Message to shareholders
Fiscal 2017 proved to be a year of both
achievements and challenges for Microbix, with
it finishing the year poised for strong results and
accelerating success in 2018.
Important achievements for the year included
revenues of over $10 million – another new
record. Of even greater importance, Microbix
has positioned to capture growth in antigen
product demand by completing validation of
its state-of-the-art bioreactor process and
expanding its overall production capacity. With
two important customer contracts executed in
the year and demand growth across its broader
customer base, Microbix is now well-positioned
for sustained double-digit sales growth and
consistent profitability.
The emerging product
line
for helping
diagnostics industry participants meet quality
assurance objectives also advanced in 2017. One
sub-category of such products already represents
For LumiSort, the dynamics of the livestock
sex-selection market have been challenging,
with the incumbent and its largest customer
suing each other. In that environment, LumiSort
partnering discussions continue, but Microbix is
proceeding cautiously. In 2017, new LumiSort IP
issued in multiple nations and for 2018 Microbix
will continue to pursue commercialization options
and more fully explore potential human health
applications of its cell-sorting technology.
Discussion of fiscal 2017 cannot ignore the
challenges that arose during the year. While non-
recurring in nature, such challenges negatively
impacted Microbix’ financial results. Several
matters impacted cash flow, such as legal disputes,
a production issue and management transitions,
that when combined increased costs by $1.7
million and reduced revenues by $0.6 million. In
addition, a non-cash debt-restructuring expense
resulted in a further charge of $2.5 million. While
Microbix recorded a net loss for 2017, backing-out
such non-recurring items reveals a clearer picture
10% of total sales, a proportion that Microbix
aims to grow. Work is ongoing to achieve sales
of results.
growth objectives, including the development of
new products, upgrading of quality systems and
relating to intellectual property.
Progress was also made with Microbix’ two
major development projects - Kinlytic® urokinase
for clearing blood clots and LumiSort™ cell-
sorting technology.
For Kinlytic, an important consultation was
undertaken with FDA to clarify the path to return
the product to the United States market. From
there, detailed 3rd party costing has been
completed to support partnering of the project
in 2018.
For fiscal 2018, Microbix expects continuing
growth in sales of its antigens and quality
products, with positive net earnings and no
apparent headwinds. Success with partnering
of Kinlytic or LumiSort would further add to such
value creation and is very much targeted. Our
team is therefore optimistic about the prospects
for Microbix.
Personally and on behalf of all my colleagues,
I thank you for your continuing support and wish
you the best for 2018.
Cameron L. Groome
Chief Executive Officer and President
1
Canadian Funds MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
Canadian Funds
The Company’s Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the audited
Consolidated Financial Statements, and notes for the year ended September 30, 2017, 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 19, 2017.
COMPANY OVERVIEW
Microbix Biosystems Inc. (Microbix or the Company) (TSX: MBX) develops biological products and technologies.
The Company has viral and bacterial 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® Urokinase, an FDA regulated human thrombolytic
drug, and is developing LumiSort™, a technology platform for ultra-rapid and efficient sorting of somatic cells that
can be used to enrich cell populations of interest, such as in sexing semen.
Revenue from the Virology business is expected to continue growing for the foreseeable future with this growth
recently accelerating as certain public health tests are starting to be adopted in the Asia Pacific region. The Virology
business is targeted to provide free cash flow to cover operating and debt service costs, and funding for business
initiatives that leverage this expertise and are related to this field.
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, Mississauga, Ontario.
2
Canadian Funds
FINANCIAL OVERVIEW
Canadian Funds
Year Ending September 30, 2017
Total revenue was $10,185,798, a 7% increase over 2016’s revenue of $9,517,137. Included was Virology product
revenue of $9,891,859, 7% higher than 2016, with the growth due to increased sales to long standing customers.
Revenue from royalties were up slightly at $293,939 (2016 - $280,985).
Gross margins of 47% (2016 – 52%) decreased by $167,671 versus 2016, due to changes in the product mix and in
large part to a production processing issue in the second half of fiscal 2017
Expenses in 2017 increased by $4,210,824 compared to last year. This was primarily due to non-recurring costs
related to (1) a non-cash adjustment of $2,457,014 to restructure the Company’s convertible debentures as part of a debt
refinancing initiative that was necessary in order to implement an enhanced revolving credit facility for the Company,
(2) the settlement of a dispute with the buyer of the Company’s WFI business in 2012 in the amount of $273,540
and (3) last year the Company capitalized $850,947 more internal development costs, related to the new bioreactor
manufacturing process. In addition, the Company incurred $687,795 more in legal costs than last year, the majority of
which were non-recurring legal costs related to a lawsuit that was resolved to our satisfaction at the end of fiscal 2017.
As a result, the Company experienced a net loss for the year of $3,780,088 (2016 – $748,407 net profit). After these
non-recurring costs, the net operating loss before debt restructuring and WFI settlement expenses was $1,499,534 for
the year compared to a net operating profit of $148,407 last year.
Cash generated from operations in this period was $297,047 compared to $913,308 in 2016. Cash used in investing
activities was $640,750 (2016 - $1,641,126), due to decreased spending on capital equipment and internal development
of intangible assets. Cash generated from financing activities was $392,748 (2016 - $629,053), primarily due to no
issuance of common shares this fiscal year vs. prior year. Net change in cash for the year was $49,045 in 2017 (2016 -
$98,765 negative).
Three Months Ending September 30, 2017
Total revenues for the quarter were $2,813,282, down 19% versus Q4 of 2016 revenues of $3,470,580. Included
was Virology product revenue of $2,719,619, down 20% versus Q4 2016, due to higher than normal sales to a
key customer in Q4 2016. Approximately $0.6 million of this decrease in Virology sales was due to a product
shipment delay past year end. Revenue from royalties were $93,662 (2016 - $58,314).
Gross margins of 39% (2016 – 54%) decreased by $1,047,492 versus Q4 2016, primarily due to decreased sales as a
result of production processing issues and resulting delay in product shipments in the second half of 2017. Operating
expenses increased by $518,350 compared to the fourth quarter last year. This was primarily due to higher legal costs
versus last year and increased stock option expenses.
In total, the Company experienced a net loss for the period of $1,009,911 (2016 – $862,930 net profit).
Cash used in operations in this quarter was $447,812 compared to cash provided of $367,235 in Q4 2016, due
to higher deferred revenue from key customers in the same period last year. Cash used in investing activities was
($26,157) (2016 - $267,276), due to decreased spending on internal development of intangible assets and purchase
of equipment. Cash provided by financing activities was $312,168 (2016 – $99,633), primarily due to proceeds
from our bank credit facility offset by debt and debenture payments. Net change in cash was ($109,486) in the
fourth quarter of 2017 (2016 - $325).
3
Canadian Funds
CHANGES IN FINANCIAL POSITION
Canadian Funds
Total Revenue
Gross Margin
S,G&A Expenses
R&D Expense
Financial Expenses
Net Operating Income (Loss)
(Before Debt Restructuring and Settlement Costs)
2017
2016
$10,185,798
$9,517,137
4,812,373
4,392,734
994,584
924,589
4,980,044
3,647,390
493,610
690,637
(1,499,534)
148,407
Cash Provided by Operating Activities
297,047
913,308
Cash
Accounts receivable
Total current assets
Total assets
Total current liabilities
Total liabilities
Total shareholders’ equity
Current ratio
Debt to equity ratio
54,460
1,337,488
6,161,837
26,437,611
6,516,249
11,262,928
15,174,683
0.95
0.74
5,415
2,021,872
5,661,219
25,247,463
5,248,993
9,955,722
15,291,741
1.08
0.65
SELECTED QUARTERLY FINANCIAL INFORMATION
Dec-31-15
$
Mar-31-16
$
Jun-30-16
$
Sep-30-16
$
Dec-31-16
$
Mar-31-17
$
Jun-30-17
$
Sep-30-17
$
1,063,405
(428,420)
Sales
Operating Income (Loss)
Operating Income (Loss),
before Debt restructuring
and settlement costs
(428,420)
2,729,779
161,979
2,253,373
(141,082)
3,470,580
555,930
1,952,502
(3,366,472)
2,646,649
107,649
2,773,365
38,646
2,813,282
(1,009,911)
161,979
(141,082)
555,930
(525,406)
107,649
(164,104)
(917,673)
OUTLOOK
Microbix’ business of producing high quality viral and bacterial antigens is the result of nearly three decades of
experience in the field, including strain selection, culturing organisms reliably and at scale, purification of biomass and
methods of inactivation. As a result of Microbix’ expertise and manufacturing capabilities, its products have received
widespread and longstanding customer acceptance, with continuing growth in demand. More recently, growth in
demand for its products has been accelerating – as a number of diagnostics for infectious diseases important to public
health are beginning to be adopted in the Asia-Pacific region.
Microbix is reinvesting in its business to help ensure that it can meet this growth in demand. Such work includes
upgrading its manufacturing technologies, processes and capacity, along with developing and launching new diagnostics-
oriented products.
Based on order projections from its customers, management expects sales of viral and bacterial antigens will
continue to grow for the foreseeable future. Accordingly, the company is increasing its production – by way of
expanding the capacity to make antigen using bioreactors, reallocating its roller-bottle antigen production space
and improving in-process controls and downstream production methods. It is intended that these steps increase
the revenue potential of current production facilities while also improving margins. As a result of these efforts,
management expects to grow sales and improve profitability.
4
Canadian Funds
OUTLOOK (Continued)
Canadian Funds
An emerging product line involves the development and sale of products that assist diagnostics industry participants
with meeting quality assurance objectives or requirements – broadly characterized as quality assurance products. Some
such products are currently being sold, with more in development. The regulatory requirements of this category of
products are dependent on their intended usages and Microbix plans to upgrade its quality systems to meet the highest
such requirements – to enable it to realize the full scope of such opportunities. At present, such products comprise
approximately 10% of annual sales, with that proportion expected to increase.
Microbix has two sizeable development projects that, to date, have not generated revenues from product sales –
Kinlytic® urokinase (Kinlytic) and LumiSort™ cell-sorting technology (LumiSort). In 2017, management has determined
that full realization of the value of these assets will best be accomplished by partnering both projects, as opposed to funding
them with Company resources. Management is of the opinion that both projects were meaningfully advanced over the
course of the year.
For Kinlytic, a consultation was undertaken with FDA about Microbix’ specific manufacturing, clinical and regulatory
plans for the re-introduction of the product into the U.S. market. Management believes that the formal feedback received
from FDA clarifies important questions about Kinlytic’s return to market and greatly de-risks the project. Following the
FDA consultation, Microbix has obtained third-party quotations for the key elements of its re-introduction plan and will
shortly begin partnering outreaches for this project as a “bolt-on” for larger entities with the appropriate qualifications. It
is management’s objective to secure an alliance that fully funds the Kinlytic project in fiscal 2018, thereby securing near
and longer term financial benefits to Microbix.
For LumiSort, Microbix has been navigating a contentious market dynamic in the livestock genetics industry –
where the incumbent sex-selection provider and its largest customer are in litigation. Partnering discussions are ongoing
for this asset, but Microbix is being appropriately cautious in light of this environment. Our actions have been focused
upon ensuring national-level issuances of Microbix’ latest cell-sorting patent and on staying fully-apprised of market
developments. For fiscal 2018, Microbix will continue to pursue commercialization options in the field of livestock sex-
selection and also more fully explore potential human health applications of its cell-sorting innovations.
To summarize, management believes the outlook for Microbix’ antigens and controls business is positive and that
increased sales, margins and profits are likely from those operations. In turn, Microbix is working to realize value from its
Kinlytic and LumiSort development projects via successful partnering.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
The consolidated financial statements have been prepared in accordance with the International Financial Reporting
Standards (“IFRS”) on a going concern basis, which presumes the Company will continue operating for the foreseeable
future and will be able to realize a return on its assets and discharge its liabilities and commitments in the normal
course of business.
The Company has incurred historical losses resulting in an accumulated deficit of $27,076,837 as at September
30, 2017. 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 adequately capitalized.
Future Liquidity and Capital Needs
The Company primarily funds new product development activities and capital expenditures from profits earned by its
Virology business and, periodically, from additional equity and/or debt.
In fiscal 2018 cash flow is expected to improve due to: 1) continued growth in Virology sales, 2) improvements
in product pricing and other sales terms, 3) commencement of sales of higher margin product from the Company’s
bioreactor production process, and 4) other business development and financial initiatives. Management expects these
developments will significantly improve the Company’s overall liquidity position in fiscal 2018.
5
Canadian Funds
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES (Continued)
Canadian Funds
Contractual Obligations
New Distribution Agreement
On January 12, 2017 Microbix signed a distribution agreement with Meridian Life Science, Inc. Under the terms of
the Agreement, Meridian will receive exclusive distribution rights to Microbix’ branded antigen products for China,
Hong Kong, Taiwan and Macau. Additionally, Microbix will also provide bulk-finished product to Meridian to be sold
under Meridian-label to customers in the Asia Pacific region. Both companies will explore additional collaboration
opportunities in the future.
The relationship will enable Microbix to leverage its expanding manufacturing capacity and Meridian’s substantial
commercial presence to better serve the region’s diagnostic customers. Overall, the distribution collaboration is expected
to significantly expand the business relationship between the two companies, and serve as a platform for the continued
growth and expansion of their respective products and services.
Expanded Customer Agreement
On August 8, 2017 Microbix announced the execution of an expanded customer supply agreement. Under the agreement,
Microbix will supply an existing long-term customer with an increasing quantity of viral antigen products over the next
five years, with the parties having the option to extend that term. Sales from the agreement are expected to total $25
million, with approximately $10 million to be incremental business.
The agreement is with a major global diagnostics company with growing sales of infectious disease tests that require
more antigen supply. The parties’ obligations under the agreement are those customary for the supply and purchase of
biological materials and its renewal and expansion provides Microbix with a secure base of business and underpins its
decision to increase its production by expanding bioreactor capacity and other measures.
Settlement of Disputes
On December 30, 2016 Microbix reached a final settlement with Irvine Scientific Inc. over a dispute related to the sale
of the Company’s Water-for-Injection business to Irvine in December 2012. Microbix has agreed to pay Irvine (U.S.)
$192,500 in three installments as follows -
December 30, 2016
March 31, 2017
June 30, 2017
(U.S.)
(U.S.)
(U.S.)
$64,167
$64,167
$64,166
As of the end of this quarter, all financial obligations relating to this settlement have been completed.
On October 11, 2017 Microbix announced the court approval of a legal dispute settlement with Zeptometrix
Corporation, with the latter party’s claims of patent infringement being withdrawn. The withdrawal of the lawsuit was
‘with prejudice’, following a settlement agreement between the parties that was to Microbix’ satisfaction.
Outstanding Share Capital
Share capital issued and outstanding as at September 30, 2017 was $31,299,416 for 84,704,257 common shares,
unchanged from September 30, 2016.
6
Canadian Funds
SUBSEQUENT EVENTS
Canadian Funds
On October 18, 2017 and October 26, 2017 (the “Closing Date”), the Company completed a private placement offering
of an aggregate of 11,666,633 units for total gross proceeds of $3,499,990, net proceeds of $3,201,997 after share issuance
costs of $297,993. Each unit consists of one common share of Microbix and one half of a common share purchase warrant.
Each whole warrant entitles the holder to purchase one additional common share at an exercise price of $0.36 for three years.
The financing was brokered. Cash commissions of $299,784 were paid and an aggregate of 755,764 Broker’s Warrants were
issued in the private placement offering. Each Broker’s Warrant entitles the holder to purchase one unit at a price of $0.335
for a period of two years. All securities issued under the private placement will be subject to a hold period expiring four
months and one day from the date of closing.
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 19, 2017.
RISKS AND UNCERTAINTIES
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
contribute a significant share of the revenue. 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 in 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® Urokinase
The Company is undertaking to return Kinlytic to the U.S. market and intends to do so by way of partnering with third parties.
There is no assurance the Company will be successful in this endeavour.
LumiSort™ technology
The Company has developed a proprietary technology platform for ultra-rapid and efficient sorting of somatic cells that can be
used to enrich cell populations of interest, such as in sexing semen, which includes 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.
7
Canadian Funds
RISKS AND UNCERTAINTIES (Continued)
Canadian Funds
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.
Operating and capital requirements
Microbix earns positive gross margins on the sale of its Virology Products, which are 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 on 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 resources and general capabilities in the areas of scientific and product development, legal review,
manufacturing, sales and marketing, and financial support than Microbix. While the Company continues to expand its
technological, commercial, legal and financial capabilities in order to remain competitive, Microbix’ competitors are likely also
making significant investments in these areas, which could make it more difficult for Microbix to commercialize its products
and technologies.
8
Canadian Funds
FINANCIAL RISK MANAGEMENT
Canadian Funds
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, 2017, five customers
accounted for 63% (2016 – five for 59%) 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 (2016 - $10,000).
Currency risk:
The Company is exposed to currency fluctuations given its global customer base. Over 95% of its revenue is denominated in
either U.S. dollars or Euros, while the majority of its costs are denominated in Canadian dollars. The Company does not use
financial instruments to hedge this currency risk. At September 30, 2017, the significant balances, quoted in Canadian dollars,
held in foreign currencies are:
US dollars
Euros
2017
2016
2017
2016
Cash
Accounts receivable
Accounts payable and
accrued liabilities
$
52,902
458,941
$
5,259
1,065,198
$
5
413,117
$
29
647,433
$ 406,000
$ 474,498
$ 11,987
$ 22,451
The impact of a 5% increase in the U.S. dollar against the Canadian dollar would result in an increase in annual U.S. dollar
based revenue of about $284,600 Cdn. The impact of a 5% increase in the Euro against the Canadian dollar would result in
an increase in annual Euro based revenue of about $201,800. Correspondingly, the impact of a 5% decrease in the U.S. dollar
against the Canadian dollar would result in a loss in annual U.S. dollar based revenue of about $284,600 Cdn. The impact of
a 5% decrease in the Euro against the Canadian dollar would result in a loss in annual Euro-based revenue of about $201,800.
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. During
the first quarter the Company implemented a new secured revolving credit facility with The Toronto-Dominion Bank
(“TD Bank”) and Export Development Canada (“EDC”). The new credit facility is being used to fund the Company’s
need for working capital to grow its existing business. Management expects this new facility will help satisfy the
Company’s liquidity needs and manage the liquidity risk going forward.
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 applies primarily to 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 $1,500,000 line of credit that bears interest at the bank’s prime lending rate plus 2.25%. A 1%
increase in the bank rate would cost the Company approximately $30,000 per year for BDC and about $15,000 on the
line of credit usage if it were fully used throughout the fiscal year.
9
Canadian Funds
FINANCIAL RISK MANAGEMENT (Continued)
Canadian Funds
Market risk
Market risk reflects changes in pricing for both Virology products and raw materials based on supply and demand
criteria. 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 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.
CRITICAL ACCOUNTING ESTIMATES
The preparation of these consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. The Company’s audited consolidated financial
statements are prepared in accordance with 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, 2017 have met the criteria
for impairment.
10
Canadian Funds
CRITICAL ACCOUNTING ESTIMATES (Continued)
Canadian Funds
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.
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.
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, 2017, 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
11
Canadian Funds
FINANCIAL INSTRUMENTS (Continued)
Canadian Funds
Internal Controls Over Financial Reporting (Continued)
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, 2017.
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, 2017 that have materially
affected, or are reasonably thought to materially affect, the internal control over financial reporting.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the
International Accounting Standards Board (IASB) or IFRS Interpretation Committee (IFRIC) that are mandatory at
certain dates or later. Management is still assessing the effects of the pronouncements on the Company. The standards
impacted that may be applicable to the Company are following:
IFRS 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 and its financial liabilities
12
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 Programs,
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 not yet determined the impact on its consolidated
financial statements.
IFRS 2, Share-based Payment (“IFRS 2”)
In June 2016, the IASB issued final amendments to IFRS 2, clarifying how to account for certain types of share-based
payment transactions. The amendments, which were developed through the IFRS Interpretations Committee, provide
requirements on the accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash-
settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax
obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classifications
of the transaction from cash-settled to equity-settled. The effective date for this standard is for reporting periods beginning
on or after January 1, 2018, with earlier application permitted. The Company has completed the review process to assess the
impact and application of the aforementioned amendments and has determined it will have no impact on the Company.
IFRIC 22, Foreign Currency Transactions and Advance Consideration
In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC
22”) which provides requirements about which exchange rate to use in reporting foreign currency transactions (such as
revenue transactions) when payment is made or received in advance. IFRIC 22 is effective for annual periods beginning
on or after January 1, 2018, with earlier adoption permitted. On initial application, entities have the option to apply either
retrospectively or prospectively. The Company is in the process of evaluating the impact of adopting these amendments
on the Company’s consolidated financial statements.
13
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 statements of financial position as at September 30, 2017 and 2016, and the consolidated statements
of (loss) income and comprehensive (loss) income, changes in shareholders’ equity and cash flows for the years 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 audits.
We conducted our audits 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 audits 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, 2017 and 2016, and its financial performance and its cash flows for
the years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
December 19, 2017
14
Canadian Funds CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at September 30, 2017 and 2016
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Inventory (Note 5)
Prepaid expenses and other assets (Note 6)
Investment tax credit receivable (Note 18)
TOTAL CURRENT ASSETS
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 (Note 11)
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 27)
Subsequent Events (Note 29)
On behalf of the Board:
(Signed) “William J. Gastle”
William J. Gastle
Director
Canadian Funds
2017
2016
$
54,460
1,337,488
4,467,106
152,989
149,794
5,415
$
2,021,872
3,395,993
55,541
182,398
6,161,837
5,661,219
1,580,000
12,211,770
6,484,004
1,130,000
12,251,984
6,204,260
20,275,774
19,586,244
$ 26,437,611 $ 25,247,463
$ 2,841,950
23,070
1,891,480
614,563
1,145,185
$ 1,898,515
1,647
1,069,455
1,595,882
683,494
6,516,249
5,248,993
74,327
802,819
1,268,623
2,600,910
11,012
635,020
1,127,657
2,933,040
4,746,679
4,706,729
$ 11,262,928
$ 9,955,722
$ 31,299,416
$ 31,299,416
2,903,789
8,048,315
(27,076,837)
2,351,425
4,937,649
(23,296,749)
$ 15,174,683
$ 15,291,741
$ 26,437,611
$ 25,247,463
(Signed) “Cameron L. Groome”
Cameron L. Groome
Director
The accompanying notes are an integral part of these consolidated financial statements.
15
Canadian Funds
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the year ended September 30, 2017 and 2016
Canadian Funds
SALES
Virology products and technologies
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
General and administrative
Research and development
Financial expenses (Note 20)
OPERATING INCOME (LOSS)
2017
2016
$ 9,891,859
293,939
$ 9,236,152
280,985
10,185,798
9,517,137
5,287,781
85,644
4,474,038
63,055
5,373,425
4,537,093
4,812,373
4,980,044
464,909
3,927,825
994,584
924,589
517,023
3,130,367
493,610
690,637
BEFORE DEBT RESTRUCTURING AND SETTLEMENT EXPENSES
(1,499,534)
148,407
Debt restructuring expense (Note 9)
Settlement expense (Note 28)
2,457,014
273,540
-
-
OPERATING INCOME (LOSS) FOR THE YEAR, BEFORE INCOME TAXES
(4,230,088)
148,407
INCOME TAXES
Deferred income taxes (Note 18)
(450,000)
(600,000)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR THE YEAR
$ (3,780,088)
$ 748,407
NET COMPREHENSIVE INCOME (LOSS)PER SHARE
Basic (Note 16)
Diluted (Note 16)
The accompanying notes are an integral part of these consolidated financial statements.
$
$
(0.045)
(0.045)
$
$
0.009
0.009
16
Canadian Funds
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended September 30, 2017 and 2016
OPERATING ACTIVITIES
Net comprehensive income (loss) for the year
Items not affecting cash
Amortization and depreciation (Note 17)
Accretion of debentures
Stock options expense (Note 15)
Deferred revenue (Note 11)
Debt restructuring expense (Note 27)
Deferred tax assets (Note 18)
Change in non-cash working
Canadian Funds
2017
2016
$ (3,780,088)
$
748,407
510,159
198,560
485,086
461,691
2,379,776
(450,000)
413,679
83,849
334,750
493,944
-
(600,000)
capital balances related to operations (Note 19)
491,863
(561,321)
CASH PROVIDED BY OPERATING ACTIVITIES
297,047
913,308
INVESTING ACTIVITIES
Purchase of property, plant and equipment (Note 7)
Additions from internal development of intangible assets (Note 8)
(182,055)
(458,695)
(702,579)
(938,547)
CASH USED IN INVESTING ACTIVITIES
(640,750)
(1,641,126)
FINANCING ACTIVITIES
Repayments of long-term debt (Note 10)
Repayments of debentures (Note 9)
Repayments of finance lease (Note 27)
Proceeds from equipment loans (Note 10)
Proceeds from credit facility (Note 10)
Proceeds from shareholder loan
Issue of common shares, net of issue costs
(340,106)
(83,367)
(13,779)
-
830,000
-
-
(320,270)
(76,171)
(6,180)
250,000
50,000
200,000
531,674
CASH PROVIDED BY FINANCING ACTIVITIES
392,748
629,053
Net Change in Cash
During the Year
Cash - Beginning of year
Cash - End of year
The accompanying notes are an integral part of these consolidated financial statements.
49,045
(98,765)
5,415
104,180
54,460
5,415
17
Canadian Funds
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
As at September 30, 2017 and 2016
Canadian Funds
SHARE CAPITAL (note 12)
STATED
NUMBER OF
CAPITAL
SHARES
CONTRIBUTED
SURPLUS
EQUITY
TOTAL
COMPONENT OF SHAREHOLDERS’
DEFICIT
DEBENTURE
EQUITY
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
Issuance of warrants pursuant
to private placement
Share issue costs pursuant
to private placement
Stock option expense
1,500,000
362,069
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
Stock option expense
Issuance of warrants pursuant to
refinancing of convertible debentures
Conversion of a convertible debenture
to a non-convertible debenture
Extinguishment of convertible debenture
Refinancing of convertible debentures
485,086
245,860
86,680
2,293,040
485,086
245,860
(86,680)
(2,264,745)
28,295
2,903,789
2,903,789
Net comprehensive income (loss) for the year
(3,780,088)
(3,780,088)
BALANCE, SEPTEMBER 30, 2017 84,704,257 $31,299,416 $8,048,315 $(27,076,837) $2,903,789 $15,174,683
The accompanying notes are an integral part of these consolidated financial statements.
18
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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’s registered office and owned manufacturing facility is located at 265 Watline Avenue, Mississauga, Ontario, L4Z 1P3.
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 financial
statements for the year ended September 30, 2017. The Board of Directors approved these consolidated financial statements on
December 19, 2017.
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 year ended September 30, 2017 and 2016. All significant
intercompany transactions and balances have been eliminated upon consolidation.
Use of estimates and judgments
The preparation of financial statements requires management to make estimates and judgements 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 judgement 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.
19
Canadian Funds NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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 judgement 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; (vi) 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. The
amortization period and amortization method for intangible assets with finite useful lives are reviewed at least at the end of each
reporting period.
iii) Financial assets and liabilities:
Estimates and judgements 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, 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) 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.
vi) Impairments:
The recoverable amount of intangible assets and property, plant and equipment is based on estimates and assumptions regarding
the expected market outlook and cash flows from each CGU.
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 recorded in long term deferred revenue. The term over which upfront fees are recognized is
revised if the period over which the Company maintains substantive contractual obligations changes.
20
Canadian Funds NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 at September 30, 2017 or 2016.
Financial assets and liabilities
All financial instruments, including derivatives, are included on the consolidated statement 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 or losses 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 as at June 30:
Classification
Measurement
2017
2016
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
Held-for-trading
Loans and receivables
Fair value
Amortized cost
$
54,460
1,337,488
$
5,415
2,021,872
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
2,841,950
1,145,185
97,398
1,170,117
1,515,888
4,492,390
$ 11,262,928
1,898,515
683,494
12,659
879,304
2,479,255
4,002,495
$ 9,955,722
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 financial statements at fair value.
Inventories
Inventory is carried at the lower of cost and market. Cost consists of direct materials, direct labour and an overhead allocation and is
determined on a first-in, first-out basis. Market is defined as net realizable value, which is defined as the summation of the 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 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.
21
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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 as at September 30, 2017 have met the criteria for impairment.
Borrowing costs
Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing
costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale are capitalized as part of the cost of the asset. All other borrowing costs are expensed
in the period they are incurred.
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.
Foreign currency translation
Foreign currency denominated revenues and expenses are translated by use of the exchange rate in effect at the end of the month in
which the transaction occurs. Foreign currency denominated monetary assets and liabilities are translated at the year-end date. Exchange
gains and losses arising on these transactions are included in the consolidated statements of comprehensive income for the period.
22
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income (loss) per common share
The Company calculates basic income per share amounts for profit or loss attributable to ordinary equity holders. Basic income per
share is calculated using the weighted average number of common shares outstanding during the period. Diluted income per share is
calculated in the same manner as basic income per share except for adjusting the profit or loss attributable to ordinary equity holders and
the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares.
Deferred taxes
Deferred income tax assets and liabilities are recognized for the estimated income tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their respective income tax bases. Deferred income tax assets 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. Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related asset cost for items of a long-term nature. These credits are only
recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the credits
in the foreseeable future.
4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the International
Accounting Standards Board (“IASB”) or IFRS Interpretation Committee (“IFRIC”) that are mandatory at certain dates or later.
Management is still assessing the effects of the pronouncements on the Company. The standards impacted that may be applicable to
the Company are following:
IFRS 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.
23
Canadian Funds NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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.
IFRS 2, Share-based Payment (“IFRS 2”)
In June 2016, the IASB issued final amendments to IFRS 2, clarifying how to account for certain types of share-based payment
transactions. The amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the
accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii)
share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms
and conditions of a share-based payment that changes the classifications of the transaction from cash-settled to equity-settled. The
effective date for this standard is for reporting periods beginning on or after January 1, 2018, with earlier application permitted.
The Company has completed the review process to assess the impact and application of the aforementioned amendments and has
determined it will have no impact on the Company.
IFRIC 22, Foreign Currency Transactions and Advance Consideration
In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”) which
provides requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when
payment is made or received in advance. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018, with earlier
adoption permitted. On initial application, entities have the option to apply either retrospectively or prospectively. The Company is
in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements.
5. INVENTORIES
Inventories as at September 30 consist of the following:
Raw material
Work in process
Finished goods
2017
$
379,661
1,593,158
2,494,287
$ 4,467,106
$
2016
253,556
840,249
2,302,188
$ 3,395,993
During the year ended September 30, 2017, inventories in the amount of $5,287,781 (2016 - $4,474,038) were recognized as an expense
through cost of sales. The allowance for inventory impairment as at September 30, 2017 was $30,561 (2016 - $30,561).
6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets as at September 30, 2017 were $152,989 (2016 - $55,541) and primarily consist of insurance
policy premiums.
24
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
7. PROPERTY, PLANT, AND EQUIPMENT
The freehold land and buildings have been pledged as security for bank loans under a mortgage (see Note 10). Property plant and
equipment consists of:
Cost
Building
Research &
development
equipment
Other
equipment
& fixtures
Land
Total
Balance, Sept 30, 2015 $4,551,102
11,281
Additions
-
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
2,996
Additions
-
Disposals
6,794,312
145,420
-
4,472,883
132,157
-
800,000
-
-
16,629,578
280,573
-
Balance, Sept 30, 2017
4,565,379
6,939,732
4,605,040
800,000
16,910,151
Accumulated depreciation
Balance, Sept 30, 2015 942,608
-
Disposals
152,504
Depreciation
531,277
-
27,822
2,585,638
-
137,745
-
-
-
4,059,523
-
318,071
Balance, Sept 30, 2016 1,095,112
Disposals
-
Depreciation 152,420
559,099
-
23,869
2,723,383
-
144,498
-
-
-
4,377,594
-
320,787
Balance, Sept 30, 2017
1,247,532
582,968
2,867,881
-
4,698,381
Net book value
Balance, Sept 30, 2015 3,608,494
3,467,271
Balance, Sept 30, 2016
$3,317,847
Balance, Sept 30, 2017
5,695,734
6,235,213
$6,356,764
1,763,248
1,749,500
$1,737,159
800,000
800,000
$800,000
11,867,476
12,251,984
$12,211,770
Included in research and development equipment is $6,169,265 not yet available for use. Included in these amounts is directly
attributable interest from borrowings to finance these asset additions of $145,421 (2016 - $154,492). These assets are not yet
subject to depreciation. During the year, the Company entered into a five-year lease agreement for the acquisition of production
equipment and $98,518 was capitalized to Other Equipment and Fixtures.
25
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
8. INTANGIBLE ASSETS
Intangible assets are depreciated on a straight line basis at the following rates:
License agreement, LumiSort™ (Note 8a)
Technology investments:
LumiSort™ (Note 8a)
Kinlytic® (Note 8b)
Bioreactor (Note 8c)
Intangible assets consist of:
Cost
5%
5%
0%
7%
Capitalized
development costs
Patents and trademarks
Licenses
LumiSort™
(a)
Bioreactor
(c)
Kinlytic®
(b)
LumiSort™
(a)
LumiSort™
(a)
Total
Balance, as 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
Additions from internal developments
30,532
-
2,000,973
87,600
2,770,529
308,057
2,041,777
73,459
278,528
-
7,122,339
469,116
Balance at September 30, 2017
30,532
2,088,573
3,078,586
2,115,236
278,528
7,591,455
Accumulated amortization
Balance, as at September 30, 2015
Amortization expense
Balance at September 30, 2016
Amortization expense
4,725
1,032
5,757
991
-
-
-
11,603
-
-
-
-
603,495
73,151
214,251
21,425
822,471
95,608
676,646
155,353
235,676
21,425
918,079
189,372
Balance at September 30, 2017
6,748
11,603
-
831,999
257,101
1,107,451
Net book value
Balance, September 30, 2015
Balance, September 30, 2016
Balance, September 30, 2017
25,807
24,775
$23,784
1,062,426
2,000,973
$2,076,970
2,770,529
2,770,529
$3,078,586
1,438,282
1,365,131
$1,283,237
64,277
42,852
$21,427
5,361,321
6,204,260
$6,484,004
a) Lumisort™
The Company acquired a license agreement from Sequent Biotechnologies Inc., 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 ImaRX
Therapeutics, Inc. 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 financial budgets.
26
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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. No amorization has been recorded, as the assets are not yet
available for use.
c) Bioreactor
The Company has internally developed an improved bioreactor production process (“Bioreactor”) to increase the efficiency
and output of manufacturing certain virology products.
9. DEBENTURES
The Company has convertible and non-convertible debentures issued and outstanding as at September 30, 2017. The carrying values
of the debt component of these debentures are as follows:
Date of issue
Face value
Liability component at
the date of issue
Balance, September 30, 2017
Less: current portion
Non-current portion
Balance, September 30, 2017
Non-convertible
Debentures
(a)
Jan, 2014
$ 2,000,000
(b)
Apr, 2017
Non-convertible
Debentures Total
Convertible
Debentures
(c)
(d)
(e)
Convertible
Debentures Total
$
500,000
$ 2,500,000
Oct, 2016
$ 1,500,000
Oct, 2016
$ 500,000 $
Oct, 2016
2,500,000
$ 4,500,000
928,373
894,955
92,136
802,819
894,955
268,955
275,162
-
$ 1,170,117
275,162
-
275,162
$
$
367,298
802,819
1,170,117
461,550
470,692
-
470,692
470,692
223,050
247,265
247,265
-
247,265
780,750
797,931
$ 1,515,888
-
797,931
797,931
247,265
$
$ 1,268,623
1,515,888
Equity component reclassifed to contributed
surplus upon extinguishment
-
28,295
$28,295
916,971
111,042
1,236,732
$ 2,264,745
Equity component at September 30, 2017
-
-
-
574,435
631,222
1,698,132
$ 2,903,789
Loss / (gain) on date of
extinguishment - Oct 2016
Loss / (gain) on date of
extinguishment - April 2017
Conversion price per
per common share
-
197,578
$
197,578
494,575
361,460
1,528,913
$ 2,384,948
-
(202,750)
$ (202,750)
-
-
-
$
-
$
-
$
-
$ 0.23
$ 0.23
$
0.23
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
30.20%
Quarterly
Apr, 2022
12%
Interest
only
N/A
31.07%
Quarterly
Jan, 2029
9%
Interest
only
N/A
30.20%
Quarterly
Feb, 2022
9%
Interest
only
N/A
30.85%
Quarterly
Sep, 2028
9%
Interest
only
N/A
27
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
9. DEBENTURES (Continued)
The Company had convertible and non-convertible debentures issued and outstanding as at September 30, 2016. The carrying
values of the debt component of these debentures were as follows:
Note
Date of issue
Proceeds of issue
Liability component at
the date of issue
Balance, September 30, 2016
Less: current portion
Non-current portion
Balance, September 30, 2016
Non-convertible
Debentures
(a)
(b)
(c)
Convertible Debentures
(d)
(e)
Total Convertible
Debentures
Jan, 2014
$ 2,000,000
Oct, 2006
500,000
$
Jan, 2014
$ 1,500,000
Feb, 2007
$ 500,000
Sep, 2008
$ 2,500,000
$ 5,000,000
928,373
879,304
244,284
635,020
879,304
413,320
498,786
498,786
-
498,786
517,470
537,686
135,000
402,686
537,686
388,958
492,812
492,812
-
492,812
885,089
949,971
225,000
724,971
949,971
$ 2,479,255
$ 1,351,598
$ 1,127,657
2,479,255
Equity component at September 30, 2016
-
86,680
916,971
111,042
1,236,732
$ 2,351,425
Conversion price per
per common share
$
-
$
0.90
$
0.35
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
12.00%
Quarterly
Oct, 2016
9%
Interest
only
N/A
27.03%
Quarterly
Jan, 2029
9%
Interest
only
N/A
13.00%
Quarterly
Feb, 2017
9%
Interest
only
N/A
25.69%
Quarterly
Sep, 2028
9%
Interest
only
N/A
As discussed in note 10, the Company arranged a new secured revolving credit facility jointly with The Toronto-Dominion Bank
(“TD Bank”) and Export Development Canada (“EDC”). To accommodate the additional security required by TD Bank and EDC,
effective October 12, 2016, the Company negotiated amended terms with the holders of its issued and outstanding convertible
debentures. The following debentures were amended: $2,500,000 debenture (e) above, $1,500,000 debenture (c) above, $500,000
(b) above and $500,000 (d) above, in exchange for reducing their security position to one of unlimited subordination to the credit
facility lenders.
The $2,500,000 debenture, (e) above, maturing in 2028 was originally convertible at $0.65 per common share, and the $1,500,000
debenture, (c) above, maturing in 2029 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 two $500,000 debentures, (b) and (d) above, were originally convertible at $0.90 per common share and matured on October
12, 2016 and February 15, 2017, respectively. The first $500,000 debenture, (b) above has been modified to extend its maturity date
to April 30, 2017 and was modified to become non-convertible. In addition, the stated interest rate was modified from 9% to 12%
for the remaining term (see paragraph below for further details on this debenture). The second $500,000 debenture, (d) above, has
been modified to extend its maturity date to February 15, 2022, and the conversion price has been modified from $0.90 to $0.23 per
common share. The debenture is now callable at the option of the holder at any time after February 15, 2017 for outstanding principal
and accrued interest. In addition, the debenture holder of both $500,000 debentures (b) and (d) received 1.5 million common share
purchase warrants, with an exercise price of $0.23 per common share and a term of five years.
28
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
9. DEBENTURES (Continued)
The Company has accounted for the modifications to each of the debentures as an extinguishment with the recognition of a new instrument.
Upon extinguishment of the debentures, the Company has recognized a non-cash loss of $2,379,776 in the consolidated statement of income
and comprehensive income. The Company measured the non-cash loss based on the change in fair value of the debentures under the original
terms and the modified terms. In addition, a value of $245,860 has been ascribed to the warrants issued at the time of the grant. The value is
determined using 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.
On April 28, 2017, the Company announced it has reached an agreement with one of its debenture holders to extend the maturity date
on the $0.5 million non-convertible debenture set to mature on April 30, 2017, (b) above, to April 30, 2022. The debenture is callable at
the option of the holder upon sixty days written notice to the Company. The Company has accounted for the modifications to each of
the debentures as an extinguishment with the recognition of a new instrument. Upon extinguishment of the debenture, the Company has
recognized a non-cash gain of $202,750 in the consolidated statement of income and comprehensive income. In addition, as part of the
amendment, the Company amended the terms of 300,000 outstanding common share purchase warrants held by the debenture holder. The
terms of the warrants were modified to extend the life of the warrants from August 21, 2019 to August 21, 2022 and modify the exercise
price from $0.55 to $0.25 per share. The modification of the debenture was accounted for as an extinguishment with recognition of a new
instrument. In addition, the modification of the warrants resulted in a non-cash loss of $28,295.
The debentures denoted as (a), (c), and (e) above 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 (b) 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. Over the term of
the convertible debentures, the debt components will be accreted to the face value of the debentures by the recording of additional interest
expense using the effective interest rate, as detailed above.
29
Canadian Funds NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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 loans are secured with the building and equipment. For loans totalling $3,000,000, consecutive monthly principal payments
of $9,260 are due to February 2037 on the outstanding balance of $2,268,700 (September 30, 2016 - $2,379,820). For loans
totalling $61,000, consecutive monthly principal payments of $725 are due to February 2017 on the outstanding balance of
$0 (September 30, 2016 – $3,625), as this loan is now fully paid. Both of the loans have a floating interest rate based on BDC’s
Floating Base Rate plus 0.5%. At September 30, 2017, the Floating Base Rate was 5.8%.
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 to July 2020 on the outstanding
balance of $348,500 (September 30, 2016 - $471,500). For loans totalling $50,000, consecutive monthly principal payments of
$1,040 are due to December 2019 on the outstanding balance of $28,080 (September 30, 2016 – $40,560). For loans totalling
$200,000, consecutive monthly principal payments of $3,330 are due to December 2020 on the outstanding balance of $129,870
(September 30, 2016 – $169,830). On October 9, 2015, the Company entered into a loan agreement with BDC for $250,000,
monthly principal payments of $4,160 are due on December 22, 2020 on the outstanding balance of $162,240 (September 30,
2016 – $212,160).
All BDC loans have a floating interest rate based on BDC’s floating base rate plus 0.5% - 1.8%. At September 30, 2017, the floating
base rate was 5.8%.
The commitment for the next five years and thereafter for the BDC loans is as follows:
2018
2019
2020
2021
2022
2023 and thereafter
$
336,480
336,480
306,620
133,590
111,120
$ 1,713,100
b) On October 20, 2016, the Company arranged a new revolving line of credit agreement with its Canadian chartered bank. The
agreement allowed the Company to draw on to a limit of $1,000,000 bearing interest at the bank’s prime lending rate plus
2.25%. Accounts receivable, inventory and certain property are pledged as collateral for the bank credit facility.
On April 28, 2017, the Company received approval from its Chartered Bank to increase the borrowing limit on its new credit
facility to $1.5 million. The new credit facility was implemented in October 2016 with an initial limit of $1.0 million, replacing
the Company’s previous credit facility of $0.5 million. The newly expanded credit facility was available on May 4, 2017.
As at September 30, 2017 the Company had drawn on $1,355,000 of the facility (2016 - $525,000).
30
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
10. LONG-TERM DEBT (Continued)
c) On December 31, 2015, the Company issued two outstanding shareholder loans for total proceeds of $200,000. These loans
were repaid on December 31, 2016.
d) On May 3, 2017, the Company signed an agreement with Business Development Corporation for a new equipment credit
facility in the amount of $610,000. As of September 30, 2017 no funds have been withdrawn against this loan.
e) On September 12, 2017, the Company issued two outstanding shareholder interest bearing loans for total proceeds of
$200,000. These loans were repaid on October 23, 2017.
11. DEFERRED REVENUE
As at September 30, 2017, the Company has received payment, in the amount of $1,145,185 (2016 - $683,494), for a portion
of product sales that was not yet shipped. This amount has been recognized as deferred revenue under current liabilities in the
consolidated statements of financial position.
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.
The number of issued and outstanding common shares and the stated capital of the Company as at September 30, 2017 are
presented below:
Common shares issued during the year
Proceeds, net of financing costs
Warrants exercised
Stock options exercised
Balance, September 30, 2015
Issued on private placement
Exercise of warrants
Exercise of stock options
2017
2016
-
-
-
-
Number
of Shares
83,204,257
1,500,000
-
-
$ 1,500,000
308,957
-
-
Share
Capital
$ 30,990,459
308,957
-
-
Balance, as at September 30, 2016 and September 30, 2017
84,704,257
$ 31,299,416
31
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
13. CONTRIBUTED SURPLUS
Changes in contributed surplus up to September 30, 2017 are described as follows:
Balance, as at September 30, 2015
Issuance of warrants pursuant
to private placement
Share issue costs pursuant to
private placement
Stock option expense
Balance, as at September 30, 2016
Issuance of warrants pursuant
to refinancing of convertible debentures
Reclassification of equity portion of a convertible
debenture converted to a non convertible debenture
Extinguishment of convertible debenture
Stock option expense
Balance, as at September 30, 2017
14. COMMON SHARE PURCHASE WARRANTS
Amount
$ 4,380,182
237,931
(15,214)
334,750
$ 4,937,649
245,860
86,680
2,293,040
485,086
$ 8,048,315
A continuity of the Company’s warrants outstanding as at September 30, 2017 is presented in the following table:
Outstanding, September 30, 2015
Issued
Expired
Outstanding, September 30, 2016
Issued
Expired
Outstanding, September 30, 2017
Weighted
average
exercise
price
Units
$ 0.54
5,442,842
$ 0.55
1,581,550
-
-
7,024,392 $ 0.54
$ 0.23
1,500,000
$ 0.25
(193,079)
8,331,313 $ 0.48
A summary of the Company’s warrants outstanding as at September 30, 2017 is presented in the following table:
2017
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
(years)
2016
Weighted
average
exercise
price
Number
outstanding
Number
outstanding
6,531,313
1,800,000
8,331,313
$
$
0.55
0.23
0.48
2.18
3.65
2.50
6,831,313
193,079
7,024,392
$ 0.55
0.25
$ 0.54
Weighted
average
remaining
contractual
life
(years)
3.13
0.02
3.13
Range of exercise prices:
$0.45 to $0.55
$0.23 to $0.44
32
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
15. STOCK OPTION PLAN
Under the Company’s stock option plan, the total number of common shares available to be issued under the plan is 12,000,000
common shares. As at September 30, 2017, the Company has a total of 6,470,000 options issued and pending (2016 – 4,007,000).
The exercise price of each option equals no less than the market price at the date immediately preceding the date of the grant.
In general, options issued under the plan vest and are exercisable in equal amounts in three steps, at the issue date and at the
anniversary date in the subsequent two years.
The activity under the Company’s stock option plan for the year ended September 30, 2017 is as follows:
Outstanding, September 30, 2015
Issued
Exercised
Expired or forfeitted
Outstanding, September 30, 2016
Issued
Exercised
Expired or forfeitted
Outstanding, September 30, 2017
Exercisable, September 30, 2017
Units
Weighted average
exercise price
4,872,000
-
-
(865,000)
4,007,000
3,220,000
-
(757,000)
6,470,000
$
0.45
-
-
0.37
0.47
0.28
-
-
0.39
2,300,500
$
0.50
The following table reflects the number of options, their weighted average price and the weighted average remaining contract life
for the options grouped by price range as of September 30, 2017:
2017
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
(years)
2016
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life
(years)
Number
outstanding
Number
outstanding
2,920,000
3,550,000
6,470,000
$
$
$
0.54
0.27
0.39
3.00
4.33
3.73
2,923,000
1,084,000
4,007,000
$ 0.54
$ 0.28
$ 0.47
2.79
2.10
2.60
Range of exercise prices:
$0.54
$0.23 to $0.28
The fair value of options granted during the year ended September 30, 2017 was estimated at the grant date using the Black-
Scholes options pricing model, resulting in the following assumptions:
Share price on issue date
Dividend yield
Volatility
Risk-free interest rate
Expected option life (years)
Weighted average fair value of each option ($/option)
Nov. 1, 2016
Aug. 3, 2017
$
$
$
0.23
-
92.9%
1.40%
6.0
0.17
$
$
$
0.27
-
86.7%
0.75%
5.0
0.18
The volatility of the stock for the Black-Scholes options pricing model was based on 5-year historic volatility of the Company’s
stock price on the Toronto Stock Exchange. Management believes that the historic stock volatility provides a fair and
appropriate basis of estimate for the expected future volatility of the stock. Stock options are assumed to be exercised at the
end of the option’s life, as management believes the probability of an early exercise is remote. During the year, the fair value
of the options vested in the year were expensed and credited to contributed surplus. The Company recorded share-based
compensation expense of $485,086 (2016 - $334,750) during 2017.
33
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
16. INCOME (LOSS) 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 (loss) per share computations:
Numerator for basic income (loss) 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
2017
2016
$ (3,780,088)
$ 748,407
84,704,257
84,656,531
294,624
21,792
-
20,687
28,571
-
85,020,673
84,705,789
($0.045)
($0.045)
$0.009
$0.009
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
2017
8,036,689
6,448,208
19,565,217
34,050,115
2016
6,831,313
3,607,000
9,242,979
19,681,292
34
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
17. EXPENSES BY NATURE
The Company has chosen to present its consolidated statements of comprehensive income (loss) based on the functions of the
entity and 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% (2016 – 25.00%)
Increase (decrease) resulting from:
Non deductible expenses
Stock-based compensation
Effect of change in tax rate
Valuation allowance
Other
Current income tax expense
2017
2016
$
308,521
991
200,647
$ 510,159
2017
$ 4,748,874
485,086
5,233,960
2,740,641
682,102
1,468,312
342,905
$ 5,233,960
$
290,249
1,032
122,398
$ 413,679
2016
$ 3,586,991
334,750
3,921,741
2,168,349
347,081
1,033,739
372,572
$ 3,921,741
2017
2016
$
(945,022)
$
37,102
552
121,272
-
(22,903)
396,101
88
83,688
205,745
(789,889)
(136,734)
$
(450,000)
$
(600,000)
35
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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
September 30:
2029
2030
2031
2032
2037
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 assets
$
155,000
476,000
1,145,000
1,223,000
122,000
$ 3,121,000
2017
2016
$ 780,350
529,057
18,028
3,864,446
(1,009,781)
(4,182,100)
-
$ 680,097
535,598
183,325
3,664,086
(862,484)
(4,200,622)
-
The unclaimed research and development investment tax credits before income tax effect may be carried forward and used to
reduce federal income taxes. These must be claimed no later than September 30:
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
$
$
15,000
160,000
149,000
303,000
293,000
304,000
395,000
175,000
220,000
170,000
123,000
107,000
67,000
159,000
126,000
97,000
2,863,000
36
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
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
2017
2016
$ 2,410,197
(830,197)
$ 1,580,000
$ 2,120,578
(990,578)
$ 1,130,000
2017
2016
Accounts receivable
Inventories
Prepaid expenses and other assets
Investment tax credits receivable
Accounts payable and accrued liabilities
20. FINANCIAL EXPENSES
Cash interest:
Interest on long-term debt
Interest on debentures
Other Interest
Interest income
Non-cash interest:
Accretion on debentures
Financial expenses
21. CAPITAL MANAGEMENT
$
$
684,384
(1,071,113)
(97,448)
32,604
943,435
491,863
$ (329,798)
229,275
160,848
(32,148)
(589,498)
$ (561,321)
2017
2016
$ 164,305
490,292
71,453
(22)
$ 132,799
463,955
10,650
(615)
198,560
924,589
$
83,849
$ 690,637
The Company’s capital management objective is to safeguard its ability to function as a going concern to maintain its virology
operations and to fund its development activities. Microbix defines its capital to include the revolving line of credit, shareholders’
equity, the Business Development Bank capital loans, and the debentures. The capital at September 30, 2017 was $22,153,078
(2016 - $22,328,085).
To date, the Company has used its cash flow, common equity issues, debentures, bank 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 Business Development Bank. If possible, the Company tries to optimize its liquidity needs
by non-dilutive sources, including investment tax credits, grants and interest income. The Company has a revolving line of credit of
$1,500,000 with its Canadian chartered bank to fund its activities, Note 10(b).
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.
37
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
22. FINANCIAL INSTRUMENTS
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 years ended September 30, 2017 and 2016, the Company has carried at fair value financial instruments in Level 1. At September
30, 2017, 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.
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-17
$ 54,460
-
-
Liabilities for which fair values are disclosed:
Non-convertible debentures
Convertible debentures
Long-term-debt
30-Sep-17
30-Sep-17
30-Sep-17
-
-
-
-
-
$ 4,492,390
$ 1,170,117
1,515,888
-
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
-
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.
38
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
23. 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 the year ended September 30, 2017, five customers
accounted for 63% (2016 - five customers accounted for 59%) of revenue. The Company has had minimal bad debts over the
past several years and accordingly management has recorded an allowance of $10,000 (2016 - $10,000).
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
Allowance for doubtful accounts
Market risk and foreign currency risk
2017
2016
$ 1,094,414
176,002
73,268
3,804
(10,000)
$ 1,337,488
$ 1,659,260
96,390
276,222
-
(10,000)
$ 2,021,872
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
Euros
2017
2016
2017
2016
$ 52,902
458,941
406,000
$
5,259
1,065,198
474,498
$
5 $
413,117
11,987
29
674,433
22,451
39
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
23. FINANCIAL RISK MANAGEMENT (Continued)
Market risk and foreign currency risk (Continued)
The Company’s revenue and expenses by foreign currency for the year ended September 30, 2017 and 2016 are as follows:
Revenue
Euros
U.S. dollars
Expenses
U.S. dollars
2017
40%
56%
9%
2016
39%
56%
7%
The impact of a 5% increase in the U.S. dollar against the Canadian dollar would result in an increase in annual U.S. dollar
based revenue of about $284,600 Cdn. The impact of a 5% increase in the Euro against the Canadian dollar would result in
an increase in annual Euro based revenue of about $201,800. Correspondingly, the impact of a 5% decrease in the U.S. dollar
against the Canadian dollar would result in a loss in annual U.S. dollar based revenue of about $284,600 Cdn. The impact of
a 5% decrease in the Euro against the Canadian dollar would result in a loss in annual Euro-based revenue of about $201,800.
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. During the first quarter
the Company implemented a new secured revolving credit facility with The Toronto-Dominion Bank (“TD Bank”) and
Export Development Canada (“EDC”). The new credit facility is being used to fund the Company’s need for working capital
to grow its existing business. Management expects this new facility will satisfy the Company’s liquidity needs and help manage
the liquidity risk going forward.
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 $1,500,000 line of credit that bears interest at the bank’s prime lending rate plus 2.25%.
A 1% increase in the bank rate would cost the Company approximately $30,000 per year for BDC and about $15,000 on the
line of credit usage if it were fully used throughout the fiscal year.
24 . 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:
Segment revenue
2017
2016
Segment profit (loss)
2016
2017
Virology products and technologies
Lumisort ™
Kinlytic®
Total for continuing operations
$ 10,185,798
$ 9,517,137
-
-
-
-
$ 10,185,798
$ 9,517,137
$ (3,510,718)
(269,370)
-
$ (3,780,088)
$ 872,812
(124,405)
-
$ 748,407
Segment revenue reported above represents revenue generated from external customers. There were no inter-segment sales in
the current period (2016 - $Nil).
40
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
24 . 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 before tax. This is the measure reported to the chief operating decision maker for the
purposes of resource allocation and assessment of segment performance.
Segmented assets and liabilities as at September 30 are as follows:
Segment assets
2017
2016
Segment liabilities
2017
2016
Virology Products and Technologies
Lumisort ™
Kinlytic®
$ 14,281,312
7,497,713
3,078,586
$ 24,857,611
$ 12,733,029
8,613,906
2,770,528
$ 24,117,463
$ 11,262,928
$ 9,955,722
-
-
-
-
$ 11,262,928
$ 9,955,722
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 revenues earned by individual reportable segments. All liabilities are allocated to
reportable segments other than borrowings and current and deferred tax liabilities. Liabilities for which reportable segments
are jointly liable are allocated in proportion to segment assets.
Segmented depreciation and amortization and additions to non-current assets as at September 30 are as follows:
Depreciation and
amortization
2017
2016
Additions to
non-current assets
2017
2016
$ 332,390
177,769
-
$ 510,159
$ 319,103
94,576
-
$ 413,679
$ 222,752
218,880
308,057
$ 749,689
$ 1,073,825
567,301
-
$ 1,641,126
Virology Products and Technologies
Lumisort ™
Kinlytic®
25. 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 customer’s
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
Non-current
assets
2017
2016
2017
2016
$ 4,082,094
5,470,037
633,667
$ 10,185,798
$ 3,496,147
5,283,841
737,149
$ 9,517,137
$ 20,275,774
$ 19,586,244
-
-
-
-
$ 20,275,774
$ 19,586,244
41
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
26. 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 directors and key management executive officers. The total number of key
management personnel was six during 2017 (2016 – four). Compensation for the Company’s key management personnel was
as follows:
Short-term wages, bonuses and benefits
Share-based payments
Total key management compensation
2017
2016
$
815,443
423,599
$ 1,239,042
$
796,880
236,329
$ 1,033,209
The Company has issued and outstanding debentures with two shareholders of the Company (see Note 9). On December
31, 2015, the Company had issued two shareholder loans for total proceeds of $200,000. On December 31, 2016, the two
outstanding shareholder loans were repaid. On September 12, 2017, the Company had issued two interest bearing shareholder
loans for total proceeds of $200,000. These loans were repaid on October 23, 2017.
27. COMMITMENTS AND CONTINGENCIES
Lease commitments
2018
2019
2020
2021
2022 and thereafter
Payments on convertible and non-convertible debentures (Principle and interest) (Note 9)
2018
2019
2020
2021
2022 and thereafter
Contingencies
Amount
31,858
27,661
21,703
21,240
12,390
114,852
$
$
$
Amount
709,242
709,242
709,242
709,242
9,394,399
$ 12,231,367
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.
42
Canadian Funds
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2017 and 2016
28. SETTLEMENT OF DISPUTES AND LAWSUITS
Sale of Microbix’ WFI business to Irvine Scientific
On December 30, 2016, Microbix reached a final settlement with Irvine Scientific Inc. over an ongoing dispute related to the
sale of the Company’s Water-for-Injection business to Irvine Scientific that occurred in December 2012. Irvine Scientific had
filed a Notice of Arbitration with the American Arbitration Association in New York as stipulated in its original agreement
with Microbix. Prior to initiation of the arbitration proceeding, the companies agreed on final settlement terms, namely that
Microbix will pay Irvine a total amount of (U.S.) $192,500 ($273,540 Cdn.) in the following instalments:
• December 30, 2016 -
• March 31, 2017 -
• June 30, 2017 -
(U.S.) $64,167
(U.S.) $64,167
(U.S.) $64,166
All obligations under this settlement were completed at June 30, 2017.
Settlement of Zeptometrix Lawsuit
On October 5, 2016, Zeptometrix Corporation filed a statement of claim against Microbix in Canadian Federal Court, alleging
infringement of its Canadian patent. During fiscal 2017 Microbix defended itself against these allegations, maintaining it did not
infringe this patent. On October 11, 2017 Microbix announced the court approval of a legal dispute settlement with Zeptometrix
Corporation, with the latter party’s claims of patent infringement being withdrawn. The withdrawal of the lawsuit was “with
prejudice”, following a settlement agreement between the parties that was to Microbix’ satisfaction.
29. SUBSEQUENT EVENTS
On October 18, 2017 and October 26, 2017 (the “Closing Date”), the Company completed a private placement offering of an
aggregate of 11,666,633 units for total gross proceeds of $3,499,990, net proceeds of $3,201,997 after share issuance costs of
$297,993. Each unit consists of one common share of Microbix and one half of a common share purchase warrant. Each whole
warrant entitles the holder to purchase one additional common share at an exercise price of $0.36 for three years. The financing
was brokered. Cash commissions of $299,784 were paid and an aggregate of 755,764 Broker’s Warrants were issued in the
private placement offering. Each Broker’s Warrant entitles the holder to purchase one unit at a price of $0.335 for a period of
two years. All securities issued under the private placement will be subject to a hold period expiring four months and one day
from the date of closing.
43
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
Pharmaceutical Executive
William J. Gastle (1) (2)
Ontario, Canada
Executive Chairman
Microbix Biosystems Inc.
Cameron Groome (1)
Ontario, Canada
Chief Executive Officer and President
Microbix Biosystems Inc.
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
AST Trust 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 28, 2018 at 1:00 PM.
ANNUAL REPORT
Additional copies of the Company’s 2017 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
Cameron L. Groome
President and Chief Executive Officer
James S. Currie
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
Kathryn Froh
Vice-President, Diagnostics
Christopher B. Lobb
General Counsel & Secretary
44
Canadian Funds
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