M I C R O B I X
B I O S Y S T E M S I NC .
ANNUAL REPORT 2016
Message to shareholders
As we reflect on 2016, we have made important
progress in terms of our financial results and
the execution of our strategy. This has setup the
will start in the near future and shipments are
expected to commence in the fall of 2017.
Discussions with several parties interested
in re-launching Kinlytic® in different markets
coming year as one of the most important in the
have reached the stage where the Company is
Company’s history.
I am pleased to report that the Company
achieved record sales performance for the fiscal
year ended September 30th. Although sales in
the first quarter were weak, we subsequently
experienced successive sales records in the
second and fourth quarters, which contributed to
the Company’s highest-ever annual sales of $9.5
million, an improvement of 13% over 2015.
All
indicators suggest customer demand
will remain strong through 2017 setting the
Company on a course for another year of strong
sales growth. The recent start-up of the new
bioreactor manufacturing process provides the
expanded production capacity needed to satisfy
this additional demand, while also contributing
significant savings in operating costs. We are
well positioned to deliver higher sales volume
and improved margins going forward.
Finally, with careful management of operating
expenses in 2016 contributing a 12% improvement
compared to last year, overall we delivered a 22%
improvement in net income and more than 50%
improvement in operating cash flow compared to
last year. The Company has now achieved four
consecutive years of continuously
improving
profitability, and established a track record of
predictable operating results.
Our new molecular controls product offering
is advancing with the continued development of
upgraded manufacturing processes and quality
systems that will ensure our operation becomes
ISO13485 compliant. Product development
1
now preparing for a meeting with the U.S. Food
and Drug Administration in early 2017. The
objective of this meeting is to establish a more
specific clinical and regulatory pathway for the
reintroduction of the drug to the U.S. market. Our
prospective partners include lead and secondary
investors,
license partners and government
agencies all of whom are looking forward to the
outcome of this meeting with the FDA, as it will
address specific questions about the proposed
Kinlytic® clinical program. I am optimistic we can
close a partnership to fund Kinlytic® in 2017.
We continue to work with a small group of
companies interested in a partnership with
Microbix to complete the development and
commercialization of the LumiSort technology.
There are different complexities being addressed
in these negotiations that are contributing to the
extended timeline, including the challenging legal
landscape in the North American animal genetics
industry. This groundbreaking technology can
ultimately provide the livestock industry with
superior yields and throughput of sexed semen
and, in so doing, we believe it can unlock
significant value for the industry. We will continue
to provide updates as developments materialize.
On behalf of my colleagues, I thank you for
your continuing loyalty and I extend best wishes
for 2017.
Vaughn C. Embro-Pantalony
PrEsidEnt and ChiEf ExECutiVE offiCEr
Canadian Funds MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015
Canadian Funds
The Company’s Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the
unaudited Consolidated Interim Financial Statements and notes and should also be read in conjunction with the
audited Consolidated Financial Statements, notes and MD&A for the year ended September 30, 2016, prepared in
accordance with International Financial Reporting Standards (“IFRS”) and filed on Sedar. Additional information
relating to the Company, including its Annual Information Form (“AIF”), can be found 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.
The Management Discussion and Analysis is dated December 20, 2016.
COMPANY OVERVIEW
Microbix Biosystems Inc. (Microbix or the Company) (TSX: MBX) develops biological products and technologies.
The Company has a Virology Products (Virology) 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. The Company owns Kinlytic®, an FDA approved human thrombolytic drug,
and is developing LumiSort™, a semen sexing technology.
Revenue from the Virology business which is expected to continue growing for the foreseeable future,
provides for operating and debt service costs, and funding for the Company’s development programs.
The Company owns and operates a Virology manufacturing facility at 265 Watline Avenue in Mississauga,
Ontario. The facility has an infectious diseases biological license from the Canadian Food Inspection Agency.
The Company’s administrative offices are located at 211 Watline Avenue.
2
Canadian Funds
FINANCIAL OVERVIEW
Canadian Funds
Year Ending September 30, 2016
Total revenue was $9,517,137, a 7% increase over 2015’s $8,873,912. Included was Virology product revenue at
$9,236,152, 13% higher than 2015, due to strong growth into Asian markets.
Revenue from licensing fees was $ nil (2015 - $413,895) due to a one time recognition of non-refundable deferred
revenue received from a prospective distributor of the Company’s LumiSort™ technology in 2015. Revenue from
royalties was $280,985 (2015 - $268,297).
Gross margin decreased by 15%, one half of which was due to lower licensing revenues in 2016 described in the
foregoing.. The balance of the decrease was due to higher material costs. Operating expenses decreased by 12%,
compared to 2015, due to significantly lower legal costs with the termination of the VIRUSMAX litigation in the
previous year. Net income was $748,407 (2015 - $613,984).
Cash generated from operations in fiscal 2016 was $913,308 compared to a $595,402 in fiscal 2015. Cash used in
investing activities was $1,641,126 (2015 - $4,842,022), a decrease due to completion of the LumiSort™ prototype in
the previous year. Cash generated from financing activities in fiscal 2016 was $629,053 (2015 - $3,803,444) primarily
due to a reduction in loan proceeds of $840,000 in 2016 compared to 2015, and no common share warrants having
been exercised in 2016 compared to $1,738,434 warrants exercised in 2015. Net cash flow was $98,765 negative in
fiscal 2016 (2015 - $443,176 negative).
Quarter Ending September 30, 2016
Virology product revenue of $3,349,785 was significantly higher than the same period last year (2015 -
$1,612,615), as antigen shipments to a large European customer returned to normal levels compared to the
fourth quarter last year; also sales in East Asia grew significantly year over year. This growth is expected to
continue in fiscal 2017.
Gross margins were slightly lower at $2,077,335 ($2,124,627 – 2015) as the comparative quarter in fiscal 2015
realized a one-time recognition of $413,895 profit in licensing revenues. Operating expenses were down by $454,184
versus the last quarter of fiscal 2015, due to the one-time legal costs incurred for the VIRUSMAX litigation during
the same period last year. Net income for the quarter was $862,930 (2015 - $403,116).
Cash provided by operations was $367,235 compared to $84,394 provided by operations for the same period
last year. Cash used in investing activities was $267,276 (2015 - $499,512), reflecting completion of the Lumisort™
prototype early in fiscal 2016 and completion of the development of the new automation process for manufacturing
Virology products in the last quarter of fiscal 2016. Cash used by financing activities was $99,633 reflecting a
reduction of debt in the quarter versus financing provided of $541,624 in the comparative quarter of fiscal 2015 to
finance the Company’s investment in equipment and process development. In summary, the fourth quarter’s net cash
flow was $325 positive (2015 – $ 125,865).
3
Canadian Funds
CHANGES IN FINANCIAL POSITION
Canadian Funds
Total Revenue
Operating income
Cash
Accounts receivable
Total current assets
Total assets
Total current liabilities
Total liabilities
Total shareholders’ equity
Current ratio
Debt to equity ratio
2016
$
9,517,137
148,407
5,415
2,021,872
5,661,219
25,247,463
5,248,993
9,955,722
15,291,741
1.08
0.65
2015
$
8,873,912
348,984
104,180
1,692,074
5,788,161
23,546,958
4,135,457
9,870,048
13,676,910
1.40
0.72
SELECTED QUARTERLY FINANCIAL INFORMATION
Dec-31-14
$
Mar-31-15
$
Jun-30-15
$
Sep-30-15
$
Dec-31-15
$
Mar-31-16
$
Jun-30-16
$
Sep-30-16
$
1,995,833
2,544,900
2,219,019
2,114,160
1,063,405
2,729,779
2,253,373
3,470,580
90,553
86,335
147,769
123,434
(428,420)
161,979
(141,082)
555,930
SALES
Operating
Income (1)
(1) Operating income represents net operating income and comprehensive operating income for the year as reported
on the Company’s consolidated statement of comprehensive income.
OUTLOOK
The business of Microbix described in these documents is the result of years of research and development,
which has delivered products and technologies that have received wide customer acceptance and experienced
continued growth in demand. Microbix has both the manufacturing capacity and the scientific capability to support
this growth, including the continuous demand for competitive process improvements and new products.
Virology product revenues are expected to continue growing in the coming years. The Company continues to
expand its conventional antigen product line and recently announced the launch of its molecular diagnostic products.
In addition, the Company is experiencing a net favourable currency effect. The Company continues to invest in new
process technologies to improve its manufacturing cost base and expand its production capacity. In light of all of
these developments, management expects to realize improved profitability from the Virology business.
Management is preparing to meet with the FDA in early 2017 to confirm its specific clinical and regulatory
plans for the re-introduction of Kinlytic® to the U.S. market. Management is optimistic about closing a partnership
in fiscal 2017 with prospective partners awaiting the outcome of the meeting with the FDA.
The Lumisort™ prototype was successfully built and tested in 2015 and partnering discussions with global animal
genetics companies continued through 2016. However, ongoing patent litigation among the three largest animal
genetics companies in the U.S. has caused significant uncertainty within the A.I. industry, which has resulted in slower
paced discussions with potential LumiSort partners. Management expects to close a partnership arrangement in fiscal
2017 to complete the development of LumiSort.
4
Canadian Funds
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
Canadian Funds
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 historical losses resulting in an accumulated deficit of $23,296,749 as at September 30,
2016. However, each of the past four fiscal years have been profitable with an accumulated net income of $1,532,748.
Management continuously monitors the financial position of the Company with respect to working capital needs,
as well as long-term capital requirements compared to the annual operating budget. Variances are highlighted and
actions are taken to ensure the Company is appropriately capitalized.
Subsequent to September 30, 2016, the Company has arranged a new secured revolving credit facility jointly with
The Toronto-Dominion Bank (“TD Bank”) and Export Development Canada (“EDC”). The new credit facility will
be used for general corporate purposes, including the execution of the Company’s overall growth strategy. Specific
terms of this new credit facility will be disclosed in the interim report for the first fiscal quarter of 2017.
Future Liquidity and Capital Needs
Microbix primarily funds new product development activities and capital expenditures from the profits earned by
its Virology business and, periodically, from additional equity and/or debt.
In fiscal 2017 cash flow is expected to improve considerably as the year progresses due to: 1) continued growth
in Virology sales, 2) implementation in early fiscal 2017 of a newly expanded operating credit line negotiated with
the Company’s bank, 3) improved profit contribution from the Virology business due to lower material costs
and higher efficiencies as the Company continues to work with customers to commercialize its new bioreactor
production process, and 4) completing the independent funding of both Lumisort™ and Kinlytic® through
partnership arrangements. Management expects these developments will significantly improve the Company’s
overall liquidity position in fiscal 2017.
Contractual Obligations
a) Commitments and Contingencies
Over the next five years the Company has long-term commitments as at September 30, 2016 as described in the
following tables:
i) Lease commitments
2017
2018
2019
2020
2021
ii) Minimum annual payments on convertible and non-convertible debentures
2017
2018
2019
2020
2021 and thereafter
$
41,152
7,602
3,096
-
-
51,850
$
1,626,742
604,242
604,242
604,242
8,944,891
12,384,359
See Note 29 Subsequent Events for changes to convertible debenture subsequent to September 30, 2016.
5
Canadian Funds
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES (Continued)
Canadian Funds
b) Outstanding Share Capital
Share capital issued and outstanding as at December 20, 2016 was $31,299,416 for 84,704,257 common shares versus
83,204,257 common shares at September 30, 2015.
LONG-TERM ASSETS
a) Tangible Assets
During fiscal 2016 the Company spent $702,579 on Lumisort™ development and Virology production equipment.
b) Intangible Assets
During fiscal 2016 the Company spent $938,547 on the development of its new bioreactor automation process.
Technology Investment - Lumisort™
In 2005 the Company acquired Sequent Biotechnologies Inc. a developer of semen-sexing technology. For financial
purposes the Company recognized the acquisition cost at the fair value of this technology.
Additional investment has been recognized under the ongoing development program, including intellectual
property in the form of new patents, as well as the work completed in the past two years to build and successfully
test the new LumiSort prototype instrument.
Technology Investment – Urokinase/Kinlytic®
On September 23, 2008, Microbix completed a $2,770,529 acquisition of all Kinlytic® assets from ImaRx
Therapeutics, Inc.
Technology Investment – Bioreactor
The Company has automated its manufacturing process with the implementation of the bioreactor process,
which increases the efficiency and output of its virology products. The bioreactor process was completed
September 30, 2016.
6
Canadian Funds
LONG-TERM DEBT
Canadian Funds
Business Development Corporation Debt
In fiscal 2009 the Company negotiated a series of loans totalling $3,061,000 with the Business Development Bank of
Canada (“BDC”) for the original purchase and build-out of its manufacturing facility.
Purchase of the building
Construction of manufacturing facility
Purchase of equipment for facility
$
1,500,000
1,500,000
61,000
3,061,000
The loans are secured against the building and equipment. For loans totalling $3,000,000, consecutive monthly principal
payments of $9,260 are due until February 2037 on the outstanding balance of $2,379,820 (September 30, 2015 -
$2,490,940). For loans totalling $61,000, consecutive monthly principal payments of $725 are due until February 2017
on the outstanding balance of $3,625 (September 30, 2015 – $12,325).
In fiscal 2015 and 2016 the Company negotiated a series of loans totalling $1,115,000 with the BDC, for process
equipment upgrades in its manufacturing facility.
Equipment for Bioreactor Project
Construction of Manufacturing Facility
Purchase of Equipment for Facility
Working capital loan
$
615,000
50,000
200,000
250,000
1,115,000
For loans totalling $615,000, consecutive monthly principal payments of $10,250 are due until July 2020 on the
outstanding balance of $471,500 (September 30, 2015 - $594,500). For loans totalling $50,000, consecutive monthly
principal payments of $1,040 are due to December 2019 on the outstanding balance of $40,560 (September 30, 2015 –
$50,000). For loans totalling $200,000, consecutive monthly principal payments of $3,330 are due until December 2020
on the outstanding balance of $169,830 (Sept 30, 2015 – $200,000). On October 9, 2015, the Company entered into a
loan agreement with BDC for $250,000, monthly principal payments of $4,160 are due until December 22, 2020 on the
outstanding balance of $212,160 (Sept 30, 2015 – $Nil).
All of these loans have a floating interest rate based on BDC’s floating base rate plus 0.5%. At September 30,
2016, the floating base rate was 4.7%.
The commitment for the next five years for the BDC loans is as follows:
2017
2018
2019
2020
2021
2022
$
340,105
336,480
336,480
306,620
133,590
1,824,220
On April 16, 2015, the Company entered into a revolving line of credit agreement with its Canadian chartered bank.
The agreement allows the Company to draw to a limit of $500,000 bearing 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.
7
Canadian Funds
Business Development Corporation Debt (Continued)
Canadian Funds
In the second quarter of fiscal 2016, the Canadian chartered bank offered an additional $100,000 in temporary
credit, for a revised temporary credit limit of $600,000, while the bank worked with management to evaluate
an expanded credit facility, which was approved subsequent to September 30, 2016. The Company had drawn
$525,000 of this temporary facility as at September 30, 2016.
SUBSEQUENT EVENTS
1) On December 12, 2016, the Company announced that it has arranged a new secured revolving credit facility
jointly with The Toronto-Dominion Bank (“TD Bank”) and Export Development Canada (“EDC”). The new
credit facility will be used for general corporate purposes, including the execution of the Company’s overall
growth strategy.
To accommodate the additional security required by TD Bank and EDC, the Company has negotiated amended
terms with the two holders of its issued and outstanding convertible debentures, in exchange for reducing their
security position to one of unlimited subordination to the credit facility lenders.
The largest debenture holder has two convertible debentures; a $2.5 million debenture maturing in 2028 that
was originally convertible at $0.65 per common share, and a $1.5 million debenture maturing in 2029 that was
originally convertible at $0.35 per common share. The conversion price for both of these debentures has been
amended to $0.23 per common share, and these debentures are now subject to restricted conversion privileges
of a combined total of 1 million shares per year for the next five years, with the remaining balances being eligible
for conversion through the end of their expiry dates in 2028 and 2029, respectively.
The second debenture holder has two convertible debentures of $0.5 million each, both originally convertible at
$0.90 per common share and maturing on October 12, 2016 and February 15, 2017, respectively. Terms of these
debentures have also been amended. The October debenture now matures on April 30, 2017 and it becomes
non-convertible, and the stated interest rate increases from 9% to 12% for the remaining term. The February
debenture maturity date has been extended to February 15, 2022, and the conversion price has been revised to
$0.23 per common share. In addition, the second debenture holder has received 1.5 million common share
purchase warrants, with an exercise price of $0.23 per common share and a term of five years.
The convertible debenture amendments and the issuance of warrants has been approved by the Toronto
Stock Exchange.
2) On October 5, 2016, Zeptometrix Corporation filed a statement of claim against Microbix in Canadian Federal
Court alleging infringement of its Canadian patent. Microbix is defending the allegation maintaining it does not
infringe this patent.
TREND INFORMATION
Historical spending patterns are no indication of future expenditures. Investment in the new products and
technologies is at the discretion of management. The Company is not aware of any material trends related to its
business that have not been discussed in this Management Discussion and Analysis dated December 20, 2016.
8
Canadian Funds
RISKS AND UNCERTAINTIES
Canadian Funds
The Company is exposed to 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:
A significant portion of Virology Product sales are dependent on key clients, open borders, international
transportation systems, and access to raw materials.
A significant share of the Company’s Virology products sales are sold to a few key customers globally. These products
contributed a significant share of the revenue in 2016. The loss of a key customer, or restrictions on export, import, or
international transportation of its products, raw materials or insufficient marketing resources, could materially impact
revenue and profitability.
Environmental, safety and other regulatory
Microbix’ research and manufacturing operations involves potentially hazardous materials. The Company takes
extensive precautions to appropriately manage these materials as regulated by the applicable environmental and safety
authorities. 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®
The Company has entered into confidentiality agreements with several parties and advanced discussions are continuing
with a select group of potential partners interested in returning Kinlytic to the U.S. and Canadian markets, and ultimately
to Europe, Asia and developing world markets. There is no assurance the Company will be successful in this endeavour.
LumiSort™ technology
The Company has developed a proprietary semen sexing technology that has a global patent estate. In 2015 the Company
successfully completed a prototype instrument that confirms the key patent claims. The Company is currently working
to secure a partner within the animal genetics industry to fund the next stage of development, to build a commercial
instrument and conduct field trials. There is no assurance the Company will be successful in this endeavour.
Products in development
The Company has several products under development. It is impossible to ensure that these development activities will
result in the completion of new commercial products. If the Company is unable to develop and commercialize products,
it will be unable to recover the related research and development, and investment.
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 pharmaceutical, biotechnology or animal genetics companies. It is possible the
Company may be unable to negotiate mutually acceptable terms.
9
Canadian Funds
RISKS AND UNCERTAINTIES (Continued)
Canadian Funds
Operating and capital requirements
Microbix earns a profit on the sale of its Virology Products, which is a major source of funding for its research and
development activities. The Company believes that cash generated from operations is sufficient to meet normal operating
and capital requirements. However, the Company may need to raise additional funds, from time to time for several reasons
including, to advance its current research and development programs, to support various collaboration initiatives with
third parties, to underwrite the cost of filing, prosecuting and enforcing patents and other intellectual property rights, to
invest in acquisitions, new technologies and new market developments. Additional financing may not be available, and
even if available, may not be offered on acceptable terms.
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 uncertain and there is no guarantee of market acceptance.
Failure to obtain and protect intellectual property could adversely affect business
Microbix’ future success depends, 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. There is no assurance that the Company 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 costs, adversely affecting the development of products or sales of
the challenged product, or intellectual property, and divert the efforts of its scientific and management personnel, whether
or not such litigation is resolved in the Company’s favour.
Microbix will continue to face significant competition
Competition from life sciences companies, and academic and research institutions is significant. Many competitors have
substantially greater product development capabilities and financial, scientific, manufacturing, sales and marketing resources
than Microbix. While the Company continues to expand its technological capabilities in order to remain competitive,
Microbix’ competitors are also making significant investments in research and development activities, and in intellectual
property, which could make it more difficult for Microbix to commercialize its products and technologies.
FINANCIAL RISK MANAGEMENT
The primary risks affecting the Company are summarized below and have not changed during the fiscal year.
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 customers are primarily large multi-national companies with very high quality credit ratings. Given this
track record, management perceives the credit risk to be low. Typically the outstanding accounts receivable balance is
relatively concentrated with a few large customers representing the majority of the value. At September 30, 2016, five
customers accounted for 59% (2015 – six for 63%) of the outstanding balance. The Company has had minimal bad
debts over the past several years and accordingly management has recorded an allowance of $10,000 (2015 - $18,295).
10
Canadian Funds
FINANCIAL RISK MANAGEMENT (Continued)
Canadian Funds
Currency risk:
The Company is exposed to currency risk given its global customer base. Over 90% of its revenue is denominated in
either U.S. dollars or Euros. The Company does not use financial instruments to hedge this currency risk. At September
30, 2016, the significant balances, quoted in Canadian dollars, held in foreign currencies are:
Cash
Accounts receivable
Accounts payable and
accrued liabilities
US dollars
Sep 30,
2016
5,259
1,065,198
Sep 30,
2015
41,015
944,667
Euros
Sep 30,
2016
29
674,433
Sep 30,
2015
-
934,864
474,498
554,642
22,451
76,552
The impact of a 5% increase in the Canadian dollar against the US dollar would result in a revenue loss of about 4.7%.
The impact of a 5% increase in the Canadian dollar against the Euro would result in a revenue loss of about 5%.
Liquidity risk
Liquidity risk measures the Company’s ability to meet its financial obligations when 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 potentially subject the Company to interest rate risk include those assets and liabilities
with a variable interest rate. Exposure to interest rate risk is primarily on the BDC debt that has a variable rate pegged
to the bank rate. The rate can be fixed, if the outlook indicates interest rates will move higher. The only other
variable debt the Company has is the $600,000 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
$6,000 on the line of credit usage if it were fully used throughout the fiscal year.
Market risk
Market risk reflects changes in pricing for both Virology products and raw materials based on supply and demand
criteria; also market forces can affect foreign currency exchange rates as well as interest rates which could affect
the Company’s financial performance or the value of its financial instruments. Microbix products are valuable
components in our customers’ products and cannot be easily replaced. The Company works closely with customers
to ensure its products meet their specific criteria.
Fair value
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 judgement
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 fair values of financial instruments included in current assets and current liabilities approximate their carrying
values due to their short-term nature.
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. The fair values of financial instruments in other long-term
liabilities approximate their carrying values as they are recorded at the net present values of their future cash flows,
using an appropriate discount rate.
11
Canadian Funds
CRITICAL ACCOUNTING ESTIMATES
Canadian Funds
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 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, 2016 have met the
criteria for impairment.
Non-Convertible and 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.
12
Canadian Funds
CRITICAL ACCOUNTING ESTIMATES (Continued)
Canadian Funds
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, 2016, 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, 2016.
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, 2016 that have materially
affected, or are reasonably thought to materially affect, the internal control over financial reporting.
13
Canadian Funds
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED
Canadian Funds
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:
IAS 1 - Presentation of Financial Statements
IAS 1, Presentation of Financial Statements was amended by the IASB in December 2014. The amendments are designed
to further encourage companies to apply professional judgement in determining what information to disclose in their
financial statements.
For example, the amendments make clear that materiality applies to the whole of financial statements and that
the inclusion of immaterial information can inhibit the usefulness of the financial disclosures. Furthermore, the
amendments clarify that companies should use professional judgement in determining where and in what order
information presented in the financial disclosures. The amendments are effective for annual periods beginning on
or after January 1, 2016. Earlier application is permitted.
IAS 16 and IAS 38 – Property, Plant and Equipment and Intangible Assets
IAS 16 and IAS 38, Property, Plant and Equipment and Intangible Assets were amended by IASB in December 2013. The
amendments clarify that the use of revenue-based methods to calculate the depreciation of an asset are not appropriate
because revenue generated by an activity that includes the use of an asset generally reflects factors other than the
consumption of the economic benefits embodied in the asset. The IASB also clarified that revenue is generally presumed
to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset.
This presumption, however, can be rebutted in certain limited circumstances.
IFRS 9 - Financial Instruments
IFRS 9, Financial Instruments was issued in final form by the IASB in July 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is
measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on
how an entity manages its financial instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets.
Most requirements in IAS 39 for classification and measurement of financial liabilities were carried forward
unchanged to IFRS 9. The new standard also requires a single impairment method be used, replacing the multiple
impairment methods in IAS 39. IFRS 9 also includes requirements relating to a new hedge accounting model,
which represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk
management activities in the financial statements.
The most significant improvements apply to those that hedge non-financial risk, and so these improvements are
expected to be of particular interest to non-financial institutions. In addition, a single, forward-looking expected
loss impairment model is introduced, which will require more timely recognition of expected credit losses. IFRS 9
is effective for annual period beginning on or after January 1, 2018. Earlier application is permitted.
The Company will continue to assess any impact on the classification and measurement of the Company’s
financial assets, as well as any impact on the classification and measurement of its financial liabilities.
14
Canadian Funds
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED (Continued)
Canadian Funds
IFRS 15 - Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers was issued by IASB in May 2014. The core principle of the new
standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that
reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The new
standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously
addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-
element arrangements. The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier
application is permitted. IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes,
IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31
Revenue – Barter Transactions Involving Advertising Services.
The Company has commenced a review process to assess any impact on its current revenue recognition policies
and reporting processes.
IFRS 16, Leases
On January 13, 2016, the IASB issued IFRS 16, which outlines requirements for lessees to recognize assets and liabilities
for most leases. Lessees are required to recognize the lease liability for the obligations to make lease payments and a right-
of-use asset for the right to use the underlying asset for the lease term. Lease liability is measured at the present value of
lease payments to be made over the term of the lease. The right-of-use asset is initially measured at the amount of the
lease liability and adjusted for prepayments, direct costs and incentives received.
The new standard will be effective for annual periods beginning on or after January 1, 2019. Early recognition
is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been
applied, or is applied at the same date as IFRS 16. The Company has commenced a review process to assess any
impact on its current revenue recognition policies and reporting processes.
15
Canadian Funds
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Microbix Biosystems Inc.
We have audited the accompanying consolidated financial statements of Microbix Biosystems Inc., which comprise
the consolidated statement of financial position as at September 30, 2016, and the consolidated statements of
income and 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 control. 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. as at September 30, 2016, and 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. for the year ended September 30, 2015, were
audited by another auditor who expressed an unmodified opinion on those consolidated financial statements dated
December 31, 2015.
Toronto, Canada
December 20, 2016
16
Canadian Funds CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at September 30, 2016 and 2015
ASSETS
CURRENT ASSETS
Cash
Accounts receivable (note 24)
Inventory (note 5)
Prepaid expenses and other assets (note 6)
Investment tax credit receivable (note 18)
Canadian Funds
2016
$
2015
$
104,180
5,415
2,021,872
1,692,074
3,395,993 3,625,268
216,389
150,250
55,541
182,398
TOTAL CURRENT ASSETS
5,661,219
5,788,161
LONG-TERM ASSETS
Deferred tax assets (note 18)
Property, plant and equipment, net (note 7)
Intangible assets, net (note 8)
TOTAL LONG-TERM ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities
Current portion of finance lease obligations
Current portion of long-term debt (note 10, 27)
Current portion of debentures (note 9)
Deferred revenue
TOTAL CURRENT LIABILITIES
Finance lease obligations
Non-convertible debenture (note 9)
Convertible debentures (note 9)
Long-term debt (note 10)
TOTAL LONG-TERM LIABILITIES
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
SHARE CAPITAL (note 12)
EQUITY COMPONENT OF
CONVERTIBLE DEBENTURES (note 9)
CONTRIBUTED SURPLUS (note 13)
ACCUMULATED DEFICIT
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
Commitments and Contingencies (Note 28)
Subsequent Events (Note 29)
1,130,000
12,251,984
6,204,260
530,000
11,867,476
5,361,321
19,586,244
17,758,797
25,247,463
23,546,958
1,898,515
1,647
1,069,455
1,595,882
683,494
2,488,013
6,180
757,430
694,284
189,550
5,248,993
4,135,457
11,012
635,020
1,127,657
2,933,040
12,658
690,062
1,966,536
3,065,335
4,706,729 5,734,591
9,955,722
9,870,048
31,299,416
30,990,459
2,351,425
4,937,649
(23,296,749)
2,351,425
4,380,182
(24,045,156)
15,291,741
13,676,910
25,247,463
23,546,958
William J. gastlE
dirECtor
Vaughn Embro-Pantalony
dirECtor
The accompanying notes are an integral part of these consolidated financial statements.
17
Canadian Funds
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended September 30, 2016 and 2015
Canadian Funds
SALES
Virology products and technologies
Licensing fees (note 11)
Royalties
TOTAL SALES
COST OF GOODS SOLD
Virology products and technologies (note 5, 17)
Royalties
Total Cost of Goods Sold
GROSS MARGIN
EXPENSES
Selling and business development (note 17)
General and administrative (note 17)
Research and development (note 17)
Financial expenses (note 21)
TOTAL EXPENSES
NET OPERATING INCOME AND COMPREHENSIVE
OPERATING INCOME FOR THE YEAR
INCOME TAXES
Deferred income taxes (note 18)
Current income taxes (note 18)
NET INCOME AND COMPREHENSIVE INCOME
FOR THE YEAR
NET COMPREHENSIVE INCOME
PER SHARE
Basic (note 16)
Diluted (note 16)
2016
$
2015
$
9,236,152
-
280,985
8,191,720
413,895
268,297
9,517,137
8,873,912
4,474,038
63,055
2,980,615
53,724
4,537,093
3,034,339
4,980,044
5,839,573
517,023
3,130,367
493,610
690,637
602,231
2,868,592
1,277,327
742,439
4,831,637
5,490,589
148,407
348,984
(600,000)
-
(265,000)
-
748,407
613,984
0.009
0.009
0.008
0.007
The accompanying notes are an integral part of these consolidated financial statements.
18
Canadian Funds
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2016 and 2015
OPERATING ACTIVITIES
Net comprehensive income for the year
Items not affecting cash
Amortization and depreciation (note 17)
Accretion of debentures
Stock options expense (note 15)
Deferred revenue (note 11)
Deferred tax assets (note 18)
Change in non-cash working
Canadian Funds
2016
$
2015
$
748,407
613,984
413,679
83,849
334,750
493,944
(600,000)
418,423
110,676
580,627
(223,100)
(265,000)
capital balances related to operations (note 19)
(561,321)
(640,208)
CASH PROVIDED BY OPERATING ACTIVITIES
913,308
595,402
INVESTING ACTIVITIES
Purchase of property, plant and equipment (note 7)
Additions from internal development of intangible assets (note 8)
(702,580)
(938,546)
(3,438,607)
(1,403,415)
CASH USED IN INVESTING ACTIVITIES
(1,641,126)
(4,842,022)
FINANCING ACTIVITIES
Repayments of long-term debt (note 10)
Repayments of debentures (note 9)
Proceeds from finance lease
Proceeds from equipment loans (note 10)
Proceeds from issuance of credit facility (note 10)
Proceeds from shareholder loan
Proceeds from exercise of warrants, net of issue costs (note 14)
Issue of common shares, net of issue costs
(320,270)
(76,171)
(6,180)
250,000
50,000
200,000
-
531,674
(140,320)
(55,338)
18,838
865,000
475,000
-
1,738,434
901,830
CASH PROVIDED BY FINANCING ACTIVITIES
629,053
3,803,444
NET CHANGE IN CASH
DURING THE YEAR
CASH - BEGINNING OF YEAR
CASH - END OF YEAR
Supplementary Cash Flow Information (Note 20)
(98,765)
(443,176)
104,180
547,356
5,415
104,180
The accompanying notes are an integral part of these consolidated financial statements.
19
Canadian Funds
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
As at and for the years ended September 30, 2016 and 2015
Canadian Funds
SHARE CAPITAL (note 12)
STATED
NUMBER OF
CAPITAL
SHARES
$
CONTRIBUTED
SURPLUS
$
EQUITY
TOTAL
COMPONENT OF SHAREHOLDERS’
DEFICIT
$
DEBENTURE
$
EQUITY
$
BALANCE, SEPTEMBER 30, 2014
75,954,458
27,662,112
4,487,638 (24,659,140)
2,351,425
9,842,035
Share issuances pursuant to
stock options exercised
Share issuances pursuant to
conversion of warrants
Stock option expense
2,442,000
1,589,913
(688,083)
4,807,799
1,738,434
580,627
Net comprehensive income for the year
613,984
901,830
1,738,434
580,627
613,984
BALANCE, SEPTEMBER 30, 2015 83,204,257
30,990,459
4,380,182 (24,045,156)
2,351,425
13,676,910
Share issuances pursuant to
private placement
1,500,000
362,069
Issuance of warrants pursuant to
private placement
Share issue costs pursuant to
private placement
Stock option expense
237,931
(53,112)
(15,214)
334,750
Net comprehensive income for the year
748,407
362,069
237,931
(68,326)
334,750
748,407
BALANCE, SEPTEMBER 30, 2016 84,704,257
31,299,416
4,937,649 (23,296,749)
2,351,425
15,291,741
The accompanying notes are an integral part of these consolidated financial statements.
20
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2016 and 2015
Canadian Funds
1. NATURE OF THE BUSINESS
Microbix Biosystems Inc. (“Microbix” or the “Company”) (TSX: MBX) is incorporated under the laws of Province of Ontario.
The Company 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 two technologies for large markets
including the thrombolytic drug, Kinlytic® (Urokinase), and an animal reproductive technology in development, LumiSort™. The
Company continually invests in Virology to adopt current technologies and standards. The manufacturing facility operates under an
infectious diseases biological license from the Canadian Food Inspection Agency.
The Company operates their Virology Business in its owned manufacturing facility at 265 Watline Avenue, Mississauga, Ontario,
which is also the Company’s registered office.
2. BASIS OF PREPARATION
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 consolidated financial statements for the years ended September 30, 2016 and 2015. The Board of Directors approved these
consolidated financial statements on December 20, 2016.
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. For each entity, the Company determines the functional currency
and items included in the financial statements of each entity are measured using the functional currency, which represents
the currency of the primary economic environment in which each entity operates. The consolidated financial statements are
presented in Canadian dollars.
Basis of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Crucible
Biotechnologies Limited, which the Company has control. Control exists when the entity is exposed, or has rights, to
variable returns from its involvement with the entity and has the ability to affect those returns through its power over the
entity. The non-controlling interest component, if any, of the Company’s subsidiaries is included in equity.
The financial statements of the Company’s subsidiary is prepared for the same reporting period as the Company, using consistent
accounting policies. All intra-company balances, transactions, unrealized gains and losses resulting from intra-company
transactions and dividends are eliminated in full.
There has been no business activity in the subsidiary during the fiscal years ended September 30, 2016, and 2015. All
significant intercompany transactions and balances have been eliminated upon consolidation.
Use of estimates and judgments
The preparation of consolidated 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 judgements and estimates are as follows:
i) Property, plant and equipment:
Measurement of property, plant and equipment 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.
21
Canadian Funds 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates and judgements (Continued)
ii) Internally generated intangible assets:
Management monitors the progress of each internal research and development project. Significant judgment is required
to distinguish between the research and development phases. Development costs are recognized as an asset when the
following criteria are met: (i) technical feasibility; (ii) management’s intention to complete the project; (iii) the ability to
use or sell; (iv) the ability to generate future economic benefits; (v) availability of technical and financial resources; and
(vi) the ability to measure the expenditures reliably. Research costs are expensed as incurred. Management also monitors
whether the recognition requirements for development assets continue to be met and whether there are any indicators that
capitalized costs may be impaired. Upon satisfying the recognition requirements for development activities, management
assesses the useful life of the long lived assets in addition to assessing for impairment.
iii) Financial assets and liabilities:
Estimates and judgments are also made in the determination of fair value of financial assets and liabilities and
include assumptions and estimates regarding future interest rates, the relative creditworthiness of the Company to its
counterparties, the credit risk of the Company’s counterparties relative to the Company, and the estimated future cash
flows and discount rates.
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) 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 various judgmental 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. Management has
determined that its CGUs are Virology products and related technologies, LumiSort and Kinlytic® (note 25).
vi) Fair value of share-based compensation:
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity
instruments at the date on which they are granted. Estimating fair value for share-based compensation transactions requires
determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This
estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the
share option, volatility, dividend yield and forfeiture rates and making assumptions about them.
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.
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.
22
Canadian Funds 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (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.
Cash
Cash consists of cash on hand and deposits with banks and investments in highly liquid instruments with original maturities of
three months or less. There are no cash equivalents held as at September 30, 2016 or 2015.
Financial assets and liabilities
All financial instruments, including derivatives, are included on the consolidated statements of financial position 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, losses or impairment included in other
comprehensive income until the asset is removed from the consolidated statements of financial position.
The following summarizes the Company’s classification and measurement of financial assets and liabilities:
Financial assets:
Cash
Accounts receivable
Financial liabilities:
Accounts payable and
accrued liabilities
Deferred revenue
Finance lease obligation
Non-convertible debentures
Convertible debentures
Long-term-debt
Total Financial liabilities
Classification
Measurement
2016
$
2015
$
Held-for-trading
Loans and receivables
Fair value
Amortized cost
5,415
2,021,872
104,180
1,692,074
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
1,898,515
683,494
12,659
879,304
2,479,255
4,002,495
9,955,722
2,488,013
189,550
18,838
934,346
2,416,536
3,822,765
9,870,048
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 fair value through profit and loss (“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 consolidated financial statements at fair value.
Inventories
Inventories are 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 estimated selling price less the cost to complete less the cost to sell. Management reviews its reserve for obsolete inventory
annually for finished goods and work in process.
Property, plant and equipment
Property, plant and equipment are measured at cost less accumulated depreciation and impairment (if any). Cost includes the
cost of material, labour and other costs directly attributable to bringing the asset to a working condition for its intended use.
Depreciation is calculated at rates which will reduce the original cost to estimated residual value over the estimated useful life of
each asset. Depreciation commences once the asset is available for use.
23
Canadian Funds
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, plant and equipment (Continued)
Depreciation is provided for at the following basis and rates:
Research and development equipment
Other equipment and fixtures
Buildings
Declining balance, 10-100%
Declining balance, 10-30%
Straight line, 50 years
Land is not depreciated. Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted
prospectively, if appropriate.
Finance lease obligation
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. Finance lease obligations 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. The impairment loss is calculated as
the difference between the carrying value of the asset and the recoverable amount. The recoverable amount is the higher of
the fair value less costs to sell and value in use. Management has determined that no long-lived assets of the Company in the
years ended September 30, 2016 and 2015 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. A forfeiture rate
is incorporated into the Company’s assumptions. Forfeitures are estimated at the time of grant and are based on historical
experience. To the extent that the actual forfeiture rate is different from the Company’s estimate, share-based compensation
related to these awards will be different from the Company’s estimate and forfeiture rates for subsequent periods are revised.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate
can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, the
reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any
provision is presented in the consolidated statements of income and comprehensive income, net of any reimbursement.
Foreign currency translation
Each asset, liability, revenue and expense is translated into Canadian dollars by the use of the exchange rate in effect on the date
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 as at the year-end date. Exchange gains and losses arising from these transactions
are included in the consolidated statement of comprehensive income for the year.
24
Canadian Funds 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 periods. 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 are recognized to the extent that it is probable that future taxable income will be available against which temporary differences
can be utilized. 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, with a corresponding charge to income. The amount
of deferred tax assets recognized is limited to the amount that is more likely than not to be realized.
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. These credits are only recognized to the extent that it is
probable that there will be sufficient taxable income 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:
IAS 1 - Presentation of Financial Statements
IAS 1, Presentation of Financial Statements was amended by the IASB in December 2014. The amendments are designed to further
encourage companies to apply professional judgment in determining what information to disclose in their financial statements.
For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of
immaterial information can inhibit the usefulness of the financial disclosures. Furthermore, the amendments clarify that companies
should use professional judgment in determining where and in what order information presented in the financial disclosures. The
amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted.
IFRS 9 - Financial Instruments
IFRS 9, Financial Instruments (“IFRS“) was issued in final form by the IASB in July 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at
amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its
financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets.
Most requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9.
The new standard also requires a single impairment method be used, replacing the multiple impairment methods in IAS 39. IFRS 9
also includes requirements relating to a new hedge accounting model, which represents a substantial overhaul of hedge accounting
that will allow entities to better reflect their risk management activities in the financial statements.
The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of
particular interest to non-financial institutions. In addition, a single, forward-looking expected loss impairment model is introduced,
which will require more timely recognition of expected credit losses. IFRS 9 is effective for annual periods beginning on or after
January 1, 2018. Earlier application is permitted.
The Company will continue to assess any impact on the classification and measurement of the Company’s financial assets, as well as
any impact on the classification and measurement of its financial liabilities.
25
Canadian Funds 4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED (Continued)
IFRS 15 - Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) was issued by the IASB in May 2014. The core principle of
the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts
that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new
standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously
addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element
arrangements. The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is
permitted. IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer
Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers,
and SIC-31 Revenue - Barter Transactions Involving Advertising Services.
The Company has commenced a review process to assess any impact on its current revenue recognition policies and reporting processes.
IFRS 16, Leases
On January 13, 2016, the IASB issued IFRS 16, which outlines requirements for lessees to recognize assets and liabilities for most
leases. Lessees are required to recognize the lease liability for the obligations to make lease payments and a right-of-use asset for
the right to use the underlying asset for the lease term. Lease liability is measured at the present value of lease payments to be
made over the term of the lease. The right-of-use asset is initially measured at the amount of the lease liability and adjusted for
prepayments, direct costs and incentives received.
The new standard will be effective for annual periods beginning on or after January 1, 2019. Early recognition is permitted,
provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been applied, or is applied at the same
date as IFRS 16. The Company has commenced a review process to assess any impact on its current revenue recognition policies
and reporting processes.
IAS 16 – Property, Plant and Equipment and IAS 38 – Intangibles
In May 2014, the IASB issued amendments to IAS 16 and IAS 38, prohibiting the use of revenue-based depreciation for property,
plant and equipment and significantly limiting the use of revenue-based amortization for intangible assets. These amendments are
effective for annual periods beginning on or after January 1, 2016 and is to be applied prospectively. The Company has reviewed
these standards and determined there is no material impact on the consolidated financial statements.
5. INVENTORIES
Inventories as at September 30, 2016 and 2015 consist of the following:
Raw material
Work in process
Finished goods
2016
$
253,556
840,249
2,302,188
3,395,993
2015
$
685,332
739,826
2,200,110
3,625,268
During the year ended September 30, 2016, inventories in the amount of $4,474,038 (2015 - $2,980,615) were recognized as
an expense through cost of sales. The allowance for inventory impairment as at September 30, 2016 amounted to $30,561
(2015 - $53,597).
6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets as at September 30, 2016 amounted to $55,541 (2015 - $216,389) and primarily consist of
insurance policy premiums, and in the prior year a contractually-required refundable deposit with a research and development
partner, and retainers with the Company’s legal counsel.
26
Canadian Funds
7. PROPERTY, PLANT, AND EQUIPMENT
The freehold land and building have been pledged as security for bank loans under a mortgage (see Notes 9 and 10). Property, plant
and equipment consists of:
Cost
Building
$
Research &
development
equipment
$
Other
equipment
& fixtures
$
Land
$
Total
$
Balance, Oct 1, 2014 4,536,288
14,814
Additions
-
Disposals
3,581,508
2,645,503
-
3,570,596
778,290
-
800,000
-
-
12,488,392
3,438,607
-
Balance, Sept 30, 2015 4,551,102
Additions
11,281
-
Disposals
6,227,011
567,301
-
4,348,886
123,997
-
800,000
-
-
15,926,999
702,579
-
Balance, Sept 30, 2016
4,562,383
6,794,312
4,472,883
800,000 16,629,578
Accumulated depreciation
790,320
Balance, Oct 1, 2014
Disposals
-
Depreciation 152,288
501,115
-
30,162
2,445,197
-
140,441
-
-
-
3,736,632
-
322,891
Balance, Sept 30, 2015 942,608
Disposals
-
Depreciation 152,504
531,277
-
27,822
2,585,638
-
137,745
-
-
-
4,059,523
-
318,071
Balance, Sept 30, 2016
1,095,112
559,099
2,723,383
-
4,377,594
Net book value
Balance, October 1, 2014 3,745,968
Balance, September 30, 2015 3,608,494
Balance, September 30, 2016 3,467,271
3,080,393
5,695,734
6,235,213
1,125,399
1,763,248
1,749,500
800,000
800,000
800,000
8,751,760
11,867,476
12,251,984
Included in research and development equipment is $6,004,352 related to assets not yet available for use. Included in this
amount is directly attributable interest from borrowings to finance these asset additions of $154,492 (2015 - $135,000). These
assets are not yet subject to depreciation.
27
Canadian Funds
8. INTANGIBLE ASSETS
Intangible assets, which comprise of capitalized development costs, patents and trademarks and licenses are on average
depreciated on a straight line basis at the following rates:
License agreement, LumiSort™ (Note 8a)
Technology investments, patents and trademarks:
LumiSort™ (Note 8a)
Intangible assets consist of:
5%
5%
Cost
Capitalized
development costs
Patents and trademarks
Licenses
LumiSort™
(a)
$
Bioreactor
(c)
$
Kinlytic®
(b)
$
LumiSort™
(a)
$
LumiSort™
(a)
$
Total
Balance at October 1, 2014
Additions from internal developments
24,795
5,737
-
1,062,426
2,770,529
-
1,706,525
335,252
278,528
-
4,780,377
1,403,415
Balance at September 30, 2015
Additions from internal developments
30,532
-
1,062,426
938,547
2,770,529
-
2,041,777
-
278,528
-
6,183,792
938,547
Balance at September 30, 2016
30,532
2,000,973
2,770,529
2,041,777
278,528
7,122,339
Accumulated amortization
Balance at October 1, 2014
Amortization expense
Balance at September 30, 2015
Amortization expense
Balance at September 30, 2016
Net book value
3,769
956
4,725
1,032
5,757
-
-
-
-
-
-
-
-
-
530,344
73,151
603,495
73,151
192,826
21,425
214,251
21,425
726,939
95,532
822,471
95,608
-
676,646
235,676
918,079
Balance, October 1, 2014
Balance, September 30, 2015
Balance, September 30, 2016
21,026
25,807
24,775
-
1,062,426
2,000,973
2,770,529
2,770,529
2,770,529
1,176,181
1,438,282
1,365,131
85,702
64,277
42,852
4,053,438
5,361,321
6,204,260
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.
The recoverable amount of the Lumisort intangible has been determined based on its fair value less cost to sell. Key assumptions
include growth rates in line with industry expectations and a discount rate determined based on the Company’s best estimate of
a risk adjusted discount rate.
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 developed and new patents are pending and under
development.
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.
28
Canadian Funds
8. INTANGIBLE ASSETS (Continued)
b) Kinlytic® (Continued)
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.
The discount rate has been determined based on the Company’s best estimate of a risk adjusted discount rate.
c) Bioreactor
The Company has internally developed an improved bioreactor production process to increase the efficiency and
output of manufacturing certain virology products. As at September 30, 2016, the process development is complete.
9. 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:
Note
(b)
(d)
(c)
(a)
(e)
Date of issue
Face value
Issue costs
Liability component at:
the date of issue
the report date
Jan, 2014
$ 2,000,000
-
$
Jan, 2014
$ 1,500,000
65,559
$
Feb, 2007
$ 500,000
-
$
Oct, 2006
$ 500,000
-
$
Sep, 2008
$ 2,500,000
-
$
$ 928,373
$ 879,304
$
$
517,470
537,686
$ 388,958
$ 492,812
$ 413,320
$ 498,786
$
$
885,089
949,971
Equity component at:
the date of issue and report date
Conversion price per common share
$
$
-
$
916,971
$ 111,042
$ 86,680
$ 1,236,732
-
$
0.35
$
0.90
$
0.90
$
0.65
Effective interest rate charged
Payment frequency
Maturity of financial instrument
Stated interest rate
Terms of repayment
Blended quarterly repayment
25.69%
Quarterly
Jan, 2029
9%
Principal
and interest
61,071
$
27.03%
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
The debentures denoted as (a), (b), and (e) 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 as (c) and (d) are secured by a subordinated security agreement covering all of the Company’s
property and assets.
Convertible debentures contain two components: liability and equity elements. The equity element is presented in equity
under the heading of “equity component of debentures”. Convertible debentures are initially accounted for in accordance
with their substance and are presented in the consolidated financial statements in their component parts measured at the
time of issue. The debt components were valued first with the residual to shareholders’ equity. The Convertible debentures
are convertible at the option of the holder, at any time, into fully paid and non-assessable Common Shares of the Company
at the Conversion Price then in effect.
All of the debentures were issued to shareholders of the Company. A holder of a debenture has an economic interest in
future earnings of the Lumisort asset and will receive a distribution equal to 10% of any future earnings that are derived
from the Lumisort asset.
29
Canadian Funds
9. DEBENTURES (Continued)
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 method, as detailed below.
Non-convertible
Debentures
Convertible
Debentures
Convertible
Debentures 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
Sep, 2008
$2,500,000
$
$
$
$
$
$
Balance, October 1, 2014
Accretion expense
Repayments
Balance, October 1, 2015
Accretion expense
Repayments
Balance, September 30, 2016
Less: current portion
Non-current portion
924,700
236,790
(227,144)
934,346
189,574
(244,616)
879,304
244,284
$635,020
521,886
141,717
(135,000)
528,603
144,083
(135,000)
537,686
135,000
402,686
459,703
59,591
(45,000)
474,294
63,518
(45,000)
492,812
492,812
-
472,238
56,485
(45,000)
483,723
60,063
(45,000)
498,786
498,786
-
917,017
237,899
(225,000)
929,916
245,055
(225,000)
949,971
225,000
724,971
2,370,844
495,692
(450,000)
2,416,536
512,719
(450,000)
2,479,255
1,351,598
1,127,657
Note
(a)
(b)
(c)
(d)
(e)
10. LONG-TERM DEBT
a) In fiscal 2009 the Company negotiated a series of loans totalling $3,061,000 with the Business Development Bank (“BDC”)
for the original purchase and build-out of its manufacturing facility.
Purchase of the building
Construction of manufacturing facility
Purchase of equipment for facility
$
1,500,000
1,500,000
61,000
3,061,000
The long-term debt requires the Company to maintain certain qualitative and quantitative covenants. As at September 30,
2016, the Company was in compliance with these covenants.
The loans are secured with the building and equipment. For loans totalling $3,000,000, consecutive monthly principal payments
of $9,260 are due until February 2037 on the outstanding balance of $2,379,820 (September 30, 2015 - $2,490,940). For loans
totalling $61,000, consecutive monthly principal payments of $725 are due until February 2017 on the outstanding balance of $3,625
(September 30, 2015 – $12,325).
In fiscal 2015 and 2016 the Company negotiated a series of loans totalling $1,115,000 with the BDC, for process equipment
upgrades in its manufacturing facility.
Equipment for Bioreactor Project
Construction of manufacturing facility
Purchase of equipment for facility
Working capital loan
30
$
615,000
50,000
200,000
250,000
1,115,000
Canadian Funds
10. LONG-TERM DEBT (Continued)
For loans totalling $615,000, consecutive monthly principal payments of $10,250 are due until July 2020 on the outstanding
balance of $471,500 (September 30, 2015 - $594,500). or loans totalling $50,000, consecutive monthly principal payments
of $1,040 are due to December 2019 on the outstanding balance of $40,560 (September 30, 2015 – $50,000). For loans
totalling $200,000, consecutive monthly principal payments of $3,330 are due until December 2020 on the outstanding
balance of $169,830 (Sept 30, 2015 – $200,000). On October 9, 2015, the Company entered into a loan agreement with
BDC for $250,000, monthly principal payments of $4,160 are due until December 22, 2020 on the outstanding balance of
$212,160 (Sept 30, 2015 – $Nil).
All BDC loans have a floating interest rate based on BDC’s floating base rate plus 0.5%. At September 30, 2016, the
floating base rate was 4.7%.
The commitment for the next five years for the BDC loans is as follows:
2017
2018
2019
2020
2021
2022
$
340,105
336,480
336,480
306,620
133,590
1,824,220
b) On April 16, 2015, the Company entered into a revolving line of credit agreement with its Canadian chartered bank. The
agreement allows the Company to draw on to a limit of $500,000 bearing 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, 2016, the Canadian chartered bank had provided a $100,000 temporary addition to the line of credit
and the Company had drawn on $525,000 of the facility (2015 - $475,000).
c) During the year, the Company issued two outstanding shareholder loans for total proceeds of $200,000. These loans are
due for repayment December 31, 2016 and bear interest of 10% per annum.
11. DEFERRED REVENUE
In 2007, the Company entered into an agreement with the Animal Fine Breeding Station (partner) 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 US$400,000 and will receive an additional payment upon a milestone
achievement. Royalty fees and payment for materials will be made with product sales. In 2014, this payment was being
accounted for in accordance with its substance and was presented in the consolidated financial statements as deferred revenue
on the consolidated statement of financial position.
In 2015 the Company advised the partner that the SST program has been abandoned as the Company has gone in a different
direction with the recent completion of its LumiSortTM prototype technology. With SST development permanently cancelled,
the non-refundable deposit was recorded in the consolidated statement of comprehensive income during the year ended
September 30, 2015.
31
Canadian Funds
12. 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.
On October 13, 2015 and October 19, 2015 (the “Closing Date”), the Company completed a private placement offering of
an aggregate of 1,500,000 units for total gross proceeds of $600,000, net proceeds of $531,674 after share issuance costs of
$68,326. Each unit consists of one common share of Microbix and one common share purchase warrant. Each whole warrant
entitles the holder to purchase one additional common share at an exercise price of $0.55 for five years. (note 14) The financing
was non-brokered. An aggregate of 81,550 Finder’s Warrants were issued in the private placement offering. Each Finder’s
Warrant entitles the holder to purchase one unit at a price of $0.46 for a period of five years.
The number of issued and outstanding common shares and the share capital of Microbix as at September 30, 2016 are
presented below:
Balance, October 1, 2014
Exercise of warrants
Exercise of stock options
Balance, September 30, 2015
Issued on private placement
Exercise of warrants
Exercise of stock options
Balance, September 30, 2016
13. CONTRIBUTED SURPLUS
Changes in contributed surplus as at September 30, 2016 are described as follows:
Balance, October 1, 2014
Stock options exercised
Stock option expense
Balance, September 30, 2015
Stock options exercised
Issuance of warrants pursuant to private placement
Share issue costs pursuant to private placement
Stock option expense
Balance, September 30, 2016
Number of
Shares
75,954,458
4,807,799
2,442,000
83,204,257
1,500,000
-
-
84,704,257
Stated
Capital ($)
27,662,112
1,738,433
1,589,914
30,990,459
308,957
-
-
31,299,416
$
4,487,638
(688,083)
580,627
4,380,182
-
237,931
(15,214)
334,750
4,937,649
32
Canadian Funds
14. COMMON SHARE PURCHASE WARRANTS
A continuity of the Company’s warrants outstanding as at September 30, 2016 and 2015 is presented in the following table:
Weighted
average
exercise
price
$
Units
Outstanding, October 1, 2014
Exercised
Expired
Outstanding, September 30, 2015
Issued
Expired
Outstanding, September 30, 2016
$ 0.46
10,280,641
(4,807,799) $ 0.36
(30,000) $ 0.40
$ 0.54
$ 0.55
-
$
7,024,392 $ 0.54
5,442,842
1,581,550
-
Warrants are recorded at the time of the grant for an amount based on the Black-Scholes option pricing model, which is
affected by the Company’s share price as well as assumptions regarding a number of subjective variables.
A summary of the Company’s warrants outstanding as at September 30, 2016 and 2015 is presented in the following table:
2016
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
years
2015
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
years
Number
outstanding
Number
outstanding
6,831,313
193,079
7,024,392
$
$
$
0.55
0.25
0.54
3.13
0.02
3.13
5,249,763
193,079
5,442,842
$ 0.55
$ 0.25
$ 0.54
3.92
0.17
3.82
Range of exercise prices:
$0.55
$0.24 to $0.40
15. 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 4,007,000 options
issued and pending (2015 – 4,872,000).
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 two steps, at the issue date and at the
anniversary date in the subsequent years of each issuance. Management only expects a nominal amount of stock options to
be issued in the year.
33
Canadian Funds
15. STOCK OPTION PLAN (Continued)
The activity under the Company’s stock option plan for the periods ended September 30, 2016 and 2015 is:
Outstanding, October 1, 2014
Issued
Exercised
Expired or forfeitted
Outstanding, September 30, 2015
Issued
Exercised
Expired or forfeitted
Outstanding, September 30, 2016
Exercisable, September 30, 2016
Weighted
average
exercise
price
$
Units
$
4,354,000
$
3,010,000
$
(2,442,000)
(50,000)
$
4,872,000 $
$
-
$
-
$
(865,000)
4,007,000 $
0.36
0.54
0.37
0.35
0.45
-
-
0.37
0.47
1,668,600 $
0.37
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 at September 30, 2016 and 2015:
2016
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
years
2015
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
years
Number
outstanding
Number
outstanding
2,923,000
1,084,000
4,007,000
$
$
$
0.54
0.28
0.47
2.79
2.10
2.60
2,985,000
1,887,000
4,872,000
$ 0.33
$ 0.32
$ 0.45
3.09
0.10
3.62
Range of exercise prices:
$0.39 to $0.55
$0.26 to $0.39
The volatility of the stock for the Black-Scholes option pricing model was based on the five 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
2016, the fair value of the options vested in the year were expensed and credited to contributed surplus in the amount of
$334,750 (2015 – $580,627).
34
Canadian Funds
16. INCOME PER SHARE
Basic income per share is calculated using the weighted average number of shares outstanding. Diluted income per share
reflects the dilutive effect of the exercise of stock options, warrants and convertible debt. The following table reconciles
the net income and the number of shares for the basic and diluted income per share computations:
Numerator for basic income per share:
Net income available to common shareholders ($)
Denominator for basic income per share:
Weighted average common shares outstanding
Effect of dilutive securities:
Warrants
Stock Options
Convertible debentures
Denominator for diluted income per share
Income per share
Basic
Diluted
2016
2015
$748,407
$613,984
84,656,531
80,868,855
20,687
28,571
-
293,822
984,729
-
84,705,789
82,147,406
$0.009
$0.009
$0.008
$0.007
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
2016
6,831,313
3,607,000
9,242,979
19,681,292
2015
-
-
7,000,000
7,000,000
35
Canadian Funds
17. 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:
Depreciation and amortization
Included in:
Cost of goods sold
General and administrative expenses
Reasearch and development expenses
Total depreciation and amortization
Employee costs
Short-term wages, bonuses and benefits
Share based payments
Total employee costs
Included in:
Cost of goods sold
Research and development expenses
General and administrative expenses
Selling and business development expenses
Total employee costs
18. INCOME TAXES
Income Taxes consist of the following, as at September 30:
Provision based on combined federal
and provincial statutory rates
of 25.00% (2015 – 26.50%)
Increase (decrease) resulting from
Non deductible expenses
Stock-based compensation
Effect of change in tax rate
Valuation allowance
Other
Income tax recovery
2016
$
290,249
1,032
122,398
413,679
2016
$
3,352,076
334,750
3,686,826
2,088,639
347,081
878,534
372,572
3,686,826
2015
$
292,729
956
124,738
418,423
2015
$
3,707,140
580,627
4,287,767
2,500,247
536,086
928,248
323,186
4,287,767
2016
$
2015
$
37,102
92,481
88
83,688
205,745
(789,889)
(136,734)
(600,000)
402
153,866
-
(894,745)
382,996
(265,000)
36
Canadian Funds
18. 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 income 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:
2030
2031
2032
The significant components of deferred 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
Deferred income tax liability related to debentures
Tax assets not recognized
Deferred tax asset
$
352,000
1,145,000
1,223,000
2,720,000
2015
$
930,702
330,406
105,441
2016
$
680,097
535,598
183,325
3,664,086
3,926,246
(862,484)
(4,200,622)
-
(955,460)
(4,337,335)
-
The unclaimed research and development investment tax credits 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
2034
2035
2036
$
100,000
149,000
303,000
293,000
304,000
395,000
175,000
220,000
170,000
123,100
107,300
132,000
96,000
60,000
2,627,400
37
Canadian Funds
18. 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
Deferred tax assets related to investment tax credits
19. CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable
Inventory
Prepaid expenses and other assets
Investment tax credits receivable
Accounts payable and accrued liabilities
20. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest
Non-cash investing and financing activities:
Fees for equity placements
Purchase of assets under capital leases
21. FINANCIAL EXPENSES
Cash interest:
Interest on long-term debt
Interest on debentures
Interest other
Interest income
Non-cash interest:
Accretion on debentures
Financial expenses
22. CAPITAL MANAGEMENT
2016
$
2015
$
2,120,578
(990,578)
1,130,000
2,133,674
(1,603,674)
530,000
2016
$
(329,798)
229,275
160,848
(32,148)
(589,498)
(561,321)
2015
$
449,434
(2,026,839)
281,422
(6,624)
662,399
(640,208)
2016
$
2015
$
838,597
771,424
-
7,476
-
15,876
2016
$
132,799
463,955
10,650
(616)
83,849
690,637
2015
$
142,717
488,682
3,149
(2,785)
110,676
742,439
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 BDC capital loans, and the debentures. The capital at September 30, 2016 amounted to $22,328,085 (2015 - $20,423,853).
To date, the Company has used common equity issues, debentures, a mortgage and other financing 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 and
other financing are with the BDC. 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 $600,000 with its Canadian
chartered bank (see Note 10).
38
Canadian Funds
22. CAPITAL MANAGEMENT (Continued)
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.
23. FINANCIAL INSTRUMENTS
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 2016 and 2015 fiscal periods, the Company has carried at fair value financial instruments in Level 1. At September 30, 2016,
the Company’s only financial instrument measured at fair value is cash, which is considered to be a Level 1 instrument. There were
no transfers between levels during the year.
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.
The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities.
Date of
valuation
Quoted prices
in active
markets
(Level 1)
$
Significant
observable
inputs
(Level 2)
$
Significant
unobservable
inputs
(Level 3)
$
Assets measured at fair value:
Cash
30-Sep-16
5,415
-
-
Liabilities for which fair values are disclosed:
Non-convertible debentures
Convertible debentures
Long-term-debt
30-Sep-16
30-Sep-16
30-Sep-16
-
-
-
-
-
4,002,495
879,304
2,479,255
-
Date of
valuation
Quoted prices
in active
markets
(Level 1)
$
Significant
observable
inputs
(Level 2)
$
Significant
unobservable
inputs
(Level 3)
$
Assets measured at fair value:
Cash
30-Sep-15
104,180
-
-
Liabilities for which fair values are disclosed:
Non-convertible debentures
Convertible debentures
Long-term-debt
30-Sep-15
30-Sep-15
30-Sep-15
-
-
-
-
-
3822765
934,346
2,416,536
-
39
Canadian Funds
23. FINANCIAL INSTRUMENTS (Continued)
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 judgement 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 fair values of financial instruments included in current assets and current liabilities approximate their carrying values due to
their short-term nature.
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. The fair values of financial instruments in other long-term liabilities approximate their carrying
values as they are recorded at the net present values of their future cash flows, using an appropriate discount rate.
24. FINANCIAL RISK MANAGEMENT
The primary risks that affect the Company are set out below and the risks have not changed during the reporting periods.
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.
Risks arising from financial instruments and risk management
The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk), credit risk
and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Company’s financial performance.
Risk management is the responsibility of the corporate finance function. Material risks are monitored and are regularly
discussed with the Audit Committee of the Board of Directors
Credit risk
The Company’s cash is 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 2016, five customers account for 59%
(2015 - six customers account for 63%) of revenue. The Company has had minimal bad debts over the past several years
and accordingly management has recorded an allowance for doubtful accounts of $10,000 (2015 - $18,295).
Trade accounts receivable are aged as follows as at September 30:
Current
0 - 30 days past due
31 - 60 days past due
61 days and over past due
Market risk and foreign currency risk
2016
$
1,649,260
96,390
276,222
-
2,021,872
2015
$
1,424,128
7,715
505
259,726
1,692,074
Market risk is the risk that changes in market prices, such as foreign exchange rates, will affect the Company’s income or
the value of its financial instruments. The Company’s activities that result in exposure to fluctuations in foreign currency
exchange rates consist of the sale of products and services to customers invoiced in foreign currencies and the purchase
of services invoiced in foreign currencies. The Company does not use financial instruments to hedge these risks. As 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
2016
$
5,259
1,065,198
474,498
2015
$
41,015
944,667
554,642
Euros
2016
$
29
674,433
22,451
2015
$
-
934,864
76,552
40
Canadian Funds
24. FINANCIAL RISK MANAGEMENT (Continued)
Market risk and foreign currency risk (Continued)
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.
The Company’s percentage of revenue and expenses by foreign currency for the years ended September 30, 2016 and 2015 are as follows:
Revenue
European Euro
U.S. dollars
Expenses
U.S. dollars
2016
39%
56%
13%
2015
45%
50%
34%
The impact of a 5% increase in the Canadian dollar against the US dollar would result in a revenue loss of about 4.7%.
The impact of a 5% increase in the Canadian dollar against the Euro would result in a revenue loss of about 5%.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting its financial liability obligations as they
become due. The Company has a planning and budgeting process in place to help determine the funds required to support
the normal operating requirements on an ongoing basis. The Company has financed its cash requirements primarily
through issuance of securities, short-term borrowings, long-term debt and debentures. The Company controls liquidity
risk through management of working capital, cash flows and the availability of sourcing of financing.
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 rate 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 at the Company’s option, if the outlook for interest rates should move higher. The
only other variable debt the Company has is the $600,000 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
$6,000 on the line of credit usage if it were fully used throughout the fiscal year.
25 . SEGMENTED INFORMATION
The Company operates in two industries: (i) the development, manufacturing and distribution of cell-based products and
technology and, (ii) the 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 profits from continuing
operations by reportable segment:
Virology products and technologies
Lumisort ™
Kinlytic®
Total for continuing operations
Segment revenue
Segment profit
2016
$
2015
$
9,517,137
-
-
9,517,137
8,873,912
-
-
8,873,912
2016
$
748,407
-
-
748,407
2015
$
613,984
-
-
613,984
Segment revenue reported above represents revenue generated from external customers. There were no inter-segment
sales in the current year (2015 - $Nil).
41
Canadian Funds
25 . SEGMENTED INFORMATION (Continued)
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, after income tax. 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
2016
$
2015
$
2016
$
2015
$
Virology Products and Technologies
Lumisort ™
Kinlytic®
12,733,028
8,613,906
2,770,529
24,117,463
13,254,452
6,991,978
2,770,528
23,016,958
9,955,722
-
-
9,955,722
9,066,596
803,452
-
9,870,048
All assets are allocated to reportable segments other than current and deferred tax assets. Assets used jointly by reportable
segments are allocated on the basis of the revenue 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.
Depreciation and
amortization
2016
$
319,103
94,576
-
413,679
2015
$
322,864
95,559
-
418,423
Additions to
non-current assets
2016
$
2015
$
1,073,825
567,301
-
1,641,126
1,752,284
3,089,738
-
4,842,022
Virology Products and Technologies
Lumisort ™
Kinlytic®
26. GEOGRAPHIC INFORMATION
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.
North America
Europe
Other foreign countries
Revenue from
external customers
2016
$
2015
$
Non-current
assets
2016
$
2015
$
3,496,147
5,283,841
737,149
9,517,137
3,138,875
5,100,407
634,630
8,873,912
19,586,244
-
-
19,586,244
17,758,797
-
-
17,758,797
42
Canadian Funds
27. 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
Share based payments
Total key management compensation
2016
$
796,880
236,329
1,033,209
2015
$
(Restated)
796,880
409,910
1,206,790
The Company has issued and outstanding debentures with two shareholders of the Company (see note 9). During the
year the Company issued two outstanding shareholder loans for total proceeds of $200,000. These loans are due for
repayment December 31, 2016 and bear interest of 10% per annum.
28. COMMITMENTS AND CONTINGENCIES
Lease commitments
2017
2018
2019
2020
2021
Minimum annual payments on convertible and non-convertible debentures (see Note 9)
2017
2018
2019
2020
2021 and thereafter
Contingencies
$
41,152
7,062
3,096
-
-
51,850
$
1,626,742
604,242
604,242
604,242
8,944,891
12,384,359
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
Canadian Funds
29. SUBSEQUENT EVENTS
1) On December 12, 2016, the Company announced that it has arranged a new secured revolving credit facility of $1,000,000
jointly with The Toronto-Dominion Bank (“TD Bank”) and Export Development Canada (“EDC”). The new credit facility
will be used for general corporate purposes, including the execution of the Company’s overall growth strategy.
To accommodate the additional security required by TD Bank and EDC, effective December 12, 2016, the Company
has negotiated amended terms with the two holders of its issued and outstanding convertible debentures, in exchange
for reducing their security position to one of unlimited subordination to the credit facility lenders.
The largest debenture holder has two convertible debentures; a $2,500,000 debenture maturing in 2028 that was
originally convertible at $0.65 per common share, and a $1,500,000 debenture maturing in 2029 that was originally
convertible at $0.35 per common share. The conversion price for both of these debentures has been amended to $0.23
per common share, and these debentures are now subject to restricted conversion privileges of a combined total of
1 million shares per year for the next five years, with the remaining balances being eligible for conversion through the
end of their expiry dates in 2028 and 2029, respectively.
The second debenture holder has two convertible debentures of $500,000 each, both originally convertible at $0.90
per common share and maturing on October 12, 2016 and February 15, 2017, respectively. Terms of these debentures
have also been amended. The October debenture now matures on April 30, 2017 and it becomes non-convertible,
and the stated interest rate increases from 9% to 12% for the remaining term. The February debenture maturity date
has been extended to February 15, 2022, and the conversion price has been revised to $0.23 per common share. In
addition, the second debenture holder has received 1.5 million common share purchase warrants, with an exercise price
of $0.23 per common share and a term of five years.
The convertible debenture amendments and the issuance of warrants has been approved by the Toronto Stock Exchange.
The Company is currently assessing the impact of the new revolving credit facility and amended terms to the
Company’s convertible debentures on the measurement of the Company’s financial liabilities.
2) On October 5, 2016, Zeptometrix Corporation filed a statement of claim against Microbix in Canadian Federal
Court alleging infringement of its Canadian patent. Microbix is defending the allegation maintaining it does not
infringe this patent.
30. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented to
conform to the presentation of the 2016 consolidated financial statements.
44
Canadian Funds
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 (1) (2)
Ontario, Canada
Executive Chairman
Microbix Biosystems Inc.
Cameron Groome (1)
Ontario, Canada
Pharmaceutical Executive
Martin A. Marino (1) (2)
Ontario, Canada
Pharmaceutical Executive
Joseph D. Renner (1) (2)
New Jersey, USA
Pharmaceutical Executive
CORPORATE INFORMATION
Corporate Counsel
Boyle & Co. LLP
Auditors
Transfer Agent
Ernst Young 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
The Toronto Dominion Bank
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 Wednesday, March 8, 2017 at 1:00 PM.
ANNUAL REPORT
Additional copies of the Company’s 2016 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
45
Canadian Funds
265 Watline Avenue,
Mississauga, ON
Canada L4Z 1P3
Tel: 905-361-8910
Fax: 905-361-8911
1-800-794-6694
Web Site: www.microbix.com