventories |  | $                                                          | 6,799,805 |  |                       | $



The amount of inventories expensed
in cost of goods sold during the year ended September 30, 2015 amounted to $6,307,322 (2014: $4,113,374). During the year ended
September 30, 2015, the Company recorded inventory impairments of $88,291 (2014:$52,011)












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | 6. | Derivative financial instruments
| | -- | --------------------------------



|                                                                      |  | September
                                         30 2015 |         |  | September 30 	2014 |  
|--------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------- |  | ------------------ | -
|Assets:                                                               |  |                                                            |         |  |                    |  
|Forward
    foreign exchange contracts                                |  | $                                                          | -       |  |                    | $
|                                                                      |  |                                                            |         |  |                    |  
|Total derivative assets                                               |  | $                                                          | -       |  |                    | $
|                                                                      |  |                                                            |         |  |                    |  
|Liabilities:                                                          |  |                                                            |         |  |                    |  
|Forward foreign exchange contracts                                    |  | $                                                          | 648,326 |  |                    | $
|Interest rate swap                                                    |  |                                                            | 245,340 |  |                    |  
|                                                                      |  |                                                            |         |  |                    |  
|Total
                                         derivative liabilities |  | $                                                          | 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, 2015, the Company had forward foreign exchange contracts outstanding with a
notional principal amount of $23,330,400 (2014: $4,861,370). For the year ended September 30, 2015, losses of $1,238,117 (2014:
gains of $173,052) were recognized in derivative losses (gains) 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 second quarter 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.
At September 30, 2015 the fair value of the interest rate swap contract represented a liability to the Company. For the year ended
September 30, 2015, losses of $245,340 (2014: nil) were recognized in derivative losses (gains) in the statements of operations
in connection with the mark-to-market valuation of this derivative financial instrument.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | 7. | Property and equipment
| | -- | ----------------------



Continuity of property and equipment as at September
30, 2015 was as follows:



|                                                   |  | ComputerEquipment |       |  | Furnitureand Fixtures |   |        | ManufacturingEquipment |  |   | Total   | 
|-------------------------------------------------- |  | ----------------- | ----- |  | --------------------- | - | ------ | ---------------------- |  | - | ------- | 
|Cost at September 30, 2014                         |  | $                 | 2,615 |  |                       | $ | 11,790 |                        |  | $ | 120,758 | 
|Foreign exchange differences                       |  |                   | 147   |  |                       |   | 101    |                        |  |   | 6,808   | 
|                                                   |  |                   |       |  |                       |   |        |                        |  |   |         | 
|Cost at September 30, 2015                         |  | $                 | 2,762 |  |                       | $ | 11,891 |                        |  | $ | 127,566 | 
|                                                   |  |                   |       |  |                       |   |        |                        |  |   |         | 
|Accumulated Depreciation at September 30, 2014     |  | $                 | 1,786 |  |                       | $ | 4,784  |                        |  | $ | -       | 
|Depreciation charge                                |  |                   | 830   |  |                       |   | 2,678  |                        |  |   | 12,083  | 
|Foreign exchange differences                       |  |                   | 146   |  |                       |   | 34     |                        |  |   | 673     | 
|                                                   |  |                   |       |  |                       |   |        |                        |  |   |         | 
|Accumulated Depreciation
    at September 30, 2015 |  | $                 | 2,762 |  |                       | $ | 7,496  |                        |  | $ | 12,756  | 
|                                                   |  |                   |       |  |                       |   |        |                        |  |   |         | 
|Carrying amount at September
    30, 2014          |  | $                 | 829   |  |                       | $ | 7,006  |                        |  | $ | 120,758 | 
|Carrying
    amount at September 30, 2015          |  | $                 | -     |  |                       | $ | 4,395  |                        |  | $ | 114,810 | 



Continuity of property and equipment for the year
ended September 30, 2014 was as follows:



|                                                   |  | ComputerEquipment |       |   | Furnitureand Fixtures |   |        | ManufacturingEquipment |  |   | Total   |  
|-------------------------------------------------- |  | ----------------- | ----- | - | --------------------- | - | ------ | ---------------------- |  | - | ------- | -
|Cost at September 30, 2013                         |  | $                 | 2,572 |   |                       | $ | 11,761 |                        |  | $ | -       |  
|Additions                                          |  |                   | -     |   |                       |   | -      |                        |  |   | 125,408 |  
|Foreign exchange differences                       |  |                   | 43    |   |                       |   | 29     |                        |  |   | (4,650  | )
|                                                   |  |                   |       |   |                       |   |        |                        |  |   |         |  
|Cost at September 30, 2014                         |  | $                 | 2,615 |   |                       | $ | 11,790 |                        |  | $ | 120,758 |  
|                                                   |  |                   |       |   |                       |   |        |                        |  |   |         |  
|Accumulated Amortization at September 30, 2013     |  | $                 | 940   |   |                       | $ | 2,102  |                        |  | $ | -       |  
|Amortization charge                                |  |                   | 862   |   |                       |   | 2,685  |                        |  |   | -       |  
|Foreign exchange differences                       |  |                   | (16   | ) |                       |   | (3     | )                      |  |   | -       |  
|                                                   |  |                   |       |   |                       |   |        |                        |  |   |         |  
|Accumulated Amortization
    at September 30, 2014 |  | $                 | 1,786 |   |                       | $ | 4,784  |                        |  | $ | -       |  
|                                                   |  |                   |       |   |                       |   |        |                        |  |   |         |  
|Carrying amount at September 30, 2013              |  | $                 | 1,631 |   |                       | $ | 9,660  |                        |  | $ | -       |  
|Carrying
    amount at September 30, 2014          |  | $                 | 829   |   |                       | $ | 7,006  |                        |  | $ | 120,758 |  














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | 8. | Intangible assets
| | -- | -----------------



Continuity of intangible assets as at September 30,
2015 was as follows:



|                                                                                        |  | Product
    Rights |             |  | Patents |   |            | Total | 
|--------------------------------------------------------------------------------------- |  | ------------------ | ----------- |  | ------- | - | ---------- | ----- | 
|Cost at September 30, 2014                                                              |  | $                  | 192,808,581 |  |         | $ | 21,961,923 |       | 
|Product acquisitions (note 3)                                                           |  |                    | 36,439,154  |  |         |   | -          |       | 
|Additions arising from internal development                                             |  |                    | 1,580,321   |  |         |   | -          |       | 
|Foreign exchange differences                                                            |  |                    | 13,578,136  |  |         |   | 1,238,297  |       | 
|                                                                                        |  |                    |             |  |         |   |            |       | 
|Cost at September 30,
    2015                                                          |  | $                  | 244,406,192 |  |         | $ | 23,200,220 |       | 
|                                                                                        |  |                    |             |  |         |   |            |       | 
|Accumulated Amortization at September 30, 2014                                          |  | $                  | 27,324,473  |  |         | $ | 10,821,679 |       | 
|Amortization charge                                                                     |  |                    | 20,330,260  |  |         |   | 4,854,710  |       | 
|Foreign exchange differences                                                            |  |                    | 1,824,439   |  |         |   | 911,561    |       | 
|                                                                                        |  |                    |             |  |         |   |            |       | 
|Accumulated
                                         amortization at September 30, 2015 |  | $                  | 49,479,172  |  |         | $ | 16,587,950 |       | 
|                                                                                        |  |                    |             |  |         |   |            |       | 
|Carrying amount at September 30, 2014                                                   |  | $                  | 165,484,108 |  |         | $ | 11,140,244 |       | 
|Carrying
    amount at September 30, 2015                                               |  | $                  | 194,927,020 |  |         | $ | 6,612,270  |       | 



Continuity of intangible assets for the year ended
September 30, 2014 was as follows:



|                                                   |  | Product
    Rights |             |   | Patents |   |            | Total | 
|-------------------------------------------------- |  | ------------------ | ----------- | - | ------- | - | ---------- | ----- | 
|Cost at September 30, 2013                         |  | $                  | 69,890,744  |   |         | $ | 21,600,365 |       | 
|Product acquisitions                               |  |                    | 121,512,827 |   |         |   | -          |       | 
|Additions arising from internal development        |  |                    | 607,971     |   |         |   | -          |       | 
|Foreign exchange differences                       |  |                    | 797,039     |   |         |   | 361,558    |       | 
|                                                   |  |                    |             |   |         |   |            |       | 
|Cost at September 30,
    2014                     |  | $                  | 192,808,581 |   |         | $ | 21,961,923 |       | 
|                                                   |  |                    |             |   |         |   |            |       | 
|Accumulated Amortization at September 30, 2013     |  | $                  | 15,319,674  |   |         | $ | 5,843,295  |       | 
|Amortization charge                                |  |                    | 7,915,136   |   |         |   | 5,068,448  |       | 
|Impairment charge                                  |  |                    | 4,212,441   |   |         |   | -          |       | 
|Foreign exchange differences                       |  |                    | (122,778    | ) |         |   | (90,064    | )     | 
|                                                   |  |                    |             |   |         |   |            |       | 
|Accumulated amortization
    at September 30, 2014 |  | $                  | 27,324,473  |   |         | $ | 10,821,679 |       | 
|                                                   |  |                    |             |   |         |   |            |       | 
|Carrying amount at September
    30, 2013          |  | $                  | 54,571,070  |   |         | $ | 15,757,070 |       | 
|Carrying
    amount at September 30, 2014          |  | $                  | 165,484,108 |   |         | $ | 11,140,244 |       | 














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



Vancocin – Product
Rights



For the year ended September
30, 2014, management identified indicators of impairment with respect to the Vancocin product rights intangible asset as a result
of actual results being lower than expectations due to the entry of a second generic competitor. The recoverable amount of the
product rights was determined based on FVLCTS calculations using a discounted cash flow analysis. These calculations used post-tax
cash flow projections covering a nine-year period plus terminal period based on management’s best estimate of the impact
of a second generic entrant on Vancocin as at September 30, 2014. Cash flows beyond the projection period were extrapolated using
an estimated rate of decline of 15.0%. A post-tax discount rate of 13.0% was applied. Based on this analysis, the carrying amount
of the Vancocin product rights was reduced to its recoverable amount through recognition of an impairment charge at September
30, 2014 of approximately $4,212,000 against the product rights.



Enablex – Product
Rights



For the year ended September
30, 2014, management identified an indicator of impairment with respect to the Enablex product rights intangible asset. Management
became aware of an effort on the part of the Federal Joint Committee (G-BA) of Germany to implement reference pricing (maximum
reimbursable price) for anticholinergic-based OAB products in the market. Germany is the Company’s largest market for Enablex.
The recoverable amount of the product rights was determined based on FVLCTS calculations using a discounted cash flow analysis.
These calculations used post-tax cash flow projections covering a nine-year period plus terminal period based on management’s
best estimate of the impact of reference pricing in Germany. Cash flows beyond the projection period were extrapolated using an
estimated rate of decline of 20.0%. A post-tax discount rate of 15.0% was applied. Based on this analysis, the FVLCTS for Enablex
was found to be greater than its carrying value and no impairment charge was taken.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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



|                                        |  | Year
                                         ended September
                                         30, 2015 |          |   | Twelve months
    ended September 30, 2014 |  
|--------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- | -------- | - | ------------------------------------------ | -
|Balance at beginning of year            |  | $                                                                                                               | 330,789  |   |                                            | $
|Charges                                 |  |                                                                                                                 | 189,227  |   |                                            |  
|Utilization                             |  |                                                                                                                 | (363,409 | ) |                                            |  
|Foreign exchange                        |  |                                                                                                                 | 11,049   |   |                                            |  
|Balance at end of year                  |  | $                                                                                                               | 167,656  |   |                                            | $
|Less: current portion
    of provisions |  |                                                                                                                 | -        |   |                                            |  
|Non-current
    portion of provisions   |  | $                                                                                                               | 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 2015 |            |  | September 30
    2014 |  
|---------------------------------------------------------------------- |  | ---------------------------------------------------------- | ---------- |  | --------------------- | -
|Current                                                                |  |                                                            |            |  |                       |  
|Secured facility, net of unamortized
    transaction costs of $536,405 |  | $                                                          | 15,463,595 |  |                       | $
|                                                                       |  |                                                            |            |  |                       |  
|Total                                                                  |  | $                                                          | 15,463,595 |  |                       | $
|                                                                       |  |                                                            |            |  |                       |  
|Non-Current                                                            |  |                                                            |            |  |                       |  
|                                                                       |  |                                                            |            |  |                       |  
|Secured facility, net of unamortized transaction
    costs of $751,586 |  | $                                                          | 47,248,414 |  |                       | $
|                                                                       |  |                                                            |            |  |                       |  
|Total                                                                  |  | $                                                          | 47,248,414 |  |                       | $



On September
5, 2014, the Company entered into a new secured debt facility with a syndicate of Canadian lenders. The new facility provided
additional funds for the purchase of Sintrom and refinanced the Company's existing senior secured debt at a lower rate and extended
term. The new facility matures September 5, 2019 and provides for an $80 million term loan, currently 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.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



In accordance
with the terms of the loan, during the second quarter 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 facility
is secured by all assets of the Company and contains affirmative and negative covenants including compliance with laws and restrictions
on additional debt, as well as financial covenants such as debt to earnings and fixed charge coverage ratios. The Company was
in compliance with all covenants of the senior secured facility during the year and at September 30, 2015. Finance costs of $1,986,786
were capitalized to the loan balance and will be amortized over the term of the loan.



| | 11. | Share capital
| | --- | -------------



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



Unlimited common shares without
par value.



Issued:



|                                                      |  | Year endedSeptember 30, 2015 |             |   | Year ended
    September 30, 2014 |  
|----------------------------------------------------- |  | ---------------------------- | ----------- | - | --------------------------------- | -
|                                                      |  | Number ofshares              |             |   | Amount                            |  
|Balance, beginning of period                          |  |                              | 81,245,724  |   |                                   | $
|Common shares cancelled pursuant to escrow agreement  |  |                              | (33,333     | ) |                                   |  
|Common shares issued pursuant to prospectus offerings |  |                              | 20,672,750  |   |                                   |  
|Common shares issued on conversion of debenture       |  |                              | -           |   |                                   |  
|Common shares issued pursuant to acquisition          |  |                              | -           |   |                                   |  
|Common shares issued
    pursuant to options exercise |  |                              | 416,500     |   |                                   |  
|Balance, end of period                                |  |                              | 102,301,641 |   |                                   | $



| | (b) | 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.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | (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.



On June 19, 2014, the Company
closed a prospectus offering of 18,400,000 shares, including the underwriter over-allotment option, at a price of $1.70 per share
for gross proceeds of $31,280,000. Proceeds were used for acquisitions and general corporate purposes. Costs of the offering were
approximately $2,017,000.



On March 25, 2014, the Company
closed a prospectus offering of 11,765,000 shares at a price of $1.70 per share for gross proceeds of $20,000,500. Additionally,
on June 30, 2014, the underwriters exercised their over-allotment option on the offering, resulting in an additional issuance
of 1,764,750 shares for gross proceeds of $3,000,075. Proceeds were used for acquisitions and general corporate purposes. Costs
of the offering were approximately $1,416,000.



| | (d) | Conversion
                                         of debenture
| | --- | ----------------------------------------------------------------



| |  | On July 17, 2014, the Company notified
                                         the holder of its convertible debenture that it had achieved the threshold required to
                                         force conversion into common shares as per the terms of the arrangement. As such, the
                                         Company issued 6,677,918 shares in satisfaction of the outstanding principal and accrued
                                         interest to the date of conversion.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Acquisitions
| | --- | ------------



On
August 14, 2014, the Company completed an acquisition agreement with Dacha Strategic Metals Inc. (“Dacha”). The acquisition
agreement provided that Dacha convert its liquid assets into cash and cash equivalents and contribute the proceeds to a new subsidiary.
The purchase price was equal to the total value of the cash held by the newly incorporated subsidiary, being $6,975,001 and was
paid for by the issuance to Dacha of the Company's common shares valued at $1.70 per share, subject to certain purchase price
adjustments. Costs of the acquisition were approximately $168,000.



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



The Company has reserved 10,230,134
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.



In the twelve months ended
September 30, 2015, the Company granted 1,935,000 options (2014: 1,525,000 options) to management, staff and directors, with exercise
prices ranging from 1.69 to 2.92 per share (2014: $1.49 to $1.80 per share). The options have a term of five years and vest over
terms ranging from one to three years.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



The estimated fair value of
the options granted during the year ended September 30, 2015, using the Black-Scholes option pricing model, was $2,233,406 (2014:
$1,633,734). $2,030,479 was expensed in the financial statements during the year ended September 30, 2015 (2014: $1,048,696) relating
to current and prior period grants and has been included in general and administrative expenses in the statement 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 |                                                 
|--------------------------------------------- |  | ----------------------- | ------------------------------------------------
|                                              |  | 2015                    |                                                 
|                                              |  |                         |                                                 
|Weighted-average fair value of options        |  | $                       | 1.15                                            
|                                              |  |                         |                                                 
|Risk-free interest rate                       |  |                         | 1.24                                            
|                                              |  |                         |                                                 
|Volatility of the Company's common shares     |  |                         | 71                                              
|                                              |  |                         |                                                 
|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 share  |  
|                                        |  |           |            |   |                  |  
|Options outstanding, September 30, 2013 |  |           | 2,465,000  |   |                  | $
|                                        |  |           |            |   |                  |  
|Options granted                         |  |           | 1,525,000  |   |                  |  
|Options expired                         |  |           | (200,000   | ) |                  |  
|Options forfeited                       |  |           | (333,333   | ) |                  |  
|Options outstanding, September 30, 2014 |  |           | 3,456,667  |   |                  | $
|                                        |  |           |            |   |                  |  
|Options granted                         |  |           | 1,935,000  |   |                  |  
|Options expired                         |  |           | (1,006,667 | ) |                  |  
|Options forfeited                       |  |           | (150,000   | ) |                  |  
|Options exercised                       |  |           | (416,500   | ) |                  |  
|                                        |  |           |            |   |                  |  
|Options outstanding, September 30, 2015 |  |           | 3,818,500  |   |                  | $












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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





|Exercise
        Price | Number
        Outstanding | Weighted
        Average
        Contractual
        Life | Number
        Exercisable
|---------------------- | -------------------------- | --------------------------------------------------------- | --------------------------
|$ 0.51                 | 8,500                      | 2.62                                                      | 8,500                     
|$ 0.91                 | 150,000                    | 2.77                                                      | 150,000                   
|$ 1.19                 | 50,000                     | 2.27                                                      | 50,000                    
|$ 1.49                 | 75,000                     | 3.26                                                      | 25,000                    
|$ 1.63                 | 200,000                    | 3.99                                                      | 200,000                   
|$ 1.69                 | 200,000                    | 3.78                                                      | 200,000                   
|$ 1.70                 | 75,000                     | 3.56                                                      | 75,000                    
|$ 1.75                 | 1,060,000                  | 4.32                                                      | 530,000                   
|$ 1.80                 | 675,000                    | 3.42                                                      | 450,000                   
|$ 1.88                 | 300,000                    | 4.23                                                      | 150,000                   
|$ 2.00                 | 450,000                    | 0.82                                                      | 450,000                   
|$ 2.02                 | 200,000                    | 1.30                                                      | 200,000                   
|$ 2.73                 | 225,000                    | 4.49                                                      | 75,000                    
|$ 2.92                 | 150,000                    | 4.65                                                      | 5,000                     
|                       | 3,818,500                  |                                                           | 2,613,500                 





(h)
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 year ended September 30, 2015, 90,000 Units (2014: nil) were forfeited in connection with a resignation, while 100,000
new Units (2014: nil) were issued to a new executive, leaving 960,000 Units currently outstanding. Share based compensation expense
in the amount of $481,980 was recognized for the year ended September 30, 2015 (2014: nil) in connection with these grants. The
purpose of the plan is to provide the Company with greater flexibility with respect to equity compensation arrangements.



| | 12. | 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.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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, the Company has restated the statement of financial position at September 30,
2014 to reflect this revised assessment. Dividends paid on the Preferred Shares are included in interest expense in the statement
of operations.



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



|                                     |  | Translation |            |  | Deferred
    Tax |   |            | Total | 
|------------------------------------ |  | ----------- | ---------- |  | ---------------- | - | ---------- | ----- | 
|At September 30, 2013                |  |             | 5,681,546  |  |                  |   | -          |       | 
|Currency translation
    differences |  |             | 1,098,559  |  |                  |   | -          |       | 
|                                     |  |             |            |  |                  |   |            |       | 
|At September 30, 2014                |  |             | 6,780,105  |  |                  |   | -          |       | 
|Deferred taxes                       |  |             |            |  |                  |   | (1,142,118 | )     | 
|Currency translation
    differences |  |             | 14,680,745 |  |                  |   | -          |       | 
|                                     |  |             |            |  |                  |   |            |       | 
|At September 30, 2015                |  | $           | 21,460,850 |  |                  | $ | (1,142,118 | )     | 



| | 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 2015 |         |  | September 30
    2014 |  
|---------------- |  | ---------------------------------------------------------- | ------- |  | --------------------- | -
|Less than 1 year |  | $                                                          | 105,576 |  |                       | $
|1 to 2 years     |  |                                                            | 105,576 |  |                       |  
|2 to 3 years     |  |                                                            | 26,394  |  |                       |  
|3 to 4 years     |  |                                                            | -       |  |                       |  
|Thereafter       |  |                                                            | -       |  |                       |  
|Total            |  | $                                                          | 237,546 |  |                       | $



Lease expense
recognized during the year ended September 30, 2015 was $193,746 (2014: $194,699), which has been included in general and administrative
expenses in the statements of operations.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



(b) Legal proceedings



Notice
of Allegation



In June
2014, Merus received notification from Apotex Inc. that it has filed with Health Canada an Abbreviated New Drug Submission seeking
market approval for a generic version of Enablex for the Canadian marketplace. In connection with this filing, Merus received
Notices of Allegation (“NOAs”) from Apotex against the Company’s Enablex patents listed on the Canadian patent
register which expire in August of 2016 and beyond. The NOAs were issued under the Canada Patented Medicines (Notice of Compliance)
Regulations. Enablex is currently protected in Canada by three issued patents listed on the Canadian patent register.



In March
2015, the Company entered into a settlement agreement with Apotex. The terms of the settlement agreement are confidential but
are not financially material. The Company plans to continue with the marketing of Enablex® to urologists and other medical
practitioners across Canada into the foreseeable future.



Arbitration
Proceeding



In August 2014, Merus received
notice of a request for arbitration from the original owner of Merus’ former Factive product. The request for arbitration
is based on the original license agreement entered into by the original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA,
Inc.). The request for arbitration names Merus as a respondent together with Cornerstone and Vansen. The request for arbitration
includes the allegation that Cornerstone did not have the legal right to transfer the Factive product to Merus. The original owner
is seeking an award for damages relating to an alleged breach of contract, as well as disgorgement of revenues and other benefits
derived by the Company from sales of Factive. The Company is defending the claim and has denied any liability to the original
owner. The Company and Cornerstone have each asserted claims against the other, seeking indemnity and damages related to the original
owner’s claim.



(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.



(d)
Purchase commitments



Pursuant
to the Company’s raw materials supply agreement with a contract manufacturer, the Company is committed to purchasing approximately
$485,000 of product per calendar year from 2016 to 2023.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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



At September 30, 2015 and
2014, 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 |          
|------------------------ |  | ----------------------- | ---------
|                         |  | 2015                    |          
|                         |  |                         |          
|Salaries                 |  | $                       | 1,538,240
|Share based compensation |  |                         | 2,512,459
|                         |  | $                       | 4,050,699



| | 16. | Income taxes
| | --- | ------------



The major components of income
tax (recovery) expense for the period ended September 30, 2015 and 2014 are:



|                                        |  | Year ended September 30 |           
|--------------------------------------- |  | ----------------------- | ----------
|Income tax recognized in profit or loss |  | 2015                    |           
|Current tax                             |  |                         |           
|Current period tax expense              |  | $                       | 62,824    
|                                        |  |                         |           
|Deferred tax:                           |  |                         |           
|Deferred tax expense                    |  |                         | (1,142,118
|Provision for income taxes              |  | $                       | (1,079,294



A reconciliation between income
tax expense and the product of accounting income multiplied by Canada’s domestic tax rate (26.47% for Merus) for the period
ended September 30, 2015 and 2014 is as follows:



|                                                                                                              |  | Year ended September 30 |           
|------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                                              |  | 2015                    |           
|                                                                                                              |  |                         |           
|Income (loss) before recovery of income taxes                                                                 |  | $                       | (1,317,173
|                                                                                                              |  |                         |           
|Income tax expense (benefit) at the statutory income
    tax rate of 26.47% (2014: 26.47%)                    |  |                         | (348,655  
|Non-deductible expenses for tax purposes                                                                      |  |                         | (1,931,523
|Deductible temporary differences and unused tax losses
    not recognized, including impact of change in rate |  |                         | 3,800,179 
|Effect of income taxes recorded at rates different
    from the Canadian tax rate                             |  |                         | (2,599,294
|Other differences                                                                                             |  |                         | -         
|Income tax (recovery) expense                                                                                 |  | $                       | (1,079,294














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



The following table summarizes the components of deferred
tax:



|                                   |  | Year ended September 30 |           
|---------------------------------- |  | ----------------------- | ----------
|                                   |  | 2015                    |           
|Deferred Tax Assets                |  |                         |           
|Non-capital losses carried forward |  | $                       | 1,142,118 
|                                   |  |                         |           
|Deferred Tax Liabilities           |  |                         |           
|Related party debt                 |  |                         | (1,142,118
|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 |  | 2015                    |           
|                                         |  |                         |           
|Balance at the beginning of the year     |  | $                       | -         
|Recognized in profit/loss                |  |                         | (1,142,188
|Recognized in OCI                        |  |                         | 1,142,188 
|                                         |  |                         |           
|Balance at end of the year               |  | $                       | -         



Deferred taxes re 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 |           
|------------------------------------------------ |  | ----------------------- | ----------
|                                                 |  | 2015                    |           
|                                                 |  |                         |           
|Unrecognized deferred tax assets in relation to: |  |                         |           
|                                                 |  |                         |           
|Non-capital losses carried forward               |  | $                       | 28,004,360
|Non-capital losses carried forward - Luxembourg  |  |                         | 7,953,372 
|Net capital losses carried forward               |  |                         | 14,600,695
|Intangible assets                                |  |                         | 7,965,190 
|Share issuance costs                             |  |                         | 6,950,690 
|Long term debt                                   |  |                         | 651,614   
|Property, plant and
    equipment                |  |                         | 1,995     
|                                                 |  | $                       | 66,127,916



Share and debt issue costs
will be fully amortized in 2019. 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.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014





The aggregate amount of temporary
differences associated with investments in subsidiaries, branches, associates and interest in joint arrangements is approximately
$3,731,653. 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         |  |                            |           
|2025 to 2029       |  |                            | 12,744,610
|2030 to 2035       |  |                            | 23,889,280
|Total              |  |                            | 36,633,890





| | 17. | 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 |           
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                             |  |                         | 2015      
|Income (loss)                                                                                |  |                         |           
|Loss attributable to equity holders of
    the Company from continuing operations            |  | $                       | (237,879  
|Income (loss) attributable
    to equity holders of the Company from discontinued operations |  |                         | -         
|Total                                                                                        |  | $                       | (237,879  
|Weighted average number of ordinary
    shares in issue                                      |  |                         | 90,060,403



(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 has two categories of dilutive potential ordinary shares: warrants and stock options. As the Company
recorded a net loss for the years ended September 30, 2015 and 2014, these items were considered anti-dilutive and have therefore
been excluded from the calculation of diluted earnings per share.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



|                                                                                             |  | Year ended September 30 |           
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                             |  | 2015                    |           
|Income (loss)                                                                                |  |                         |           
|Loss attributable to equity holders of
    the Company from continuing operations            |  | $                       | (237,879  
|Income (loss) attributable
    to equity holders of the Company from discontinued operations |  |                         | -         
|Total                                                                                        |  | $                       | (237,879  
|Weighted average number of ordinary shares in issue                                          |  |                         | 90,060,403
|Weighted average number of ordinary
    shares for diluted earnings per share                |  |                         | 90,060,403



| | 18. | Management of capital
| | --- | ---------------------



The Company includes the following
in its definition of capital:



|                     |  | September 30 |             |   | September 30 |  
|-------------------- |  | ------------ | ----------- | - | ------------ | -
|                     |  | 2015         |             |   | 2014         |  
|Debt comprised of:   |  |              |             |   |              |  
|Secured facility     |  | $            | 62,712,009  |   |              | $
|Preferred shares     |  |              | 9,947,730   |   |              |  
|                     |  |              |             |   |              |  
|Equity comprised of: |  |              |             |   |              |  
|Share capital        |  |              | 184,534,553 |   |              |  
|Equity reserve       |  |              | 37,215,779  |   |              |  
|Deficit and AOCI     |  |              | (40,952,882 | ) |              |  
|                     |  | $            | 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
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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 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 has however declared and paid cash dividends to its preferred shareholders. 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.



| | 19. | 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, loan receivable 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 long-term liabilities 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, 2015                        
|------------------------------------------
|Classification                            
|Financial assets and liabilities at FVTPL 
|- Short-term investments                  
|- Derivative liabilities used for hedging 
|Loans and receivables                     
|- Cash and cash equivalents               
|- Trade and other receivables             
|Other financial liabilities               
|- Accounts payable and accrued liabilities
|- Long term debt                          
|- Preferred Shares                        












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



|September 30, 2014                        
|------------------------------------------
|Classification                            
|Financial assets at FVTPL                 
|- Short-term investments                  
|- Derivative assets used for hedging      
|Loans and receivables                     
|- Cash and cash equivalents               
|- Trade and other receivables             
|Other financial liabilities               
|- Accounts payable and accrued liabilities
|- Long term debt                          
|- Preferred Shares                        



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, 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      | 












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



At September 30, 2014, the Company’s
financial assets and liabilities would be classified as follows:



|                       |  |                    |         |  | Significant |   |       | Significant Other |  |   | Significant  | 
|---------------------- |  | ------------------ | ------- |  | ----------- | - | ----- | ----------------- |  | - | ------------ | 
|                       |  |                    |         |  | Observable  |   |       | Observable        |  |   | Unobservable | 
|                       |  |                    |         |  | Inputs      |   |       | Inputs            |  |   | Inputs       | 
|                       |  | September 30, 2014 |         |  | (Level 1)   |   |       | (Level 2)         |  |   | (Level 3)    | 
|                       |  |                    |         |  |             |   |       |                   |  |   |              | 
|Assets:                |  |                    |         |  |             |   |       |                   |  |   |              | 
|Short-term investments |  | $                  | 5,002   |  |             | $ | 5,002 |                   |  | $ | -            | 
|Derivative assets      |  |                    | 269,699 |  |             |   | -     |                   |  |   | 269,699      | 
|                       |  | $                  | 274,701 |  |             | $ | 5,002 |                   |  | $ | 269,699      | 
|                       |  |                    |         |  |             |   |       |                   |  |   |              | 
|Liabilities:           |  |                    |         |  |             |   |       |                   |  |   |              | 
|N/A                    |  | $                  | -       |  |             | $ | -     |                   |  | $ | -            | 
|                       |  | $                  | -       |  |             | $ | -     |                   |  | $ | -            | 



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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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, 2015                          |  | 2016                    |           
|Debt                                           |  | $                       | 16,000,000
|Accounts payable and       accrued liabilities |  |                         | 8,314,308 
|Income taxes payable                           |  |                         | 1,460,249 
|Total                                          |  | $                       | 25,774,557



|                                               |  | Year ended September 30 |           
|---------------------------------------------- |  | ----------------------- | ----------
|At September 30, 2014                          |  | 2015                    |           
|Debt                                           |  | $                       | 16,000,000
|Accounts payable and       accrued liabilities |  |                         | 4,169,095 
|Income taxes payable                           |  |                         | 997,102   
|Total                                          |  | $                       | 21,166,197



| | (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 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 3.












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



The following financial assets
and liabilities were denominated in foreign currencies at September 30, 2015 (U.S. dollar 1.3345, Euro 1.4951) and September 30,
2014 (U.S. dollar 1.1200, Euro 1.4153):



|                                         |  | September
                                         30 2015 |            |   | September 30
    2014 | 
|---------------------------------------- |  | ---------------------------------------------------------- | ---------- | - | --------------------- | 
|Denominated in U.S. dollars              |  |                                                            |            |   |                       | 
|Cash and cash equivalents                |  |                                                            | 13,206,260 |   |                       | 
|Trade and other receivables              |  |                                                            | 6,685,246  |   |                       | 
|Accounts payable and accrued liabilities |  |                                                            | (2,112,871 | ) |                       | 
|Net assets denominated in U.S. dollars   |  |                                                            | 17,778,635 |   |                       | 
|                                         |  |                                                            |            |   |                       | 
|Denominated in Euros                     |  |                                                            |            |   |                       | 
|Cash and cash equivalents                |  |                                                            | 13,294,546 |   |                       | 
|Trade and other receivables              |  |                                                            | 5,107,363  |   |                       | 
|Accounts payable and accrued liabilities |  |                                                            | (4,148,804 | ) |                       | 
|Income taxes payable                     |  |                                                            | (1,150,791 | ) |                       | 
|Net assets denominated in Euros          |  |                                                            | 13,102,314 |   |                       | 
|                                         |  |                                                            |            |   |                       | 



The following table shows the
estimated sensitivity of the Company’s total comprehensive loss for the year ended September 30, 2015 from a change in foreign
currencies with all other variables held constant as at September 30, 2015:



|                     |  | Change in net after-tax |         |  | Change in net after-tax |  
|-------------------- |  | ----------------------- | ------- |  | ----------------------- | -
|Percentage change in |  | loss from % increase    |         |  | loss from % decrease    |  
|foreign currencies   |  | in foreign currencies   |         |  | in foreign currencies   |  
|                     |  |                         |         |  |                         |  
|2%                   |  | $                       | 139,187 |  |                         | $
|4%                   |  |                         | 278,374 |  |                         |  
|6%                   |  |                         | 417,561 |  |                         |  
|8%                   |  |                         | 556,748 |  |                         |  
|10%                  |  |                         | 695,935 |  |                         |  



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



Certain of
the Company’s financial assets, including cash and cash equivalents and short-term investments, and accounts receivable
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.














|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



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



Interest
risk is the impact that changes in interest rates could have on the Company’s earnings and liabilities. The Company is exposed
to variable interest rates as a result of its senior secured debt, which currently bears interest at the Canadian BA rate plus
4.5%. The Company's exposure to interest rate movements is limited through facilities under its credit agreement, whereby 50%
of the loan value has been fixed through an interest rate swap through maturity. It is management’s opinion that the Company
is not exposed to significant interest rate risk. At September 30, 2015, the Company held no interest-bearing investments.



| | 20. | 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 |           
|------------- |  | ----------------------- | ----------
|              |  | 2015                    |           
|Canada        |  | $                       | 6,593,171 
|International |  |                         | 42,365,254
|              |  | $                       | 48,958,425



Other than Canada, the Company
derived more than 10% of its revenues in the year ended September 30, 2015 or year ended September 30, 2014 period from Germany,
Spain, Netherlands and the UK. Revenues in Germany of $11,750,229 (2014: $4,707,240), Spain of $9,325,727 (2014: 544,543), Netherlands
of $2,419,652 (2014: $3,325,481) and UK of $4,407,362 (2014: $2,688,366) 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 |  
|---------- |  | ------------ | ----------- |  | ------------ | -
|           |  | 2015         |             |  | 2014         |  
|Canada     |  | $            | 2,979,402   |  |              | $
|Luxembourg |  |              | 198,679,093 |  |              |  
|           |  | $            | 201,658,495 |  |              | $












|Merus
    Labs International Inc.              
|-----------------------------------------------
|Notes to Consolidated Financial Statements     
|(Expressed
    in Canadian dollars)            
|                                               
|For the years ended September 30, 2015 and 2014



| | 21. | Prior period adjustment and reclassification
| | --- | --------------------------------------------



During the year ended September
30, 2014, the Company issued $10,000,000 of Series A convertible preferred shares (see note 12). The preferred shares pay a dividend
of 8% per annum, subject to adjustments after October 31, 2019 as described in note 12. The preferred shares were originally treated
as a component of equity. Due to the non-discretionary nature of the dividends, it was determined that the entire instrument should
have been treated as a liability. Accordingly, the fair value of the instrument at inception should be recorded as a liability.
Any dividends declared should be recorded through profit and loss. The comparatives of the prior period have been adjusted to
reflect this as follows:



|As at and for the year ended 
September 30, 2014 |  | As previously reported |           |  | Adjustment |   |            | As restated | 
|------------------------------------------------ |  | ---------------------- | --------- |  | ---------- | - | ---------- | ----------- | 
|                                                 |  |                        |           |  |            |   |            |             | 
|Statement of Financial Position:                 |  |                        |           |  |            |   |            |             | 
|Preferred shares – non-current liability         |  | $                      | -         |  |            | $ | 9,947,730  |             | 
|Preferred shares – equity                        |  |                        | 9,947,730 |  |            |   | (9,947,730 | )           | 



Additionally, certain amounts
have been reclassified from foreign exchange gains to derivative losses (gains) in the prior year to conform with current year
presentation.