Outstanding

Notes to Consolidated Financial Statements
December 31, 2009
[In thousands of Canadian dollars except share and per share amounts]
1. Governing Statute and Nature of Operations
Paladin Labs Inc. is a specialty pharmaceutical public company continued under the Canada Business Corporations Act, focused on
developing, acquiring, in-licensing, marketing and distributing innovative pharmaceutical products. Paladin Labs Inc., together with
its subsidiaries, is hereinafter referred to as the “Company”.
2. Basis of Presentation and Significant Accounting Policies
Basis of presentation
The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally
accepted accounting principles [“GAAP”].
Basis of consolidation
The consolidated financial statements include the accounts of the Company and all its subsidiaries, including the acquisition of
Isotechnika Inc. as of June 18, 2009 and ViRexx Medical Corp. as of December 23, 2008, the effective dates of these acquisitions
[described in more detail in Note 13]. Any intercompany transactions and balances have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Paladin’s critical accounting estimates
include revenue recognition, inventory valuation, the recording of research and development expenses and related tax credits, the
useful lives and fair value of intangible assets, stock-based compensation expense, income taxes and the determination of fair value
of financial instruments. Actual results could differ from those estimates, and such differences could be material.
Cash and cash equivalents
Cash consists of bank deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of change in value, and consist primarily of banker’s acceptances with
initial maturities of three months or less.
Marketable securities
Marketable securities are classified as “Available-for-sale” and are initially measured at fair value with any resulting subsequent
changes in the fair value being charged or credited to other comprehensive income and when ultimately sold, to net income. Fair
values for marketable securities are obtained using quoted active market prices for such securities.
Inventory
Inventory is valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value. The cost of finished goods
and work-in-progress includes direct costs and an allocation of overhead. Net realizable value is determined to be the selling price
in the ordinary course of business less applicable selling expenses.
Notes to Consolidated Financial Statements —39