Microbix Biosystems Inc.
Annual Report 2014

Plain-text annual report

M I C R O B I X B I O S Y S T E M S I N C . ANNUAL REPORT 2014 Microbix has a Virology products business including the manufacturing and sale of cell culture-based biological products, including one of the world’s most expansive sources of Infectious Disease Antigens targeted at the diagnostics market. This platform has led to the development of VIRUSMAX® (a virus yield enhancement technology), and Kinlytic® (a thrombolytic drug), and LumiSort™ a semen sexing technology. These products have been selected based on their near term market potential to provide an above average return on investment. TABLE OF CONTENTS Letter to Shareholders ................................................. Management’s Discussion and Analysis ..................... 1 2 Auditors’ Report ........................................................... 14 Financial Statements ................................................... 16 Message to shareholders In 2014 we continued to build on the transformational changes implemented last year, while we also pursued the successful commercialization of our pipeline products. We experienced extraordinary growth in our Virology Products business driven by a new multi-year commitment from a large European customer. This was a very important vote of confidence in our Company and we responded by expanding our manufacturing capacity; adding a second production shift and investing in new process equipment. As a result, we successfully satisfied all of the new shipment requests, which increased our total virology product sales by 25%. We also carefully controlled our costs during the sexing providing dairy and beef producers with much lower costs and improved productivity. It was an extremely busy year for our VIRUSMAX® franchise. We successfully defended our European patents against a challenge by Novartis Vaccines and Diagnostics in Munich last January. We also launched legal actions against Novartis alleging patent infringement in both the U.S. and Europe. We expect both actions will go to trial in late 2015. In the past year we have met with several parties that are interested in returning Kinlytic® to the U.S., Canadian and European markets. We are now in advanced discussions with a small number of parties, and I am optimistic that we will secure a new Kinlytic® partner in 2015. year helping to improve operating profits to nearly In the past year I have presented Microbix’ $500,000 in 2014. In February, we closed on new financing to develop the LumiSort™ prototype, the first step towards eventually commercializing the LumiSort™ technology platform. This was part of a larger refinancing of our overall debt position with a major debenture holder that helped to strategy to several investment houses in Canada and the U.S. They like our story and they believe our Company is significantly undervalued. Recently our share price reached a 52-week high of $0.90, up from a low of $0.12 last December. I am pleased our shareholders are finally being rewarded for supporting our Company and we improve our balance sheet. This new financing have so much more work to accomplish. arrangement also provided the opportunity to In November, Microbix placed 2nd among 18 replace an earlier, very restrictive agreement with finalists from across the province for the Ontario an animal genetics company, thereby restoring Business Achievement Award for medium-sized our ability to independently decide on future companies, sponsored by the Ontario Chamber of partnering opportunities for Lumisort™. Commerce. We are very proud of this recognition In early March, we started developing the from such a respected organization. LumiSort™ prototype with Lathrop Engineering in On behalf of everyone at Microbix, I extend to California. As we publish our year-end results, we you our best wishes for the coming year. are also announcing completion of the LumiSort™ prototype, the first step in bringing a commercial version of this platform to the global livestock artificial insemination market valued at over $2 billion. LumiSort™ will introduce transformative advantages in speed, yield and fertility to semen 1 Vaughn C. Embro-Pantalony PrEsidEnt and ChiEf ExECutiVE offiCEr Microbix biosysteMs inc.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 The Company prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”) as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). The audited disclosures and values in this MD&A have been prepared using the standards and interpretations currently issued and effective at the end of September 30, 2014. The following analysis is prepared by Management and provides a review of the Company’s results of operations, financial condition and cash flows for the years ended September 30, 2014 and 2013. This analysis should be read in conjunction with the audited consolidated financial statements and related notes for the year ended September 30, 2014. The 2014 Annual Report for the Company and additional information regarding the business of the Company are available on SEDAR at www.sedar.com. Reference to “we”, “us”, “our”, or the “Company” means Microbix Biosystems Inc. unless otherwise stated. All amounts are presented in Canadian dollars unless otherwise stated. Statements contained herein, which are not historical facts, are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth or implied. These forward-looking statements involve risks and uncertainties, including the difficulty in predicting product approvals, acceptance of and demand for new products, the impact of the products and pricing strategies of competitors, delays in developing and launching new products, regulatory enforcement, changes in operating results and other risks, some or any of which could make the results differ materially from those discussed or implied in the forward-looking statements. The Company disclaims any intent or obligation to update these forward looking statements. This Management Discussion and Analysis is dated December 19, 2014. COMPANY OVERVIEW Microbix Biosystems Inc. (Microbix or the Company) (TSX: MBX) develops biological products and technologies. The Virology Business (Virology) manufactures and develops cell culture-based biological products and technologies. The Company has developed and acquired three technologies for large life sciences markets including Virus Yield Enhancement Technology, Virusmax®, the thrombolytic drug Kinlytic® (Urokinase), and an animal reproductive technology in development, LumiSort™. The development of new products and technologies are funded with income earned from Virology and additional cash flows from equity and debt issuance. Microbix has substantial capability, both in technical expertise and laboratory facilities for development. Microbix is providing materials for diagnoses of infectious diseases. The same expertise and competencies involved are applicable to developing materials to facilitate treatment. The Company continually invests in Virology to adopt current technologies and standards, upgrading capabilities to support its customers. Revenue generated from Virology is used to meet operational costs, the development program and to service the Company’s debt. The Virology Business is expected to continue to generate a profit, part of which will be invested in the development pipeline. The Company may seek additional capital needed to maintain its current level of investment in the development pipeline. If necessary, management and the Board of Directors have the discretion to reduce or suspend investment in development depending on the cash/liquidity needs of the Company. The Company operates the Virology Business in its owned manufacturing facility at 265 Watline Avenue, Mississauga, Ontario. The manufacturing facility operates under an infectious diseases biological license from the Canadian Food Inspection Agency. 2 Microbix biosysteMs inc.FINANCIAL OVERVIEW Year Ended September 30, 2014 Total revenue for the year was $8,396,796 ($7,574,593 – 2013), or an increase of 11%. Virology Products revenue was $8,258,175 ($6,584,844 – 2013), or an increase of 25% as a result of new antigen sales to a large European diagnostics customer. Meanwhile, Research and Development Contract revenue declined by $851,128 in 2014 as a result of the termination of the urokinase contract by Zydus Cadila in the first quarter of 2014. Operating profit for the year was $475,624 ($168,178 – 2013). This improvement was entirely attributable to higher Virology Products revenue, which resulted in an increased gross margin of $677,384 for fiscal 2014. Operating expenses for the year at $4,035,877 ($3,665,939 – 2013) were up 10%. However, after removing one-time gains in fiscal 2013 operating expenses ($131,379 gain on asset disposals, and a one-time debt recovery of $376,171), 2014 operating expenses actually declined 3% compared to normalized operating expenses in 2013. Net cash inflows in 2014 were $287,308 compared with $31,619 in 2013. Cash used in operations of $1,170,842 ($428,355 cash provided in 2013) was primarily due to higher accounts receivable and inventory of approximately $1 million and $0.5 million respectively, due primarily to significantly higher antigen sales in 2014. This higher level of sales is expected to continue in fiscal 2015. Cash from financing activities increased $5,002,766 in 2014 compared to 2013, while cash used in investing activities increased $3,134,389 over 2013 primarily due to the development of the LumiSort prototype instrument. Quarter Ended September 30, 2014 Total revenue in the fourth quarter was $2,355,879, 5% below the same quarter in 2013. Although Virology sales at $2,258,029 were 3% above that of the comparative quarter in fiscal 2013, total revenue was down due to a $185,394 reduction in research and development contract revenue due to the termination of the urokinase contract by Zydus Cadila in the first quarter of fiscal 2014. The operating loss in the fourth quarter was $302,963 compared to a normalized operating income of $64,382 in the fourth quarter of 2013, (after removing one-time gains of $131,379 on asset disposals and $376,171 on debt restructuring in the last quarter of fiscal 2013). This operating loss is the result of lower sales in the fourth quarter as well as increased spending on pipeline activities. SELECTED ANNUAL FINANCIAL INFORMATION The following table is a summary of highlights from the audited financial statements of the Company for the past two years. Total Revenue Operating income (loss) Total Assets Total Long-term liabilities Net Income (Loss) per share (basic and diluted) Current Ratio Debt to Equity Ratio 2014 $ 2013 $ 8,396,796 475,624 7,574,593 168,178 17,998,928 12,716,036 5,517,175 5,026,217 0.006 1.78 0.60 0.000 1.34 0.91 The Company’s 2014 net income for tax purposes is $1,721,660. The company has sufficient income tax credits to reduce resulting taxable income to nil. 3 Microbix biosysteMs inc. SELECTED QUARTERLY FINANCIAL INFORMATION The following summarizes key financial information from each of the last eight quarters. Dec-31-12 $ (restated) 1,095,614 Mar-31-13 $ (restated) 2,103,426 Jun-30-13 $ (restated) 1,906,652 Sep-30-13 $ (restated) 2,468,899 SALES Dec-31-13 $ Mar-31-14 $ Jun-30-14 $ Sep-30-14 $ 1,927,885 2,073,097 2,039,935 2,355,879 Operating income (loss) before income taxes (689,538) 308,471 (22,687) 571,932 214,406 269,620 294,561 (302,963) Sales fluctuate on a quarterly basis due to the timing of customer orders. Net losses in earlier quarters are due to significant investment in new product development. LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) on a going concern basis, which presumes the Company will continue operating for the foreseeable future and will be able to realize a return on its assets and discharge its liabilities and commitments in the normal course of business. The company has incurred operating losses resulting in an accumulated deficit of $24,426,070 as at September 30, 2014. Management continuously monitors the financial position of the Company with respect to working capital needs, as well as long-term capital needs compared to the annual budget. Variances are highlighted and actions are taken to ensure the Company is appropriately capitalized. The current annual operating budget confirms the Company is on target and able to support its planned activities. a) Sources and Uses of Cash Overall, the Company has realized an improvement in its closing cash balance from $260,048 at the end of fiscal 2013 to $547,356 at the end of fiscal 2014. However, the sources and uses of cash changed significantly from the prior year. Cash used by operations in 2014 was $1,170,842 versus cash provided by operations of $428,355 in 2013. Most of this change was due to the following: (1) an increase in Accounts Receivables of $990,526 which resulted from higher sales in 2014; (2) a $526,278 increase in Inventory due to growth in Virology sales which required higher volumes of finished goods inventory, plus significant price increases in various key raw materials; (3) a $421,984 increase in Prepaid Expenses, most of which relates to retainers with various legal counsel, and deposits with the engineering firm associated with the Lumisort project. Growth of accounts receivables and inventory are projected to moderate to about 5% in fiscal 2015, in line with projected growth of Virology sales. Cash of $4,588,340 provided by financing activities arose mainly from three sources: Issuance of a convertible debenture for net proceeds of $1,434,441, conversion of warrants and stock options for proceeds of $1,260,481 and net proceeds of $1,953,328 from shares issued pursuant to a private placement. Cash used in investing activities for new manufacturing equipment, new intellectual property development, patents, Lumisort™ engineering and equipment totaled $3,380,190, partially offset by the receipts of $250,000 released from previously restricted cash. Projected capital spending in fiscal 2015 is $1.5 million for completion of the Lumisort Phase 1 project and $1.1 million to upgrade and expand Virology manufacturing. 4 Microbix biosysteMs inc.b) Future Liquidity and Capital Needs Microbix funds new product development activities and capital expenditures through profits earned from its Virology Business and, periodically, from additional equity and/or debt. The Virology business is expected to continue to generate profits, which will be invested in new product development and manufacturing equipment. c) Contractual Obligations The Company had contractual obligations and commercial commitments at September 30, 2014 described in the following table: payments due Total $ Less than One year $ Accounts payable 1,825,614 1,825,614 2-3 Years $ - 4-5 Years $ - After 5 years $ - Debentures Long-term debt Operating leases 13,772,843 694,284 1,322,318 1,208,568 10,537,673 2,623,085 119,820 234,565 222,240 2,046,460 110,621 65,515 40,422 4,684 - Total Contractual Obligations 18,332,163 2,705,233 1,597,305 1,435,492 12,584,133 d) Outstanding Share Capital Share capital issued and outstanding as at December 19, 2014 was $28,375,872 for 77,993,116 common shares, an increase of $713,760 and 2,038,658 common shares since September 30, 2014, compared to $24,299,594 of share capital with 66,684,350 common shares issued and outstanding as September 30, 2013. RELATED PARTIES During the fiscal 2014, the Company paid interest of $639,046 ($495,000 – 2013) on the convertible debentures issued to related party shareholders. LONG-TERM ASSETS a) Tangible Assets During fiscal 2014 the Company spent $3,192,421 on Virology Products production equipment and Lumisort engineering and equipment. b) Intangible Assets Capital Spending During 2014 the Company invested $187,769, primarily on its patent estate for pipeline projects. Technology Investment - Lumisort™ In 2005 the Company acquired Sequent Biotechnologies Inc. involved in the development and commercialization of semen-sexing technology. The fair value of the technology acquired was established as an intangible asset. New intellectual property has been added as a result of our ongoing research program and new patents, accepted and pending. Technology Investment - Urokinase/Kinlytic® On September 23, 2008, Microbix completed a $2,770,529 acquisition of all Kinlytic assets from ImaRx Therapeutics, Inc. 5 Microbix biosysteMs inc.The recoverable amount of the Urokinase intangible has been determined based on a fair value less cost to sell calculation. That calculation uses risk adjusted cash flow projections based on probability weighted financial budgets approved by management covering an 11 year period, and a discount rate of 10% per cent. Management made assumptions based on probabilities of technical, regulatory and clinical acceptances and financial support. Management also believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount. LONG-TERM DEBT a) Non-Convertible Debenture During the second quarter of fiscal 2014 the Company issued a $2,000,000 non-convertible debenture to a shareholder of the Company, with principal and interest at 9% per annum payable on a quarterly basis, having a maturity date of January 31, 2029. The debenture is secured against the Company’s property at 265 Watline Avenue, Mississauga and other personal property of the Company and is subordinate only to indebtedness to a Canadian chartered bank or similar financial institution on normal commercial terms up to the maximum principal amount of $2,000,000. The debenture is being accounted for in accordance with its substance and is presented in the financial statements in its component parts measured at the time of issue. The debt component was valued first at its present value based on the effective interest rate on the debt at 25.69% per annum which reflects the inherent risk of investment in the Company taking into account its underlying stock volatility, credit profile and the ranking of the debt behind the secured mortgage and commercial banking creditors. b) Convertible Debentures During the second quarter, the Company cancelled the $2,000,000 convertible debenture issued on September 10, 2008 and replaced it with a non-convertible debenture. See preceding section a) for further details on the non- convertible debenture. On January 31, 2014, the Company issued a $1,500,000 debenture to a shareholder of the Company, with interest only payable at 9% per annum on a quarterly basis, and having a maturity date of January 31, 2029. The debenture is convertible into Common Shares at the option of the holder at any time on or prior to the maturity at a conversion price of $0.35 per common share. The debenture is secured against the real property and the personal property of the Company including without limiting the foregoing, a registered second mortgage on the property at 265 Watline Avenue, Mississauga, Ontario in favour of the Holder, its successors and assigns subordinate only to indebtedness to a Canadian chartered bank or similar financial institution on normal commercial terms up to the maximum principal amount of $1,500,000. The debenture is being accounted for in accordance with its substance and is presented in the financial statements in its component parts measured at the time of issue. The debt component was valued with the residual to shareholders’ equity. Over the term of the convertible debenture, the debt component will be accreted to the face value of the convertible debenture by the recording of additional interest expense. The effective interest rate on the debt is 25.69%. c) Business Development Corporation Debt The Company negotiated a $3,000,000 loan with the Business Development Bank (BDC) for the purchase and build- out of its new manufacturing facility. There was a further loan of $350,000 for the purchase of new equipment. The first $1,500,000 from the Business Development Bank for the construction of the Watline facility. The mortgage is secured with the building. The interest rate is floating, based on BDC’s Floating Base Rate plus a variance of 1.35%. At September 30, 2014 the Floating Base Rate was 5.00% on the outstanding balance of $2,602,060 (2013 - $2,657,620). Consecutive monthly principal payments of $9,260 are due to February 2037. 6 Microbix biosysteMs inc.Additionally, BDC offered a 6 month deferral of principal payments on the mortgage beginning with the month of April, 2014. The deferral amounts to $55,560. As a result the monthly principal payments of $9,260 have been extended to August 2037. The second BDC loan of $60,000 was for the purchase of equipment for the facility. The interest rate is floating, based on BDC’s Floating Base Rate plus a variance of 1.80%, over a term of 8 years. At September 30, 2014 the Floating Base Rate was 5.00% on the outstanding balance of $21,025 (2013 - $25,375). Consecutive monthly principal payments of $725 are due to February 2017. BUSINESS DEVELOPMENT CORPORATION EQUIPMENT LOAN During the fiscal year, the Company negotiated an additional $615,000 loan with the BDC with a maturity of July, 2020, subject to interest at the BDC’s Floating Base Rate plus 0.5%, with monthly repayments of principal and interest of $10,250 starting in August, 2015. The funds were advanced to the Company from the BDC subsequent to year-end and as at September 30, 2014, the outstanding balance on this loan is $Nil. TREND INFORMATION Historical spending patterns are no indication of future expenditures. Investment in the pipeline projects is at the discretion of management. The Company is not aware of any material trends related to its business that have not been discussed above. OUTLOOK The business of Microbix described in these documents is the result of years of investment in research and development, which has delivered products and technologies that have received wide customer acceptance and continued growth in demand. Microbix has both the manufacturing facilities and the scientific expertise in personnel to support this growth, including the continuous demand for competitive process improvements, as well as new products. In fiscal 2015, management is projecting continued growth of its Virology business of at least 5%. The Company also expects to launch its initial offering of molecular genetics antigens primarily targeted at the North American diagnostic testing marketplace. Advanced discussions continue with a select group of potential partners interested in returning Kinlytic to the U.S., Canadian and European markets. Management believes there is a reasonable opportunity to close a partnership agreement during fiscal 2015. Construction of the Lumisort prototype will be complete in early 2015. The Company will then commence partnering discussions with select animal genetics companies in order to fund the pre-commercial phase of development that will be initiated later in 2015. This will be followed by field trials currently projected for early in fiscal 2016. Finally, the Company is involved in litigation relating to its VIRUSMAX technology. There are two actions wherein the Company is alleging infringement of its VIRUSMAX patents in the U.S. and Europe. Both of these actions are expected to reach the trial stage in late 2015. RISKS AND UNCERTAINTIES The Company is exposed to a wide variety of business risks, both known and unknown, which may or may not affect its operations. Management works continuously to mitigate unacceptable risk, while still allowing the business to grow and prosper. These risk factors include the following: Virology Product sales are dependent on a few key clients, open borders, international transportation systems, and access to raw materials. The majority of the Company’s Virology sales are made to a small number of key customers located all over the world. Since these products contributed a majority of the revenue during fiscal 2014, loss of a key customer or, restrictions on export, import, international transportation of its products, raw materials or insufficient marketing resources, could materially impact revenue and profitability. 7 Microbix biosysteMs inc.Environmental, safety and other regulatory Microbix’ research and manufacturing operations involves potentially hazardous materials. The Company takes the necessary precautions to appropriately manage such materials as required by applicable environmental and safety regulations. Changes to environmental and safety legislation may limit the Company’s activities or increase costs. An environmental accident could adversely impact its operations. Microbix’ diagnostic products are not regulated by governments in Canada or other jurisdictions. Commercialization of certain products requires approval of regulatory agencies such as the FDA, in which case Microbix will not receive revenue until regulatory approval is obtained. Manufacturing of Kinlytic® In December 2013, Zydus terminated the Kinlytic® license agreement due to a change in their strategic priorities. During 2014 the Company entered into confidentiality agreements with several parties interested in returning Kinlytic to the market. Vaccine technology The market for the Company’s proprietary Vaccine technology (VIRUSMAX) is limited to a small number of influenza vaccine manufacturers and this is protected by patents in twenty-one countries globally. In 2014 the Company successfully defended its European patents at the European Patent Office hearing, following a challenge by Novartis Vaccines & Diagnostics. This patent defense has led to separate legal actions by the Company against Novartis alleging infringement in the United States and Europe. These legal actions require significant investment and there is no assurance that the Company will prevail in these actions. Products in development The Company has several products under development, however, it is impossible to ensure these development activities will result in the completion of a commercial product. If the Company is unable to develop and commercialize products, it will be unable to recover the related research and development and other expenses. Product commercialization requires strategic relationships To commercialize large market products in development, Microbix may need to establish strategic partnerships, joint ventures or licensing relationships with other pharmaceutical and biotechnology companies. The Company may not be able to form acceptable strategic relationships. Operating and capital requirements Microbix believes that its cash generated from operations is sufficient to meet normal operating and capital needs. However, additional funding needs may depend upon several factors including: progress of research and development programs; costs associated with the regulatory process; collaborative and license arrangements with third parties; cost of filing, prosecuting and enforcing patent claims and other intellectual property rights; potential acquisitions and technological and market developments. The Company earns most of its profit from sales of its Virology products and technologies and thus it is a major source of funding for research and development activities. However the Company may, from time to time, need to raise additional funds to satisfy the funding of current research and development programs, as well as extraordinary operating costs noted above. Additional financings may not be available, and even if available, may not be on acceptable terms. Financing from additional capital through an offering of common shares, or debt, may result in dilution or the issuance of securities with rights senior to the rights of the holders of common shares. The Company’s success depends on the successful commercialization of our technology The successful commercialization of products under development is key to Microbix’ success. Product development in the pharmaceutical and biotechnology industry is highly uncertain and there is no guarantee of market acceptance. 8 Microbix biosysteMs inc.Failure to obtain and protect intellectual property could adversely affect the business Microbix’ success will depend, in part, on its ability to obtain patents, or licenses to patents, maintain trade secret protection and enforce its rights against others. The Company’s intellectual property includes trade secrets and know-how that may not be protected by patents and there is no complete assurance that it will be able to protect its trade secrets. To help protect its intellectual property, the Company requires employees, consultants, advisors and collaborators to enter into confidentiality agreements. However, these agreements may not adequately protect trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Protection of intellectual property may also entail prosecuting claims against others who the Company believes are infringing its rights. Involvement in intellectual property litigation could result in significant expenses, adversely affecting the development of products or sales of the challenged product or intellectual property and diverting the efforts of its technical and management personnel, whether or not such litigation is resolved in the Company’s favour. Microbix faces and will continue to face significant competition Competition from pharmaceutical companies, biotechnology companies and academic and research institutions is significant. Many competitors have substantially greater product development capabilities and financial, scientific, manufacturing, sales and marketing resources and experience than Microbix. While the Company continues to expand its technological capabilities in order to remain competitive, Microbix’ competitors are also investing in research and development activities and enhanced intellectual property positions, which could make it more difficult for Microbix to commercialize its new technologies and products. FINANCIAL RISK MANAGEMENT The primary risks affecting the Company are summarized below and have not changed during the quarter. The list does not cover all risks, nor is there an assurance that the strategy of management to mitigate the risks is sufficient to eliminate the risk. Credit risk: The Company’s cash and cash equivalents are held in accounts or short-term interest bearing accounts at a major Canadian chartered bank. Management perceives the credit risk to be low. There is a concentration of accounts receivable risk due to a few large customers comprising the Company’s international customer base. The Company has had virtually no bad debts over the past several years and accordingly management has recorded an allowance of $1,018 ($54,013 – 2013). Accounts receivable at September 30, 2014 was $2,141,508 ($1,150,982 – 2013), an increase of 86% mostly due to increased sales in 2014. Currency risk: The Company is exposed to currency risk through fluctuations in the exchanges rate affecting sales and receivables denominated in US dollars and Euros. The Company does not use financial instruments to hedge these risks. At September 30, 2014 the Company had US dollar and Euro balances in cash, accounts receivable and accounts payable. Liquidity risk: Liquidity risk is the risk that the Company will not be able to meets its financial obligations as they fall due. To manage this situation, the Company projects and monitors its cash requirements to accommodate changes in liquidity needs. Interest rate risk: Financial instruments that expose the Company to cash flow interest rate risk are those assets and liabilities with a variable interest rate. Interest risk exposure is primarily on the BDC debt and the Company’s $500,000 line of credit with a chartered bank, each of which bear a variable rate pegged to the institution’s base rate. A 1% increase in the bank rate would cost the Company about $30,000 per year for BDC and about $5,000 on the line of credit if each credit facility was used to the limit. At September 30, 2014, the Company was not utilizing its line of credit. 9 Microbix biosysteMs inc.Market risk: Market risk reflects changes in product prices based on changes in supply and demand, currency and interest rates and the effect on the Company’s income or value of financial instruments held. Microbix’ products are valuable components of our customers’ products and are not easily replaced. The Company works closely with customers to ensure its products satisfy critical customer needs. CRITICAL ACCOUNTING ESTIMATES The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company’s audited consolidated financial statements are prepared in accordance with Canadian GAAP and International Financial Reporting Standards (“IFRS”) and the reporting currency is Canadian dollars. On an on-going basis, management bases its estimates on historical and other experience and assumptions, which it believes are reasonable in the circumstances. The significant accounting policies that the Company believes are the most critical in fully understanding and evaluating the reported financial results include: Intangible Assets Intangible assets include technology costs, patents, trademarks and licenses. Each is recorded at cost and amortized on a straight-line basis over the term of the agreements. Intangible assets with indefinite lives are not amortized but are assessed for impairment on an annual basis. Impairment of Long-lived Assets The Company reviews the carrying value of non-financial assets with definite lives for potential impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of non-financial assets with indefinite lives, and of non-financial assets with definite lives but are not ready for use, are assessed at least annually for impairment based on the impairment test on cash-generating units (CGUs). The impairment test on CGUs is carried out by comparing the carrying amount of the CGU and its recoverable amount. The recoverable amount of a CGU is the higher of fair value, less costs to sell and its value in use. This complex valuation process entails the use of methods such as the discounted cash method which requires numerous assumptions to estimate future cash flows. The recoverable amount is impacted significantly by the discount rate selected to be used in the discounted cash flow model, as well as the quantum and timing of risk-adjusted future cash flows and the growth rate used for the extrapolation. The impairment loss is calculated as the difference between the fair value of the asset and its carrying value. Management has determined that no long-lived assets of the Company as at September 30, 2014 have met the criteria for impairment. Convertible and Non-Convertible Debentures Management determines the fair value of the debenture using valuation techniques. Those techniques are significantly affected by the estimated assumptions used, including discount rates, expected life and estimates of future cash flows. Deferred income taxes Deferred income tax assets and liabilities are recognized for the estimated income tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective income tax bases. Deferred income tax assets and liabilities are measured using tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effects of changes in income tax rates are reflected in future income tax assets and liabilities in the year that the rate changes are substantively enacted. 10 Microbix biosysteMs inc.Share-based payments The Company applies the fair value method of accounting for stock-based compensation for awards granted to officers, directors, employees and consultants of the Company. The fair value of the award at the time of granting is determined using the Black-Scholes option pricing model, and recognized as a compensation expense on a straight- line basis over the vesting period with an offsetting amount recorded to contributed surplus. The amount of the compensation cost recognized at any date at least equals the value of the portion of the options vested at that date. When stock options are exercised, the consideration paid by employees or directors, together with the related amount in contributed surplus, is credited to capital stock. When an employee leaves the Company, vested options must be exercised within 90 days, or the options expire. Any options that are unvested are reversed in the period that the employee leaves. FINANCIAL INSTRUMENTS The fair value of a financial instrument is approximated by the consideration that would be agreed to in an arm’s length transaction between willing parties and through appropriate valuation methods, but considerable judgment is required for the Company to determine the value. The actual amount that could be realized in a current market exchange could be different than the estimated value. The carrying amounts of cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments. Based on available market information, the fair value of the obligation under capital lease approximates its carrying value. The fair value of the long-term debt is based on rates currently available for items with similar terms and maturities. The fair value of the liability for each convertible debenture has been calculated and the residual is accounted for in equity. The Company does not have any off balance sheet financial instruments. MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING DISCLOSURE CONTROLS The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in the National Instrument 52-109 Certification of Disclosure in Issuer’s Annual Filings (NI 52-109F1). As at September 30, 2014, management has concluded that the disclosure controls are effective in providing reasonable assurance that information required to be disclosed in the Company’s reports is recorded, processed summarized and reported within the time periods specified in the Canadian Securities Administrator’s rules and forms. INTERNAL CONTROLS OVER FINANCIAL REPORTING The design of internal controls over financial reporting (“ICFR”) within the company is a management responsibility to provide reasonable assurance that the reliability of financial reporting and that the preparation of financial statements for external purposes is in accordance with generally accepted accounting principles of IFRS. While the CEO and CFO believe that the internal controls are adequate to provide the above information, the process to evaluate and document all policies and procedures that could impact financial reporting is continuously reviewed with consultation with the Audit Committee. Shareholders should be aware that Microbix is a small company without the department resources associated with larger firms. Management is using the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) Framework and has concluded that the Internal Control over Financial Reporting (“ICFR”) as defined in NI 52-109 is effective as at the period ended September 30, 2014. Examination by the Chief Executive Officer and the Chief Financial Officer showed that there were no changes to the internal controls over financial reporting during the period ended September 30, 2014 that have materially affected, or are reasonably thought to materially affect, the internal control over financial reporting. 11 Microbix biosysteMs inc.RECENT ACCOUNTING PRONOUNCEMENTS Periodically new standards, interpretations, amendments and improvements to existing standards are issued by the International Accounting Standards Board (IASB) or IFRS Interpretation Committee (IFRIC) that become mandatory at certain dates. Management routinely assesses the impact of these pronouncements on the Company. There are no pending standards that may be applicable to the Company. IFRS 7 – Financial Instruments: Disclosures In December 2011, the IASB amended IFRS 7 to provide additional information about offsetting of financial assets and financial liabilities. Additional disclosures will be required to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on the entity’s financial position. The amendments are effective for annual periods beginning on or after January 1, 2013. There was no impact to the financial statements as a result of the adoption of this update. IFRS 9 – Financial Instruments IFRS 9, issued in November 2009 and amended in October 2010, introduced new requirements for the classification and measurement of financial assets and the classification and measurement of financial liabilities and for their de-recognition. All recognized financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement are to be subsequently measured at amortized cost or fair value. Specifically, debt investments that have contractual cash flows that are solely payments of principal and interest are generally measured at amortized cost at the end of subsequent periods. All other debt and equity investments are measured at their fair value at the end of subsequent periods. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability, that is attributable to changes in the credit risk of that liability, is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. The directors anticipate that the application of IFRS 9 in the future may have an impact on amounts reported in respect of the Company’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. IFRS 10 - Consolidated Financial Statements In May 2011, the IASB issued IFRS 10, which establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes International Accounting Standards (“IAS”) 27, Consolidated and Separate Financial Statements and Standing Interpretations Committee (“SIC”) 12, Consolidation – Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. There was no impact to the Company’s financial statements as a result of adopting this standard. IFRS 11 - Joint Arrangements In May 2011, the IASB issued IFRS 11, Joint Arrangements. This standard separates joint arrangements into joint ventures and joint operations and provides guidance on accounting for these types of arrangements. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. There was no impact to the Company’s financial statements as a result of adopting this standard. 12 Microbix biosysteMs inc.IFRS 12 - Disclosures of interests in other entities In May 2011, the IASB issued IFRS 12, which outlines the disclosure requirements for interests in subsidiaries and other entities to enable users to evaluate the risks associated with interests in other entities and the effects of those interests on an entity’s financial position, financial performance and cash flows. IFRS 12 supersedes IAS 27, Consolidated and Separate Financial Statements and SIC-12, Consolidation – Special Purpose Entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. As a result of adoption of this standard, the Company provided additional disclosure in note 1a. There was no impact to the Company’s financial statements as a result of adopting this standard. IFRS 13 - Fair value measurement In May 2011, the IASB issued IFRS 13, Fair Value Measurement. This standard defines fair value, sets out a single IFRS framework for measuring fair value and outlines disclosure requirements about fair value measurements. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. This IFRS is to be applied prospectively as of the beginning of the annual period in which it is initially applied. Disclosure requirements do not need to be applied to the comparative periods prior to initial application. As a result of adoption of this standard, the Company provided additional disclosures in note 2(e)(i) and note 15. There were no impacts to the consolidated financial statements as a result of the adoption of this standard. 13 Microbix biosysteMs inc.Collins Barrow Toronto LLP Collins Barrow Place 11 King Street West Suite 700, Box 27 Toronto, Ontario M5H 4C7 Canada T. 416.480.0160 F. 416.480.2646 www.collinsbarrow.com INDEPENDENT AUDITORS’ REPORT To the Shareholders of Microbix Biosystems Inc. We have audited the accompanying consolidated financial statements of Microbix Biosystems Inc. and its subsidiaries, (collectively referred to as the “Company”), which comprise the consolidated statements of financial position as at September 30, 2014, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider 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 controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audit 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 Microbix Biosystems Inc. and its subsidiaries as at September 30, 2014, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 14 Microbix biosysteMs inc.Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Microbix Biosystems Inc. and its subsidiaries as at September 30, 2014, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other Matter The consolidated financial statements of Microbix Biosystems Inc. and its subsidiaries for the year ended September 30, 2013 were audited by another auditor who expressed an unmodified opinion on those statements on December 24, 2013. Collins Barrow Toronto LLP Licensed Public Accountants Chartered Accountants December 19, 2014 15 Microbix biosysteMs inc.CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS CURRENT ASSETS Cash and cash equivalents Accounts receivable (note 26) Inventory (note 5) Prepaid expenses and other assets (note 6) Investment tax credit receivable As at September 30, 2014 $ As at September 30, 2013 $ 547,356 260,048 2,141,508 1,150,982 1,598,429 1,072,151 75,827 78,757 276,107 143,626 TOTAL CURRENT ASSETS 4,707,026 2,637,765 LONG-TERM ASSETS Restricted cash (note 7) Deferred tax asset (note 20) Prepared expenses (note 6) Property, plant and equipment (note 8) Intangible assets (note 9) TOTAL LONG-TERM ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities Current portion of long-term debt (note 12) Current portion of debentures (note 11) TOTAL CURRENT LIABILITIES Non-Convertible debenture (note 11) Convertible debentures (note 11) Long-term debt (note 12) Deferred revenue (note 13) TOTAL LONG-TERM LIABILITIES TOTAL LIABILITIES SHAREHOLDERS’ EQUITY SHARE CAPITAL (note 14) EQUITY COMPONENT OF CONVERTIBLE DEBENTURES (note 11) CONTRIBUTED SURPLUS (note 15) ACCUMULATED DEFICIT TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY - 265,000 221,704 8,751,760 4,053,438 250,000 - - 5,929,168 3,899,103 13,291,902 10,078,271 17,998,928 12,716,036 1,825,614 119,820 694,284 1,353,635 119,820 495,000 2,639,718 1,968,455 680,416 1,920,844 2,503,265 412,650 - 2,050,392 2,563,175 412,650 5,517,175 5,026,217 8,156,893 6,994,672 27,662,112 24,299,594 2,351,425 4,487,638 (24,659,140) 2,699,368 3,550,521 (24,828,119) 9,842,035 5,721,364 17,998,928 12,716,036 William J. gastlE dirECtor Vaughn Embro-Pantalony dirECtor The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 16 Microbix biosysteMs inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SALES Virology products and technologies Research and development contracts TOTAL SALES COST OF GOODS SOLD Virology products and technologies (note 5, 19) Research and development contracts Total Cost of Goods Sold GROSS MARGIN EXPENSES Selling and business development (note 19) General and administrative (note 19) Research and development (note 19) Gain on disposal of assets Financial expenses (note 23) TOTAL EXPENSES NET COMPREHENSIVE OPERATING INCOME FOR THE YEAR INCOME TAXES Current income taxes (note 20) NET COMPREHENSIVE INCOME FOR THE YEAR NET COMPREHENSIVE INCOME PER SHARE (note 18) Basic Diluted Years ended September 30 2014 $ 2013 $ 8,258,175 138,621 6,584,844 989,749 8,396,796 7,574,593 3,769,255 116,040 2,891,136 849,340 3,885,295 3,740,476 4,511,501 3,834,117 656,989 1,846,745 691,067 - 841,076 893,579 1,789,012 445,817 (131,379) 668,910 4,035,877 3,665,939 475,624 168,178 306,645 166,800 168,979 1,378 0.002 0.002 0.000 0.000 The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 17 Microbix biosysteMs inc. CONSOLIDATED STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income for the year Items not affecting cash Amortization (note 19) Accretion of debentures (note 11) Accretion of asset retirement obligation Unrealized foreign exchange loss (gain) Stock options expense (Gain) loss on disposal of assets Loss on sale of assets Recognition of deferred tax asset (note 20) Change in non-cash working capital balances (note 21) Years ended September 30 2013 2014 $ $ 168,979 1,378 403,263 39,394 - - 14,200 - - (265,000) 419,195 37,171 (40,708) (13,491) 186,654 (143,520) 12,142 - (1,531,678) (30,466) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,170,842) 428,355 INVESTING ACTIVITIES Restricted cash (note 7) Proceeds from sale of business Proceeds from sale of assets (note 8) Purchase of property and equipment and intangible assets (note 8, 9) 250,000 - - (3,380,190) - 143,520 89,214 (228,535) CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,130,190) 4,199 FINANCING ACTIVITIES Decrease in bank indebtedness Repayments of long term debt Proceeds from issuance of convertible debenture, net of issue cost (note 11) Proceeds from exercise of warrants, net of issue costs (note 14) Issue of common shares, net of issue costs (note 14) - (59,910) 1,434,441 1,051,381 2,162,428 (494,736) (110,560) (100,000) 10,000 280,870 CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,588,340 (414,426) Effect of foreign currency exchange rate changes on cash and cash equivalents NET CHANGE IN CASH AND CASH EQUIVALENTS DURING THE YEAR - 13,491 287,308 31,619 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 260,048 228,429 CASH AND CASH EQUIVALENTS - END OF YEAR 547,356 260,048 The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 18 Microbix biosysteMs inc. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY SHARE CAPITAL (note 14) STATED NUMBER OF SHARES CAPITAL $ CONTRIBUTED SURPLUS $ EQUITY TOTAL COMPONENT OF SHAREHOLDERS’ DEFICIT $ DEBENTURE $ EQUITY $ OPENING BALANCE, OCTOBER 1, 2012 65,594,350 24,033,712 3,338,881 (24,829,497) 2,699,368 5,242,464 Share issuances pursuant to private placement 1,050,000 315,000 Share issue costs, private placements (59,118) 24,986 Share issuances pursuant to conversion of warrants 40,000 10,000 Stock option expense Net income for the year 186,654 1,378 315,000 (34,132) 10,000 186,654 1,378 BALANCE, SEPTEMBER 30, 2013 66,684,350 24,299,594 3,550,521 (24,828,119) 2,699,368 5,721,364 Share issuances pursuant to private placement 5,128,208 2,000,000 Share issue costs, private placements (46,672) Share issue costs related to warrants (41,160) 41,160 598,000 398,969 (189,869) 3,543,900 1,051,381 Share issuances pursuant to stock options exercised Share issuances pursuant to conversion of warrants Settlement of equity component of convertible debenture Equity component of convertible debentures Stock option expense Net income for the year 1,071,626 (1,264,914) (193,288) 916,971 916,971 14,200 168,979 14,200 168,979 2,000,000 (46,672) 209,100 1,051,381 BALANCE, SEPTEMBER 30, 2014 75,954,458 27,662,112 4,487,638 (24,659,140) 2,351,425 9,842,035 The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 19 Microbix biosysteMs inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2014 and 2013 1. NATURE OF THE BUSINESS Microbix Biosystems Inc. (Microbix or the Company) (TSX: MBX) develops biological products and technologies. The Virology Business (Virology) manufactures and develops cell culture-based biological products and technologies. The Company has developed and acquired three technologies for large life sciences markets including Virus Yield Enhancement Technology, Virusmax®, the thrombolytic drug Kinlytic® (Urokinase), and an animal reproductive technology in development, LumiSort™. The development of new products and technologies are funded with income earned from Virology and additional cash flows from equity and debt issuance. Microbix has substantial capability, both in technical expertise and laboratory facilities for development. Microbix is providing materials for diagnoses of infectious diseases. The same expertise and competencies involved are applicable to developing materials to facilitate treatment. The Company continually invests in Virology to adopt current technologies and standards, upgrading capabilities to support its customers. Revenue generated from Virology is used to meet operational costs, the development program and to service the Company’s debt. The Virology business is expected to continue to generate a profit, part of which will be invested in the development pipeline. The Company may seek additional capital needed to maintain its current level of investment in the development pipeline. If necessary, management and the Board of Directors have the discretion to reduce or suspend investment in development depending on the cash/liquidity needs of the Company. The Company operates the Virology business in its owned manufacturing facility at 265 Watline Avenue, Mississauga, Ontario. The manufacturing facility operates under an infectious diseases biological license from the Canadian Food Inspection Agency. 2. BASIS OF PREPARATION Statement of Compliance The Company’s management prepared these consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of financial statements. The Board of Directors approved these Consolidated Financial Statements on December 19, 2014. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value. Items included in the financial statements of each consolidated entity in the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. Basis of consolidation These consolidated financial statements include the accounts of the Company and its subsidiary Crucible Biotechnologies Limited. There has been no business activity in the subsidiary during the fiscal years ended September 30, 2014, and 2013. Use of estimates and judgments The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from estimates and such differences could be material. Key areas of managerial judgments and estimates are as follows: i) Property, Plant and Equipment (PP&E): Measurement of PP&E involves the use of estimates for determining the expected useful lives of depreciable assets. Management’s judgment is also required to determine depreciation methods and an asset’s residual value and whether an asset is a qualifying asset for the purposes of capitalizing borrowing costs. 20 Microbix biosysteMs inc.3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ii) Impairment of non-financial assets: The Company reviews the carrying value of non-financial assets with definite lives for potential impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of non-financial assets with indefinite lives, and of non-financial assets with definite lives but not ready for use, are assessed at least annually for impairment based on the impairment test on cash-generating units (CGUs). The impairment test on CGUs is carried out by comparing the carrying amount of the CGU and its recoverable amount. The recoverable amount of a CGU is the higher of fair value, less costs to sell and its value in use. This complex valuation process entails the use of methods such as the discounted cash method which requires numerous assumptions to estimate future cash flows. The recoverable amount is impacted significantly by the discount rate selected to be used in the discounted cash flow model, as well as the quantum and timing of risk-adjusted future cash flows and the growth rate used for the extrapolation. iii) Foreign Currency translation: The determination of functional currency requires judgment. The functional currency is determined based on the currencies of the main economic activity, the magnitude of these revenue streams and the payments for materials and employees. The Company generates cash in a variety of currencies and expends cash mainly in one currency, the Canadian dollar. iv) Income Taxes: The Company recognizes deferred tax assets, related tax-loss carry-forwards and other deductible temporary differences where it is probable that sufficient future taxable income can be generated in order to fully utilize such losses and deductions. This requires significant estimates and assumptions regarding future earnings, and the ability to implement certain tax planning opportunities in order to assess the likelihood of utilizing such losses and deductions. v) Share-based payments: The Company measures the cost of share-based payments, either equity or cash-settled, with employees by reference to the fair value of the equity instrument or underlying equity instrument at the date granted. Estimating the fair value for share- based payments requires management to determine the appropriate valuation model for a grant, which is dependent of the terms and conditions of each grant. In valuing certain types of stock-based payments, such as incentive stock options, the Company uses the Black-Scholes option pricing model. This valuation includes assumptions about the expected life of the option, stock price volatility and forfeiture rates. vi) Accounts receivable: The Company uses valuation techniques to estimate the fair value of accounts receivable. Note 26 (a) provides additional information about the aging of accounts receivable. This information was used by management in the determination of the fair value of these balances. vii) Debentures: The Company uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of convertible and non-convertible debentures. Note 11 provides additional information about the terms of these debentures which were used by management in the determination of their fair values. Revenue Recognition Revenues from product sales are recognized when persuasive evidence of an arrangement exists, the product is shipped, received or accepted by the customer, there are no future performance obligations, the purchase price is fixed and determinable, and collectability is reasonably assured. Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract. Revenues from licensing are recognized when the service is rendered or the deliverables are substantially complete and other revenue recognition criteria are met. For upfront, non-refundable payments received in accordance with the execution of licensing and collaboration agreements, revenue is deferred and recognized over the performance period, the period over which the Company maintains substantive contractual obligations. Amounts the Company expects to earn in the current year are included in the current portion of deferred revenue and amounts expected to be earned in subsequent periods are included in deferred revenue. The term over which upfront fees are recognized is revised if the period over which the Company maintains substantive contractual obligations changes. 21 Microbix biosysteMs inc. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Milestone payments are immediately recognized as licensing revenue when the condition is met, if the milestone is not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized over the remaining term of the agreement or the performance period. Revenues from research and development contracts are recognized based on the percentage of completion method, measured by the percentage of costs incurred over the estimated total costs for each contract or based on the achievement of milestones specified in the contract. Management considers expended costs to be the best available measure of progress on these contracts. Contract costs include all direct material and labour costs and those indirect costs related to contract performance. Provisions for estimated losses on incomplete contracts are made in the period in which such losses are determined. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, deposits with banks and investments in highly liquid instruments with original maturities of three months or less. Due to the liquid nature of these financial assets the Company has elected to classify them as held for trading. There are no cash equivalents held at September 30, 2014 or 2013. Financial assets and liabilities All financial instruments, including derivatives, are included on the consolidated balance sheet and are measured either at fair market value or, in limited circumstances, at cost or amortized cost. Subsequent measurement and recognition of the changes in fair value of financial instruments depends upon their initial classifications as follows: - Held-for-trading financial assets, measured at fair value with subsequent changes in fair value recognized in current period net income; - Held-to-maturity assets, loans and receivables and other financial liabilities, initially measured at fair value and subsequently measured at amortized cost with changes recognized in current period net income; and - Available-for-sale financial assets, measured at fair value with subsequent gains and losses included in other comprehensive income until the asset is removed from the balance sheet. The following summarizes the Property’s classification and measurement of financial assets and liabilities: Financial assets: Cash and cash equivalents Accounts receivable Restricted cash Financial liabilities: Accounts payable and accrued liabilities Non-convertible debentures Convertible debentures Long-term-debt Classification Measurement Held-for-trading Loans and receivables Held-for-trading Fair value Amortized cost Fair value Other liabilities Other liabilities Other liabilities Other liabilities Amortized cost Amortized cost Amortized cost Amortized cost Transaction costs that are directly attributable to the acquisition or issuance of financial assets or financial liabilities, other than financial assets and financial liabilities measured at FVTPL, are accounted for as part of the carrying amount of the respective asset or liability at inception. Transaction costs related to financial instruments measured at amortized cost are amortized using the effective interest rate over the anticipated life of the related instrument. Transaction costs on financial assets and financial liabilities measured at FVTPL are expensed in the period incurred. Financial assets are derecognized when the contractual rights to the cash flows from financial assets expire or have been transferred. All derivative instruments, including embedded derivatives, are recorded in the financial statements at fair value, except for embedded derivatives exempted from derivative accounting treatment. Share issuance and financing costs Share issue costs are recorded as a reduction of share capital at the date of closing. Financing costs due to the issuance of debt are deferred, recorded as a reduction of the carrying value of the related debt and amortized over the term of the related debt using the effective interest method. 22 Microbix biosysteMs inc. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventory Inventory is carried at the lower of cost and market. Cost consists of direct materials, direct labour and an overhead allocation and is determined on a first-in, first-out basis. Market is defined as net realizable value, which is defined as the summation of the selling price plus the cost to complete plus the cost to sell. Management reviews its reserve for obsolete inventory annually for finished goods and work-in-process. Property and equipment Property and equipment is carried at cost less accumulated amortization. Amortization is calculated at rates which will reduce the original cost to estimated residual value over the estimated useful life of each asset. Amortization commences once the asset is available for use. The following rates and methods are used: Research and development equipment Other equipment and fixtures Leasehold improvements Buildings Declining balance, 10-100% Declining balance, 10-30% Declining balance, 20% Declining balance, 4% Assets under lease Leases that transfer substantially all of the benefits and risks of ownership of the asset to the Company are accounted for as finance leases. At the time a finance lease is entered into, an asset is recorded together with its related long-term obligation, reflecting the fair value of future lease payments, discounted at the appropriate interest rates. Assets under finance leases are amortized over their estimated useful lives at the same rates used for other equipment and fixtures. All other leases are classified as operating leases and expensed on a straight line basis. Intangible assets Intangible assets represent technology costs, patents and trademarks, and rights and licenses. Each is recorded at cost and is amortized on a straight-line basis over the term of the agreements or over the useful life of the asset. Amortization commences when the intangible asset is available for use. Intangible assets with definite lives but not yet available for use are assessed annually for impairment. Impairment of long-lived assets An impairment charge is recognized for long-lived assets, including intangible assets with definite lives, when an event or change in circumstances indicates that the assets’ carrying value may not be recoverable. Intangible assets not yet available for use are tested annually for impairment. The impairment loss is calculated as the difference between the fair value of the asset, less costs to sell and its value in use. Management has determined that no long-lived assets of the Company in the years ended September 30, 2014 and 2013 have met the criteria for impairment. Share-based compensation The Company applies the fair value method of accounting for share-based compensation for awards granted to officers, directors and employees of the Company. The fair value of the award at the time of granting is determined using the Black-Scholes option pricing model, and recognized as a compensation expense over the vesting period with an offsetting amount recorded to contributed surplus. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Share options issued to consultants of the Company are based on the fair value of the services provided. The amount of the compensation cost recognized at any date at least equals the value of the portion of the options vested at that date. When stock options are exercised, the consideration paid by employees or directors, together with the related amount in contributed surplus, is credited to share capital. When an employee leaves the Company, vested options must be exercised within 90 days, or the options expire. Any options that are unvested are reversed in the period that the employee leaves. No valuation allowance has been made for the expected forfeitures upon issuance of stock options with vesting periods, due to minor expectation of such events. Foreign currency translation Each asset, liability, revenue and expense is translated into Canadian dollars by the use of the exchange rate in effect at the end of the month in which the transaction occurs. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate determined by the Bank of Canada at the year-end date. Exchange gains and losses arising on these transactions are included in the statement of comprehensive income for the year. 23 Microbix biosysteMs inc.3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income per common share The Company calculates basic income per share amounts for profit or loss attributable to ordinary equity holders. Basic income per share is calculated using the weighted average number of common shares outstanding during the period. Diluted income per share is calculated in the same manner as basic income per share except for adjusting the profit or loss attributable to ordinary equity holders and the weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares. Deferred taxes Deferred income tax assets and liabilities are recognized for the estimated income tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective income tax bases. Deferred income tax assets and liabilities are measured using tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effects of changes in income tax rates are reflected in deferred income tax assets and liabilities in the year that the rate changes are substantively enacted. Research and development expenses Costs associated with research and development activities are expensed during the year in which they are incurred net of tax credits earned, except where product development costs meet the criteria under IFRS for deferral and amortization. Investment tax credits The Company is entitled to Canadian federal and provincial investment tax credits which are earned as a percentage of eligible research and development expenditures incurred in each taxation year. Investment tax credits are accounted for as a reduction of the related expenditure for items of a current nature. These credits are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the credits in the foreseeable future. 4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED Certain new standards, interpretations, amendments and improvements to existing standards were issued by the International Accounting Standards Board (IASB) or IFRS Interpretation Committee (IFRIC) that are mandatory at certain dates or later. Management is still assessing the effects of the pronouncements on the Company. The standards impacted that may be applicable to the Company are following: IFRS 7 – Financial Instruments: Disclosures In December 2011, the IASB amended IFRS 7 to provide additional information about offsetting of financial assets and financial liabilities. Additional disclosures will be required to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on the entity’s financial position. The amendments are effective for annual periods beginning on or after January 1, 2013. There was no impact to the financial statements as a result of the adoption of this update. IFRS 9 – Financial Instruments IFRS 9, issued in November 2009 and amended in October 2010, introduced new requirements for the classification and measurement of financial assets and the classification and measurement of financial liabilities and for their de-recognition. All recognized financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement are to be subsequently measured at amortized cost or fair value. Specifically, debt investments that have contractual cash flows that are solely payments of principal and interest are generally measured at amortized cost at the end of subsequent periods. All other debt and equity investments are measured at their fair value at the end of subsequent periods. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability, that is attributable to changes in the credit risk of that liability, is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. The directors anticipate that the application of IFRS 9 in the future may have an impact on amounts reported in respect of the Company’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. 24 Microbix biosysteMs inc.4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED (continued) IFRS 10 - Consolidated Financial Statements In May 2011, the IASB issued IFRS 10, which establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes International Accounting Standards (“IAS”) 27, Consolidated and Separate Financial Statements and Standing Interpretations Committee (“SIC”) 12, Consolidation – Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. There was no impact to the Company’s financial statements as a result of adopting this standard. IFRS 11 - Joint Arrangements In May 2011, the IASB issued IFRS 11, Joint Arrangements. This standard separates joint arrangements into joint ventures and joint operations and provides guidance on accounting for these types of arrangements. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. There was no impact to the Company’s financial statements as a result of adopting this standard. IFRS 12 - Disclosures of interests in other entities In May 2011, the IASB issued IFRS 12, which outlines the disclosure requirements for interests in subsidiaries and other entities to enable users to evaluate the risks associated with interests in other entities and the effects of those interests on an entity’s financial position, financial performance and cash flows. IFRS 12 supersedes IAS 27, Consolidated and Separate Financial Statements and SIC- 12, Consolidation – Special Purpose Entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. There was no impact to the Company’s financial statements as a result of adopting this standard. IFRS 13 - Fair value measurement In May 2011, the IASB issued IFRS 13, Fair Value Measurement. This standard defines fair value, sets out a single IFRS framework for measuring fair value and outlines disclosure requirements about fair value measurements. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. This IFRS is to be applied prospectively as of the beginning of the annual period in which it is initially applied. Disclosure requirements do not need to be applied to the comparative periods prior to initial application. As a result of adoption of this standard, the Company provided additional disclosures in Notes 25 and 26. There were no other impacts to the consolidated financial statements as a result of the adoption of this standard. 5. INVENTORY Inventories as at year-end consist of the following: Raw material Work in process Finished goods 2014 $ 404,809 347,698 845,922 1,598,429 2013 $ 195,801 207,076 669,274 1,072,151 During the year ended September 30, 2014, inventories in the amount of $1,780,819 (2013 - $1,640,581) were recognized as an expense through cost of sales. The cost of inventories recognized as an expense includes $Nil (2013 - $67,813) in respect of write-downs of inventory to net realizable value. The allowance for inventory impairment as at September 30, 2014 was $27,933 (2013 - $27,933). 6. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses as at September 30, 2014 were $497,811 (2013 - $75,827) and primarily consist of insurance policy premiums, a contractually required refundable deposit with a research and development partner, and retainers with the Company’s legal counsel. 7. RESTRICTED CASH As a condition of the loan agreement with the Business Development Bank in Note 12, $250,000 was restricted and held as an irrevocable unconditional Letter of Credit. On February 7, 2014 the Business Development Bank advised the Company it had met the performance criteria required to release the restricted cash of $250,000. On meeting the performance criteria, the Company reclassified these monies into Cash and cash equivalents on the statement of financial position. 25 Microbix biosysteMs inc. 8. PROPERTY, PLANT AND EQUIPMENT The freehold land and buildings have been pledged as security for bank loans under a mortgage (see Note 12). The Company is not allowed to pledge these assets as security for other borrowings or to sell them to another entity. Property, plant and equipment consists of: Cost Building $ Research & development equipment $ Other equipment & fixtures $ Land $ Leasehold improvements $ Total $ Balance, Oct 1, 2012 Additions Disposals 4,424,004 109,514 - Balance, Sept 30, 2013 4,533,518 Additions 2,770 Other transfers Disposals - 907,574 3,217,824 800,000 116,957 - 48,965 - - 169,047 738,527 3,285,816 800,000 2,842,981 346,670 - (61,890) - - - - 351,660 - 256,850 9,701,062 226,471 474,862 94,810 - - (94,810) 9,452,671 3,192,421 (61,890) (94,810) Balance, Sept 30, 2014 4,536,288 3,581,508 3,570,596 800,000 - 12,488,392 Accumulated depreciation 487,568 Balance, Oct 1, 2012 Reversals - Depreciation 150,396 Balance, Sept 30, 2013 Disposals Depreciation 152,356 637,964 - 563,059 2,234,715 (126,646) - (34,664) - - 35,241 119,024 471,654 2,319,075 - - - 29,461 126,122 - - 287,798 (212,195) 19,207 3,573,140 (373,505) 323,868 94,810 (94,810) - 3,523,503 (94,810) 307,939 Balance, Sept 30, 2014 790,320 501,115 2,445,197 - - 3,736,632 Carrying value Oct 1, 2012 3,936,436 Sept 30, 2013 3,895,554 Sept 30, 2014 3,745,968 344,515 266,873 983,109 800,000 966,741 800,000 3,080,393 1,125,399 800,000 63,862 - - 6,127,922 5,929,168 8,751,760 Included in Research and development equipment is $2,842,981 related to assets not yet available for use. These assets are not subject to depreciation. 26 Microbix biosysteMs inc. 9. INTANGIBLE ASSETS Intangible assets are depreciated on a straight line basis at the following rates: License agreement, LumiSort™ (Note 9a) Technology investments LumiSort™ (Note 9a) Kinlytic® (Note 9b) Intangible assets consist of: 5% 5% 0% Cost Capitalized development LumiSort™ $ Balance at October 1, 2012 Additions from internal developments Acquisitions through business transactions Disposals or classified as held for sale Other transfers 23,307 - - (4,662) - Patents and trademarks Licenses Kinlytic® $ 2,770,529 - - - - LumiSort™ $ 1,463,016 - - - - LumiSort™ $ Total $ 278,528 - - - - 4,535,380 - - (4,662) - Balance at September 30, 2013 18,645 2,770,529 1,463,016 278,528 4,530,718 Additions from internal developments Acquisitions through business transactions Disposals or classified as held for sale Other transfers - 6,150 - 61,890 - - - - 181,619 - - - - - - - 181,619 6,150 - 61,890 Balance at September 30, 2014 86,685 2,770,529 1,644,635 278,528 4,780,377 Accumulated amortization Balance at October 1, 2012 Amortization expense Disposals or classified as held for sale Balance at September 30, 2013 Amortization expense Balance at September 30, 2014 Carrying value 7,032 650 (4,661) 3,021 748 3,769 - - - - - - 384,042 73,151 - 149,975 21,426 - 541,049 95,227 (4,661) 457,193 171,401 631,615 73,151 21,425 95,324 530,344 192,826 726,939 Net carrying amount, October 1, 2012 Net carrying amount, September 30, 2013 Net carrying amount, September 30, 2014 16,275 15,624 82,916 2,770,529 2,770,529 2,770,529 1,078,974 1,005,823 1,114,291 128,553 107,127 85,702 3,994,331 3,899,103 4,053,438 27 Microbix biosysteMs inc. 9. INTANGIBLE ASSETS (Continued) a) Lumisort™ The Company acquired a license agreement from Sequent Biotechnologies Inc. (“Sequent”), a biotechnology company solely involved in the development and commercialization of the Lumisort™ technology under license. New intellectual property with the issue of patents has resulted from this research program. These assets are in the process of being developed and new patents are pending and under development. b) Kinlytic® The Company acquired the assets and rights pertaining to development, production, and licensing of Kinlytic® from Abbott Laboratories in 2008. These assets are in the process of being commercialized. The recoverable amount of the Kinlytic® intangible has been determined based on its fair value less cost to sell. This estimate uses risk-adjusted cash flow projections based on probability-weighted financial budgets. Management made these assumptions based on probabilities of technical, regulatory and clinical acceptances and financial support. Management believes that any reasonably-possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount. 10. BANK INDEBTEDNESS The Company has a revolving line of credit of $500,000 with its Canadian chartered bank that bears interest at the bank’s prime lending rate plus 2.25%. Accounts receivable and property, plant and equipment are pledged as collateral for the bank credit facility. As at September 30, 2014 and 2013, the line of credit was fully unused. 28 Microbix biosysteMs inc.11. DEBENTURES The Company has convertible and non-convertible debentures issued and outstanding as at year-end. The carrying values of the debt component of these debentures are as follows: Non-convertible Convertible Total Date of issue Proceeds of issue Jan, 2014 $2,000,000 Jan, 2014 $1,500,000 Feb, 2007 $500,000 Oct, 2006 $500,000 Feb, 2006 $2,000,000 Sep, 2008 $2,500,000 $ $ $ $ $ $ $ Balance, October 1, 2012 Accretion expense Repayments Balance, September 30, 2013 Issuance (extinguishment) Accretion expense Repayments Balance, September 30, 2014 Less: current portion - - - - 928,373 128,425 (132,098) 924,700 244,284 680,416 - - - - 517,470 77,464 (73,048) 521,886 135,000 386,886 434,077 56,990 (45,000) 446,067 - 58,636 (45,000) 459,703 45,000 414,703 451,758 54,638 (45,000) 461,396 - 55,842 (45,000) 472,238 45,000 427,238 725,312 7,060 - 732,372 (735,085) 74,596 (71,883) - - - 897,074 233,483 (225,000) 905,557 - 236,460 (225,000) 917,017 225,000 692,017 2,508,221 352,171 (315,000) 2,545,392 (217,615) 502,998 (459,931) 2,370,844 450,000 1,920,844 Note (a) (b) (c) (d) (e) (f) The debentures denoted (a), (b), and (f) are secured against the real property and the personal property of the Company including without limiting the foregoing, a registered second mortgage on the property at 265 Watline Avenue, Mississauga, Ontario in favour of the holder, its successors and assigns subordinate only to indebtedness to a Canadian chartered bank or similar financial institution on normal commercial terms up to their maximum principal. The debentures denoted (c) and (d) are secured by a subordinated security agreement covering all of the Company’s property and assets, including its goodwill. The debenture denoted (e) was extinguished in the current fiscal year. Upon extinguishment, the Company allocated the consideration paid along with transaction costs incurred consistent with the method used in the allocation of proceeds between debt and equity when the debenture was originally issued. The result of this allocation was a $Nil gain in the consolidated statement of comprehensive income and recognition of $1,071,626 of contributed surplus. 29 Microbix biosysteMs inc. 11. DEBENTURES (Continued) Convertible debentures contain two components: liability and equity elements. The equity element is presented in equity under the heading of “equity component of debenture”. Convertible debentures are initially accounted for in accordance with their substance and are presented in the financial statements in their component parts measured at the time of issue. The debt components were valued first with the residual to shareholders’ equity. Over the term of the convertible debentures, the debt components will be accreted to the face value of the debentures by the recording of additional interest expense using the effective interest rate, as detailed below. All of the debentures were issued to a shareholder of the company. Note (a) (b) (c) (d) (e) (f) Date of issue Proceeds of issue Issue costs Liability component at the date of issue Jan, 2014 $ 2,000,000 $ $ - 928,373 Jan, 2014 $ 1,500,000 65,559 $ 517,470 $ Feb, 2007 $ 500,000 $ $ 388,958 - Oct, 2006 $ 500,000 $ $ 413,320 - Feb, 2006 $ 2,000,000 $ $ 735,086 - Sep, 2008 $ 2,500,000 - $ 885,089 $ Equity component at the date of issue Conversion price per common share N/A $ - $ $ 916,971 0.35 $ 111,042 0.90 $ $ $ 86,680 0.90 $ 1,264,914 0.90 $ $ 1,614,911 0.65 $ Effective interest rate charged Payment frequency Maturity of financial instrument Stated interest rate Terms of repayment Blended quarterly payments 25.69% Quarterly Jan, 2029 9% Principal and interest 61,071 $ 25.69% Quarterly Jan, 2029 9% Interest only N/A 13.00% Quarterly Feb, 2017 9% Interest only N/A 12.00% Quarterly Oct, 2016 9% Interest only N/A 25.69% Quarterly Jan, 2028 9% Interest only N/A 25.69% Quarterly Sep, 2028 9% Interest only N/A As the issuance of the non-convertible debenture denoted as (a) and the cancellation of the convertible debenture denoted as (e), were transacted with the same shareholder and represented a substantial modification in the terms, the non-convertible debenture is being accounted for in accordance with its substance and is presented in the financial statements as new debt, measured at fair value at the time of the issue. 12. LONG-TERM DEBT The Company negotiated a series of loans totalling $3,410,000 with the Business Development Bank (BDC) for the purchase and build-out of its new manufacturing facility. Purchase of the building Construction of manufacturing facility Purchase of equipment for facility The loans are secured with the building. $ 1,500,000 1,500,000 410,000 3,410,000 For loans totalling $3,350,000, the interest rate is floating, based on BDC’s Floating Base Rate plus 1.35%. At September 30, 2014 the Floating Base Rate was 5.00% on the outstanding balance of $2,602,060 (2013 - $2,657,620). Consecutive monthly principal payments of $9,260 are due to February 2037. For loans totalling $60,000, the interest rate is floating, based on BDC’s Floating Base Rate plus 1.80%, over a term of 8 years. At September 30, 2014 the Floating Base Rate was 5.00% on the outstanding balance of $21,025 (2013 - $25,375). Consecutive monthly principal payments of $725 are due to February 2017. 30 Microbix biosysteMs inc. During the fiscal year, the BDC offered a 6 month deferral of principal payments on the mortgage, beginning with the payment for April, 2014. The deferral amounted to $55,560 and, as a result, the monthly principal payments of $9,260 have been extended into August of 2037. Following is the commitment for the Business Development Corporation loans. 2015 2016 2017 2018 2019 Thereafter $ 119,820 119,820 114,745 111,120 111,120 2,046,460 During the fiscal year, the Company negotiated an additional $615,000 loan with the BDC with a maturity of July, 2020, subject to interest at the BDC’s Floating Base Rate plus 0.5%, with monthly repayments of principal and interest of $10,250 starting in August, 2015. The funds were advanced to the Company from the BDC subsequent to year-end and as at September 30, 2014, the outstanding balance on this loan is $Nil. 13. DEFERRED REVENUE In 2007, the Company entered into an agreement with the Animal Fine Breeding Station of Hebei Province in China, as the exclusive distributor of Microbix’ proprietary Semen Sexing Technology (“SST”). Under the terms of the agreement, the Company had received a non-refundable payment of $400,000 US and will receive an additional payment upon a milestone achievement. Royalty fees and payment for materials will be made with product sales. This payment is being accounted for in accordance with its substance and is presented in the financial statements as deferred revenue on the statement of financial position. The Company will defer recognition of this revenue until all of the deliverables in the agreement are complete. At September 30, 2014, all of the deliverables have not been met and are not expected to be met within the next fiscal year and therefore no amount has been recognized or reclassified to current liabilities. 14. SHARE CAPITAL The Company is authorized to issue an unlimited number of Common Shares with no par value and an unlimited number of Preference Shares with no par value. The changes in issued and fully paid common shares are noted in the Consolidated Statement of Shareholder’s Equity and are as follows: Common shares issued Proceeds, net of financing costs Warrants exercised Stock options exercised 2014 9,270,108 $3,403,678 3,543,900 598,000 2013 1,090,000 $290,868 40,000 - 31 Microbix biosysteMs inc. 14. SHARE CAPITAL (continued) The Company closed the following private placement offerings for the years ended September 30, 2014 and 2013: Date of private placement Private placement unit, consisting of: Common shares Common share purchase warrants Price, per unit Gross proceeds of private placement Less: transaction costs Net proceeds of private placement Exercise price of purchase warrant Term of purchase warrant Note 2014 Aug, 2014 2013 Oct, 2012 5,128,208 5,128,208 1,050,000 1,050,000 $ 0.39 $ 2,000,000 $ (46,672) $ 1,953,328 $ 0.55 5 years $ $ $ $ $ 0.30 315,000 (59,118) 255,882 0.33 24 months (a) (b) (a) Each unit consisted of one common share of Microbix and one common share purchase warrant. Securities issued are subject to a holding period of four months plus a day. A total of 121,555 finder’s warrants were issued. Each finder’s warrant allows the holder to purchase a unit for $0.47 for a period of 5 years and one day from the date of issue. (b) Each unit consisted of one common share of Microbix and one common share purchase warrant. Securities issued are subject to a holding period of four months plus a day. A total of 192,000 finder’s warrants were issued. Each finder’s warrant allows the holder to purchase a unit for $0.33 for a period of 24 months and one day from the date of issue. The number of issued and outstanding common shares and the stated capital of Microbix as at September 30, 2014 are presented below: Balance, October 1, 2012 Issued on private placement Exercise of warrants Balance, September 30, 2013 Issued on private placement Exercise of warrants Exercise of stock options Balance, September 30, 2014 15. CONTRIBUTED SURPLUS Balance, October 1, 2012 Share issue costs Stock option expense Balance, September 30, 2013 Warrant issue costs Stock options exercised Settlement of equity component of convertible debentures Stock option expense Balance, September 30, 2014 32 Number of Shares 65,594,350 1,050,000 40,000 66,684,350 5,128,208 3,543,900 598,000 75,954,458 Stated Capital ($) 24,033,712 255,882 10,000 24,299,594 1,912,168 1,051,381 398,969 27,662,112 $ 3,338,881 24,986 186,654 3,550,521 41,160 (189,869) 1,071,626 14,200 4,487,638 Microbix biosysteMs inc. 16. COMMON SHARE PURCHASE WARRANTS A total of 2,990,641 warrants scheduled to expire in fiscal 2014, were extended one additional year to March 29, 2015. A continuity of the Company’s warrants outstanding as at September 30, 2014 and 2013 is presented in the following table: Outstanding, October 1, 2012 Issued Exercised Expired Extended Outstanding, September 30, 2013 Issued Exercised Expired Extended Outstanding, September 30, 2014 Weighted average exercise price $ 0.59 0.33 0.25 0.98 0.40 0.34 0.55 0.30 0.39 0.40 0.48 Units 12,625,694 $ $ 1,242,000 (40,000) $ (5,186,226) $ 3,250,000 $ 11,891,468 $ 5,249,763 $ (3,543,900) $ (6,454,455) $ 2,990,641 $ 10,133,517 $ A summary of the Company’s warrants outstanding as at September 30, 2014 and 2013 is presented in the following table: 2014 Weighted average exercise price $ Weighted average remaining contractual life years Number outstanding Number outstanding 5,128,208 5,005,309 - 10,133,517 $ $ $ $ 0.55 0.36 - 0.48 4.92 0.43 - 2.70 - - 11,891,468 11,891,468 2013 Weighted average exercise price $ - $ $ - $ 0.34 $ 0.34 Weighted average remaining contractual life years - - 0.90 0.90 Range of exercise prices: $0.55 $0.24 to $0.40 $0.24 to $0.44 33 Microbix biosysteMs inc. 17. STOCK OPTION PLAN On March 5, 2013, the shareholders of the Company approved a resolution to amend the Company’s stock option plan. This amendment changed the total number of Common Shares available to be issued under the plan from a maximum of 10,000,000 to a maximum of 12,000,000 common shares. Under the plan, the Company has a total of 4,354,000 options issued and pending (2013 - 6,660,000). The exercise price of each option equals no less that the market price at the date immediately preceding the date of the grant. In general, options issued under the plan vest and are exercisable in equal amounts in three steps, at the issue date and at the anniversary date in the subsequent two years. Management does not expect any stock options issued in the year and remaining unvested at the year-end to be forfeited before they vest. The following table reflects the activity under the Company’s stock option plan period ended September 30, 2014 and 2013. Weighted average exercise price $ Units Outstanding, October 1, 2012 Issued Exercised Expired or forfeitted Outstanding, September 30, 2013 Issued Exercised Expired or forfeitted Outstanding, September 30, 2014 7,201,666 400,000 - (941,666) 6,660,000 - $ $ $ $ $ $ (598,000) $ $ $ (1,708,000) 4,354,000 0.46 0.26 - 1.08 0.36 - 0.35 1.08 0.36 The exercise price of each option equals the closing market price of the Company’s capital stock on the day preceding the grant date. The following table reflects the number of options, their weighted average price and the weighted average remaining contract life for the options grouped by price range as of September 30, 2014 and 2013. 2014 Weighted average exercise price $ Weighted average remaining contractual life years 2013 Weighted average Number of options exercise outstanding price $ Number of options outstanding 4,354,000 - - 4,354,000 $ $ $ $ 0.36 - - 0.36 1.37 - - 1.37 - 6,535,000 125,000 6,660,000 - $ $ 0.35 $ 0.65 $ 0.36 Weighted average remaining contractual life years - 1.38 0.25 1.35 Range of exercise prices: $0.26 to $0.39 $0.26 to $0.60 $0.64 to $0.73 34 Microbix biosysteMs inc. 17. STOCK OPTION PLAN (continued) The fair value of options granted during the year ended September 30 was estimated at the grant date using the Black- Scholes options pricing model, resulting in the following weighted-average assumptions: Share price on issue date Dividend yield Volatility Risk-free interest rate Expected option life (years) Weighted average fair value of each option ($/option) 2013 $0.28 0.00% 94.7% 5.00% 5 0.19 The volatility of the stock for the Black-Scholes options pricing model was based on 5-year historic volatility of the Company’s stock price on the Toronto Stock Exchange. Management believes that the historic stock volatility provides a fair and appropriate basis of estimate for the expected future volatility of the stock. Stock options are assumed to be exercised at the end of the option’s life, as management believes the probability of an early exercise is remote. During the year, the fair value of the options vested in the year were expensed and credited to contributed surplus. 18. INCOME PER SHARE Basic income per share is calculated using the weighted average number of shares outstanding. Diluted income per share reflects the dilutive effect of the exercise of stock options, warrants and convertible debt. The following table reconciles the net income and the number of shares for the basic and diluted loss per share computations: Numerator Net income available to common shareholders Denominator for basic EPS – weighted average common shares outstanding Effect of dilutive securities: Warrants Stock Options Convertible Debentures Denominator for diluted EPS Earnings per share Basic Diluted 2014 $168,979 68,977,187 2,039,737 1,215,000 - 72,231,924 $0.002 $0.002 2013 $1,378 66,599,987 - - - 66,599,987 $0.000 $0.000 The following represents the warrants, stock options and convertible debentures not included in the calculation of diluted EPS due to their anti-dilutive impact: Pursuant to warrants Under stock options Pursuant to convertible debentures 2014 8,093,779 3,139,000 9,242,979 20,475,758 2013 11,891,468 6,660,000 7,179,487 25,730,955 35 Microbix biosysteMs inc. 19. EXPENSES BY NATURE The Company has chosen to present its Statements of Comprehensive Income based on the functions of the entity. The Consolidated Statements of Comprehensive Income include the following expenses by nature: a) Employee costs: Short-term wages, bonuses and benefits Share based payments Total employee costs Included in: Cost of goods sold Research and development General and administrative expenses Selling and business development Total employee costs b) Depreciation and amortization Included in: Cost of goods sold General and administrative expenses Research and development Total depreciation and amortization 20. INCOME TAXES Income Taxes consist of the following, as at September 30: Provision based on combined federal and provincial statutory rates of 26.50% (2013 – 26.50%) Increase (decrease) resulting from Permanent differences Adjustment to previous year’s federal investment tax credits Adjustment to previous year’s other deferred tax assets Federal investment tax credits and Ontario research and development tax credits utilized/refundable (net of tax) Changes in deferred tax assets not recognized Benefit of deferred tax assets recognized Other Current income tax expense 36 2014 $ 2,234,024 14,200 2,248,224 1,076,258 451,975 385,575 334,416 2,248,224 278,478 748 124,037 403,263 2014 $ 126,040 7,851 (1,774,320) (87,146) 232,867 1,567,554 265,000 (31,201) 306,645 2013 $ 3,406,376 186,654 3,593,030 2,069,280 513,526 687,096 323,128 3,593,030 266,041 23,337 129,817 419,195 2013 $ 44,600 63,600 - - - 70,100 - (11,500) 166,800 Microbix biosysteMs inc. 20. INCOME TAXES (continued) The Company has unclaimed research and development expenses, research and development investment tax credits and accumulated losses for income tax purposes. Certain of these credits have been recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the credits in the foreseeable future. The accumulated non-capital losses may be used to reduce taxable income in future years and must be claimed no later than: 2026 2027 2028 2029 2030 2031 2032 The significant components of future income tax assets are summarized as follows: Deferred income tax assets Non-capital loss carry-forwards Difference in net book value compared to undepreciated capital cost Deferred revenue Unclaimed research and development expenditures Future income tax liability related to debentures Tax assets not recognized Deferred tax asset $ 449,900 630,700 1,821,400 975,100 475,800 1,144,800 1,223,100 6,720,800 2014 $ 2013 $ 1,780,978 1,755,400 617,715 187,416 640,100 215,00 3,734,309 3,480,800 (970,124) (5,350,294) (783,000) (5,308,300) - - The unclaimed research and development investment tax credits before income tax effect may be carried forward and used to reduce federal income taxes. These must be claimed no later than: 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $ 1,000 149,000 303,000 293,000 304,000 394,000 175,000 220,000 170,000 123,000 107,000 2,239,000 37 Microbix biosysteMs inc. 20. INCOME TAXES (continued) The associated tax benefits relating to the unclaimed credits are as follows: Unclaimed research and development tax credits Tax assets not recognized Asset related to investment tax credits 21. CHANGES IN NON-CASH WORKING CAPITAL BALANCE Accounts receivable Inventory Prepaid expenses & other assets Investment tax credits receivable Accounts payable and accrued liabilities 22. SUPPLEMENTARY CASH FLOW INFORMATION Cash paid for interest Non-cash investing and financing activities Fees for equity placements Purchase of assets under capital leases 23. FINANCIAL EXPENSES Cash interest Interest on long-term debt Interest on debentures Interest other Interest income Non-cash interest Accretion on debentures Accretion on asset retirement Financial expenses 2014 $ 2013 $ 1,790,540 (1,525,540) 2,428,300 (2,428,300) 265,000 - 2014 $ (990,526) (526,278) (421,984) (64,869) 471,979 (1,531,678) 2013 $ 296,588 175,123 71,903 (12,865) (561,215) (30,466) 2014 $ 2013 $ 804,393 681,611 44,672 6,907 34,130 - 2014 $ 2013 $ 168,096 639,046 7,059 (9,807) 36,682 - 841,076 172,393 495,000 14,218 (9,164) 37,171 (40,708) 668,910 38 Microbix biosysteMs inc. 24. CAPITAL MANAGEMENT The Company’s capital management objective is to safeguard its ability to function as a going-concern to maintain its virology operations and to fund its development activities. Microbix defines its capital to include the revolving line of credit, shareholders’ equity, the Business Development Bank capital loan, and the debentures. The capital at September 30, 2014 was $15,760,664 (2013 - $11,199,751). To date, the Company has used common equity issues, debentures and a bank mortgage to fund its activities. The equity is through private placements, the debentures are all controlled by private individuals known to the Company and the mortgage is with the Business Development Bank. If possible, the Company tries to optimize its liquidity needs by non- dilutive sources, including investment tax credits, grants and interest income. The Company has a revolving line of credit of $500,000 with its Canadian chartered bank, Note 10. The Company’s general policy is to not pay dividends and retain cash to keep funds available to finance the Company’s growth. However, the Board of Directors may, from time to time, choose to declare a dividend in assets if warranted by circumstances. There was no change during the year in how the Company defines its capital or how it manages its capital. 25. FINANCIAL INSTRUMENTS The fair value of a financial instrument is approximated by the consideration that would be agreed to in an arm’s length transaction between willing parties and through appropriate valuation methods, but considerable judgment is required for the Company to determine the value. The actual amount that could be realized in a current market exchange could be different than the estimated value. The carrying amounts of cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term debt is based on rates currently available for items with similar terms and maturities. The convertible and non-convertible debenture fair values are not readily determinable as the convertible debentures have been issued to shareholders of the Company. 26. FINANCIAL RISK MANAGEMENT The primary risks that affect the Company are set out below and the risks have not changed during the reporting year. The list does not cover all risks to the Company, nor is there an assurance that the strategy of management to mitigate the risks is sufficient to eliminate the risk. a) Credit risk The Company’s cash and cash equivalents are held in accounts or short-term interest bearing accounts at one of the major Canadian chartered banks. Management perceives the credit risk to be low. There is a concentration of accounts receivable risk due to the few large customers comprising the Company’s international customer base. In fiscal 2014, four customers account for 82% (2013 - four customers account for 43%) of revenue. The Company has had minimal bad debts over the past several years and accordingly management has recorded an allowance of $1,018 (2013 - $54,013). 39 Microbix biosysteMs inc.26. FINANCIAL RISK MANAGEMENT (Continued) Trade accounts receivable are aged as follows at September 30: Current 0 - 30 days past due 31 - 60 days past due 61 - days and over past due b) Currency risk 2014 $ 1,350,443 526,022 48,482 216,561 2,141,508 2013 $ 1,061,661 111,630 (22,309) - 1,150,982 Through its global sales the Company is exposed to currency risk, through fluctuations in the exchange rate affecting sales and receivables denominated in US dollars and Euros. The Company does not use financial instruments to hedge these risks. At September 30, the significant balances, quoted in Canadian dollars, held in foreign currencies are: Cash Accounts receivable Accounts payable and accrued liabilities US dollars 2014 99,491 1,259,391 2013 54,736 1,000,454 Euros 2014 - 738,372 2013 - 140,460 650,440 289,747 32,621 7,024 The impact of a 1 cent increase in the Canadian dollar against the US dollar would result in a revenue loss of about 1%. The impact of a 1 cent increase in the Canadian dollar against the Euro would result in a revenue loss of about 1.4%. c) Liquidity risk Liquidity risk is the risk that the Company will not be able to meets its financial obligations as they fall due. To manage this situation, the Company projects and monitors its cash requirements to accommodate changes in liquidity needs. d) Interest rate risk Financial instruments that potentially subject the Company to cash flow interest rate risk are those assets and liabilities with a variable interest rate. Interest risk exposure is primarily on the BDC debt that has a variable rate that is pegged to the bank rate. The rate can be fixed, if the outlook for interest rates should move higher. The only other variable debt the Company has is the $500,000 line of credit that bears interest at the bank’s prime lending rate plus 2.25%. A 1% increase in the bank rate would cost the Company approximately $30,000 per year for BDC and about $5,000 on the line of credit usage. e) Market risk Market risk is the risk that changes in product prices based on supply and demand criteria, foreign exchange rates and interest rates will affect the Company’s income or the value of the financial instruments held. Microbix products are valuable components in many of our customers’ products and not easily replaced. The Company works closely with key customers to ensure our products meet critical customer results. f) Fair value The Company categorizes its financial assets and liabilities measured at the fair value into one of three different levels depending on the observation of the inputs used in the measurement. For the 2014 and 2013 fiscal periods, the Company has only the financial instruments in Level 1. At September 30, 2014, the Company`s financial instruments are cash and cash equivalents for an amount of $547,356 (2013 - $260,048) which are considered to be Level 1 instruments. There were no transfers between levels during the year. 40 Microbix biosysteMs inc. 26. FINANCIAL RISK MANAGEMENT (Continued) f) Fair value (Continued) The three levels are defined as follows: a) Level 1: Fair value is based on unadjusted quoted prices for identical assets or liabilities in active markets. b) Level 2: Fair value is based on inputs other than quoted prices included within Level 1 that are not observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and c) Level 3: Fair value is based on valuation techniques that require one or more significant unobservable inputs. 27 . SEGMENTED INFORMATION The Company operates in two industries: the development, manufacturing and distribution of cell based products and technology and, provision of facility, technical and production personnel for contract research and development. External revenue by segment is attributed to geographic regions based on the location of customers: North America, Europe and Other foreign countries. The following is an analysis of the Company’s revenue and results from continuing operations by reportable segment: Virology Products and Technologies Lumisort ™ Kinlytic® Total for continuing operations Segment revenue Segment profit 2014 $ 8,396,796 - - 8,396,796 2013 $ 7,574,593 - - 7,574,593 2014 $ 168,979 - - 168,979 2013 $ 1,378 - - 1,378 Segment revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the current year (2013 - $Nil). The accounting policies of the reportable segments are the same as the Company’s accounting policies described in Note 3. Segment profit represents the profit before tax earned by each segment without allocation of central administration costs and directors’ salaries, share of profits of associates, gain recognised on disposal of interest in former associate, investment income, other gains and losses as well as finance costs. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. Segment assets Segment liabilities 2014 $ 2013 $ 2014 $ 2013 $ Virology Products and Technologies Lumisort ™ Kinlytic® Total for continuing operations 11,122,269 4,106,130 2,770,529 17,998,928 8,816,932 1,128,575 2,770,529 12,716,036 2,238,264 1,766,285 - - - - 2,238,264 1,766,285 All assets are allocated to reportable segments other than interests in associates and current and deferred tax assets. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments. All liabilities are allocated to reportable segments other than borrowings and current and deferred tax liabilities. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets. 41 Microbix biosysteMs inc. 27 . SEGMENTED INFORMATION (Continued) Virology Products and Technologies Lumisort ™ Kinlytic® Total for continuing operations 28. GEOGRAPHIC INFORMATION Depreciation and amortization Additions to non-current assets 2014 $ 307,939 95,324 - 403,263 2013 $ 323,968 95,227 - 419,195 2014 $ 369,200 3,010,990 - 3,380,190 2013 $ 228,535 - - 228,535 The Company operates in three principal geographical areas – North America (country of domicile), Europe and in other foreign countries. The Company’s revenue from continuing operations from external customers by location of operations and information about its non-current assets by location of assets are detailed below. Revenue from external customers 2014 $ 1,652,425 5,835,078 909,293 8,396,796 2013 $ 2,638,189 4,287,621 648,783 7,574,593 Non-current assets 2014 $ 2013 $ 13,291,902 10,078,271 - - - - 13,291,902 10,078,271 North America Europe Other foreign countries 29. RELATED PARTY TRANSACTIONS Key Management Compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company. Key management includes three executive officers. Compensation for the Company’s key management personnel was as follows: Short-term wages, bonuses and benefits Termination benefits Share based payments Total key management compensation 2014 $ 595,690 - - 595,690 2013 $ 621,339 87,000 77,516 785,855 During the year ended September 30, 2014, the Company paid interest of $595,721 (2013 - $495,000) on the convertible debentures issued to related party shareholders. 42 Microbix biosysteMs inc. 30. COMMITMENTS AND CONTINGENCIES a) Lease commitments 2015 2016 2017 2018 2019 b) Payments on convertible and non-convertible debentures (Note 11) 2015 2016 2017 2018 2019 c) Contingencies $ 65,515 35,646 4,776 3,306 1,378 110,621 $ 694,284 694,284 638,034 604,284 604,284 3,235,170 The Company is party to legal proceedings arising out of the normal course of business. The results of these litigations cannot be predicted with certainty, and management is of the opinion that the outcome of these proceedings is not determinable. Any loss resulting from these proceedings will be charged to operations in the period when the loss becomes probable to occur and reasonably measurable. 43 Microbix biosysteMs inc. DIRECTORS Peter M. Blecher Ontario, Canada Staff Emergency Physician Lakeridge Health Hospital Mark A. Cochran Virginia, USA Managing Director Johns Hopkins Medicine Vaughn C. Embro-Pantalony (1) (2) Ontario, Canada Chief Executive Officer and President Microbix Biosystems Inc. William J. Gastle (2) Ontario, Canada Executive Chairman Microbix Biosystems Inc. Cameron Groome (1) Ontario, Canada Pharmaceutical Executive Martin A. Marino (1) (2) Ontario, Canada Pharmaceutical Executive Andrew C. Pollock (1) (2) Ontario, Canada Marketing Excecutive Joseph D. Renner (2) New Jersey, USA Pharmaceutical Executive CORPORATE INFORMATION Corporate Counsel Boyle & Co. LLP Auditors Transfer Agent Collins Barrow Toronto LLP Chartered Accountants Canadian Stock Transfer Company Inc. as the Administrative Agent for CIBC Mellon Trust Company 416-682-3860 1-800-387-0825 Bankers Bank of Montreal Head Office Microbix Biosystems Inc. 265 Watline Avenue, Mississauga, Ontario Canada L4Z 1P3 Tel: 905-361-8910 Fax: 905-361-8911 www.microbix.com NOTICE OF ANNUAL MEETING The Annual Meeting of the Shareholders will be held at the University Club, 380 University Avenue, Toronto, Ontario on Tuesday, March 3, 2015 at 1:00 PM. ANNUAL REPORT Additional copies of the Company’s 2014 Annual Report are available by contacting Microbix’ head office. (1)Member of Audit Committee. (2)Member of the Human Resources, Compensation and Governance Committee. SENIOR MANAGEMENT William J. Gastle Executive Chairman Vaughn C. Embro-Pantalony President and Chief Executive Officer Charles S. Wallace Chief Finanical Officer Dr. Mark Luscher Senior Vice-President, Scientific Affairs Phillip Casselli Senior Vice-President, Sales & Business Development Kevin J. Cassidy Vice President, Biopharmaceuticals Christopher B. Lobb General Counsel & Secretary 44 Microbix biosysteMs inc. M I C R O B I X B I O S Y S T E M S I N C . 265 Watline Avenue, Mississauga, Ontario Canada L4Z 1P3 Tel: 905-361-8910 Fax: 905-361-8911 1-800-794-6694 Web Site: www.microbix.com 

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