Unaudited Financial Statements

REPORT OF THE CHAIRMAN On behalf of your directors I present the Annual Report of the directors for Promisia Integrative Limited and its subsidiaries ("the group") for the year ended 31 December 2018. Group Results The loss for the year was significant at $2,208,000 compared with a loss of $876,000 in the previous year, due largely to the Medsafe Alert which: o caused an immediate collapse of Arthrem sales in New Zealand, o overshadowed and reduced significantly the impact of the launch of Arthrem in Australia o had a very negative impact on the launch of Artevite in New Zealand Significant expenditure had been incurred, especially television advertising, for the launch of both Arthrem in Australia and Artevite in New Zealand. It had been the Company's expectation that this expenditure would be recovered from product sales over the course of the year but that outcome did not eventuate. Take up of both products was affected by adverse publicity surrounding the Medsafe Alert. Total sales for the year were $727,000 compared with $2,332,000 in the previous year. This was a reduction of 69%. The directors were unsure about the effect of the Medsafe Alert and adopted a policy of reducing expenditure to save cash. This proved to be the correct course as the level of committed expenditure did not allow sufficient leeway for error. Medsafe Alert As noted in the 2017 Annual Report and subsequent communications with shareholders, the Medsafe Alert of February 2018 had a dramatic negative effect on the sale of Arthrem in New Zealand. Initially sales fell by 90% and, while some recovery has been noted, the rise in sales has been limited. The directors have noted previously their concerns about the accuracy of the reports of adverse reactions as reported to the Centre for Adverse Reaction Monitoring (CARM) and the lack of investigation by both CARM and Medsafe to confirm the accuracy of the information reported to CARM. It is clear that in a number of the reported adverse reactions the offending product was unlikely to have been Arthrem due to the dose size and number of capsules taken daily. These are likely to have been competing products that have subsequently been withdrawn from sale in pharmacies. We have pointed out these anomalies to Medsafe but there is has been little interest in ensuring that the reports are accurate. This is, in our view, a major failing of the CARM reporting system and its use as a basis for Medsafe to issue Alerts. In December 2018 Medsafe issued an updated Alert. It is the company's view that at least 15 of the total 25 adverse reactions reported to date relate to the competitors' products. It is worth repeating that the recommended dose for Arthrem is one 150mg capsule twice daily, usually morning and night. All competing products had a recommended dose of a single 300mg capsule daily. It is the company's view that the double dose in a single capsule is responsible for most of the reported adverse reactions. Medsafe Prosecution In late January 2019 Medsafe commenced a prosecution of the company in the District Court alleging 9 breaches of the Medicines Act 1981. Two of the charges relate to the alleged sale of an unlicensed medicine, being Arthrem. The company has always maintained that Arthrem is a dietary supplement, not a medicine. The remaining charges relate to the promotion of Arthrem on the company's websites and is based on the assumption that Arthrem is an unlicensed medicine. The company notes that all its marketing and advertising material was submitted for review to the Therapeutic Goods Advertising Pre-Vetting Service (TAPS) before being published and it received a TAPS Approval Number that is displayed on every item. The directors are unable to comment in more detail as this matter is now before the Courts. The directors have retained senior counsel and will defend the charges. The outcome of this action is likely to have a significant impact on the natural products sector in New Zealand. New Zealand Arthrem has retained the support of most pharmacies and continues to sell, however consumer confidence has been shaken by the Medsafe Alerts. Very little advertising and marketing support for Arthrem was undertaken post the Medsafe Alert and sales have suffered accordingly. In view of the Medsafe prosecution no additional expenditure will be incurred in New Zealand until the matter has been resolved. In the meantime Arthrem remains available in pharmacies and online. The release of two new products has been deferred until the Medsafe issues have been resolved. Australia The launch of Arthrem in New South Wales in February 2018 coincided with the Medsafe Alert. Sales were affected as pharmacies were reluctant to recommend Arthrem. The combination of a lack of revenue from the New Zealand market and the need to conserve cash meant that there was little additional marketing expenditure following the launch publicity. Nevertheless, Arthrem is now stocked throughout Australia in approximately 600 pharmacies, mainly in most of the major pharmacy groups, and is also available online. Sales have been lower than expected due to the lack of marketing and advertising support. The situation will be reviewed in 2019. The company has ensured that pharmacy staff in Australia are aware of the need to question potential Arthrem customers prior to selling them Arthrem to ensure that those customers do not have any liver related conditions or are not taking medicines that may have an adverse impact on the liver. Arthrem has a different legal status in Australia that is not available in New Zealand and allows more definite advertising claims to be used. Medsafe has the view that Promisia may be in breach of the Medicines Act to refer to this status by name in New Zealand. Artevite The launch of Artevite in New Zealand in early 2018 was also affected by the Medsafe Alert. Sales have been considerably lower than expected and have suffered from the lack of advertising after the initial launch. The product has a shelf life and creative measures are being taken to get the product into the hands of dog owners to build market share without incurring significant expenditure. Capital Raising The capital raising in January 2018 provided the cash to fund the launch of Arthrem in Australia and Artevite in New Zealand and enabled the company to survive following the Medsafe Alert. Despite a severe reduction in expenditure, particularly in marketing and advertising costs, the company required financial support in order to remain in business. The company was fortunate to receive the significant financial support from Brankin Trust, an entity associated with Tom Brankin, one of the company's directors. Total advances from Brankin Trust were $800,000 by year end and these advances were converted into equity in the rights issue held in December 2018. On behalf of the directors and all shareholders I wish to thank Brankin Trust and Mr Tom Brankin for their ongoing support of the company. Without this support the company would have had to stop trading. The December rights issue was supported by a number of shareholders and the directors thank them for their support. The compliance requirements, and associated costs, for smaller capital raisings are high and make raising capital an expensive exercise for smaller companies. Current Priorities The outcome of the Medsafe prosecution will have a significant influence on the direction of the company in 2019 and beyond. The future of Arthrem and the proposed new products, particularly in New Zealand, is dependent on an acceptable outcome to the prosecution. As noted previously, it will also have a significant effect on the non-medicine sector of the health market, particularly natural products. The directors are not prepared to commit any significant expenditure in New Zealand until the position is clarified. A revised strategy is being developed for Australia. Other markets for Artemisia products are also being investigated. The company will not need to grow an Artemisia crop in Tanzania this year as it has sufficient extract and dried leaf on hand to satisfy foreseeable requirements. The last year has been one of the most trying in the company's recent history. Directors and shareholders look forward to a more productive 2019. Shareholders will be kept informed of progress as it occurs over the next few months. Stephen Underwood Chairman End CA:00331362 For:PIL Type:FLLYR Time:2019-03-01 14:15:22