Microbix Biosystems Inc.
Annual Report 2019

Plain-text annual report

Message to Shareholders On behalf of Microbix, I’m pleased to inform you of another year of record sales, totaling $13.4 million for fiscal 2019 and $3.6 million for the fourth quarter, each up materially from 2018. Still more importantly, gross margin improved by $1.2 million, while growth in SG&A expenses was held to a minimum. As a result, net earnings from operations exceeded breakeven for the year, as opposed to the material losses of prior years. Similarly, Microbix recorded positive cash flow from operations in fiscal 2019, for another financial win. We are building from this strengthening financial foundation and continuing to improve operations at every level – across finance & admin., sales & service, production, QC, QA, and product development. We believe the benefits of such changes will be seen in fiscal 2020 and beyond, in the form of continuing sales growth and accelerating profitability. The signs of such progress are already evident, with full-scale antigen production in bioreactors now underway to improve margins, federal government contribution funding secured to help automate and expand quality assessment products (QAPs™) capacity, recognition of our export sales success, and our first regulated product registrations. That last achievement is a very critical milestone for Microbix. Specifically, our company has always been a relatively-anonymous maker of critical ingredients for the diagnostics industry. On obtaining approvals to sell its initial high-risk Human Papilloma Virus (HPV) QAPs across the European Union and the United States, Microbix now becomes a creator and marketer of innovative, proprietary, branded and regulated medical devices. We thereby open large new potential markets into which Microbix can sell large volumes of its higher margin QAPs. Our QAPs are a very natural extension of our longstanding expertise with human pathogens. Each QAP closely mimics the clinical sample of an infected patient and enables diagnostic tests to be checked for accuracy using a “control” that is known to contain the pathogen and human cells (as appropriate), while being stable and non-infectious. 1 Under modern regulatory standards, clinical labs are being required to use QAPs (a.k.a., IVD Controls) as a part of their quality management systems, providing opportunities for Microbix to identify and create important new products. Thus far in QAPs, there is intense interest in a number of current and emerging Microbix products, and the main rate- limiters to rolling-out a series of successful products are enough trained staff and production equipment, with plans underway to address each constraint. So we’re pleased and excited about the prospects for our sales-driven business (antigens & QAPs)! We can also offer encouragement about Microbix’s biologic drug asset, Kinlytic® urokinase. Slowly, but steadily, we are progressing toward an alliance to fund the re-introduction of this FDA and Health Canada approved “clot buster” for its catheter- clearance sub-indication. Confidential discussions continue with multiple qualified parties about this asset and we continue to believe in the prospects for an alliance on terms that would enable Microbix to retain a meaningful proportion of very attractive project economics. News release disclosure of details would follow execution of either a binding letter of intent or a definitive agreement. On the flip side, it is inevitable that Microbix faces obstacles and challenges. In fiscal 2019, our two main challenges were (i) reductions in the level of antigen inventories carried by our Asia-Pacific distributor and (ii) sequential delays of conversion to bioreactor-antigen by a leading customer. The former issue reduced sales growth, while the latter impacted margins. Doubtless fiscal 2020 will have its own challenges which we’ll overcome in due course. is ongoing, gross To summarize, sales growth margins are continuing to improve, and we believe sustained positive net earnings and cash flow will be achieved in fiscal 2020. Your company is now poised for accelerating operational success and share price appreciation. 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 Canadian Funds MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2019 AND 2018 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, 2019, 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 antigens and quality assessment products 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 19, 2019. 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 in two categories, (1) antigens and (2) quality assessment products (QAPs™). In the context of Microbix’s business, antigens are purified and inactivated bacteria and viruses, which are used in the immunoassay format of medical tests to assess exposure to, or immunity from, those pathogens. QAPs are inactivated and stabilized samples of a pathogen, that are created to resemble patient samples in order to support one or more of (i) the proficiency testing of clinical labs, (ii) test development, instrument validation and technician training, or (iii) the quality management of patient tests by clinical laboratories. Microbix’ antigens and QAPs 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 products or technologies. Currently it has two; (1) Kinlytic® urokinase, a biologic thrombolytic drug (used to dissolve blood clots), and (2) LumiSort™ cell-sorting, a technology for ultra-rapid and efficient sorting of particles that can be used to enrich cell populations of interest. Revenue from the antigens and QAPs business (Antigens & QAPs) is expected to continue growing for the foreseeable future. Antigen sales growth will be largely driven by certain public health tests starting to be adopted in the Asia Pacific region. QAPs sales growth will be driven by Microbix’s creation of new value-added, branded and proprietary products and by increasing European and American regulation of clinical laboratories. Resulting sales are expected to provide free cash flow to cover operating and debt service costs, and funding for business initiatives that leverage Microbix’s expertise. 2 Canadian Funds Canadian Funds COMPANY OVERVIEW (Continued) The Company owns and operates a biologicals 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 in a leased building located at 235 Watline Avenue, Mississauga, Ontario. FINANCIAL OVERVIEW Year Ending September 30, 2019 (“2019”) 2019 revenue was $13,412,341, a 7% increase from 2018 revenues of $12,510,558. Included were antigen and QAPs revenues of $13,067,727, 7% higher than 2018. Sales were strong across multiple customers in North America and Europe and several of our key products. Revenue from royalties were $344,614 (2018 - $319,201). Gross margin for the year was 49%, up from 43% in fiscal 2018, due to resolution of 2018 antigen yield control issues and changes to overall product mix that had a positive impact on margins. Operating expenses increased by 6% from 2018, primarily a result of increased investment in sales and marketing, and $135,000 of financing expenses in fiscal 2019 which had been capitalized in prior years. Stronger sales and gross margins in 2019 led to an operating income of $43,681 versus an operating loss before impairment of assets of $742,808 in 2018 and a net income of $31,918 in 2019 versus a net loss of $8,621,566 in 2018 (following a large one-time impairment charge). Cash provided by operations (“CFO”) was $44,368, compared to cash used of $537,005 in 2018. Quarter Ending September 30, 2019 (“Q4”) Total Q4 revenue was $3,587,285, a 6% increase from 2018 fourth quarter revenue of $3,389,574. Included were antigen and QAPs revenues of $3,503,268 (2018 - $3,308,913) and revenue from royalties were $84,017 (2018 - $80,661). Q4 sales were principally to antigen customers in North American and Europe and were across multiple customers and key products. Gross margin for Q4 was 44%, up from 41% in Q4 of fiscal 2018. This increase was due to the mix of products sold in Q4 and the year-over-year improvement in margins of one of our key antigen products. Revenues from bioreactor-produced antigen were lower than expected, due to an on-going delay in the conversion of a key customer, resulting in most sales of that antigen continuing to be from conventional methods in Q4. Operating expenses for Q4 increased by $22,286 from 2018, due to further investment in sales and marketing and debenture interest costs that were previously capitalized in 2018. As a result of all the foregoing, a net loss of $48,816 was reported in Q4 versus a net loss of $8,185,894 (or a net loss of $307,136 without the one-time impairment charge) in Q4 2018. Cash provided by operations (“CFO”) in Q4 was $574,570 (primarily due to higher gross margins for the quarter), compared to cash provided of $349,783 in 2018. 3 Canadian Funds Financial Highlights as at and for the year ended Canadian Funds Sept 30, 2019 Sept 30, 2018 Revenue $ 13,412,341 $ 12,510,558 Gross Margin Sales, General and Administrative Expenses Research and Development Expense Financial Expenses 6,547,447 4,395,496 1,042,192 1,066,078 5,369,436 4,170,641 1,089,746 851,857 Operating Income (Loss) before impairment of assets 43,681 (742,808) Income (Loss) and Comprehensive Income (Loss) 31,918 (8,621,566) Net Income (Loss) per share 0.000 (0.090) Cash Provided (Used) by Operating Activities 44,368 (537,005) Cash Accounts receivable Total current assets Total assets Total current liabilities Total liabilities Total shareholders’ equity Current ratio Debt to equity ratio SELECTED QUARTERLY FINANCIAL INFORMATION 95,571 1,709,470 6,452,308 19,629,573 4,765,895 9,092,165 10,537,408 1.35 0.86 44,358 1,313,480 6,067,018 19,310,067 4,161,417 8,956,565 10,353,502 1.46 0.87 Dec-31-17 $ Mar-31-18 $ Jun-30-18 $ Sep-30-18 $ Dec-31-18 $ Mar-31-19 $ Jun-30-19 $ Sep-30-19 $ Revenue 2,885,567 3,000,193 3,235,224 3,389,574 2,460,812 4,253,629 3,110,615 3,587,285 Net Income (Loss) and Comprehensive Income (Loss) Operating Income (Loss) before debt restructuring, settlement expenses and Impairment of assets (94,128) (342,502) 958 (8,185,894) (119,296) 391,352 (191,322) (48,816) (94,128) (342,502) 958 (307,136) (119,296) 482,037 (191,322) (127,738) 4 Canadian Funds Canadian Funds 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 “immunoassay” 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. More recently, growth in demand for Microbix’ antigens has been stronger to end customers in both established and emerging markets. Much of that growth is believed to be due to a number of diagnostics for infectious diseases important to public health beginning to be adopted in the Asia-Pacific region. In fiscal 2018, we saw 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 native antigens that has created and validated leading-edge production techniques, Microbix believes it is now prepared to fulfill such demand growth. Microbix’s emerging QAPs business involves the use of antigens for purposes beyond the large-scale manufacturing of medical test kits. This newer usage packages a very small amount of stabilized and inactivated bacteria or virus into individual one milliliter vials or dried onto swabs. Such samples are used as tools to establish whether the quality objectives of clinical laboratories 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 and ISO 15189 standards, 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 to test and instrument makers, and to clinical laboratories directly. Due to the positive prospects of each of the above two lines of its 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. In fiscal 2018 and 2019, multiple upgrades to facilities were completed and further investments will be made in infrastructure going forward. Additionally, Microbix will be investing in people – with efforts to enhance training, career progression and retention. Initial benefits of the manufacturing upgrades were seen in the sales of fiscal 2018 and 2019, which demonstrated an annual compound growth rate of 15% over the two year period. In fiscal 2020, Microbix aims for continuing sales growth alongside material improvement to its percentage gross margins, with margin gains being driven by the use of new production technologies and a growing proportion of higher margin products. Further progress on enhancing production capabilities are expected to result from the $2.75 million contribution agreement with FedDev Ontario, announced on July 30, 2019. Additionally, on August 1, Microbix confirmed the timetable of conversion of a major antigen product into its bioreactor technology and, over the month of September, approvals to sell innovative new QAPs to clinical laboratories in the European Union and the United States. 5 Canadian Funds OUTLOOK (Continued) Canadian Funds Going forward, Microbix is continuously working to improve its percentage gross margin while also growing its sales of both antigens and QAPs. Percentage gross margin improvements should be achievable by way of an increasing proportion of bioreactor-driven antigen sales, improving antigen yields on a broader basis and larger sales of quality products. Achievement of sales and gross margin goals is expected to lead to meaningful quarterly net earnings. Quarterly reporting will update shareholders on progress with such operational goals. Headway is also being made with Kinlytic® urokinase. Microbix has been actively working with a U.S. agent on outreaches to potential out-licensing and development partners. Multiple potential partners are now under confidentiality agreements and Microbix is engaged with assisting such parties in conducting due diligence on its “Data Room” materials. 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. To summarize, the company continues to target double-digit annual percentage growth in sales, while concurrently expanding gross margins and net earnings. Sustainable growth and consistent profitability are core goals for Microbix. Those objectives should be attainable based on increasing demand for antigens, implementation of innovative antigen production methods, the launch of new QAPs product lines and successful partnering of Kinlytic. It is intended for success with such initiatives to drive share price appreciation. 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 $35,666,485 as at September 30, 2019. 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 2020, cash flow is expected to improve due to: 1) continued growth in antigen and quality product sales, 2) improvements in product pricing or other sales terms, 3) commencement of sales of higher percentage gross 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 fruition. Microbix will continue to monitor and manage its cash position, with the objective of anticipating and meeting all future liquidity and capital needs. 6 Canadian Funds LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES (Continued) Canadian Funds Related Party Transactions On March 28, 2018 the board of directors approved the repricing of 1,500,000 of warrants held by a director of the Company, in lieu of other director compensation. 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. Outstanding Share Capital Share capital issued and outstanding as at September 30, 2019 and September 30, 2018 was $33,912,460 for 96,972,705 common shares. TREND INFORMATION Historical spending patterns are no indication of future expenditures. Investment in the new products and technologies is at the discretion of management and the board of directors. The Company is not aware of any material trends related to its business that have not been discussed in this Management Discussion and Analysis dated December 19, 2019. RISKS AND UNCERTAINTIES The Company is exposed to business risks, both known and unknown, which may or may not affect its operations. Management works continuously to mitigate unacceptable risk, while still allowing the business to grow and prosper. These risk factors include the following: A significant portion of 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. 7 Canadian Funds RISKS AND UNCERTAINTIES (Continued) Canadian Funds 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 & QAPs, 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. 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 or securing its freedom to operate relative to the rights of other parties. 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. 8 Canadian Funds FINANCIAL RISK MANAGEMENT Canadian Funds The primary risks affecting the Company are summarized below and have not changed during the fiscal year. The list does not cover all risks, nor is there an assurance that the strategy of management to mitigate the risks is sufficient to eliminate the risk. Credit risk: The Company’s customers are primarily large multi-national companies with very high quality credit ratings. Given this track record, management perceives the credit risk to be low. Typically the outstanding accounts receivable balance is relatively concentrated with a few large customers representing the majority of the value. For the period ended September 30, 2019, five customers accounted for 78% (2018 - five customers accounted for 66%) of the outstanding balance. The Company has had minimal bad debts over the past several years and accordingly management has recorded an allowance of $25,625 (2018- $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, 2019, the significant balances, quoted in Canadian dollars, held in foreign currencies are: US dollars Euros 2019 2018 2019 2018 Cash Accounts receivable Accounts payable $ 88,820 797,352 197,551 $ 42,557 652,429 204,696 $ 5,223 591,454 - $ 247 314,402 - Based upon 2019 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 $354,100 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 $298,700. 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 $354,100 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 $298,700. 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 $2,000,000 line of credit that bears interest at the bank’s prime lending rate plus 2.0%. A 1% increase in the bank rate would cost the Company approximately $30,000 per year for BDC and about $20,000 on the line of credit usage if it were fully used throughout the fiscal year. 9 Canadian Funds FINANCIAL RISK MANAGEMENT (Continued) Canadian Funds Market risk Market risk reflects changes in pricing for both Antigens & QAPs 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 or useful life of the asset. Amortization commences when the intangible asset is available for use. Intangibles with definite lives but not yet available for use are assessed at least annually for impairment or more frequently if there are indicators of impairment. 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. 10 Canadian Funds CRITICAL ACCOUNTING ESTIMATES (Continued) Canadian Funds Non-Convertible and Convertible Debentures Management determines the fair value of the debenture using valuation techniques. Those techniques are significantly affected by the estimated assumptions used, including discount rates, expected life and estimates of future cash flows. Deferred income taxes Deferred income tax assets and liabilities are recognized for the estimated income tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective income tax bases. Deferred income tax assets and liabilities are measured using tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effects of changes in income tax rates are reflected in future income tax assets and liabilities in the year that the rate changes are substantively enacted. Share-based payments The Company applies the fair value method of accounting for stock-based compensation for awards granted to officers, directors, employees and consultants of the Company. The fair value of the award at the time of granting is determined using the Black-Scholes option pricing model, and recognized as a compensation expense on a straight- line basis over the vesting period with an offsetting amount recorded to contributed surplus. The amount of the compensation cost recognized at any date at least equals the value of the portion of the options vested at that date. When stock options are exercised, the consideration paid by employees or directors, together with the related amount in contributed surplus, is credited to capital stock. When an employee leaves the Company, vested options must be exercised within 90 days, or the options expire. Any options that are unvested are reversed in the period that the employee leaves. FINANCIAL INSTRUMENTS The fair value of a financial instrument is approximated by the consideration that would be agreed to in an arm’s length transaction between willing parties and through appropriate valuation methods, but considerable judgment is required for the Company to determine the value. The actual amount that could be realized in a current market exchange could be different than the estimated value. The carrying amounts of cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments. Based on available market information, the fair value of the obligation under capital lease approximates its carrying value. The fair value of the long-term debt is based on rates currently available for items with similar terms and maturities. The fair value of the liability for each convertible debenture has been calculated and the residual is accounted for in equity. The Company does not have any off balance sheet financial instruments. Disclosure Controls The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in the National Instrument 52-109 Certification of Disclosure in Issuer’s Annual Filings (NI 52-109F1). As at September 30, 2019, 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 11 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, 2019. 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, 2019 that have materially affected, or are reasonably thought to materially affect, the internal control over financial reporting. IMPACT OF NEW ACCOUNTING STANDARDS 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 described below. NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 The Company has adopted new amendments to the following accounting standards effective for its interim and annual consolidated financial statements commencing October 1, 2018. The effect of these pronouncements on the Company’s results and operations are described below. IFRS 2, Share-based Payment (“IFRS 2”) In September 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. IFRS 9 - Financial instruments (“IFRS 9”) The Company has adopted IFRS 9, effective October 1, 2018 on a modified retrospective basis, in accordance with the transitional provisions of IFRS 9. As such, comparative figures have not been restated. IFRS 9 provides a revised model for recognition, measurement and impairment of financial instruments and includes a new model for hedge accounting aligning the accounting treatment with risk management activities. As detailed below, the Company has changed its accounting policy for financial instruments retrospectively, except where described below. 12 Canadian Funds NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 (Continued) IFRS 9 - Financial instruments (“IFRS 9”) (Continued) Canadian Funds Financial assets IFRS 9 includes a revised model for classifying financial assets, which results in classification according to a financial instrument’s contractual cash flow characteristics and the business models under which they are held. At initial recognition, financial assets are measured at fair value. Under the IFRS 9 model for classification of financial assets, the Company has classified and measured its financial assets as described below: Cash and cash equivalents measured at fair value through profit or loss under International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (“IAS 39”) continue to be measured as such under IFRS 9. Accounts receivable classified as financial assets continue to be measured at amortized cost under IFRS 9. The adoption of IFRS 9 did not result in a change in the carrying values of any of the Company’s financial assets on the transition date. Financial liabilities Financial liabilities are recognized initially at fair value, and in the case of financial liabilities, not subsequently measured at fair value, net of directly attributable transaction costs. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled, or expired. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements and, since the Company does not have any financial liabilities designated at fair value through profit or loss, the adoption of IFRS 9 did not impact the Company’s accounting policies for financial liabilities. Accounts payable and accrued liabilities, interest payable, and long-term debt are classified as financial liabilities to be subsequently measured at amortized cost. The adoption of IFRS 9 did not result in a change in the carrying values of any of the Company’s financial liabilities on the transition date. Expected credit loss impairment model IFRS 9 requires a forward-looking expected credit loss impairment (“ECL”) model as opposed to an incurred credit loss model under IAS 39. As the Company’s financial assets are substantially made up of trade receivables, the Company has opted to use the simplified approach for measuring the loss allowance at an amount equal to lifetime ECL. The simplified approach does not require the tracking of changes in credit risk, but instead requires the recognition of lifetime ECLs at all times. Lifetime ECL represents the ECL that would result from all possible default events over the expected life of a financial instrument. The adoption of the ECL model did not have a significant impact on the Company’s financial statements, and did not result in a transitional adjustment. Financial instruments The Company’s financial assets and liabilities (financial instruments) include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt financial instruments. All financial instruments are recorded at fair value at recognition. Subsequent to initial recognition, financial instruments classified as accounts receivables, accounts payable and accrued liabilities, and long-term debt are measured at amortized cost using the effective interest method. Other financial assets and liabilities are recorded at fair value subsequent to initial recognition. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) Effective October 1, 2018, the Company adopted IFRS 15. IFRS 15 supersedes International Accounting Standard 18, Revenue (“IAS 18”). IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring 13 Canadian Funds NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 (Continued) Canadian Funds IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) (Continued) goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The Company has elected to use the modified retrospective method, which requires the cumulative effect of initially applying the Standard to be recognized at the date of initial application, which is October 1, 2018, and that the financial information previously presented for the year ended September 30, 2018 would remain unchanged. The transition to the new standard had no material impact on the measurement and recognition of revenue in the current or prior periods. The Company has elected to make use of the following practical expedients: (i) Completed contracts under IAS 18 before the date of transition have not been reassessed. (ii) Financing components are not considered in the Company’s transaction price as the time gap between payment and delivery of goods and services is expected to be less than one year. (iii) Contract costs incurred related to contracts with an amortization period of less than one year have been expensed as incurred. 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 has elected to adopt IFRIC 22 prospectively beginning on October 1, 2018. The adoption of the standard has had no significant impact on the Company’s unaudited interim consolidated financial statements for the three-month ended period September 30, 2019. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED IFRS 16, Leases (“IFRS 16”) 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. The Company is currently assessing the impact of the new interpretation on its consolidated financial statements. 14 Canadian Funds INDEPENDENT AUDITOR’S REPORT To the Shareholders of Microbix Biosystems Inc. We have audited the consolidated financial statements of Microbix Biosystems Inc. and its subsidiaries (the Group), which comprise the consolidated statements of financial position as at September 30, 2019 and September 30, 2018, and the consolidated statements of income (loss) and comprehensive income (loss), consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects the consolidated financial position of the Group as at September 30, 2019 and September 30, 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis; and • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis and Annual Report prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. 15 Canadian Funds INDEPENDENT AUDITOR’S REPORT (Continued) Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Laura Sluce. Toronto, Canada December 19, 2019 16 Canadian Funds CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT SEPTEMBER 30, 2019 AND 2018 ASSETS CURRENT ASSETS Cash Accounts receivable (Note 20) Inventories (Note 5) Prepaid expenses and other assets Investment tax credit receivable (Note 15) TOTAL CURRENT ASSETS LONG-TERM ASSETS Deferred tax asset (Note 15) Property, plant and equipment (Note 6) Intangible assets (Note 7) TOTAL LONG-TERM ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities Bank indebtedness (Note 9) Current portion of finance lease obligation Current portion of long-term debt (Note 9) Current portion of debentures (Note 8) Deferred revenue (Note 22) TOTAL CURRENT LIABILITIES Finance lease obligation Non-convertible debenture (Note 8) Convertible debentures (Note 8) Long-term debt (Note 9) TOTAL LONG-TERM LIABILITIES TOTAL LIABILITIES SHAREHOLDERS’ EQUITY Share capital (Note 10) Equity component of convertible debentures (Note 8) Contributed surplus Accumulated deficit TOTAL SHAREHOLDERS’ EQUITY Canadian Funds 2019 2018 $ 95,571 1,709,470 4,480,192 99,201 67,874 6,452,308 $ 44,358 1,313,480 4,446,968 169,965 92,247 6,067,018 1,568,237 6,650,380 4,958,648 13,177,265 1,580,000 6,646,730 5,016,319 13,243,049 $ 19,629,573 $ 19,310,067 $ 1,462,616 1,400,000 80,378 408,260 774,178 640,463 4,765,895 169,149 750,350 1,353,905 2,052,866 4,326,270 $ 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 $ 9,092,165 $ 8,956,565 $ 33,912,460 $ 33,912,460 2,903,789 2,903,789 9,235,656 9,387,644 (35,698,403) (35,666,485) $ 10,537,408 $ 10,353,502 TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $ 19,629,573 $ 19,310,067 Commitments and Contingencies (Note 24) (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. 17 Canadian Funds CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) For the years ended September 30, 2019 and 2018 Canadian Funds SALES Antigen products and technologies Royalties TOTAL SALES (Note 22) COST OF GOODS SOLD Antigen products and technologies (Notes 14) Royalties TOTAL COST OF GOODS SOLD GROSS MARGIN EXPENSES Selling and business development (Note 14) General and administrative (Note 14) Research and development (Note 14) Financial expenses (Note 17) OPERATING INCOME (LOSS) BEFORE IMPAIRMENT OF ASSETS Impairment of long-term assets (Notes 6, 7) INCOME (LOSS) FOR THE YEAR, BEFORE INCOME TAXES INCOME TAXES Deferred income taxes (Note 15) Current income taxes NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR THE YEAR NET INCOME (LOSS) PER SHARE Basic (Note 13) Diluted (Note 13) 2019 2018 $ 13,067,727 344,614 13,412,341 $ 12,191,357 319,201 12,510,558 6,796,735 68,159 6,864,894 7,076,797 64,325 7,141,122 6,547,447 5,369,436 651,460 3,744,036 1,042,192 1,066,078 556,414 3,614,227 1,089,746 851,857 43,681 (742,808) - 7,878,758 43,681 (8,621,566) 11,763 - - - $ 31,918 $ (8,621,566) $ $ 0.000 0.000 $ $ (0.090) (0.090) The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 18 Canadian Funds CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 2019 and 2018 OPERATING ACTIVITIES Net income (loss) for the period Items not affecting cash Amortization and depreciation (Note 6, 7) Accretion of debentures Stock options and warrants expense (Note 12) Share and warrant issuance for services (Note 10, 11) Deferred tax asset (Note 3) Impairment of long-term asset (Note 6, 7) Change in non-cash working capital balances (Note 16) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES Purchase of property, plant and equipment (Note 6) Additions from internal development of intangible assets (Note 7) CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Repayments of long-term debt (Note 9) Proceeds from Equipment Loan (Note 9) Repayments of convertible and non-convertible debentures (Note 8) Repayments of shareholders’ loans Repayments of finance lease obligation Proceeds (repayments) of credit facility (Note 9) Proceeds from exercise of stock options and warrants Issue of common shares, net of issue costs CASH PROVIDED BY FINANCING ACTIVITIES NET CHANGE IN CASH - DURING THE YEAR CASH - BEGINNING OF YEAR CASH - END OF YEAR Canadian Funds 2019 2018 $ 31,918 $ (8,621,566) 568,822 208,592 151,988 - 11,763 - (928,715) 690,078 161,934 458,525 99,969 - 7,878,758 (1,204,703) 44,368 (537,005) (433,233) (944,252) (81,567) (273,747) (514,800) (1,217,999) (438,120) - (362,050) 323,906 (99,609) - (80,626) 1,140,000 - - (91,127) (200,000) (72,719) (1,095,000) 104,608 3,137,283 521,645 1,744,901 51,213 (10,102) 44,358 54,460 $ 95,571 $ 44,358 The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 19 Canadian Funds CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the years ended September 30, 2019 and 2018 SHARE CAPITAL (Note 10) STATED NUMBER OF CAPITAL SHARES CONTRIBUTED SURPLUS DEFICIT Canadian Funds EQUITY COMPONENT OF DEBENTURE TOTAL SHAREHOLDERS’ EQUITY BALANCE, SEPTEMBER 30, 2017 84,704,257 $31,299,416 $8,048,315 $(27,076,837) $2,903,789 $15,174,683 Stock option expense Share Issuance pursuant to Stock Options Exercised Share Issuance pursuant to Warrants Exercised Issue of Warrants pursuant to Private Placement 458,525 400,000 181,516 (77,516) 1,815 811 (203) Issue 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 200,000 55,000 Warrants Issuance for Services 44,969 743,905 120,328 458,525 104,000 608 743,905 120,328 2,756,085 (483,035) 55,000 44,969 Net loss for the year (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 Stock option expense Net income for the year 151,988 31,918 151,988 31,918 BALANCE, SEPTEMBER 30, 2019 96,972,705 $33,912,460 $9,387,644 $(35,666,485) $2,903,789 $10,537,408 The accompanying notes and summary of significant accounting policies are an integral part of these consolidated financial statements. 20 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 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. Currently it has 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 principal 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 19, 2019. 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, which is the Company’s functional currency. 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, 2019 and 2018. 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. 21 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 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: Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the asset may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash- generating units). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. Management evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. 22 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Revenues from product sales are recognized when control of the promised good is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. Revenues from licensing of the Company’s intangible assets are recognized when the service is rendered and control of the service is transferred to the Company’s customers. Royalty income is recognized based on activity at the point in time each service instance is provided. The Company may invoice certain customers in advance for contracted product sales. Amounts received in advance of control of the product transferring to the customer are deferred and recognized as revenue in the period control is transferred. 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, 2019 or 2018. Financial assets and liabilities Effective September 1, 2018, the Company adopted IFRS 9 – Financial Instruments (IFRS 9) (See Note 4, Changes in Accounting Policies). The following are policies on financial instruments under IFRS 9. There are three measurement categories in which the Company classifies its financial assets: • Amortized cost: Financial instruments that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortized cost. Interest income (expense) from these financial instruments is recorded in net income (loss) using the effective interest rate method. • Fair value through other comprehensive income (FVOCI): Debt instruments that are held for collection of contractual cash flows and for selling the financial instruments, where the financial instruments’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses that are recognized in net income (loss). When the financial instrument is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to net income (loss) and recognized in other gains (losses). Interest income (expense) from these financial instruments is included in interest using the effective interest rate method. Foreign exchange gains (losses) is presented in other gains (losses) and impairment expenses in other expenses. • Fair value through profit (loss) (FVTPL): Financial instruments that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL. A gain or loss on a financial instrument that is subsequently measured at FVTPL and is not part of a hedging relationship is recognized in net income (loss) and presented net in comprehensive income (loss) within other gains (losses) in the period in which it arise. Financial liabilities are either classified as amortized cost or FVTPL when the Company revises its estimates of payments of a financial liability to reflect actual and revised estimated contractual cash flows. Gross carrying amount of the amortized cost of the financial liability as the present value of the estimated future contractual cash flows that are discounted adjustment is recognized in income 23 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 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: Measurement 2019 2018 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 Fair value through profit or loss $ Amortized cost 95,571 1,709,470 $ 44,358 1,313,480 Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost $ 1,462,616 1,400,000 640,463 249,527 1,199,619 1,678,814 2,461,126 $ 9,092,165 $ 1,766,592 260,000 931,125 330,153 1,184,014 1,585,435 2,899,246 8,956,565 $ 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, plant and equipment are measured at cost less accumulated depreciation and impairment (if any). Cost includes the cost of material, labour and other costs directly attributable to bringing the asset to a working condition for its intended use. Depreciation is calculated at rates which will reduce the original cost to estimated residual value over the estimated useful life of each asset. Depreciation commences once the asset is available for use. 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. 24 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 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 or useful life of the asset. Amortization commences when the intangible asset is available for use. Intangibles with definite lives but not yet available for use are assessed at least annually for impairment or more frequently if there are indicators of 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 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. 25 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 period-end date. Exchange gains and losses arising on these transactions are included in the consolidated statements of loss and comprehensive loss for the period. 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. 26 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 4. IMPACT OF NEW ACCOUNTING STANDARDS 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 described below. NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 The Company has adopted new amendments to the following accounting standards effective for its interim and annual consolidated financial statements commencing October 1, 2018. The effect of these pronouncements on the Company’s results and operations are described below. 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 IFRIC, 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. IFRS 9 - Financial instruments (“IFRS 9”) The Company has adopted IFRS 9, effective October 1, 2018 on a modified retrospective basis, in accordance with the transitional provisions of IFRS 9. As such, comparative figures have not been restated. IFRS 9 provides a revised model for recognition, measurement and impairment of financial instruments and includes a new model for hedge accounting aligning the accounting treatment with risk management activities. The Company has changed its accompanying policy for financial instruments retrospectively. Financial assets IFRS 9 includes a revised model for classifying financial assets, which results in classification according to a financial instrument’s contractual cash flow characteristics and the business models under which they are held. At initial recognition, financial assets are measured at fair value. Under the IFRS 9 model for classification of financial assets, the Company has classified and measured its financial assets as described below: Cash and cash equivalents measured at fair value through profit or loss under International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (“IAS 39”) continue to be measured as such under IFRS 9. Accounts receivable classified as financial assets continue to be measured at amortized cost under IFRS 9. The adoption of IFRS 9 did not result in a change in the carrying values of any of the Company’s financial assets on the transition date. 27 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 4. IMPACT OF NEW ACCOUNTING STANDARDS (Continued) NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 (Continued) IFRS 9 - Financial instruments (“IFRS 9”) (Continued) Financial liabilities Financial liabilities are recognized initially at fair value, and in the case of financial liabilities, not subsequently measured at fair value, net of directly attributable transaction costs. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled, or expired. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements and, since the Company does not have any financial liabilities designated at fair value through profit or loss, the adoption of IFRS 9 did not impact the Company’s accounting policies for financial liabilities. Accounts payable and accrued liabilities, interest payable, and long-term debt are classified as financial liabilities to be subsequently measured at amortized cost. The adoption of IFRS 9 did not result in a change in the carrying values of any of the Company’s financial liabilities on the transition date. Expected credit loss impairment model IFRS 9 requires a forward-looking expected credit loss impairment (“ECL”) model as opposed to an incurred credit loss model under IAS 39. As the Company’s financial assets are substantially made up of trade receivables, the Company has opted to use the simplified approach for measuring the loss allowance at an amount equal to lifetime ECL. The simplified approach does not require the tracking of changes in credit risk, but instead requires the recognition of lifetime ECLs at all times. Lifetime ECL represents the ECL that would result from all possible default events over the expected life of a financial instrument. The adoption of the ECL model did not have a significant impact on the Company’s financial statements, and did not result in a transitional adjustment. Financial instruments The Company’s financial assets and liabilities (financial instruments) include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt financial instruments. All financial instruments are recorded at fair value at recognition. Subsequent to initial recognition, financial instruments classified as accounts receivables, accounts payable and accrued liabilities, and long-term debt are measured at amortized cost using the effective interest method. Other financial assets and liabilities are recorded at fair value subsequent to initial recognition. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) Effective October 1, 2018, the Company adopted IFRS 15. IFRS 15 supersedes International Accounting Standard 18, Revenue (“IAS 18”). IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The Company has elected to use the modified retrospective method, which requires the cumulative effect of initially applying the Standard to be recognized at the date of initial application, which is October 1, 2018, and that the financial information previously presented for the year ended September 30, 2018 would remain unchanged. The transition to the new standard had no material impact on the measurement and recognition of revenue in the current or prior periods. The Company has elected to make use of the following practical expedients: (i) Completed contracts under IAS 18 before the date of transition have not been reassessed. (ii) Financing components are not considered in the Company’s transaction price as the time gap between payment and delivery of goods and services is expected to be less than one year. (iii) Contract costs incurred related to contracts with an amortization period of less than one year have been expensed as incurred. 28 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 4. IMPACT OF NEW ACCOUNTING STANDARDS (Continued) NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN FISCAL 2019 (Continued) 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 has elected to adopt IFRIC 22 prospectively beginning on October 1, 2018. The adoption of the standard has had no significant impact on the Company’s consolidated financial statements for the year ended period September 30, 2019. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET APPLIED IFRS 16, Leases (“IFRS 16”) 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. The Company is currently assessing the impact of the new interpretation on its consolidated financial statements. 5. INVENTORIES Inventories as at September 30 consist of the following: Raw material Work in process Finished goods $ 2019 496,021 1,387,824 2,596,347 $ 4,480,192 $ 2018 488,060 1,679,926 2,278,982 $ 4,446,968 During the year ended September 30, 2019, inventories in the amount of $6,796,735 (2018 - $7,076,797) were recognized as an expense through cost of sales. The allowance for inventory impairment as at September 30, 2019 was $55,747 (2018 - $55,747). 29 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 6. PROPERTY, PLANT AND EQUIPMENT The freehold land and buildings have been pledged as security for bank loans under a mortgage (see Note 9). Property, plant and equipment consists of: Building Research and Development Equipment Other Equipment and Fixtures Land Total COST Balance, as at September 30, 2017 $ 4,565,379 Additions 357,654 - Impairment $ 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, as at September 30, 2018 4,923,033 Additions 64,074 - Disposals 500,709 16,422 - 5,349,475 352,737 - 800,000 - - 11,573,217 433,233 - Balance, as at September 30, 2019 4,987,107 517,131 5,702,212 800,000 12,006,450 ACCUMULATED DEPRECIATION Balance, as at September 30, 2017 1,247,532 - Impairment 159,266 Depreciation Balance, as at September 30, 2018 1,406,798 - Disposals 167,060 Depreciation 582,968 (180,276) 20,662 423,354 - 10,635 2,867,881 - 228,453 3,096,334 - 251,888 - - - - - - 4,698,381 (180,276) 408,381 4,926,487 - 429,583 Balance, as at September 30, 2019 1,573,858 433,989 3,348,222 - 5,356,070 NET BOOK VALUE 3,516,235 Balance, as at September 30, 2018 Balance, as at September 30, 2019 $ 3,413,249 77,355 $ 83,142 2,253,141 $ 2,353,990 800,000 $ 800,000 6,646,730 $ 6,650,380 In fiscal 2018, the Company determined that the Lumisort related research and development equipment was impaired. See note 7 for discussion. 30 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 7. INTANGIBLE ASSETS Intangible assets are depreciated on a straight line basis at the following rates: Technology investments: LumiSort™ (Note 7a) Kinlytic® (Note 7b) Bioreactor (Note 7c) Intangible assets consist of: COST 5% 0% 7% Capitalized Development Costs Patents and Trademarks Licenses LumiSort™ (a) Bioreactor (c) Kinlytic® (b) LumiSort™ (a) QAPs (d) LumiSort™ (a) Total Balance, as at September 30, 2017 Additions Impairment $30,532 $2,088,575 - - - (30,532) $3,078,586 $2,115,236 286,384 (2,401,620) - - $ - 81,567 - $278,528 - (278,528) $7,591,457 367,951 (2,710,680) Balance, as at September 30, 2018 Additions - - 2,088,575 - 3,078,586 - - - - 81,567 - - 5,167,161 81,567 Balance, as it September 30, 2019 - 2,088,575 3,078,586 - 81,567 - 5,248,728 ACCUMULATED AMORTIZATION Balance, as at September 30, 2017 Amortization expense Impairment 6,748 951 (7,699) 11,603 139,239 - Balance, as at September 30, 2018 Amortization expense - - 150,842 139,238 - - - - - 831,998 120,079 (952,077) - - - - - - - 257,102 21,426 (278,528) 1,107,451 281,695 (1,238,304) - - 150,842 139,238 Balance, as at September 30, 2019 - 290,080 - - - - 290,080 NET BOOK VALUE Balance, as at September 30, 2018 Balance, as at September 30, 2019 $ 1,937,733 3,078,586 - - 1,798,495 3,078,586 - - - 81,567 - - 5,016,319 4,958,648 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 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. 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 and in prior years, the Company incurred 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. In fiscal 2018, the Company assessed that it could not 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. 31 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 7. INTANGIBLE ASSETS (Continued) 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. The recoverable amount considered assumptions based on probabilities of technical, regulatory and clinical acceptances and financial support. Further, Management uses risk-adjusted cash flow projections based on financial budgets. 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. d) Quality Assessment Products (“QAPs”) To enhance its QAPs business of providing sample mimics for use in quality checks across various laboratory test applications, Microbix has been developing intellectual property. Accordingly, it has capitalized various patent application costs. When the resulting patent issues in key markets, those costs will begin to be amortized in accordance with IFRS standards. 32 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 8. DEBENTURES The Company has convertible and non-convertible debentures issued and outstanding as at September 30, 2019. 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 Accretion Repayments Balance, September 30, 2019 894,955 75,312 (91,127) 879,140 79,323 (99,609) 858,854 275,162 29,712 - 304,875 35,890 - 340,765 1,170,117 105,024 (91,127) 1,184,014 115,213 (99,609) 1,199,618 470,692 12,637 - 483,330 17,045 - 500,375 247,265 33,210 - 280,475 44,434 - 324,909 797,931 23,700 - 821,630 31,900 - 853,530 1,515,888 69,547 - 1,585,435 93,379 - 1,678,814 Less: current portion Non-current portion Balance, September 30, 2019 Equity component at September 30, 2019 and 2018 Conversion price per common share 108,504 763,692 858,854 $ 340,765 - 340,765 449,269 750,350 $ 1,199,619 $ - 500,375 500,375 324,909 - 324,909 $ $ - 853,530 853,530 324,909 1,353,905 $ 1,678,814 $ - - - - 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 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. 33 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 9. 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, 2019: 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, 2018 323,906 $ $ 4,438,906 Balance, September 30, 2017 Proceeds from loan Loan repayments during the period Balance, September 30, 2018 Proceeds from loan Loan repayments during the period Balance, September 30, 2019 2,268,700 - (111,120) 2,157,580 - (111,120) $ 2,046,460 348,500 - (123,000) 225,500 - (123,000) $ 102,500 28,080 - (12,480) 15,600 - (12,480) $ 3,120 129,870 - (39,960) 89,910 - (39,960) $ 49,950 162,240 - (49,920) 112,320 - (49,920) $ 62,400 - 323,906 (25,570) 298,336 - (101,640) $ 196,696 2,937,390 323,906 (362,050) 2,899,246 - (438,120) $ 2,461,126 Current Portion Non-current portion 111,120 1,935,340 102,500 - 3,120 - 39,960 9,990 49,920 12,480 101,640 95,056 $ 408,260 2,052,866 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, 2019, the rate was 6.55% (2018 – 5.80%). The loans are secured with the building and equipment. As at September 30, 2019, the commitments for the next five fiscal years and thereafter for the BDC loans is as follows: 2020 2021 2022 2023 2024 2025 and thereafter $ Amount 408,260 228,645 111,120 111,120 111,120 $ 1,490,861 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 expanded credit facility was made available on May 4, 2017. On September 18, 2019, the Company received approval from its Chartered Bank to increase the borrowing limit on its line of credit to $2.0 million. This line of credit bears interest at prime plus 2% (5.95% on September 30, 2019). As at September 30, 2019 the Company had drawn on $1,400,000 of the facility (2018 - $260,000). The Company’s usage of this facility varies across its manufacturing, sales and AR collection cycles. 34 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 9. LONG-TERM DEBT, BANK INDEBTEDNESS AND OTHER DEBT (Continued) b) 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. No further funds have been drawn since that date. 10. 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 consisted 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 and 2019 are presented below: Balance, September 30, 2018 and 2019 96,972,705 $ 33,912,460 Number of Shares Stated Capital 35 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 11. COMMON SHARE PURCHASE WARRANTS A continuity of the Company’s warrants outstanding as at September 30, 2019 and September 30, 2018 is presented in the following table: Balance, September 30, 2017 Issued Exercised Expired Balance, September 30, 2018 Issued Exercised Expired Balance, September 30, 2019 Weighted average exercise price $ 0.48 0.36 0.34 - $ 0.40 - - 0.55 $ 0.36 Units 8,331,313 6,839,081 (1,815) - 15,168,579 - - (3,449,763) 11,718,816 A summary of the Company’s warrants outstanding as at September 30, 2019 and September 30, 2018 is presented in the following table: September 30, 2019 September 30, 2018 Weighted average exercise price Number outstanding Weighted average remaining contractual life years Weighted average exercise price Number outstanding Weighted average remaining contractual life years 1,500,000 10,218,816 11,718,816 $ $ 0.55 0.33 0.36 1.03 1.37 1.32 4,949,763 10,218,816 15,168,579 $ 0.55 0.33 $ 0.40 1.24 2.37 2.00 Range of exercise prices: $0.47 to $0.55 $0.23 to $0.46 36 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 12. 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, 2019, the Company has a total of 7,738,000 options (2018 – 5,590,000) 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 than the market price at the date immediately preceding the date of the grant. In general, the Company’s stock option plan vests options in equal amounts across a period following their issue date. The options granted during this year and future options grants will generally be vested in a single step on the third anniversary date following their issue. 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, 2019 is as follows: Balance, September 30, 2017 Stock options exercised Stock options forfeited Stock options issued Balance, September 30, 2018 Stock options exercised Stock options forfeited Stock options issued Balance, September 30, 2019 Exercisable, September 30, 2019 Weighted average exercise price Units 6,470,000 (400,000) (480,000) - 5,590,000 - (22,000) 2,170,000 7,738,000 4,934,400 $ $ $ $ 0.39 0.26 0.54 - 0.39 - 0.54 0.23 0.35 0.38 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, 2019 and September 30, 2018: September 30, 2019 September 30, 2018 Weighted average exercise price Number outstanding Weighted average remaining contractual life years Weighted average exercise price Number outstanding Weighted average remaining contractual life years 2,418,000 5,320,000 7,738,000 $ $ $ 0.54 0.25 0.35 1.08 3.72 2.83 2,440,000 3,150,000 5,590,000 $ 0.54 $ 0.28 $ 0.39 2.08 4.18 3.41 Range of exercise prices: $0.54 $0.23 to $0.28 37 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 12. STOCK OPTION PLAN (Continued) The fair value of options granted during the year ended September 30, 2019 was estimated at the grant date using the Black-Scholes options pricing model, resulting in the following weighted-average assumptions: Option Grant Dates Share price on issue date Dividend yield Volatility Risk-free interest rate Expected option life (years) Weighted average fair value of each option ($ / option) Feb 2019 0.23 0% 67% 0.5% 5 0.13 $ $ Apr 2019 $ 0.25 0% 67% 0.5% 5 0.14 $ 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 $151,988 (2018 - $458,525). 13. INCOME (LOSS) PER SHARE Basic income (loss) 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 2019 2018 Numerator for basic income (loss) per share: Net income (loss) available to common shareholders $ 31,918 $ (8,621,566) Denominator for basic income (loss) per share: Weighted average common shares outstanding Effect of dilutive securities: Warrants Stock Options Convertible debentures 96,972,705 96,198,810 105,325 7,022 - - - - Denominator for diluted net income (loss) per share 97,085,052 96,198,810 Net income (loss) per share: Basic Diluted $0.000 $0.000 ($0.090) ($0.090) 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 2019 11,613,491 7,730,978 19,565,217 38,909,686 2018 15,168,579 5,590,000 19,565,217 40,323,796 38 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 14. EXPENSES BY NATURE The Company has chosen to present its consolidated statements of income (loss) and comprehensive income (loss) based on the functions of the entity and include the following expenses by nature: Depreciation and amortization Included in: Cost of goods sold General and administrative expenses Reasearch and development Total depreciation and amortization 2019 2018 $ $ 553,346 4,841 10,635 568,822 $ $ 526,958 951 162,169 690,078 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 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 2019 2018 $ 6,074,929 151,987 6,226,916 $ 5,797,619 180,121 5,977,740 $ $ 3,135,253 960,924 1,656,456 474,283 6,226,916 $ 3,222,526 788,367 1,551,893 414,954 5,977,740 $ 15. INCOME TAXES AND INVESTMENT TAX CREDITS Income taxes consist of the following, for the years ended September 30: Provision based on combined federal and provincial statutory rates of 25.00 % (2018 – 25.00%) Increase (decrease) resulting from: Non deductible expenses Stock-based compensation Change in deferred tax assets not recognized Adjustment in respect of income taxes of prior year and other Income tax expense 2019 $ 2018 $ 7,980 (2,155,391) 869 37,997 (274,083) 239,000 11,763 2,076 125,874 2,098,271 (70,830) - 39 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 15. INCOME TAXES AND INVESTMENT TAX CREDITS (Continued) The Company has unclaimed research and development expenses and accumulated losses for income tax purposes. Certain amounts 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 losses and expenses 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 $ 901,000 1,127,000 278,000 2,306,000 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 reserve Unclaimed research and development expenses Deferred income tax liability related to debentures Tax assets not recognized Deferred tax assets recognized 2019 2018 576,538 2,720,015 78,165 3,785,915 (913,213) (4,679,182) 1,568,237 595,897 2,606,720 95,811 3,908,332 (965,644) (4,661,116) 1,580,000 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. The unrecognized balance of federal research and development investment tax credits carried forward is $2,673,988, reduced by a deferred tax liability of $668,497. The credits expire between 2023 and 2039. The unrecognized balance of Ontario research and development tax credits carried forward is $142,464 and these credits expire between 2033 and 2039. 40 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 16. 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 17. FINANCIAL EXPENSES Cash interest: Interest on long-term debt Interest on debentures Interest other Interest income Non-cash interest: Accretion on debentures Financial expenses 18. CAPITAL MANAGEMENT 2019 2018 $ $ (395,990) (33,224) 70,764 24,373 (290,662) (303,976) (928,715) $ $ 24,008 20,138 (16,976) 57,547 (214,060) (1,075,358) (1,204,701) 2019 2018 $ 175,798 609,675 72,013 - 208,592 $ 1,066,078 $ $ 172,565 483,158 34,373 (172) 161,933 851,857 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 drawn portion of the revolving line of credit, shareholders’ equity, the Business Development Bank capital loans, and the debentures. The capital at September 30, 2019 was $17,276,967 (2018 - $16,282,197). 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 $2,000,000 with its Canadian chartered bank, Note 9. 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. 41 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 19. 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, 2019 and 2018, the Company has carried at fair value financial instruments in Level 1. At September 30, 2019, the Company’s only financial instrument measured at fair value is cash, which is considered to be a Level 1 instrument. There were no transfers between levels during the year. The three levels are defined as follows: a) Level 1: Fair value is based on unadjusted quoted prices for identical assets or liabilities in active markets. b) Level 2: Fair value is based on inputs other than quoted prices included within Level 1 that are not observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and c) Level 3: Fair value is based on valuation techniques that require one or more significant unobservable inputs. The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities. Date of valuation Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets measured at fair value: Cash 30-Sep-19 $ 95,571 - - Liabilities for which fair values are disclosed: Non-convertible debentures Convertible debentures Long-term-debt and other debt 30-Sep-19 30-Sep-19 30-Sep-19 - - - - - $ 1,199,618 1,678,814 $ 3,861,126 - 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 - - - - - 3,159,246 $ $ 1,184,014 1,585,435 - 42 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 19. FINANCIAL INSTRUMENTS (Continued) The fair value of a financial instrument is approximated by the consideration that would be agreed to in an arm’s length transaction between willing parties and through appropriate valuation methods, but considerable judgement is required for the Company to determine the value. The actual amount that could be realized in a current market exchange could be different than the estimated value. The fair values of financial instruments included in current assets and current liabilities approximate their carrying values due to their short-term nature. The fair value of the long-term debt is based on rates currently available for items with similar terms and maturities and is repriced to floating market interest rates and as such, the carrying value of the long-term debt and other debt approximates fair value. The convertible and non-convertible debenture fair values are estimated based on rates for items with similar terms and maturity. 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. 20. 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, 2019, five customers accounted for 78% (2018 - five customers accounted for 66%) of the outstanding balance. The Company has had minimal bad debts over the past several years and accordingly management has recorded an allowance of $25,625 (2018 - $10,000). Trade accounts receivable are aged as follows as at September 30: Current 0 - 30 days past due 31 - 60 days past due 61 days and over past due 2019 2018 $ 1,602,262 102,962 4,246 - $ 1,709,470 $ 1,171,341 117,975 18,686 5,478 $ 1,313,480 43 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 20. 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: Canadian Dollar Equivalents Cash Accounts receivable Accounts payable U.S. dollars Euros 2019 2018 2019 2018 $ 88,820 797,352 197,551 $ 42,557 652,429 204,696 $ 591,454 - 5,223 $ 247 314,402 - The Company’s revenue and expenses by foreign currency for the years ended September 30, 2019 and 2018 are as follows: Revenue Euros U.S. dollars Expenses U.S. dollars 2019 45% 53% 7% 2018 43% 53% 6% Based upon 2019 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 $354,100 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 $298,700. 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 $354,100 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 $298,700. 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 and sourcing of financing. Based on current funds available and expected cash flow from operating activities, management believes that the Company has sufficient funds available to meet its liquidity requirements for the foreseeable future. However, if cash from operating activities is significantly lower than expected, if the Company incurs major unanticipated expenses or the Company’s borrowings are called, it may be required to seek additional capital in the form of debt or equity or a combination of both. Management’s current expectations with respect to future events are based on currently available information and the actual outcomes may differ materially from those current expectations. 44 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 20. FINANCIAL RISK MANAGEMENT (Continued) 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 $2,000,000 line of credit that bears interest at the bank’s prime lending rate plus 2.0%. A 1% increase in the bank rate would cost the Company approximately $30,000 per year for BDC and about $20,000 on the line of credit usage if it were fully used throughout the fiscal year. 21. 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 2019 2018 Segment profit (loss) 2018 2019 Antigen Products and Technologies Lumisort ™ Kinlytic® Total for continuing operations $ 13,412,341 $ 12,510,558 - - - - $ 13,412,341 $ 12,510,558 $ 303,935 (156,901) (115,116) $ 31,918 $ (407,379) (8,101,911) (112,276) $ (8,621,566) Segment revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the current period (2018 - $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. Segmented assets and liabilities as at September 30 are as follows: Segment revenue 2019 2018 Segment liabilities 2019 2018 Antigen Products and Technologies Lumisort ™ Kinlytic® Total for continuing operations $ 14,982,751 $ 14,651,482 $ 7,692,165 $ 8,696,565 - - 3,078,585 $ 18,061,336 3,078,585 $ 17,730,067 - - - - $ 7,692,165 $ 8,696,565 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. During fiscal 2018, a decision was made to write-down all of the LumisortTM related assets. 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. 45 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 21. SEGMENTED INFORMATION (Continued) Segmented depreciation and amortization and additions to non-current assets as at September 30 are as follows: Depreciation and amortization 2019 2018 Additions to non-current assets 2019 2018 Antigen Products and Technologies Lumisort ™ Kinlytic® $ 568,822 - - $ 548,572 141,506 - $ 514,800 - - $ 1,102,089 434,021 - $ 568,822 $ 690,078 $ 514,800 $ 1,536,110 22. REVENUES AND 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 2019 2018 2019 2018 North America Europe Other foreign countries $ 4,958,987 8,129,031 324,323 $ 5,863,529 $ 13,177,265 $ 13,243,049 6,493,927 153,102 - - - - $ 13,412,341 $ 12,510,558 $ 13,177,265 $ 13,243,049 The following table reflects the movement in the Company’s deferred revenues: Balance, beginning of year $ 931,125 $ 1,145,185 Cash payments or advance payments on performance obligations Revenue recognized during the y ear 2,777,273 (3,067,935) 2,523,096 (2,737,156) Balance, end of year $ 640,463 $ 931,125 2019 2018 46 Canadian Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at and for the years ended September 30, 2019 and 2018 23. 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 24. COMMITMENTS AND CONTINGENCIES Lease commitments 2020 2021 2022 2023 2024 2025 and thereafter Payments on convertible and non-convertible debentures (Note 9) 2020 2021 2022 2023 2024 2025 and thereafter Contingencies 2019 2018 $ 927,603 99,945 $ 1,027,548 $ $ 901,575 403,743 1,305,318 Amount 168,770 168,308 133,768 11,339 - - 482,185 $ $ $ Amount 709,242 709,242 1,657,992 604,242 604,242 6,527,924 $ 10,812,884 The Company is not party to any legal proceedings arising out of the normal course of business. 25. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2019 consolidated financial statements. 47 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 DIRECTORS Peter M. Blecher Ontario, Canada Medical Director Centres for Pain Management 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 Financial Officer Kenneth Hughes Chief Operating Officer Dr. Mark Luscher Senior Vice-President, Scientific Affairs Phillip Casselli Senior Vice-President, Sales & Business Development Kevin J. Cassidy Vice-President, Biopharmaceuticals Christopher B. Lobb General Counsel & Secretary 48 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 

Continue reading text version or see original annual report in PDF format above