PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND REVIEW REPORT OF INDEPENDENT ACCOUNTANTS MARCH 31, 2018 AND 2017

Transcription

1 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND REVIEW REPORT OF INDEPENDENT ACCOUNTANTS MARCH 31, 2018 AND 2017 For the convenience of readers and for information purpose only, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. In the event of any discrepancy between the English version and the original Chinese version or any differences in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. ~1~

2 REPORT ON REVIEW OF FINANCIAL STATEMENTS TRANSLATED FROM CHINESE To the Board of Directors and Stockholders of PharmaEngine, Inc. Introduction We have reviewed the accompanying consolidated balance sheets of PharmaEngine, Inc. and its subsidiary (the Group ) as at March 31, 2018 and 2017, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for the three-month periods then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34, Interim Financial Reporting as endorsed by the Financial Supervisory Commission. Our responsibility is to express a conclusion on these consolidated financial statements based on our reviews. Scope of Review We conducted our reviews in accordance with the Statement of Auditing Standards No. 65 Review of Financial Information Performed by the Independent Auditor of the Entity in the Republic of China. A review of consolidated financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. ~2~

3 Conclusion Based on our reviews, nothing has come to our attention that causes us to believe that the accompanying consolidated financial statements do not present fairly, in all material respects, the consolidated financial position of the Group as at March 31, 2018 and 2017, and of its consolidated financial performance and its consolidated cash flows for the three-month periods then ended in accordance with Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34, Interim Financial Reporting as endorsed by the Financial Supervisory Commission. Teng, Sheng-Wei Audrey Tseng For and on behalf of PricewaterhouseCoopers, Taiwan May 2, 2018 The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the review of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying financial statements and review report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice. As the financial statements are the responsibility of the management, PricewaterhouseCoopers cannot accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation. ~3~

4 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2018, DECEMBER 31, 2017 AND MARCH (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) (THE CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2018 AND 2017 ARE REVIEWED, NOT AUDITED) Current assets March 31, 2018 December 31, 2017 March 31, 2017 Assets Notes Amount % Amount % Amount % 1100 Cash and cash equivalents 6(1) $ 133,300 4 $ 575, $ 1,786, Accounts receivable, net 6(2) and 12(4) 10, , , Other receivables 18, ,259-16, Current income tax assets 2, X Inventories 6(3) 11,466-16,154-9, Prepayments 1,386-1,066-2, Other current financial assets 6(4) 3,817, ,702, ,970, Other current assets XX Total current assets 3,996, ,071, ,794, Non-current assets 1600 Property, plant and equipment, net 6(5) 6,738-7,410-9, Intangible assets Deferred income tax assets 45, , , Other non-current assets 6(6) 3,808-3,805-3,787-15XX Total non-current assets 56, , , XXX Total assets $ 4,053, $ 4,110, $ 3,830, (Continued) ~4~

5 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2018, DECEMBER 31, 2017 AND MARCH (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) (THE CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2018 AND 2017 ARE REVIEWED, NOT AUDITED) March 31, 2018 December 31, 2017 March 31, 2017 Liabilities and Equity Notes Amount % Amount % Amount % Current liabilities 2150 Notes payable $ $ $ Other payables 6(7) 59, , , Current tax liabilities 126, , , Other current liabilities 697-4,531-1,052-21XX Total current liabilities 186, , , XXX Total liabilities 186, , ,544 4 Share capital 6(10) 3110 Common stock 1,471, ,471, ,225, Capital surplus 6(11) 3200 Additional paid-in capital 1,624, ,619, ,788, Retained earnings 6(12) 3310 Legal reserve 120, , , Special reserve Unappropriated retained earnings 649, , , Other equity interest 3400 Other equity interest ( 75 ) - ( 108 ) - ( 320 ) - 3XXX Total equity 3,866, ,911, ,689, Significant contingent liabilities and 9 unrecognized contract commitments 3X2X Total liabilities and equity $ 4,053, $ 4,110, $ 3,830, The accompanying notes are an integral part of these consolidated financial statements. ~5~

6 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR LOSS PER SHARE DATA) (REVIEWED, NOT AUDITED) Three months ended March Items Notes Amount % Amount % 4000 Operating revenue 6(13) and 12(5) $ 33, $ 10, Operating costs 6(3)(14)(17)(18) ( 3,242) ( 10 )( 452) ( 4) 5900 Gross profit 30, , Operating expenses 6(17)(18) 6100 Selling expenses ( 6,402) ( 19 )( 5,780) ( 53) 6200 General and administrative expenses ( 19,376) ( 57 )( 14,570) ( 133) 6300 Research and development expenses ( 33,899) ( 100 )( 27,037) ( 247) 6000 Total operating expenses ( 59,677) ( 176 )( 47,387) ( 433) 6900 Operating loss ( 29,112) ( 86 )( 36,889) ( 337) Non-operating income and expenses 7010 Other income 6(15) 16, , Other gains and losses 6(16) ( 54,764) ( 162 )( 124,507) ( 1137) 7000 Total non-operating income and expenses ( 37,903) ( 112 )( 113,821) ( 1039) 7900 Loss before income tax ( 67,015) ( 198 )( 150,710) ( 1376) 7950 Income tax benefit 6(19) 17, , Loss for the period ( $ 49,145 ) ( 145 )( $ 125,515 ) ( 1146 ) Other comprehensive income (loss), net Components of other comprehensive income (loss) that will be reclassified to profit or loss (after tax) 8361 Exchange differences on translation $ 33 - ( $ 25 ) Other comprehensive income (loss) for the period, net $ 33 - ( $ 25 ) Total comprehensive loss for the period ( $ 49,112 ) ( 145 )( $ 125,540 ) ( 1146 ) Loss attributable to: 8610 Owners of the parent ( $ 49,145 ) ( 145 )( $ 125,515 ) ( 1146 ) Comprehensive loss attributable to: 8710 Owners of the parent ( $ 49,112 ) ( 145 )( $ 125,540 ) ( 1146 ) Loss per share 6(20) 9750 Basic loss per share ( $ 0.33 )( $ 0.85 ) 9850 Diluted loss per share ( $ 0.33 )( $ 0.85 ) The accompanying notes are an integral part of these consolidated financial statements. ~6~

7 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) (REVIEWED, NOT AUDITED) Equity attributable to owners of the parent Capital surplus Retained earnings Other equity interest Notes Common stock Additional paid-in capital Capital surplustreasury shares Capital surplusemployee stock options Legal reserve Special reserve Unappropriated retained earnings Exchange difference on translation of foreign financial statements Total equity Three months ended March 31, 2017 Balance at January 1, 2017 $ 1,224,592 $ 1,682,975 $ 26,197 $ 64,698 $ 51,761 $ - $ 748,850 ($ 295 ) $ 3,798,778 Amortization of compensation cost of employee stock options Exercise of employee stock options converted to shares 6(9) 6(9)(10) , ,467 1,240 16,760 - ( 6,674 ) ,326 Expired employee stock options ( 823 ) Loss after income tax for the three months ended March 31, (12) ( 125,515 ) - ( 125,515 ) Other comprehensive loss ( 25 ) ( 25 ) Total comprehensive loss ( 125,515 ) ( 25 ) ( 125,540 ) Balance at March 31, 2017 $ 1,225,832 $ 1,700,558 $ 26,197 $ 61,668 $ 51,761 $ - $ 623,335 ( $ 320 ) $ 3,689,031 Three months ended March 31, 2018 Balance at January 1, 2018 $ 1,471,288 $ 1,521,717 $ 26,197 $ 72,013 $ 120,723 $ 295 $ 698,907 ( $ 108 ) $ 3,911,032 Effect of retrospective application ( 229 ) - ( 229 ) Equity at beginning of period after adjustments 1,471,288 1,521,717 26,197 72, , ,678 ( 108 ) 3,910,803 Amortization of compensation cost of employee stock options Exercise of employee stock options converted to shares Loss after income tax for the three months ended March 31, (9) 6(9)(10) 6(12) , , ,610 - ( 465 ) , ( 49,145 ) - ( 49,145 ) Other comprehensive income Total comprehensive loss ( 49,145 ) 33 ( 49,112 ) Balance at March 31, 2018 $ 1,471,538 $ 1,523,327 $ 26,197 $ 75,414 $ 120,723 $ 295 $ 649,533 ( $ 75 ) $ 3,866,952 The accompanying notes are an integral part of these consolidated financial statements ~7~

8 PHARMAENGINE, INC. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) (REVIEWED, NOT AUDITED) Three months ended March 31, Notes Cash flows from operating activities Loss before income tax for the period ($ 67,015 ) ($ 150,710 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Adjustments to reconcile profit (loss) Depreciation 6(17) Amortization 6(17) Amortization of compensation cost of employee stock options 6(9) 3,866 4,467 Interest income 6(15) ( 13,017 ) ( 10,685 ) Changes in assets/liabilities relating to operating activities Net changes in assets relating to operating activities Accounts receivable, net 752,840 ( 3,714 ) Other receivables Current income tax assets ( 2,818 ) ( 180 ) Inventories 4, Prepayments ( 320 ) ( 351 ) Other current assets 591 ( 70 ) Net changes in liabilities relating to operating activities Notes payable ( 290 ) ( 67 ) Other payables ( 9,301 ) ( 8,481 ) Other current liabilities ( 3,834 ) 54 Cash provided by (used in) operations 666,461 ( 167,486 ) Interest received 5,333 3,591 Net cash provided by (used in) operating activities 671,794 ( 163,895 ) Cash flows from investing activities Increase in other current financial assets ( 1,585,403 ) - Decrease in other current financial assets 470,131 97,134 Acquisition of property, plant and equipment 6(5) - ( 36 ) (Increase) decrease in other non-current assets ( 3 ) 1,170 Net cash (used in) provided by investing activities ( 1,115,275 ) 98,268 Cash flows from financing activities Employees stock options exercised 1,395 11,326 Net cash provided by financing activities 1,395 11,326 Effect of exchanges rate changes 22 ( 29 ) Net decrease in cash and cash equivalents ( 442,064 ) ( 54,330 ) Cash and cash equivalents at beginning of period 575,364 1,841,117 Cash and cash equivalents at end of period $ 133,300 $ 1,786,787 The accompanying notes are an integral part of these consolidated financial statements. ~8~

9 PHARMAENGINE, INC. AND ITS SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT AS OTHERWISE INDICATED) (REVIEWED, NOT AUDITED) 1. HISTORY AND ORGANIZATION PharmaEngine, Inc. (the Company ) was incorporated as a company limited by shares under the provisions of the Company Act of the Republic of China (R.O.C.) in August On September 18, 2012, the Company s common stock was officially listed on the GreTai Securities Market. The Company and its subsidiary (collectively referred herein as the Group ) are primarily engaged in the development of new medicine and therapeutic drugs for cancer. The Company focuses on building effective corporate governance structure to enhance the Board of Directors function, to maximize audit committees function and improve management s principles and communication. Information transparency, stakeholders interest and social responsibility are enhanced to ensure the shareholders equity interest. The Company has received a Certificate of Corporate Governance System CG6009 General Assessment issued by the Taiwan Corporate Governance Association on September 30, THE DATE OF AUTHORIZATION FOR ISSUANCE OF THE CONSOLIDATED FINANCIAL STATEMENTS AND PROCEDURES FOR AUTHORIZATION These consolidated financial statements were reported to the Board of Directors on May 2, APPLICATION OF NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS (1) Effect of the adoption of new issuances of or amendments to International Financial Reporting Standards ( IFRS ) as endorsed by the Financial Supervisory Commission ( FSC ) New standards, interpretations and amendments as endorsed by the FSC effective from 2018 are as follows: Effective date by International Accounting New Standards, Interpretations and Amendments Standards Board Amendments to IFRS 2, Classification and measurement of sharebased payment transactions January 1, 2018 Amendments to IFRS 4, Applying IFRS 9, Financial instruments January 1, 2018 with IFRS 4, Insurance contracts IFRS 9, Financial instruments January 1, 2018 IFRS 15, Revenue from contracts with customers January 1, 2018 Amendments to IFRS 15, Clarifications to IFRS 15, Revenue from January 1, 2018 contracts with customers Amendments to IAS 7, Disclosure initiative January 1, 2017 Amendments to IAS 12, Recognition of deferred tax assets for January 1, 2017 unrealized losses Amendments to IAS 40, Transfers of investment property January 1, 2018 ~9~

10 New Standards, Interpretations and Amendments IFRIC 22, Foreign currency transactions and advance consideration Annual improvements to IFRSs cycle-amendments to IFRS 1, First-time adoption of International Financial Reporting Standards Annual improvements to IFRSs cycle-amendments to IFRS 12, Disclosure of interests in other entities Annual improvements to IFRSs cycle-amendments to IAS 28, Investments in associates and joint ventures Effective date by International Accounting Standards Board January 1, 2018 January 1, 2018 January 1, 2017 January 1, 2018 Except for the following, the above standards and interpretations have no significant impact to the Group s financial condition and financial performance based on the Group s assessment. A. IFRS 9, Financial instruments (a) Classification of debt instruments is driven by the entity s business model and the contractual cash flow characteristics of the financial assets, which would be classified as financial asset at fair value through profit or loss, financial asset measured at fair value through other comprehensive income or financial asset measured at amortized cost. Equity instruments would be classified as financial asset at fair value through profit or loss, unless an entity makes an irrevocable election at inception to present subsequent changes in the fair value of an investment in an equity instrument that is not held for trading in other comprehensive income. (b) The impairment losses of debt instruments are assessed using an expected credit loss approach. An entity assesses at each balance sheet date whether there has been a significant increase in credit risk on that instrument since initial recognition to recognize 12-month expected credit losses or lifetime expected credit losses (interest revenue would be calculated on the gross carrying amount of the asset before impairment losses occurred); or if the instrument that has objective evidence of impairment, interest revenue after the impairment would be calculated on the book value of net carrying amount (i.e. net of credit allowance). The Company shall always measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables that do not contain a significant financing component. (c) In adopting the new standards endorsed by the FSC effective from 2018, the Group applied the new rules under IFRS 9 retrospectively from January 1, 2018, with the practical expedients permitted under the statement. Further, the Group has elected to adopt IFRS9 using the modified retrospective approach. The significant effects of applying the standards as of January 1, 2018 are summarized below: ~10~

11 Consolidated balance sheet 2017 version Effect of adoption of 2018 version Affected items IFRSs amount new standards IFRSs amount January 1, 2018 Accounts receivable $ - ($ 229) ($ 229) Total affected assets $ - ($ 229) ($ 229) Retained earnings $ - ($ 229) ($ 229) Total affected equity - ( 229) ( 229) Total affected liabilities and equity $ - ($ 229) ($ 229) In line with the regulations of IFRS 9 on provision for impairment, accounts receivable was reduced by $229 and retained earnings decreased by $229. (d) Please refer to Note 12(4) for disclosure in relation to the first application of IFRS 9. (2) Effect of new issuances of or amendments to IFRSs as endorsed by the FSC but not yet adopted by the Group None. (3) IFRSs issued by IASB but not yet endorsed by the FSC New standards, interpretations and amendments issued by IASB but not yet included in the IFRSs as endorsed by the FSC are as follows: New Standards, Interpretations and Amendments Amendments to IFRS 9, Prepayment features with negative compensation Amendments to IFRS 10 and IAS 28, Sale or contribution of assets between an investor and its associate or joint venture Effective date by International Accounting Standards Board January 1, 2019 To be determined by International Accounting Standards Board IFRS 16, Leases January 1, 2019 IFRS 17, Insurance contracts January 1, 2021 Amendments to IAS 19, Plan amendment, curtailment or January 1, 2019 settlement Amendments to IAS 28, Long-term interests in associates and joint January 1, 2019 ventures IFRIC 23, Uncertainty over income tax treatments January 1, 2019 Annual improvements to IFRSs cycle January 1, 2019 Except for the following, the above standards and interpretations have no significant impact to the Group s financial condition and financial performance based on the Group s assessment. The quantitative impact will be disclosed when the assessment is complete. IFRS 16, Leases IFRS 16, Leases, replaces IAS 17, Leases and related interpretations and SICs. The standard requires lessees to recognize a 'right-of-use asset' and a lease liability (except for those leases ~11~

12 with terms of 12 months or less and leases of low-value assets). The accounting stays the same for lessors, which is to classify their leases as either finance leases or operating leases and account for those two types of leases differently. IFRS 16 only requires enhanced disclosures to be provided by lessors. The Group will adopt the simple modified retrospective transitional provisions of IFRS 16 Lease, and classify the effects on the lease contract of lessee to January 1, 2019 in accordance with IFRS 16. In the first quarter of 2018, the Group reported to the Board of Directors that IFRS 16 has no material impact to the Group. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted are consistent with Note 4 in the consolidated financial statements for the year ended December 31, 2017, except for the compliance statement, basis of preparation, basis of consolidation and additional policies as set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (1) Compliance statement A. The consolidated financial statements of the Group have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Accounting Standard 34, Interim financial reporting as endorsed by the FSC. B. These consolidated financial statements are to be read in conjunction with the consolidated financial statements for the year ended December 31, (2) Basis of preparation A. The consolidated financial statements have been prepared under the historical cost convention. B. The preparation of financial statements in conformity with International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC Interpretations as endorsed by the FSC (collectively referred herein as the IFRSs ) requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5. C. In adopting IFRS 9 and IFRS 15 effective January 1, 2018, the Group has elected to apply modified retrospective approach whereby the cumulative impact of the adoption was recognized as retained earnings as of January 1, 2018 and the financial statements for the year ended December 31, 2017 and the first quarter of 2017 were not restated. The financial statements for the year ended December 31, 2017 and the first quarter of 2017 were prepared in compliance with International Accounting Standard 39 ( IAS 39 ), International ~12~

13 Accounting Standard 11 ( IAS 11 ), International Accounting Standard 18 ( IAS 18 ) and related financial reporting interpretations. Please refer to Notes 12(4) and (5) for details of significant accounting policies. (3) Basis of consolidation A. Basis for preparation of consolidated financial statements: The basis for preparation of consolidated financial statements are consistent with those of the year ended December 31, B. Subsidiaries included in the consolidated financial statements: Name of Name of investor subsidiary PharmaEngine, Inc. PharmaEngine Europe SARL Main business activities Development and promotion of new drugs Ownership (%) March 31, December 31, March 31, Note C. Subsidiaries not included in the consolidated financial statements: None. D. Adjustments for subsidiaries with different balance sheet dates: None. E. Significant restrictions: None. F. Subsidiaries that have non-controlling interests that are material to the Group: None. (4) Accounts receivable A. Accounts and notes receivable entitle the Group a legal right to receive consideration in exchange for transferred goods or rendered services. B. The short-term accounts and notes receivable without bearing interest are subsequently measured at initial invoice amount as the effect of discounting is immaterial. (5) Impairment of financial assets For financial assets at amortized cost, at each reporting date, the Group recognizes the impairment provision for 12 months expected credit losses if there has not been a significant increase in credit risk since initial recognition or recognizes the impairment provision for the lifetime expected credit losses (ECLs) if such credit risk has increased since initial recognition after taking into consideration all reasonable and verifiable information that includes forecasts. On the other hand, for accounts receivable or contract assets that do not contain a significant financing component, the Group recognizes the impairment provision for lifetime ECLs. (6) Revenue recognition A. Sales of goods The Group sells new medicine. Revenue from the sale of goods is recognized when the Group sells a product to the customer. ~13~

14 B. Revenue from licensing intellectual property (a) The Group entered into a contract with a customer to grant a license of development and sale of new medicine. Given the license is distinct from other promised goods or services in the contract, the Group recognizes the revenue from licensing when the license is transferred to a customer either at a point in time or over time based on the nature of the license granted. The nature of granting a license is a promise to provide a right to access the Group s intellectual property, if the Group undertakes activities that significantly affect the development and sale of new medicine to which the customer has rights, the customer is affected by the Group s activities and those activities do not result in the transfer of a good or a service to the customer as they occur. Then, the royalties are recognized as revenue on a straight-line basis throughout the licensing period. In case the abovementioned conditions are not met, the nature of the Group s promise in granting a license is a promise to provide a right to use the Group s intellectual property and therefore the revenue is recognized when the license is transferred to a customer at a point in time. (b) Some contracts require a sales-based royalty in exchange for a license of development and sale of new medicine. The Group recognizes revenue when the performance obligation has been satisfied and the subsequent sale occurs. C. Financing components The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. (7) Income tax A. The tax expense for the period comprises current and deferred tax. Tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or items recognized directly in equity, in which cases the tax is recognized in other comprehensive income or equity. B. The current income tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiary operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in accordance with applicable tax regulations. It establishes provisions where appropriate based on the amounts expected to be paid to the tax authorities. An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve to retain the earnings. ~14~

15 C. Deferred tax is recognized, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. D. Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. At each balance sheet date, unrecognized and recognized deferred tax assets are reassessed. E. Current income tax assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. F. The interim period income tax expense is recognized based on the estimated average annual effective income tax rate expected for the full financial year applied to the pre-tax income of the interim period, and the related information is disclosed accordingly. G. If a change in tax rate is enacted or substantively enacted in an interim period, the Group recognizes the effect of the change immediately in the interim period in which the change occurs. The effect of the change on items recognized outside profit or loss is recognized in other comprehensive income or equity while the effect of the change on items recognized in profit or loss is recognised in profit or loss. 5. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND KEY SOURCES OF ASSUMPTION UNCERTAINTY There was no significant change as of March 31, Please refer to Note 5 in the consolidated financial statements for the year ended December 31, DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and cash equivalents March 31, 2018 December 31, 2017 March 31, 2017 Cash on hand and revolving funds $ 200 $ 200 $ 200 Checking accounts and demand deposits (including foreign currency) 133, , ,664 Time deposits (including foreign currency) - 461,505 1,575,923 $ 133,300 $ 575,364 $ 1,786,787 A. The Group transacts with a variety of financial institutions all with high credit quality to disperse credit risk, so it expects that the probability of counterparty default is remote. B. The Group has no cash and cash equivalents pledged to others. ~15~

16 (2) Accounts receivable March 31, 2018 Accounts receivable $ 11,058 Less: Loss allowance for bad debts ( 229) $ 10,829 A. The Group has no accounts receivable pledged to others as collateral. B. The ageing analysis of accounts receivable that were past due but not impaired is as follows: March 31, 2018 Without past due $ 11,058 The above ageing analysis was based on past due date. C. For details of the significant accounts as of December 31, 2017 and March 31, 2017, please refer to Note 12(4). D. Information relating to credit risk is provided in Note 12(2). (3) Inventories March 31, 2018 Cost Allowance for valuation loss Book value Goods $ 13,957 ($ 2,491) $ 11,466 December 31, 2017 Cost Allowance for valuation loss Book value Goods $ 16,154 $ - $ 16,154 March 31, 2017 Cost Allowance for valuation loss Book value Goods $ 9,665 $ - $ 9,665 The cost of inventories recognized as expense for the period: Three months ended March 31, Cost of goods sold $ 751 $ 452 Loss on decline in market value 2,491 - $ 3,242 $ 452 (4) Other financial assets Item March 31, 2018 December 31, 2017 March 31, 2017 Current item: Other current financial assets - time deposits $ 3,817,933 $ 2,702,661 $ 1,970,597 The Group has no other current financial assets pledged to others. ~16~

17 (5) Property, plant and equipment Computer and communication equipment At January 1, 2018 Testing equipment Office equipment Leasehold improvements Cost $ 1,349 $ 180 $ 3,046 $ 9,621 $ 14,196 Accumulated depreciation ( 577) ( 63) ( 1,421) ( 4,725) ( 6,786) $ 772 $ 117 $ 1,625 $ 4,896 $ 7, Opening net book amount $ 772 $ 117 $ 1,625 $ 4,896 $ 7,410 Depreciation charge ( 58) ( 7) ( 124) ( 494) ( 683) Effects of foreign exchange Closing net book amount $ 714 $ 110 $ 1,501 $ 4,413 $ 6,738 At March 31, 2018 Cost $ 1,349 $ 180 $ 3,046 $ 9,637 $ 14,212 Accumulated depreciation ( 635) ( 70) ( 1,545) ( 5,224) ( 7,474) $ 714 $ 110 $ 1,501 $ 4,413 $ 6,738 At January 1, 2017 Computer and communication equipment Testing equipment Office equipment Leasehold improvements Cost $ 1,330 $ 180 $ 3,046 $ 9,599 $ 14,155 Accumulated depreciation ( 438) ( 33) ( 918) ( 2,837) ( 4,226) $ 892 $ 147 $ 2,128 $ 6,762 $ 9, Opening net book amount $ 892 $ 147 $ 2,128 $ 6,762 $ 9,929 Additions Depreciation charge ( 54) ( 8) ( 127) ( 493) ( 682) Effects of foreign exchange Closing net book amount $ 838 $ 139 $ 2,001 $ 6,308 $ 9,286 At March 31, 2017 Cost $ 1,330 $ 180 $ 3,046 $ 9,833 $ 14,389 Accumulated depreciation ( 492) ( 41) ( 1,045) ( 3,525) ( 5,103) $ 838 $ 139 $ 2,001 $ 6,308 $ 9,286 (6) Other non-current assets March 31, 2018 December 31, 2017 March 31, 2017 Refundable deposits $ 3,808 $ 3,805 $ 3,787 Total Total ~17~

18 (7) Other payables March 31, 2018 December 31, 2017 March 31, 2017 Accrued directors and supervisors remuneration and employees compensation $ 32,064 $ 45,536 $ 53,478 Employees salary and bonus payable 15,828 14,589 6,013 Payables for commissioned research 4, Others 6,669 8,395 6,495 $ 59,219 $ 68,520 $ 65,986 (8) Pensions Defined contribution plans A. Effective July 1, 2005, the Company has established a defined contribution pension plan (the New Plan ) under the Labor Pension Act (the Act ), covering all regular employees with R.O.C. nationality. Under the New Plan, the Company contributes monthly an amount based on 6% of the employees monthly salaries and wages to the employees individual pension accounts at the Bureau of Labor Insurance. The benefits accrued are paid monthly or in lump sum upon termination of employment. B. The pension costs under the defined contribution pension plan of the Company for the three months ended March 31, 2018 and 2017 were $522 and $467, respectively. C. The subsidiary, PharmaEngine Europe SARL, was established on November 13, 2015 and had no employee as of March 31, (9) Share-based payment A. For the three months ended March 31, 2018 and 2017, the Company s share-based payment arrangements were as follows: Type of arrangement Third employee stock options plan Fourth employee stock options plan Fifth employee stock options plan Fifth employee stock options plan Fifth employee stock options plan Sixth employee stock options plan Quantity Grant date granted (in thousands) Contract period Vesting conditions years 1.59~3.59 years' service ,150 8 years 2~4 years' service years 2~4 years' service years 2~4 years' service years 2~4 years' service ,000 8 years 2~4 years' service ~18~

19 Type of arrangement Treasury shares transferred to employees Sixth employee stock options plan Quantity Grant date granted (in thousands) Contract period Vesting conditions N/A Vested immediately years 2~4 years' service The abovementioned share-based payment arrangements are equity-settled. B. Details of the share-based payment arrangements are as follows: No. of options Weighted-average exercise price No. of (in dollars) options Weighted-average exercise price (in dollars) Options outstanding at January 1 2,720 $ ,526 $ Options exercised ( 25) ( 124) Options forfeited - - ( 20) Options outstanding at March 31 2, , Options exercisable at March 31 1, Due to capitalization of earnings in 2017, the above weighted-average exercise price had been adjusted. C. The weighted-average stock price of stock options at exercise dates for the three months ended March 31, 2018 and 2017 was $133.5 and $ (in dollars), respectively. D. As of March 31, 2018, December 31, 2017 and March 31, 2017, the range of exercise prices of stock options outstanding were all $10.42~$ (in dollars), and the weighted-average remaining contractual period was 0.76~6.67 years, 1~6.91 years and 1.76~7.37 years, respectively. Exercise prices of stock options had been adjusted due to capitalization of earnings in E. The fair values of the Company s stock options are all measured using the Black-Scholes option-pricing model. Relevant information is as follows: Type of arrangement Third employee stock options plan Fourth employee stock options plan Fifth employee stock options plan Fifth employee stock options plan Fifth employee stock options plan Stock price (in dollars) (Note) Exercise price (in dollars) (Note) Fair value per unit (in dollars) (Note) Expected Expected Expected Risk-free price option dividends interest Grant date volatility life (in dollars) rate $ $ % 8 years $ % 6.06~ % 8 years % 15.26~ % 8 years % % 8 years % % 8 years % ~19~

20 Type of arrangement Sixth employee stock options plan Treasury stock transferred to employees Sixth employee stock options plan Stock price Exercise price Expected Expected Expected Risk-free Fair value per unit (in dollars) (in dollars) price option dividends interest (in dollars) Grant date (Note) (Note) volatility life (in dollars) rate (Note) $ $ % 8 years % $ N/A N/A N/A N/A N/A % 8 years % Note: Due to capitalization of earnings in 2017, exercise price had been adjusted. F. Expenses incurred on share-based payment transactions are shown below: For the three months ended March 31, 2018 and 2017, expenses incurred on share-based payment transactions were accrued at $3,866 and $4,467, respectively. (10) Share capital As of March 31, 2018, the Company s authorized capital was $1,800,000, consisting of 180 million shares of ordinary stock (including 15 million shares reserved for employee stock options), and the paid-in capital was $1,471,538, with a par value of NT$10 (in dollars) per share. All proceeds from shares issued have been collected. Movements in the number of the Company s ordinary shares outstanding are as follows (shares in thousands): At January 1 147, ,459 Employee stock options exercised At March , ,583 (11) Capital surplus A. Pursuant to the R.O.C. Company Act, capital surplus arising from paid-in capital in excess of par value on issuance of common stocks and donations can be used to cover accumulated deficit or to issue new stocks or cash to shareholders in proportion to their share ownership, provided that the Company has no accumulated deficit. Further, the R.O.C. Securities and Exchange Law requires that the amount of capital surplus to be capitalised mentioned above should not exceed 10% of the paid-in capital each year. Capital surplus should not be used to cover accumulated deficit unless the legal reserve is insufficient. Movements in capital surplus additional paid-in capital and employee stock options are provided in the statements of changes in equity. B. Details of distribution of cash and stock dividends from capital surplus-additional paid-in capital as resolved by the Company are provided in Note 6(12) F. ~20~

21 (12) Unappropriated retained earnings At January 1 $ 698,907 $ 748,850 Effects of retrospective application ( 229) - Loss after income tax for the period ( 49,145) ( 125,515) At March 31 $ 649,533 $ 623,335 A. Under the Company s Articles of Incorporation, the current year s earnings, if any, shall first be used to pay all taxes and offset prior years operating losses and then 10% of the remaining amount shall be set aside as legal reserve; if necessary, an amount drawn from the special reserve can be added to the remaining amount. The Board of Directors is authorized to propose the appropriation of the entire or a portion the remainder, if any, as dividends or retained earnings, which shall be approved by the stockholders at the stockholders meeting. B. Except for covering accumulated deficit or issuing new stocks or cash to shareholders in proportion to their share ownership, the legal reserve shall not be used for any other purpose. The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to their share ownership is permitted, provided that the distribution of the reserve is limited to the portion in excess of 25% of the Company s paid-in capital. C. In accordance with the regulations, the Company shall set aside special reserve from the debit balance on other equity items at the balance sheet date before distributing earnings. When debit balance on other equity items is reversed subsequently, the reversed amount could be included in the distributable earnings. D. The appropriations of earnings for 2016 was resolved by the stockholders during their meeting on June 13, Details are summarized below: Year ended December 31, 2016 Dividends per Amount share (in dollars) Legal reserve $ 68,962 $ - Special reserve Cash dividends 245,166 2 Stock dividends 122,583 1 $ 437,006 $ 3 The appropriations of 2016 earnings as resolved by the shareholders were in agreement with the appropriations as resolved by the Board of Directors. E. On June 13, 2017, the stockholders resolved to distribute cash and stock dividends from capital surplus in the amount of $61,292 and $122,583, respectively. The above distributions as resolved by the shareholders were in agreement with the distributions as resolved by the Board of Directors. ~21~

22 F. The appropriations of earnings for 2017 had been proposed by the Board of Directors on March 22, Details are summarized below: Year ended December 31, 2017 Dividends per Amount share (in dollars) Legal reserve $ 38,706 $ - Cash dividends 294,308 2 $ 333,014 $ 2 As of May 2, 2018, the aforementioned proposal for earnings appropriation for the year ended December 31, 2017 has not yet been resolved by stockholders. G. In accordance with the regulations, the Company shall set aside special reserve from the debit balance on other equity items at the balance sheet date before distributing earnings. When debit balance on other equity items is reversed subsequently, the reversed amount could be included in the distributable earnings. The debit balance on other equity items has decreased for the year ended December 31, 2017, therefore $187 was reversed from the special reserve and included in distributable earnings. H. For information on employees compensation and directors and supervisors remuneration, please refer to Note 6(18). (13) Operating revenue Three months ended March 31, 2018 Revenue from contracts with customers $ 33,807 A. Disaggregation of revenue from contracts with customers The Group derives revenue from the transfer of goods and services at a point in time in the following contract categories: Three months ended March 31, 2018 Royalty revenue Sales revenue Total Total segment revenue $ 23,275 $ 10,532 $ 33,807 Revenue from external customer contracts $ 23,275 $ 10,532 $ 33,807 Timing of revenue recognition At a point in time $ 23,275 $ 10,532 $ 33,807 Royalty revenue for the three months ended March 31, 2018 was accrued as the Company was entitled to collect a certain percentage of sales from Merrimack Pharmaceuticals, Inc. from its sales in the European region pursuant to the supplementary agreement of Cooperation Contract in 2011, and Ipsen S.A. has generally assumed all the rights and obligations in relation to the Cooperation Contract since April 3, For the three months ended March 31, 2018, the Company recognized USD795 thousand as royalty revenue, which had been collected. ~22~

23 B. For the three months ended March 31, 2017, related disclosures for operating revenue are provided in Note 12(5) B. (14) Operating costs Three months ended March 31, Cost of sales - Cost of goods sold $ 751 $ 452 Other operating cost 2,491 - $ 3,242 $ 452 (15) Other income Three months ended March 31, Interest income from bank deposits $ 13,017 $ 10,685 Government grants revenue 3,718 - Other income $ 16,861 $ 10,686 (16) Other gains and losses Three months ended March 31, Net currency exchange loss ($ 54,763) ($ 124,506) Others ( 1) ( 1) ($ 54,764) ($ 124,507) (17) Expenses by nature Three months ended March 31, Employee benefit expense $ 26,493 $ 28,918 Depreciation charges on property, plant and equipment $ 683 $ 682 Amortisation charges on intangible assets $ 58 $ 81 (18) Employee benefit expense (All are operating expenses) Three months ended March 31, Wages and salaries $ 19,657 $ 21,941 Employee stock options 3,866 4,467 Labour and health insurance fees 1, Pension costs Other personnel expenses 1,429 1,153 $ 26,493 $ 28,918 A. In accordance with the Articles of Incorporation of the Company, if there are distributable profits of the current year, the Board of Directors shall resolve to allocate between 2% and ~23~

24 8% of profit to employees and an amount to directors which shall not exceed 2% of the profit. However, if the Company has accumulated losses, the distributable profit should cover such losses first, and this should be reported in the stockholders meeting. B. For the three months ended March 31, 2018 and 2017, employees compensation and (19) Income tax directors and supervisors remuneration were both accrued at $0. Employees compensation and directors and supervisors remuneration for 2017 as resolved by the Board of Directors on March 22, 2018 were in agreement with those amounts recognized in the 2017 financial statements. However, employees compensation for 2017 was reduced from $26,720 to $21,376 as resolved by the Board of Directors on May 2, 2018, and the difference had been adjusted in the first quarter of The employees compensation for 2017 has not yet been distributed as of May 2, Information about the appropriation of employees compensation and directors and supervisors remuneration by the Company as proposed by the Board of Directors will be posted in the Market Observation Post System at the website of Taiwan Stock Exchange. A. Income tax expense Components of income tax expense: Three months ended March 31, Current tax: Total current tax $ - $ - Deferred tax: Origination and reversal of temporary differences ( 12,957) ( 25,195) Impact of change in tax rate ( 4,913) - Total deferred tax ( 17,870) ( 25,195) Income tax benefit ($ 17,870) ($ 25,195) B. The Company s income tax returns through 2016 have been assessed and approved by the Tax Authority. C. Under the amendments to the Income Tax Act which was promulgated by the President of the Republic of China in February, 2018, the Company s applicable income tax rate was raised from 17% to 20% effective from January 1, The Group has assessed the impact of the change in income tax rate. ~24~

25 (20) Loss per share Three months ended March 31, 2018 Weighted average number of ordinary shares outstanding (shares in thousands) Earnings per share (in dollars) Amount after tax Basic earnings per share Net loss ($ 49,145) 147,130 ($ 0.33) Diluted earnings per share Net loss ($ 49,145) 147,130 Assumed conversion of all dilutive potential ordinary shares: Employees stock options (Note 1) - - ($ 49,145) 147,130 ($ 0.33) Three months ended March 31, 2017 Weighted average number of ordinary shares outstanding (shares in thousands) Earnings per share (in dollars) Amount after tax Basic earnings per share Net loss ($ 125,515) 146,981 ($ 0.85) Diluted earnings per share Net loss ($ 125,515) 146,981 Assumed conversion of all dilutive potential ordinary shares: Employees stock options (Note 1) - - ($ 125,515) 146,981 ($ 0.85) Note 1: If anti-dilutive effect will arise when adopting treasury stock method, anti-dilutive shares are not included in the computation. Note 2: For the year ended December 31, 2017, the weighted average number of shares outstanding was adjusted to reflect the capitalization of earnings. 7. RELATED PARTY TRANSACTIONS (1) Significant related party transactions For the three months ended March 31, 2018 and 2017, the Group has no significant transactions made with related parties. ~25~

26 (2) Key management compensation Three months ended March 31, Salaries and other short-term employee benefits $ 10,192 $ 7,620 Post-employment benefits Share-based payments PLEDGED ASSETS None. $ 11,040 $ 8, SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED CONTRACT COMMITMENTS The Group s significant commitments as of March 31, 2018 were as follows: (1) The Company has signed a licensing and collaboration contract for NBTXR3 in Asia-Pacific region with Nanobiotix S.A. on August 6, 2012, and promised to pay license fee and a certain percentage of royalties based on the stage of completion and sales of products. The maximum license fee payable is USD56 million. The Company has paid upfront payment of approximately USD1 million, the first milestone payment of USD1 million and the second milestone payment of USD1 million in the third quarter of 2012, fourth quarter of 2014 and second quarter of 2016, respectively. (2) As of March 31, 2018, the Company entered into drug research commissioned contract amounting to $47,172, of which $30,743 had been paid. (3) Operating lease agreements The future aggregate minimum lease payments payable under operating leases are as follows: March 31, 2018 December 31, 2017 March 31, 2017 Not later than one year $ 10,756 $ 11,011 $ 11,696 Later than one year but not later than five years 8,168 10,668 18,891 $ 18,924 $ 21,679 $ 30, SIGNIFICANT DISASTER LOSS None. 11. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE None. 12. OTHERS (1) Capital management There is no significant changes in reporting period. Please refer to Note 12 in the consolidated financial statements for the year ended December 31, ~26~