M I C R O B I X B I O S Y S T E M S I N C .
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Message to Shareholders
Sales results of $3.4 million for the fourth quarter
(Q4) and $12.5 million for the full year (12Mos) of
fiscal 2018 have fully demonstrated that Microbix
has accelerated its growth: Each quarter of fiscal
2018 recorded double-digit percentage sales growth
compared to the prior year and the first three set
records for a Q1, Q2 and Q3 respectively. Sales during
individual quarters will continue to fluctuate, but
now usually exceed $1.0 million per month, with
double-digit growth expected to continue.
In addition to strong sales growth, Microbix has also
attained positive cash-flow from operations, putting
it into elite company – as most life sciences firms
consume cash, not generate it. This lack of a “burn
rate” means Microbix can build value without adding
to shares outstanding and relying on volatile capital
markets. Management aims to strengthen finances in
fiscal 2019, with positive cash-flow and meaningful
net earnings targeted for the full year.
However, fiscal 2018 was not without challenges.
Specifically, Microbix did not generate a profit for the
year and incurred net losses for three of four quarters.
Those losses were manageable and due principally
to a yield control issue with a major conventionally-
produced antigen product. It is a pleasure to report
that the issue was successfully resolved and should
not recur – Positioning Microbix for improved results
in fiscal 2019.
Another notable item is the decision to write-
down the book value of LumiSort™ technology. In
accordance with applicable accounting standards,
Microbix had capitalized development costs of the
prototype instrument and related patent expenses.
For Q4, it was decided to write-down the full value
of such LumiSort-related assets – for a total non-
cash charge of $7.9 million. That decision was
driven by the emerging knowledge that, (1) Microbix
could not provide the funding needed to complete
commercialization
in a timely manner, and (2)
licensing terms being offered to Microbix may not
adequately support LumiSort’s carried value.
While the LumiSort charge to earnings has zero
impact on cash, taking this step now will make
certain that targeted improvements to bottom-line
results are not overshadowed by a later write-down.
Also, any future value realized from LumiSort should
now be entirely additive to earnings.
From here, Microbix will be focusing on profitable
growth. Demand for the materials (antigens) we
make for the diagnostics industry continues to
increase, driven by new test makers in China as well
as by increasing orders from existing western-based
customers. Additionally, Microbix’s line of quality
assessment products (QAPs) are eliciting strong
interest from instrument makers and others that
need greater assurance that medical test results are
fully accurate. Collectively, sales growth in the range
of 20% per year is targeted.
The outlook for gross margins is also positive. Going
forward, Microbix expects an increased contribution
from its new bioreactor antigen production process,
which is demonstrating much better margins than
the conventional method it replaces. The QAPs line
likewise provides strong gross margins – further
enhancing Microbix’s bottom-line potential. Between
improving antigen production methods and enhancing
the product mix, there are solid reasons for being
optimistic about fiscal 2019.
One additional asset should not be overlooked –
namely Kinlytic® urokinase. While Kinlytic has been in
the Microbix stable for a long time, it is by no means
dormant. In fiscal 2018, a great deal of work was
conducted in refining project plans for re-launching
this drug for its FDA and Health Canada approved
indication of clearing blood clots from intravenous
catheters. Partnering is needed to fund validation of
new manufacturing and we will update on progress
toward such an agreement in 2019.
To summarize, sales growth is strong, gross margins
are expected to
is already
positive and meaningful net earnings are in sight.
Your company is now poised for greater operational
success and share price appreciation.
improve, cash-flow
Personally and on behalf of our team, I thank you for
your continuing support and wish you all the best.
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, 2018 AND 2017
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, 2018, 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 include, without limitation, discussion of financial
results or the outlook for the business, risks associated with its financial results and stability, its biologicals
business, development projects such as those referenced herein, sales to foreign jurisdictions, engineering
and construction, production (including control over costs, quality, quantity and timeliness of delivery),
foreign currency and exchange rates, maintaining adequate working capital and raising further capital on
acceptable terms or at all, and other similar statements concerning anticipated future events, conditions
or results that are not historical facts. These statements reflect management’s current estimates, beliefs,
intentions and expectations; they are not guarantees of future performance. The Company cautions that
all forward looking information is inherently uncertain and that actual performance may be affected by a
number of material factors, many of which are beyond the Company’s control. Accordingly, actual future
events, conditions and results may differ materially from the estimates, beliefs, intentions and expectations
expressed or implied in the forward looking information. All statements are made as of the date of this
disclosure and represent the Company’s judgment as of that date and the Company disclaims any intent or
obligation to update such forward-looking statements.
The Management Discussion and Analysis is dated December 20, 2018.
COMPANY OVERVIEW
Microbix Biosystems Inc. (Microbix or the Company) (TSX: MBX) specializes in developing biological and
technology solutions for human health and well-being. It manufactures a wide range of critical biological
materials for the global diagnostics industry, notably purified and inactivated bacteria and viruses,
known as antigens, which are used in immunoassays or quality assessment products. Microbix’ antigen-
based products are sold to more than 100 customers worldwide, primarily to multinational diagnostics
companies and laboratory accreditation organizations
Microbix has also applied its biological expertise and infrastructure to create proprietary new
products or technologies. It has been working to commercialize two; (1) Kinlytic® urokinase, a biologic
thrombolytic drug (used to dissolve blood clots), and (2) LumiSort™ cell-sorting, a technology platform
for ultra-rapid and efficient sorting of particles that can be used to enrich cell populations of interest
(such as sexing semen for the livestock industry).
Revenue from the antigens business (Antigens) is expected to continue growing for the foreseeable
future, with this growth recently accelerating as certain public health tests are being adopted in the
Asia Pacific region. The Antigens business provides 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 an Antigens manufacturing facility at 265 Watline Avenue in
Mississauga, Ontario. Microbix has a Pathogen and Toxin license for its facility, issued by the Public
Health Agency of Canada. The Company’s administrative offices are located at 211 Watline Avenue,
Mississauga, Ontario.
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Canadian Funds
FINANCIAL OVERVIEW
Year Ending September 30, 2018 (“2018”)
For 2018, revenue was $12,510,558, a 23% increase over 2017 revenue of $10,185,798, with sales to each
of Microbix’ two largest customers increasing significantly. Included were antigen and quality product
revenues of $12,191,357, 23% higher than 2017, due to strong sales growth in Asia and increased sales to
key customers. Revenue from royalties was up 9% at $319,201 (2017 - $293,939).
At $5,369,436, gross margin increased by $557,063 or 12%, due to increased sales and changes to
product mix, but with sales-related gains offset by yield-control issues with a conventionally-produced
antigen. Additionally, the benefit of shifting production of a leading antigen into bioreactors was not
fully-realized due to the conversion of a key customer being slower than anticipated.
Operating expenses for 2018 decreased by $199,663 compared to 2017. This was primarily due to lower
legal costs in 2018 versus prior year. However, during its review of intangible assets, Microbix determined
that it has become less likely that it will fully recover the investments made in LumiSort™. The decision
was therefore made to write-down all LumiSort™-related assets; namely its original investment and
its capitalized development, prototyping and patenting costs. While Microbix can no longer support
retaining an asset value of $7,878,758 on its books for LumiSort, efforts to license or sell the technology
will continue.
As a result, the Company experienced a net loss for the year of $8,621,566 (versus a net loss of
$3,780,088 for 2017). Adjusting for such one-time costs in both fiscal years, operating loss before debt
restructuring, settlement expenses and impairment of assets in 2018 was $742,808 compared to a loss
of $1,499,534 for 2017.
Cash used in operations (CFO) in 2018 was $537,005, compared to cash provided of $297,047 in 2017.
This swing was largely due to utilization of funds to reduce accounts payable in Q1 and Q2 of fiscal 2018,
which deployed some of the funds from our Q1 2018 private placement. Cash used in investing activities
was $1,217,999 (2017 - $640,750), due to increased investment on capital equipment and manufacturing
facility upgrades, with the increase partly offset by lower investment in development of intangible
assets. Accounting for all sources and uses, net cash provided by financing activities was $1,744,901
(2017 - $392,748), as a result of the company raising $3,137,283 (net of issue costs) in a private placement
in the first quarter of fiscal 2018. These funds were used primarily to pay down operating bank debt,
reduce accounts payable obligations, invest in capital equipment, and as working capital to support our
growth. Net of all entries, cash decreased by $10,102 in 2018 (2017 - increase of $49,045).
Quarter Ending September 30, 2018 (“Q4”)
Total Q4 revenue was $3,389,574, a 20% increase over last year’s fourth quarter revenue of $2,813,282.
Included were antigen and quality product revenues of $3,308,913, 22% higher than last year’s fourth
quarter, due largely to strong growth into Asian markets through our distribution partner and growth in
sales to key customers. Revenue from royalties was $80,661 (2017 - $93,663).
Gross margin for Q4 was 41%, up from 39% in fiscal Q4 of 2017, but well below objectives. Gross
margin varies with product mix but, as in Q2 and Q3 of 2018, yield-control issues with a conventionally-
produced antigen meaningfully reduced gross margin (by about 10%). In dollar terms, Q4 gross margin
increased by $289,330 versus Q4 of 2017 or by 27%. Those yield-control issues are now resolved and
further measures to improve yields and margins are being undertaken across multiple products which
should soon begin to show positive effects.
Operating expenses for Q4 decreased by $321,206 compared to 2017. This was primarily due to lower
legal costs during the quarter, as in 2017 Microbix was incurring the costs of defending a patent lawsuit which
was later settled in our favour. In addition, Microbix had lower interest costs due to lower use of bank credit
facility in fiscal 2018. As outlined above the Company took a write-down during the quarter of $7,878,758 for
its Lumisort assets. As a result, the Company experienced a net loss for the quarter of $8,185,894 (versus a
net loss of $1,009,911 for 2017). However, Microbix generated improved operating results for Q4, with a net
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FINANCIAL OVERVIEW (Continued)
Quarter Ending September 30, 2018 (“Q4”) (Continued)
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operating loss before one-time adjustments of $307,135, versus a loss of $917,673 in 2017.
Cash provided by operations (CFO) in Q4 was $249,815, compared to cash used of $447,812 in 2017. The
impact of increased Q4 sales on CFO was blunted by the yield-control issue. As a result, the increased CFO
in Q4 2018 was largely due to the reductions in accounts receivable and decreased inventory levels. Net
cash used in investing activities was $77,148 (2017 – negative $26,157), due to continued investment in
upgrading manufacturing equipment. Cash used in financing activities was $229,435 (2017 – provided by
$312,168). Net of all entries, cash decreased by $11,798 in Q4 2018 (2017 - $109,486).
FINANCIAL HIGHLIGHTS
Total Revenue
Gross Margin
SG&A Expenses
R&D Expense
Financial Expenses
Operating Loss before debt restructuring,
settlement expenses and impairment of assets
As at
Sept 30, 2018
$
12,510,558
As at
Sept 30, 2017
10,185,798
$
5,369,436
4,170,641
1,089,746
851,857
4,812,373
4,392,734
994,584
924,589
(742,808)
(1,499,534)
Net Loss and Comprehensive Loss for the year
(8,621,566)
(3,780,088)
Cash Provided (Used) by Operating Activities
(537,005)
297,047
Cash
Accounts receivable
Total current assets
Total assets
Total current liabilities
Total liabilities
Total shareholders’ equity
Current ratio
Debt to equity ratio
44,358
1,313,480
6,067,018
19,310,067
4,161,417
8,956,565
10,353,502
1.46
0.87
54,460
1,337,488
6,161,837
26,437,611
6,516,249
11,262,928
15,174,683
0.95
0.74
SELECTED QUARTERLY FINANCIAL INFORMATION
Dec-31-16
$
Mar-31-17
$
Jun-30-17
$
Sep-30-17
$
Dec-31-17
$
Mar-31-18
$
Jun-30-18
$
Sep-30-18
$
1,952,502
2,646,649
2,773,365
2,813,282
2,885,567
3,000,193
3,235,224
3,389,574
(3,366,472)
107,649
38,646
(1,009,911)
(94,128)
(342,502)
958
(8,185,894)
Sales
Net Loss and
Comprehensive Loss
Operating Loss before debt
restructuring, settlement expenses
and Impairment of assets
(525,406)
107,649
(164,104)
(917,673)
(94,128)
(342,502)
958
(307,136)
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OUTLOOK
Microbix’ primary business is the result of nearly three decades of experience manufacturing high quality
viral and bacterial antigens – for use in the medical diagnostic testing industry. Its many antigen products
have received widespread and longstanding acceptance by diagnostic test makers, with continuing growth
in demand. Microbix antigens are now used by over 100 diagnostics manufacturers and are the critical
biology inside tens of millions of medical tests for bacterial and viral diseases.
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More recently, growth in demand for Microbix’ antigens 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. We are seeing the emergence of this Asian demand materialize in orders from our
distribution partner for such markets, as well as from customers based in North America and Europe
that are reporting growing sales into Asia. The long-term effect of this trend may be to take our potential
market from being the population of ~700 million of North America and Western Europe to closer
to the global population of 7.6 billion. As a leading global supplier of such vital antigens, Microbix
believes it must prepare to fulfill such demand growth, lest unmet need spawn a new competitor.
A second line of business involves the use of antigens for purposes other than the large-scale
manufacturing of medical test kits. This newer usage packages a very small amount of stabilized antigen
into individual one milliliter vials. Such samples are used as tools to establish whether lab quality objectives
are being met – for example to assess whether testing equipment is functioning properly and whether staff
has been adequately trained. Such finished quality assessment products (QAPs™, pronounced as “caps”)
are a high value end-use of Microbix’ antigens and there is a growing need for such products as regulators
progressively tighten their surveillance of the competence of medical testing labs. A notable driver for
such demand are the U.S. “CLIA” regulations, that are requiring labs to use quality products from qualified
third parties across their ever-broadening portfolio of tests. Microbix now derives about 10% of its sales
from providing QAPs to laboratory accreditation organizations and is building-out this business segment.
Due to the positive prospects of each of the two lines of its Antigens business, Microbix is reinvesting
to better ensure that it can meet the expected growth in demand. Such work includes upgrading
its manufacturing technologies, quality systems, processes and training, capacity and allocation
of capacity, along with developing and launching new products. This has involved many steps to
both de-bottleneck and de-risk our production processes, work that will be ongoing as Microbix
continues to grow sales across our product lines. Much of the required investment was completed
in the third quarter of fiscal 2018, as reflected in the news release entitled “Microbix Completes
Multiple Facility Upgrades” dated May 8 that listed the 12 categories of upgrades we have completed.
Initial benefits of the manufacturing upgrades are already being seen in the sales growth of
fiscal 2018. Management believes that it would have been very difficult to attain the rate of sales
growth seen in fiscal 2018 (i.e., the 23% increase in sales over 2017), without such investment.
Where Microbix has not yet seen the intended benefits, is in its gross margins and net profits.
Microbix is behind where it hoped to be on gross margins and profits – due largely, if not wholly,
to two matters, (1) a yield-control issue with a leading conventionally-produced antigen product that
led to considerable margin loss in Q2, Q3 and Q4 but has now been corrected, and (2) a delay in the
acceptance of bioreactor-produced antigen by a key customer for that product – while it completes more
lengthy real-time stability testing of kits made with such antigen that were unexpected by Microbix.
Both matters are being addressed and should not obstruct the drive to improve gross margins
well above the 38-47% range seen across fiscal 2018. With ongoing sales growth in the range of
20% per year and improved margins in sight, it is believed that meaningful quarterly net earnings
are not far off. Other very promising drivers should likewise not be ignored, starting with the QAPs
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OUTLOOK (Continued)
products. The sales of QAPs to lab accreditation organizations (the PTDx™ line) are already well-established,
at about 10% of overall sales. A sibling of PTDx, the PROCEEDx line, was hatched in early 2018 and has been
targeted to researchers, test developers and laboratories for R&D, validation/verification of instruments,
troubleshooting and operator training. PROCEEDx™ is now garnering accelerating interest from prospective
customers and we are hopeful of material fiscal 2019 sales from this added QAPs product line. We will report
on such progress as firm, material product orders are received from customers.
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Headway is also being made with Kinlytic®. Microbix is actively working with a U.S. agent on outreaches
to potential out-licensing and development partners. Management views progress as satisfactory at this
stage and will likely update shareholders based on either of two process milestones, (i) executing a binding
letter-of intent, or (ii) signing a definitive agreement. For LumiSort, it has been determined that the financial
terms being discussed with livestock sex selection industry participants do not support the carrying value of
the related assets. While LumiSort retains all of its technical and commercial merits, Microbix cannot afford
to complete the commercialization of this asset without the involvement of such industry participants.
Accordingly, the decision has been taken to provision for the full book value of LumiSort. With a zero value
now assigned to LumiSort, any funds received from licensing the livestock-related or other applications of
the technology should directly add to Microbix’s earnings.
To summarize, the company is now growing sales at a rate of about 20% per year – faster than ever
before. Gross margins and net profits are not yet where we want them to be, but plans are in place to
meaningfully increase both over the coming quarters. The new QAPs products are gaining recognition from
potential customers and should provide an additional source of high margin sales growth.
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 $35,698,403
as at September 30, 2018. Management continuously monitors the financial position of the Company
with respect to working capital needs, as well as long-term capital requirements compared to the
annual operating budget. Variances are highlighted and actions are taken to ensure the Company is
appropriately capitalized.
Future Liquidity and Capital Needs
The Company primarily funds new product development activities and capital expenditures from profits
earned by its business and, periodically from additional equity and/or debt.
Over the course of fiscal 2019, cash flow is expected to improve due to: 1) continued growth in antigen
and quality product 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 overall liquidity position, as the Company’s plans come to full fruition.
The $3.1 million of net proceeds from Microbix’ October private placement have been deployed to support
growth plans and ongoing operations. Principal utilizations have been to purchase needed equipment and
improve working capital. Further funds were allocated to reduce bank credit utilization, which may be redrawn
as needed. Microbix will continue to monitor and manage its cash position, with the objective of anticipating
and meeting all future liquidity and capital needs.
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CONTRACTUAL OBLIGATIONS AND OTHER TRANSACTIONS
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New Distribution Agreement
On January 12, 2017 Microbix signed a distribution agreement with Meridian Life Science, Inc. Under the
terms of the Agreement, Meridian has received exclusive distribution rights to Microbix’ branded antigen
products for China, Hong Kong, Taiwan and Macau. Additionally, Microbix is providing 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 enables 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 has significantly expanded the
business relationship between the two companies, and serves 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
this agreement, Microbix is supplying 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 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 Microbix will pay Irvine a total amount
of (U.S.) $192,500, which was fully paid by September 30, 2017.
Outstanding Share Capital
Share capital issued and outstanding as at September 30, 2018 was $33,912,460 for 96,972,705 common
shares versus $31,299,416 for 84,704,257 common shares at September 30, 2017.
Related Party Transactions
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. On March 28, 2018 the board of directors
approved the repricing of 1,500,000 of warrants held by a director of the Company. These warrants were
repriced from $0.55 to $0.32 and the expiry was extended by one year. The non-cash financial impact was
$128,901, which is included in general and administrative expenses.
TREND INFORMATION
Historical spending patterns are no indication of future expenditures. Investment in the new products
and technologies is at the discretion of management. The Company is not aware of any material trends
related to its business that have not been discussed in this Management Discussion and Analysis dated
December 20, 2018.
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RISKS AND UNCERTAINTIES
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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 Antigens Product sales are dependent on key clients, open borders, international
transportation systems, and access to raw materials.
A significant share of the Company’s Antigens products sales are sold to a few key customers globally.
These products contributed a significant share of the revenues. 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’ antigen products are
considered a production ingredient and not directly regulated by governments in Canada or other jurisdictions.
Commercialization of certain quality assessment products require approval of regulatory agencies such as the
FDA, in which case Microbix will not receive revenue until regulatory approval is obtained.
Re-Launch of Kinlytic® urokinase
Microbix’ goal is to re-launch this biologic clot-buster drug into the United States market. The Company has
consulted with the United States Food and Drug Administration about the viability of its re-launch plans and
secured quotations for major project tasks from third-party service providers to independently validate budgets
and timelines. Outreach has been undertaken to secure project funding from development partners on the basis of
the resulting re-launch plans. There is no assurance the Company will be successful in this endeavour.
Quality Assessment Products in development
The Company has multiple quality assessment products under development, with the goal of building its
sales of this category of product. There is no assurance 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 its related product development investments.
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 seeks to earn a profit on the sale of its Antigens Products, which is a major source of funding for its
research and development activities. The Company believes that cash generated from operations is sufficient
to meet normal operating and capital requirements. However, the Company may need to raise additional funds,
from time to time for several reasons including, to expand production capacity, 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.
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RISKS AND UNCERTAINTIES (Continued)
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Future success may depend on successfully commercializing new products or technologies
In the nearer term, Microbix must maintain and grow its existing product sales. To survive and prosper over
the longer term, Microbix may need to commercialize new products or technologies. Such work is inherently
uncertain and there is no guarantee that Microbix will be successful with its efforts.
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 know-how. To help protect its intellectual property, the Company requires employees,
consultants, advisors and collaborators to enter into confidentiality agreements. However, these agreements
may not adequately protect trade secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure. Protection of intellectual property may also entail prosecuting claims against
others who the Company believes are infringing its rights. Involvement in intellectual property litigation could
result in significant costs, adversely affecting the development of products or sales of the challenged product,
or intellectual property, and divert the efforts of its scientific and management personnel, whether or not such
litigation is resolved in the Company’s favour.
Microbix will continue to face significant competition
Competition from life sciences companies, and academic and research institutions is significant. Many
competitors have substantially greater 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 may also be making significant investments in all of these areas, which could
make it more difficult for Microbix to commercialize its products and technologies.
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FINANCIAL RISK MANAGEMENT
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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. For the year ended September 30, 2018, five customers accounted for 66% (2017 - five customers
accounted for 63%) of the outstanding balance. The Company has had minimal bad debts over the past
several years and accordingly management has recorded an allowance of $10,000 (2017 - $10,000).
Currency risk:
The Company is exposed to currency risk given its global customer base. Over 90% of its revenue is denominated
in either U.S. dollars or Euros. The Company does not use financial instruments to hedge this currency risk. At
September 30, 2018, the significant balances, quoted in Canadian dollars, held in foreign currencies are:
US dollars
Euros
2018
2017
2018
2017
Cash
Accounts receivable
Accounts payable and
accrued liabilities
$ 42,557
652,429
$
52,902
458,941
247
314,402
5
413,117
$ 204,696
$ 406,000
-
11.987
Based upon 2018 results, 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 approximately $330,400 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
approximately $271,500. 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 approximately $330,400 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 approximately $271,500.
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. In addition, during fiscal 2017 the Company announced that it has arranged a secured
revolving credit facility with The Toronto-Dominion Bank (“TD Bank”) and Export Development Canada
(“EDC”). The credit facility is being used to fund the Company’s need for working capital to grow its existing
business. This facility is helping to satisfy the Company’s liquidity needs and to 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 is primarily on the BDC debt that has a
variable rate pegged to the bank rate. The rate can be fixed, if the outlook indicates interest rates will move
higher. The only other variable debt the Company has is the $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.
10
Canadian Funds
FINANCIAL RISK MANAGEMENT (Continued)
Canadian Funds
Market risk
Market risk reflects changes in pricing for both Antigens products and raw materials based on supply and
demand criteria; also market forces can affect foreign currency exchange rates as well as interest rates
which could affect the Company’s financial performance or the value of its financial instruments. Microbix
products are valuable components in our customers’ products and cannot be easily replaced. The Company
works closely with customers to ensure its products meet their specific criteria.
Fair value
The fair value of a financial instrument is approximated by the consideration that would be agreed to in
an arm’s length transaction between willing parties and through appropriate valuation methods, but
considerable judgement is required for the Company to determine the value. The actual amount that could
be realized in a current market exchange could be different than the estimated value.
The fair values of financial instruments included in current assets and current liabilities approximate
their carrying values due to their short-term nature.
The fair value of the long-term debt is based on rates currently available for items with similar terms
and maturities. The convertible and non-convertible debenture fair values are not readily determinable as
the convertible debentures have been issued to shareholders of the Company. The fair values of financial
instruments in other long-term liabilities approximate their carrying values as they are recorded at the net
present values of their future cash flows, using an appropriate discount rate.
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 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 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.
11
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, 2018, 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
12
Canadian Funds
FINANCIAL INSTRUMENTS (Continued)
Canadian Funds
Internal Controls Over Financial Reporting (Continued)
accounting principles of IFRS. While the CEO and CFO believe that the internal controls are adequate to
provide the above information, the process to evaluate and document all policies and procedures that
could impact financial reporting is continuously reviewed with consultation with the Audit Committee.
Shareholders should be aware that Microbix is a small company without the department resources
associated with larger firms. Management is using the Committee of Sponsoring Organization of the
Treadway Commission (“COSO”). Framework and has concluded that the Internal Control over Financial
Reporting (“ICFR”) as defined in NI 52-109 is effective as at the period ended September 30, 2018.
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, 2018
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 (“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 has assessed the impact of IFRS 9 on the consolidated financial statements and has
determined that the adoption of IFRS 9 will enhance disclosures, but will not have a material impact
on the consolidated financial statements.
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
13
Canadian Funds
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED (Continued)
Canadian Funds
IFRS 15, Revenue from Contracts with Customers (Continued)
Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue - Barter Transactions Involving
Advertising Services.
The Company has not identified any significant differences in the timing or recognition of revenues as
a result of IFRS 15. The Company continues to assess the impact of required disclosure in the notes to the
consolidated financial statements.
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.
14
Canadian Funds
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Microbix Biosystems Inc.
Canadian Funds
We have audited the accompanying consolidated financial statements of Microbix Biosystems Inc. which comprise the
consolidated statements of financial position as at September 30, 2018 and 2017, and the consolidated statements of loss and
comprehensive loss, 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, 2018 and 2017, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
December 20, 2018
Toronto, Canada
15
Canadian Funds
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at September 30, 2018 and 017
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 asset (Note 18)
Property, plant and equipment (Note 7)
Intangible assets (Note 8)
TOTAL LONG-TERM ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities
Bank indebtedness (Note 10)
Current portion of finance lease obligation
Current portion of long-term debt (Note 10)
Current portion of debentures (Note 9)
Deferred revenue (Note 11)
TOTAL CURRENT LIABILITIES
Finance lease obligation
Non-convertible debentures (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
Canadian Funds
2018
2017
$
44,358
1,313,480
4,446,968
169,965
92,247
6,067,018
$
54,460
1,337,488
4,467,106
152,989
149,794
6,161,837
1,580,000
6,646,730
5,016,319
13,243,049
1,580,000
12,211,770
6,484,004
20,275,774
$ 19,310,067
$ 26,437,611
$
1,766,592
260,000
80,627
438,120
684,953
931,125
4,161,417
249,526
779,536
1,304,960
2,461,126
4,795,148
$
2,841,950
1,355,000
23,070
536,480
614,564
1,145,185
6,516,249
74,327
802,819
1,268,623
2,600,910
4,746,679
$
8,956,565
$ 11,262,928
$ 33,912,460
$ 31,299,416
2,903,789
9,235,656
(35,698,403)
$ 10,353,502
2,903,789
8,048,315
(27,076,837)
$ 15,174,683
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
$ 19,310,067
$ 26,437,611
Commitments and Contingencies (Note 27)
On behalf of the Board:
(Signed) “William J. Gastle”
William J. Gastle
Director
(Signed) “Cameron L. Groome”
cameron l. Groome
Director
The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements.
16
Canadian Funds
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the years ended September 30, 2018 and 2017
SALES
Antigen products and technologies
Royalties
TOTAL SALES
COST OF GOODS SOLD
Antigen products and technologies (Notes 5, 17)
Royalties
TOTAL COST OF GOODS SOLD
GROSS MARGIN
EXPENSES
Selling and business development (Note 17)
General and administrative (Note 17)
Research and development (Note 17)
Financial expenses (Note 20)
OPERATING LOSS BEFORE DEBT RESTRUCTURING,
SETTLEMENT EXPENSES AND IMPAIRMENT
OF ASSETS
Debt restructuring expense (Note 9)
Settlement expense (Note 28)
Impairment of long-term assets (Notes 7, 8)
LOSS AND COMPREHENSIVE LOSS
FOR THE YEAR, BEFORE INCOME TAXES
INCOME TAXES
Deferred income taxes
Current income taxes
NET LOSS AND COMPREHENSIVE LOSS
FOR THE YEAR
NET LOSS PER SHARE
Basic (Note 16)
Diluted (Note 16)
Canadian Funds
2018
2017
$ 12,191,357
319,201
12,510,558
$ 9,891,859
293,939
10,185,798
7,076,797
64,325
7,141,122
5,287,781
85,644
5,373,425
5,369,436
4,812,373
556,414
3,614,227
1,089,746
851,857
464,909
3,927,825
994,584
924,589
(742,808)
(1,499,534)
-
-
7,878,758
2,457,014
273,540
-
(8,621,566)
(4,230,088)
-
-
(450,000)
-
$ (8,621,566) $ (3,780,088)
$
$
(0.090)
(0.090)
$
$
(0.045)
(0.045)
The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements.
17
Canadian Funds
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2018 and 2017
OPERATING ACTIVITIES
Net Loss for the Year
Items not affecting cash
Amortization and depreciation (Note 17)
Accretion of debentures (Note 9)
Stock options and warrants expense (Note 15)
Share and warrant issuance for services (Notes 12, 13)
Debt restructuring expense (Note 9)
Deferred tax asset (Note 18)
Impairment of long-term assets (Notes 7, 8)
Change in non-cash working capital balances (Note 19)
Canadian Funds
2018
2017
$ (8,621,566) $ (3,780,088)
690,078
161,934
458,525
99,969
-
-
7,878,758
(1,204,703)
510,159
198,560
485,086
-
2,379,776
(450,000)
-
953,554
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(537,005)
297,047
INVESTING ACTIVITIES
Purchase of property, plant and equipment (Note 7)
Additions from internal development
of intangible assets (Note 8)
CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Repayments of long-term debt (Note 10)
Proceeds from Equipment Loan (Note 10)
Repayments of convertible and
non-convertible debentures (Note 9)
Repayments of shareholders’ loans (Note 10)
Repayments of finance lease
Proceeds (repayments) of credit facility (Note 10)
Proceeds from exercise of stock options and warrants
Issue of common shares and warrants, net of issue costs (Notes 12, 13)
CASH PROVIDED BY FINANCING ACTIVITIES
NET CHANGE IN CASH - DURING THE YEAR
CASH - BEGINNING OF YEAR
CASH - END OF YEAR
(944,252)
(182,055)
(273,747)
(458,695)
(1,217,999)
(640,750)
(362,050)
323,906
(340,106)
-
(91,127)
(200,000)
(72,719)
(1,095,000)
104,608
3,137,283
(83,367)
-
(13,779)
830,000
-
-
1,744,901
392,748
$
(10,102) $
49,045
54,460
5,415
$
44,358
$
54,460
The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements.
18
Canadian Funds
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
As at September 30, 2018 and 2017
SHARE CAPITAL (Note 12)
STATED
NUMBER OF
SHARES
CAPITAL
CONTRIBUTED
SURPLUS
DEFICIT
Canadian Funds
EQUITY
COMPONENT OF
DEBENTURE
TOTAL
SHAREHOLDERS’
EQUITY
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 debentures
Refinancing of
convertible debentures
Net comprehensive
loss for the year
485,086
245,860
485,086
245,860
86,680
(86,680)
-
2,293,040
(2,264,745)
28,295
2,903,789
2,903,789
(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
Stock option and warrant expense
458,525
Share Issuance pursuant
to Stock Options Exercised
Share Issuance pursuant
to Warrants Exercised
Issue of Warrants pursuant to
Private Placement
400,000
181,516
(77,516)
1,815
811
(203)
743,905
120,328
Issuance of Broker Warrants
Share Issuance pursuant to
Private Placement
11,666,633
2,756,085
Share Issue Costs pursuant to
Private Placement
(380,368)
(102,667)
Share Issuance
for Services
Warrants Issuance
for Services
Net comprehensive
loss for the year
200,000
55,000
44,969
458,525
104,000
608
743,905
120,328
2,756,085
(483,035)
55,000
44,969
(8,621,566)
(8,621,566)
BALANCE, SEPTEMBER 30, 2018 96,972,705 $33,912,460 $9,235,656 (35,698,403) $2,903,789 $10,353,502
The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements.
19
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
1. NATURE OF THE BUSINESS
Microbix Biosystems Inc. (the “Company” or “Microbix”), incorporated under the laws of the Province of Ontario,
develops and commercializes proprietary biological and technology solutions for human health and wellbeing. Microbix
manufactures a wide range of critical biological materials for the global diagnostics industry, notably antigens used in
immunoassays or quality assessment and proficiency testing controls (the Antigen Business).
Microbix has also applied its biological expertise and infrastructure to create proprietary new products or technologies.
It has been working to commercialize two; (1) Kinlytic® urokinase, a biologic thrombolytic drug (used to dissolve blood
clots), and (2) LumiSort™ cell-sorting, a technology platform for ultra-rapid and efficient sorting of particles that can be
used to enrich cell populations of interest (such as sexing semen for the livestock industry).
The registered office and principle place of business of the Company 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”). The Board of Directors
approved these consolidated financial statements on December 20, 2018.
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. 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, over 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 years ended September 30, 2018 and 2017. 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.
20
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates and judgements (Continued)
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.
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 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.
21
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Amounts the Company expects to earn over the next year are included in deferred revenue. The term over which
upfront fees are recognized is revised if the period over which the Company maintains substantive contractual
obligations changes.
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, 2018 or 2017.
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.
22
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial assets and liabilities (Continued)
The following summarizes the Company’s classification and measurement of financial assets and liabilities as at
September 30:
Classification
Measurement
2018
2017
Financial assets:
Cash
Accounts receivable
Financial liabilities:
Accounts payable and
accrued liabilities
Bank Indebtedness
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
$
44,358
1,313,480
$
54,460
1,337,488
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$ 1,766,592
260,000
931,125
330,153
1,184,014
1,585,435
2,899,246
$ 8,956,565
$ 2,841,950
1,355,000
1,145,185
97,398
1,170,117
1,515,888
3,137,390
$ 11,262,928
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 at each reporting date 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.
23
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
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.
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. No
24
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-based compensation (Continued)
forfeiture rate is incorporated into the Company’s assumptions on awarding options. To the extent actual forfeitures occur,
share-based compensation related to these awards will be different from the Company’s estimate and are revised.
Foreign currency translation
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.
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
loss and comprehensive loss for the year.
Income (loss) per common share
The Company calculates basic income per share amounts for profit or loss attributable to ordinary equity holders. Basic
income (loss) 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.
25
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the 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 has assessed the impact of IFRS 9 on the consolidated financial statements and has determined that the
adoption of IFRS 9 will enhance disclosures, but will not have a material impact on the consolidated financial statements.
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 for 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 not identified any significant differences in the timing or recognition of revenues as a result of IFRS 15.
The Company continues to assess the impact of required disclosure in the notes to the consolidated financial statements.
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.
26
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
4. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED (Continued)
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
$
2018
488,060
1,679,926
2,278,982
$ 4,446,968
$
2017
379,661
1,593,158
2,494,287
$ 4,467,106
During the year ended September 30, 2018, inventories in the amount of $7,051,611 (2017 - $5,287,781) were
recognized as an expense through cost of sales. The allowance for inventory impairment as at September 30, 2018 was
$55,747 (2017 - $30,561).
6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets as at September 30, 2018 were $169,985 (2017 - $152,989), consisting of insurance
policy premiums, deposits for trade shows and other prepaid amounts.
27
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
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:
Building
Research &
Development
Equipment
Other
Equipment
and Fixtures
Land
Total
COST
Balance, as at Sept 30, 2016 4,562,383
Additions
2,996
-
Disposals
6,794,312
145,420
-
4,472,883
132,157
-
800,000
-
-
16,629,578
280,573
-
Balance, as at Sept 30, 2017
Additions
Impairment
4,565,379
357,654
-
6,939,732
147,637
(6,586,660)
4,605,040
744,435
-
800,000
-
-
16,910,151
1,249,726
(6,586,660)
Balance, Sept 30, 2018
4,923,033
500,709
5,349,475
800,000
11,573,217
ACCUMULATED DEPRECIATION
Balance, as at Sept 30, 2016 1,095,112
152,420
Depreciation
-
Disposals
559,099
23,869
-
2,723,383
144,498
-
Balance, as at Sept 30, 2017
Depreciation
Impairment
1,247,532
159,266
-
582,968
20,662
(180,276)
2,867,881
228,453
-
-
-
-
-
-
-
4,377,594
320,787
-
4,698,381
408,382
(180,276)
Balance, Sept 30, 2018
1,406,798
423,354
3,096,334
-
4,926,487
NET BOOK VALUE
Balance, Sept 30, 2016
Balance, Sept 30, 2017
Balance, Sept 30, 2018
3,467,271
3,317,847
$3,516,234
6,235,213
6,356,764
$77,355
1,749,500
1,737,159
$2,253,141
800,000
800,000
$800,000
12,251,984
12,211,770
$6,646,730
As of September 30, 2018, the Company determined that the Lumisort related research and development
equipment that was classified as not yet available for use was impaired. See note 8 for discussion.
28
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
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:
5%
5%
0%
7%
Capitalized
Development Costs
Patents and Trademarks
Licenses
LumiSort™
(a)
Bioreactor
(c)
Kinlytic®
(b)
LumiSort™
(a)
LumiSort™
(a)
Total
COST
Balance, as at September 30, 2016
Additions from internal developments
30,532
-
2,000,975
87,600
2,770,529
308,057
2,041,777
73,459
278,528
-
7,122,341
469,116
Balance, as at September 30, 2017
Additions from internal developments
Impairment (a)
30,532
-
(30,532)
2,088,575
-
-
3,078,586
-
-
2,115,236
286,384
(2,401,620)
278,528
-
(278,528)
7,591,457
286,384
(2,710,680)
Balance, as it September 30, 2018
-
2,088,575
3,078,586
-
-
5,167,161
ACCUMULATED AMORTIZATION
Balance, as at September 30, 2016
Amortization expense
Balance, as at September 30, 2017
Amortization expense
Impairment (a)
5,757
991
6,748
951
(7,699)
-
11,603
11,603
139,238
-
-
-
-
-
-
676,646
155,352
235,676
21,426
918,079
189,372
831,998
120,079
(952,077)
257,102
21,426
(278,528)
1,107,451
281,694
(1,238,304)
Balance, as at September 30, 2018
-
150,842
-
-
-
150,842
NET BOOK VALUE
24,775
Balance, as at September 30, 2016
23,784
Balance, as at September 30, 2017
Balance, as at September 30, 2018 $ -
2,000,975
2,076,972
$1,937,733
2,770,529
3,078,586
$3,078,586
1,365,131
1,283,238
$ -
42,852
21,426
$ -
6,204,262
6,484,006
$5,016,319
At each reporting date, the Company is required to assess its long-lived assets for potential indicators of impairment.
If any such indication exists, the Company estimates the recoverable amount of the asset or cash generating unit
(“CGU”) and compares it to the carrying value. In addition, irrespective of whether there is any indication of
impairment, the Company is required to test long-lived assets with definite lives which are not yet available for use
at least annually.
29
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
8. INTANGIBLE ASSETS (Continued)
a) Lumisort™
The Company acquired a license agreement from Sequent Biotechnologies Inc. (“Sequent”), a biotechnology
company solely involved in the development and commercialization of the LumiSort™ technology under license.
Subsequent to the acquisition, the Company continued to incur new intellectual property with the issue of patents
has resulted from this research program, as well as the cost incurred for the research and development equipment
that is not yet available for use.
The Company has assessed that it cannot fund the development of LumiSort™ assets in a timely manner and
that licensing terms may not adequately support its continued value. The decision was therefore made to write-
down all of the LumiSort™ related assets, including the original investment, capitalized research and development
equipment, prototype costs and patent related costs.
b) Kinlytic®
The Company acquired the assets and rights pertaining to development, production, and licensing of Kinlytic® from
ImaRX Therapeutics, Inc. in 2008. The asset is not yet available for use, accordingly no amortization has been recorded.
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.
Management made these assumptions based on probabilities of technical, regulatory and clinical acceptances
and financial support. Management believes that any reasonably-possible change in the key assumptions on which
the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount. The
discount rate has been determined based on the Company’s best estimate of a risk adjusted discount rate.
c) Bioreactor
The Company has internally developed an improved bioreactor production process (“Bioreactor”) to increase
the efficiency and output of manufacturing certain Antigen products.
30
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
9. DEBENTURES
The Company has convertible and non-convertible debentures issued and outstanding as at September 30, 2018. The
carrying values of the debt component of these debentures are as follows:
Non-convertible
Debentures
(a)
(b)
Total Non-convertible
Debentures
Convertible Debentures
(d)
(c)
(e)
Total Convertible
Debentures
Date of issue
Face value
Jan, 2014
$ 2,000,000
Apr, 2017
500,000
$
$ 2,500,000
Oct, 2016
$ 1,500,000
Oct, 2016
$
500,000 $
Oct, 2016
2,500,000
$ 4,500,000
Liability component at
the date of issue
928,373
268,955
-
461,550
223,050
780,750
Balance, September 30, 2017
Accretion
Repayments
Balance, September 30, 2018
894,955
75,312
(91,127)
879,140
275,162
29,712
-
304,874
1,170,117
105,024
(91,127)
1,184,014
470,692
12,637
-
483,329
247,265
33,210
-
280,475
797,931
23,700
-
821,631
1,515,888
69,547
-
1,585,435
Less: current portion
Non-current portion
Balance, September 30, 2018
99,604
779,536
879,140
$
304,874
-
304,874
404,478
779,536
$ 1,184,014
-
483,329
483,329
$
$
280,475
-
280,475
$
$
-
821,631
821,631
280,475
1,304,960
$ 1,585,435
Equity component at September 30, 2018
and 2017
Conversion price
per common share
-
-
-
-
574,435
631,222
1,698,132
2,903,789
$
-
$
-
$ 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
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. With the exception of debenture (a) above, all the other debentures were
amended 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 were 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.
31
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
9. DEBENTURES (Continued)
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 was 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, were modified to extend its maturity date to February 15, 2022, and the conversion price
were 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.
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 2017 comprehensive consolidated statement of loss. The Company measured the non-cash
loss based on the change in fair value of the debentures under the original and modified terms. In addition, a value of
$245,860 were ascribed to 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 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.
32
Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
10. LONG-TERM DEBT, BANK INDEBTEDNESS AND OTHER DEBT
a) The Company has term loans with the Business Development Bank (“BDC”) for a variety of purposes. The following
summarizes these loans as at September 30, 2018:
Term Loans with the Business
Development Bank (“BDC”)
(a)
(b)
(c)
(d)
(e)
(f)
Total
Effective date of loan
Initial Loan Amount
Jun, 2008
$ 3,000,000
Oct, 2014
615,000
$
Oct, 2015
$ 50,000
Oct, 2015
$ 200,000
Nov, 2015
$ 250,000
Jul, 2015
323,906
$
$ 4,438,906
Balance, September 30, 2017
2,268,700
348,500
28,080
129,870
162,240
-
2,937,390
Proceeds from loan
Loan repayments during the period
-
(111,120)
-
(123,000)
-
(12,480)
-
(39,960)
-
(49,920)
323,906
(25,570)
323,906
(362,050)
Balance, September 30, 2018
$ 2,157,580
$ 225,500
$ 15,600
$
89,910
$ 112,320
$
298,336 $ 2,899,246
Current Portion
Non-current portion
$
111,120
2,046,460
$ 123,000
102,500
$ 12,480
3,120
$
39,960
49,950
$
49,920
62,400
$ 101,640
196,696
$ 438,120
2,461,126
Payment frequency
Maturity of loan
Terms of repayment
Monthly
Feb, 2038
Principal
and interest and interest and interest and interest
Monthly
Dec, 2019
Principal
Monthly
Dec, 2020
Principal
Monthly
Jul, 2020
Principal
Monthly
Dec, 2020
Principal
and interest
Monthly
Sep, 2021
Principal
and interest
Notes:
(a) Loan for the purchase of manufacturing facility and building improvements.
(b) Loan for the purchase of equipment for our bioreactor project
(c) Loan for the purchase of building improvements.
(d) Loan for the purchase of manufacturing equipment
(e) Working Capital loan
(f) Loan for the purchase of manufacturing equipment
All BDC loans have a floating interest rate based on BDC’s floating base rate plus 0.5% - 1.8%. At September 30,
2018, the floating base rate was 5.8% (2017 – 5.3%). The loans are secured with the building and equipment.
As at September 30, 2018, the commitments for the next five fiscal years and thereafter for the BDC loans is as follows:
2019
2020
2021
2022
2023
2024 and thereafter
$
Amount
438,120
408,260
228,645
111,120
111,120
$ 1,601,981
On October 20, 2016, the Company arranged a new revolving line of credit agreement with its Canadian chartered
bank. That 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%. This credit facility was implemented in November 2016, replacing the Company’s previous
credit facility of $0.5 million. Accounts receivable and inventory were 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
credit facility to $1.5 million. The newly expanded credit facility was available on May 4, 2017.
As at September 30, 2018 the Company had drawn on $260,000 of the facility (2017 - $1,355,000).
33
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
10. LONG-TERM DEBT, BANK INDEBTEDNESS AND OTHER DEBT (Continued)
b) 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.
c) 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. On July 4, 2018 the Company received funds in the amount of $323,906,
drawn on this facility.
11. DEFERRED REVENUE
As at September 30, 2018, the Company has received payment, in the amount of $931,125 (2017 - $1,145,185), for a
portion of product sales which was not yet shipped. This amount has been recognized as deferred revenue under the
current liabilities in the consolidated statements of loss and comprehensive loss.
12. SHARE CAPITAL
The Company is authorized to issue an unlimited number of common shares with no par value and an unlimited
number of preference shares with no par value.
On October 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 $3,137,283 after
share issuance costs of $362,707. 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. Fair value of the common share purchase warrants was determined to be $
1,102,144. Gross proceeds were allocated to common shares and common share purchase warrants in the amount
of $ 2,756,085 and $ 743,905 respectively. The financing was brokered. Cash commissions of $226,729 were paid and
an aggregate of 755,764 Broker’s Warrants were issued in the private placement offering. Fair value of the broker
warrants was determined to be $120,328 using the Black-Scholes option pricing model. 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 (86%), a risk free rate of interest of 1.45% based upon the two year Government of
Canada Bond Yield at the date of the award of the Broker’s warrants and a two year term. Management believes that
the historic stock volatility provides a fair and appropriate basis of estimate for the expected future volatility of the
stock. 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 holding period, expiring four months and one
day from the date of closing.
During 2018, the Company issued 200,000 shares at a price of $0.275 and 250,000 warrants at an exercise price
of $0.30 as partial compensation for a consulting agreement. The transaction was measured at the fair value of
the common shares issued and warrants awarded, as the fair value of the services provided could not be measured
reliably. The number of issued and outstanding common shares and the stated capital of the Company as at
September 30, 2018 are presented below:
Balance, as at September 30, 2017
Issued on private placement
Issued for services
Exercise of Warrants
Exercise of stock options
Number
of Shares
84,704,257
11,666,633
200,000
1,815
400,000
Stated
Capital
$ 31,299,416
2,375,717
55,000
811
181,516
Balance, as at September 30, 2018
96,972,705
$ 33,912,460
34
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
13. CONTRIBUTED SURPLUS
Changes in contributed surplus up to September 30, 2018 are described as follows:
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 options expensed
Balance, as at September 30, 2017
Share Issuance pursuant to Stock Options Exercised
Share Issuance pursuant to Warrants Exercised
Issuance of Warrants pursuant to Private Placement
Issuance of Broker Warrants pursuant to Private Placement
Issuance of Warrants for Services
Share warrants issue costs pursuant to Private Placement
Stock options expensed
Balance, as at September 30, 2018
14. COMMON SHARE PURCHASE WARRANTS
$ 4,937,649
245,860
86,680
2,293,040
485,086
$ 8,048,315
(77,516)
(203)
743,905
120,328
44,969
(102,667)
458,525
$ 9,235,656
A continuity of the Company’s warrants outstanding as at September 30, 2018 and September 30, 2017 is presented
in the following table:
Weighted
average
exercise
price
Units
Outstanding, September 30, 2016
Issued
Exercised
Expired
Outstanding, September 30, 2017
Issued
Exercised
Expired
Balance, September 30, 2018
7,024,392
1,500,000
$ 0.54
$ 0.23
-
$ 0.25
$ 0.48
$ 0.36
(1,815) $ 0.34
-
(193,079)
8,331,313
6,839,081
-
15,168,579
-
$ 0.40
35
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
14. COMMON SHARE PURCHASE WARRANTS (Continued)
A summary of the Company’s warrants outstanding as at September 30, 2018 and September 30, 2017 is presented in the
following table:
September 30, 2018
September 30, 2017
Weighted
average
exercise
price
Number
outstanding
Weighted
average
remaining
contractual
life
years
Weighted
average
exercise
price
Number
outstanding
Weighted
average
remaining
contractual
life
years
4,949,763
10,218,816
15,168,579
$
$
0.55
0.33
0.40
1.24
2.37
2.00
6,531,313
1,800,000
8,331,313
$ 0.55
0.23
$ 0.48
2.18
3.65
2.50
Range of exercise prices:
$0.47 to $0.55
$0.23 to $0.46
15. STOCK OPTION PLAN
On March 28, 2018 the shareholders of the Company approved a resolution to amend the Company’s stock option
plan. This amendment changed the total number of common shares available to be issued under the plan from a
maximum of 12,000,000 common shares to a rolling maximum of 10% of issued and outstanding common shares.
Under the plan as at September 30, 2018, the Company has a total of 5,590,000 options (2017 – 6,470,000) issued and
pending and is eligible to issue up to a total of 9,697,270 options.
The exercise price of each option equals no less that the market price at the date immediately preceding the date
of the grant. In general, options issued under the plan vest and are exercisable in equal amounts in three steps, at
the issue date and at the anniversary date in the subsequent two years. Management does not expect any remaining
unvested stock options at the year-end to be forfeited before they vest.
The activity under the Company’s stock option plan for the year ended September 30, 2018 is as follows:
Outstanding, September 30, 2016
Stock options exercised
Stock options expired or forfeited
Stock options issued
Outstanding, September 30, 2017
Stock options exercised
Stock options forfeited
Stock options issued
Balance, September 30, 2018
Exercisable, September 30, 2018
36
Weighted average
exercise price
Units
4,007,000
3,220,000
(757,000)
-
6,470,000
(400,000)
(480,000)
-
5,590,000
3,523,458
$
$
$
$
0.47
0.28
0.54
-
0.39
0.26
0.54
-
0.39
0.39
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
15. STOCK OPTION PLAN (Continued)
The exercise price of each option equals the closing market price of the Company’s capital stock on the day
preceding the grant date. The following table reflects the number of options, their weighted average price and
the weighted average remaining contract life for the options grouped by price range as of September 30, 2018 and
September 30, 2017:
September 30, 2018
September 30, 2017
Weighted
average
exercise
price
Number
outstanding
Weighted
average
remaining
contractual
life
years
Weighted
average
exercise
price
Number
outstanding
Weighted
average
remaining
contractual
life
years
2,440,000
3,150,000
5,590,000
$
$
$
0.54
0.28
0.39
2.33
4.18
3.41
2,920,000
3,550,000
6,470,000
$ 0.54
$ 0.27
$ 0.39
3.00
4.33
3.73
Range of exercise prices:
$0.54
$0.23 to $0.28
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 period, the fair value of the options vested in the year were expensed and
credited to contributed surplus. During the year, the Company recorded share-based compensation expense of
$458,525 (2017 - $485,086).
37
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
16. INCOME PER SHARE
Basic income per share is calculated using the weighted average number of shares outstanding. Diluted income
per share reflects the dilutive effect of the exercise of stock options, warrants and convertible debt. The following
table reconciles the net income and the number of shares for the basic and diluted loss per share computations:
For the years ended September 30
2018
2017
Numerator for basic income per share:
Net loss available to common shareholders
Denominator for basic income (loss) per share:
Weighted average common shares outstanding
Effect of dilutive securities:
Warrants
Stock Options
Convertible debentures
$ (8,621,566)
$ (3,780,088)
96,198,810
84,704,257
-
-
-
294,624
21,792
-
Denominator for diluted net loss per share
96,198,810
82,020,673
Net loss per share:
Basic
Diluted
($0.090)
($0.090)
($0.045)
($0.045)
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
2018
15,168,579
5,590,000
19,565,217
40,323,796
2017
8,036,689
6,448,208
19,565,217
34,050,114
38
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
17. EXPENSES BY NATURE
The Company has chosen to present its consolidated statements of loss and comprehensive 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
Total depreciation and amortization
2018
2017
$
$
526,958
951
162,169
690,078
$
$
308,521
991
200,647
510,159
Amortization expense included within cost of goods sold includes amortization of Bioreactor development costs
that were capitalized in previous years and began amortization at the beginning of fiscal 2018.
Employee costs
Included in:
Short-term wages, bonuses and benefits
Share based payments
Total employee costs
Included in:
Cost of goods sold
Research and development
General and administrative expenses
Selling and business development
Total employee costs
2018
2017
$ 5,797,619
180,121
5,977,740
$ 5,011,506
290,962
5,302,468
$ 3,222,526
788,367
1,551,893
414,954
$ 5,977,740
$ 2,764,397
786,305
1,408,859
342,907
$ 5,302,468
Short-term wages, bonuses and benefits in 2018, fully includes CEO salary that had been reflected in consulting
costs in the previous year.
39
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
18. INCOME TAXES
Provision based on combined federal and provincial
statutory rates of 25.00 % (2017 – 25.00%)
Increase (decrease) resulting from:
Non deductible expenses
Non deductible expenses
Non deductible expenses
Adjustments to prior years’ tax returns
Current income tax expense
2018
2017
$ (2,155,391)
$
(945,022)
2,076
125,874
2,098,271
(70,830)
-
552
121,272
(22,903)
396,101
(450,000)
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:
2031
2032
2037
$
1,029,000
1,223,000
132,000
2,384,000
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 financing fees and other reserves
Unclaimed research and development expenses
Deferred income tax liability related to debentures
Tax assets not recognized
Deferred tax assets
2018
2017
$
595,897
2,606,720
95,811
3,908,332
(965,644)
(6,241,116)
-
$
780,350
529,057
18,028
3,864,446
(1,009,781)
(4,182,100)
-
In fiscal 2018 the Company incurred $362,707 of share issuance costs recorded directly to equity and which will
be deducted from taxable income at $72,541 over five years. The deferred tax asset for this transaction has not
been recognized.
40
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
18. INCOME TAXES (Continued)
The unclaimed research and development investment tax credits may be carried forward and used to reduce federal
income taxes. These must be claimed no later than September 30:
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
The associated tax benefits relating to the unclaimed credits are as follows:
Unclaimed research and development tax credits
Tax assets not recognized
Deferred tax assets related to investment tax credits
19. CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable
Inventory
Prepaid expenses and other assets
Investment tax credits receivable
Deferred Revenue
Accounts payable and accrued liabilities
41
$
$15,000
160,000
149,000
303,000
293,000
304,000
394,000
175,000
220,000
170,000
123,000
107,000
67,000
159,000
126,000
96,000
41,000
2,902,000
2018
2017
$ 2,449,453
(869,453)
1,580,000
$ 2,410,197
(830,197)
1,580,000
2018
2017
$
24,008
20,138
(16,976)
57,547
(214,060)
(1,075,358)
$ (1,204,703)
684,384
$
(1,071,113)
(97,448)
32,604
461,691
943,436
953,554
$
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
20. FINANCIAL EXPENSES
Cash interest:
Interest on long-term debt
Interest on debentures
Interest other
Interest income
Non-cash interest:
Accretion on debentures
Financial expenses
21. CAPITAL MANAGEMENT
2018
2017
$
$
172,565
483,158
34,373
(172)
-
161,934
851,857
$
$
164,305
490,292
71,454
(22)
-
198,560
924,589
The Company’s capital management objective is to safeguard its ability to function as a going concern to maintain
and grow its 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, 2018 was $16,282,197 (2017 - $22,153,078).
To date, the Company has used cash provided by operating activities, 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 and TD Bank. If possible, the Company tries to optimize its liquidity needs by non-dilutive sources,
including cash provided by operating activities, investment tax credits, grants and interest income. The Company
has a revolving line of credit of $1,500,000 with its Canadian chartered bank, 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.
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, 2018 and 2017, the Company has carried at fair value financial instruments
in Level 1. At September 30, 2018, 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.
42
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
22. FINANCIAL INSTRUMENTS (Continued)
The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities.
Date of
valuation
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets measured at fair value:
Cash
30-Sep-18
$ 44,358
-
-
Liabilities for which fair values are disclosed:
Non-convertible debentures
Convertible debentures
Long-term-debt and other debt
30-Sep-18
30-Sep-18
30-Sep-18
-
-
-
-
-
$ 1,184,014
1,585,435
$ 3,159,246
-
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 and other debt
30-Sep-17
30-Sep-17
30-Sep-17
-
-
-
-
-
4,492,390
$
$ 1,170,117
1,515,888
-
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.
43
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
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. Typically the outstanding accounts receivable
balance is relatively concentrated with a few large customers representing the majority of the value. As at September
30, 2018, five customers accounted for 66% (2017 - five customers accounted for 63%) of the outstanding balance.
The Company has had minimal bad debts over the past several years and accordingly management has recorded
an allowance of $10,000 (2017 - $10,000).
Trade accounts receivable are aged as follows at September 30:
Current
0 - 30 days past due
31 - 60 days past due
61 days and over past due
2018
2017
$ 1,171,341
117,975
18,686
5,478
$ 1,313,480
$ 1,084,414
176,002
73,268
3,804
$ 1,337,488
44
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
22. FINANCIAL RISK MANAGEMENT (Continued)
Market risk and foreign currency risk
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:
US dollars
Euros
2018
2017
2018
2017
Cash
Accounts receivable
Accounts payable and accrued liabilities
$
42,557
652,429
204,696
$
52,902
458,941
406,000
247
314,402
-
5
413,117
11,987
The Company’s revenue and expenses by foreign currency for the quarters ended September 30, 2018 and 2017 are as follows:
Revenue
Euros
U.S. dollars
Expenses
U.S. dollars
2018
43%
53%
6%
2017
40%
56%
7%
Based upon prior year results, 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 $330,400 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 $271,500. 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 $330,400 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 $271,500.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting its financial liability obligations as they
become due. The Company has a planning and budgeting process in place to help determine the funds required to
support the normal operating requirements on an ongoing basis. The Company has financed its cash requirements
primarily through issuance of securities, short-term borrowings, long-term debt and debentures. The Company
controls liquidity risk through management of working capital, cash flows and the availability of sourcing of financing.
Interest rate risk
Financial instruments that potentially subject the Company to cash flow interest rate risk are those assets and liabilities
with a variable interest rate. Interest rate risk exposure is primarily on the BDC debt that has a variable rate that is
pegged to the bank rate. The rate can be fixed at the Company’s option, if the outlook for interest rates should move
higher. The only other variable debt the Company has is the $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.
45
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
24. SEGMENTED INFORMATION
The Company operates in two ways: (i) the development, manufacturing and sales of antigens as materials for the
medical diagnostic industry or as quality assessment products and, (ii) the development and commercialization of novel
and proprietary products or technologies such as Lumisort and Kinlytic. The following is an analysis of the Company’s
revenues and profits from continuing operations for the year, segmented between antigens, Lumisort and Kinlytic:
Segment revenue
2018
2017
Segment loss
2018
2017
Antigen Products and Technologies
Lumisort ™
Kinlytic®
Total for continuing operations
$ 12,510,558
$ 10,185,798
-
-
-
-
$ 12,510,558
$ 10,185,798
$ (407,379) $ (3,510,718)
(269,370)
(8,101,911)
(112,276)
$ (8,621,566)
-
$ (3,780,088)
Segment revenue reported above represents revenue generated from external customers. There were no inter-
segment sales in the current period (2017 - $Nil).
The accounting policies of the reportable segments are the same as the Company’s accounting policies described
in Note 3. Segment loss represents the profit (loss) before tax earned by each segment without allocation of central
administration costs, directors’ fees, and finance costs. These general costs are reflected in the Antigen Products and
Technologies segment. This is the measure reported to the chief operating decision maker for the purposes of resource
allocation and assessment of segment performance. The Lumisort segment loss includes impairment of long-term
assets of $7,878,758 (2017-NIL), which is recognized in loss and comprehensive loss for the year.
Segmented assets and liabilities as at September 30 are as follows:
Segment assets
2018
2017
Segment liabilities
2018
2017
Antigen Products and Technologies
Lumisort ™
Kinlytic®
$ 14,651,481
-
3,078,586
$ 17,730,067
$ 14,181,887
7,597,138
3,078,586
$ 8,696,565
$ 11,262,928
-
-
-
-
$ 24,857,611
$ 8,696,565
$ 11,262,928
All assets are allocated to reportable segments other than interests in associates and current and deferred tax assets.
Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable
segments. All liabilities are allocated to reportable segments other than borrowings and current and deferred tax
liabilities. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets.
Segmented depreciation and amortization and additions to non-current assets as at September 30 are as follows:
Depreciation and
amortization
2018
2017
Additions to
non-current assets
2018
2017
Antigen Products and Technologies
Lumisort ™
Kinlytic®
$ 537,680
152,398
-
$ 321,342
188,817
-
$ 690,078
$ 510,159
$ 1,102,089
434,021
-
$ 1,536,110
$ 203,260
238,372
308,057
$ 749,689
46
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
25. GEOGRAPHIC INFORMATION
The Company operates in three principal geographical areas – North America (where it is domiciled), Europe and in
other foreign countries. The Company’s revenue from external customers is tracked based on the bill-to location.
Information about its non-current assets by location of assets are also detailed below. It should be noted that our
distribution partner for Asia is based in the United States, so most sales destined to Asia are reflected in the North
American total.
Revenue from
external customers
Non-current
assets
2018
2017
2018
2017
North America
Europe
Other foreign countries (directly)
$ 5,863,529
6,493,927
153,102
$ 12,510,558
$ 4,082,094
$ 13,243,049
$ 20,275,774
5,470,037
633,667
-
-
-
-
$ 10,185,798
$ 13,243,049
$ 20,275,774
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. Compensation for the Company’s key management personnel was as follows:
Short-term wages, bonuses and benefits
Share-based payments
Total key management compensation
2018
2017
$
901,575
403,744
$ 1,305,318
$
815,443
423,599
$ 1,239,042
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. On March 28, 2018 the board of directors
approved the repricing of 1,500,000 of warrants held by a director of the Company. These warrants were repriced
from $0.55 to $0.32 and the expiry was extended by one year. The non-cash financial impact was $128,901, which
is included in general and administrative expenses.
47
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
27. COMMITMENTS AND CONTINGENCIES
Lease commitments
2019
2020
2021
2022
2023
2024 and thereafter
Payments on convertible and non-convertible debentures (Note 9)
2019
2020
2021
2022
2023
2024 and thereafter
Commitments for the Company’s long term debt and bank indebtedness are discussed in note 10.
Contingencies
The Company is not party to any legal proceedings arising out of the normal course of business.
Amount
191,243
91,700
91,238
82,388
11,339
-
467,908
$
$
$
Amount
709,242
709,242
709,242
1,657,992
604,242
7,132,166
$ 11,522,125
48
Canadian Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended September 30, 2018 and 2017
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 Microbix will pay Irvine a total amount of (U.S.) $192,500, which was fully paid by
September 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. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented
to conform to the presentation of the 2018 consolidated financial statements.
49
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 (2)
Ontario, Canada
Executive Chairman
Microbix Biosystems Inc.
Cameron Groome (2)
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
(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
Chief Executive Officer and President
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
50
Canadian Funds
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 27, 2019 at 1:00 PM.
ANNUAL REPORT
Additional copies of the Company’s 2018 Annual Report
are available by contacting Microbix’ head office.
51
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