Ondine Biomedical Inc.

Consolidated Statements of Cash Flows

(In thousands of Canadian dollars)

The accompanying notes are an integral part of these consolidated financial statements.

Ondine Biomedical Inc.

Consolidated Statements of Cash Flows

 (In thousands of Canadian dollars)

Cash and restricted cash are comprised of:                                                                                

The accompanying notes are an integral part of these consolidated financial statements.

Ondine Biomedical Inc.

Notes to the Consolidated Financial Statements

Year ended December 31, 2023 and 2022

(In thousands of Canadian dollars, except as otherwise indicated)

1.      Nature of operations and going concern

Ondine Biomedical Inc. (the "Company") was incorporated under the British Columbia Business Corporations Act on September 9, 1996. The Company is a biotechnology company engaged in the development and commercialization of innovative anti-infective therapies covering a broad spectrum of bacterial, fungal and viral infections primarily using antimicrobial photodynamic therapy ("aPDT") as a platform technology for its products, which are used as an alternative to the use of antibiotics. The Company's aPDT products employ laser-based activation of proprietary compounds to treat a wide range of medical infections. The address of the Company's corporate office is 888-1100 Melville Street, Vancouver, BC, Canada. The common shares of the Company are listed on the AIM Market of the London Stock Exchange under the symbol "OBI.L".

These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to meet its obligations and continue its operations in the normal course of business for at least twelve months from December 31, 2023.

The Company has a history of incurring significant losses and as at December 31, 2023, had an accumulated deficit of $266,334 (December 31, 2022 - $251,922). As at December 31, 2023, the Company had a cash and cash equivalents balance of $2,981 (December 31, 2022 - $13,125) and a positive working capital balance of $1,260 (December 31, 2022 - $11,222). In the year ended December 31, 2023, cash used in operating activities totaled $13,653 (December 31, 2022 - $16,345).

The Company's ability to continue as a going concern is dependent on its ability to develop profitable operations and/or to continue to obtain the necessary financing to meet its corporate expenditures and discharge its liabilities in the normal course of business. The Company will need to raise funds through public or private equity and/or debt financings. Although the Company has been successful in raising finance in the past there can be no assurance that it will be successful in the future. If the Company is unable to generate positive cash flows or obtain adequate financing, the Company may need to curtail operations. These factors give rise to material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern. The consolidated financial statements do not give effect to adjustments to carrying values and to the classification of assets and liabilities that would be required if the Company were unable to continue as a going concern and such adjustments could be material.

2.      Basis of preparation

(a) Statement of compliance

These consolidated financial statements have been presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS Accounting Standards").

Certain comparative figures have been reclassified to conform to the current year's presentation. The reclassifications have no effect on the previously reported assets, liabilities and previously reported net loss for the year ended December 31, 2022.

The consolidated financial statements were approved and authorized for issue by the Board of Directors on June 6, 2024.

(b) Basis of measurement

The consolidated financial statements have been prepared on a going concern basis under the historical cost basis as stated in the accounting policies. The expenses within the consolidated statements of loss and comprehensive loss are presented by function. Refer to Note 19 for details of expenses by nature.

(c) Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars. The parent company's functional currency is Canadian dollars while the functional currency of the Company's subsidiaries are their respective local currencies, except Ondine International Holdings Ltd and Ondine International A.G. whose functional currencies are United States dollars.

(d) Use of estimates, assumptions and judgments

The preparation of consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on management's knowledge of current events and actions the Company may undertake in the future, actual results may differ from the estimates and the differences may be material.

Estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates, if any, are recognized in the year in which the estimates are revised and in any future years affected. Significant judgments, estimates and assumptions used in applying the Company's accounting policies that have the most significant effects on the amounts in the consolidated financial statements are summarized below.

Significant judgments:

Going concern

Management applied judgment in determining that there are material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern. The assessment of the Company's ability to continue as a going concern and to raise sufficient funds to pay for its ongoing corporate expenditures, discharge its liabilities for the ensuing year, and to fund planned development and commercialization of its products, involves significant judgment based on historical experience and other factors including expectation of future events that are believed to be reasonable under the circumstances.

Revenue recognition

Determining whether the goods are considered distinct performance obligations requires judgment. Management exercises judgment to evaluate these arrangements to determine whether the goods are considered distinct performance obligations that should be accounted for separately from each other. A good is distinct if the customer can benefit from it on its own or together with other readily available resources and the Company's promise to transfer the good is separately identifiable from other promises in the contract. Management has determined that the goods are distinct performance obligations. Where a contract consists of more than one performance obligation, revenue is allocated to each based on their standalone selling price.

Estimates, assumptions, and changes in estimates:

Bonus accrual

During the twelve months ended December 31, 2023, the Company reassessed the initial estimates of the employees and managements' performance against the established criteria, leading to a change in estimate of the bonus accrual. This change primarily reflects the nonperformance of the established criteria. The effect of these changes on actual bonus expenses, included in 'research and development' and 'general and administration', in the consolidated statement of comprehensive income, is a decrease of $300 and $583, respectively, for 2023.

Provision for excess and obsolete inventory

A significant estimate for the Company is its allowance for excess and obsolete inventory. The allowance is based upon management's assessment of a variety of factors, including, among other things, expected selling prices, technological change, product obsolescence, regulatory clearance timeframes, and the demand for the Company's products in the market as compared to the number of units currently on hand.

Share-based payments

Share-based payment charges are determined using the Black-Scholes option pricing model ("Black-Scholes model") based on estimated fair values of all share-based awards at the date of grant and are expensed to the statement of loss and comprehensive loss over each awards' vesting period. The Black Scholes model utilizes subjective assumptions such as expected fair value of shares, volatility, expected life of the options, risk free interest rate, forfeiture rates and applicable future performance conditions and exercise patterns.

Share-based compensation provided to a consultant takes into account the number of warrants expected to vest based on achieving different milestones in relation to regulatory approval. It is reasonably possible that future estimates of the actual outcome and timing may be different than assumptions used in the preparation of these consolidated financial statements and a material change in share-based compensation reflected in the consolidated statement of loss and comprehensive loss may occur.

Income taxes

The Company's operations are conducted in multiple jurisdictions with complex tax laws and regulations that can require significant interpretation. As such is the case, the Company and the tax authorities could disagree on tax filing positions and any reassessment of the Company's filing positions could result in material adjustments to tax expense, taxes payable and deferred income taxes.

3.    Material accounting policies

The accounting policies below have been applied consistently by the Company and all of its subsidiaries.

(a)                Basis of consolidation

The consolidated financial statements include the accounts of the Company and its principal subsidiaries:

Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns though its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intercompany balances and transactions are eliminated in the consolidated financial statements.

b)  Foreign currency

The consolidated financial statements are presented in Canadian dollars.

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of the Company's subsidiaries at exchange rates as at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rates in effect at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate in effect when the fair value was determined. Foreign currency differences are generally recognized in net income/(loss). Non-monetary items that are measured based on historical cost in a foreign currency are translated to the functional currency using the exchange rate in effect at the date of the transaction giving rise to the item.

Foreign operations

The assets and liabilities of foreign operations are translated to the presentation currency using exchange rates at the reporting date. The income and expenses of foreign operations are translated to the presentation currency using the monthly average exchange rates. Foreign currency differences are recognized in other comprehensive income/(loss).

(c) Cash and restricted cash

Cash includes cash on hand and restricted cash deposits relating to the acquisition of common shares of Ondine International A.G.

(d) Inventory

Inventory cost includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories, cost includes an appropriate share of production under normal operating capacity.

Raw materials are recorded at the lower of cost, determined on a specific item basis, and replacement cost. Finished goods are recorded at the lower of weighted average cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. The Company assesses the net realizable value of inventory at each reporting date.

(e) Financial instruments

(i) Financial assets

All financial assets are initially recorded at fair value and upon initial recognition are classified as those to be measured subsequently at fair value (either through other comprehensive income ("FVOCI") or profit or loss ("FVTPL")) or those to be measured at amortized cost. The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification.

Financial assets classified as amortized cost are measured using the effective interest method less any allowance for impairment. The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period.

Financial assets classified as FVOCI are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary or a significant or prolonged decline in the fair value of that investment below its cost. Such losses are recorded in the consolidated statements of loss and comprehensive loss. The Company does not have any financial assets classified as FVOCI.

Transaction costs associated with FVTPL financial assets are expensed as incurred while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset and amortized to profit or loss as part of the application of the effective interest method.

In accordance with IFRS 9, Financial Instruments ("IFRS 9"), all of the Company's financial assets, which consist primarily of cash and accounts receivable, are categorized at amortized cost.

(ii) Financial liabilities

All financial liabilities are initially recorded at fair value and upon initial recognition are either designated as FVTPL or classified as amortized cost.

Financial liabilities classified as amortized cost are initially recognized at fair value less directly attributable transaction costs and, after initial recognition, are subsequently measured at amortized cost using the effective interest method. Financial liabilities designated as FVTPL include financial liabilities designated upon initial recognition as FVTPL. Derivatives are also classified as FVTPL unless they are designated as effective hedging instruments. Transaction costs on financial liabilities designated as FVTPL are expensed as incurred. Fair value changes on financial liabilities designated as FVTPL are recognized through profit or loss.

(iii) Derecognition of financial assets and liabilities

Financial assets are derecognized when the rights to receive cash flows from the assets expire or the financial assets are transferred and the Company has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized directly in equity is recognized in profit or loss.

Financial liabilities are derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

(f) Property and equipment

Items of property and equipment are measured at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes any expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management. Gains and losses on the disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment.

During the twelve months ended December 31, 2023, the Company conducted a review of its property and equipment and the timing of which economic benefits are derived from its use. This resulted in a change in estimate for the Company's depreciation method from declining balance to straight-line for the assets under the categories of computer equipment, laboratory and office equipment, furniture and fixtures, and manufacturing equipment and tools. The estimated useful lives of the assets have not changed. The annual effect of these changes on actual and expected depreciation expenses, included in 'depreciation and amortization' and 'cost of goods sold' in the consolidated statement of comprehensive income, is as follows.

Depreciation is calculated on a straight-line balance basis over their useful lives and are generally recognized in profit or loss.

Estimated useful lives of property and equipment are as follows:

Depreciation methods, useful lives and residual values are reviewed at the reporting date and adjusted as appropriate.

(g) Impairment

(i)     Impairment of financial assets

An expected credit loss ("ECL") model applies to financial assets measured at amortized cost and debt investments at FVOCI, but not to investments in equity instruments. The Company's financial assets measured at amortized cost and subject to the ECL model consist primarily of accounts receivable.

The Company measures the loss allowance on accounts receivable at an amount equal to the lifetime ECL. To measure ECL on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Company's historical credit losses experienced and are updated to reflect the effects of the current conditions and forecasts of future conditions that did not affect the period on which the historical data is based.

Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to make contractual payments for a period of greater than 90 days past due.

(ii) Impairment of non-financial assets

Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs of disposal, the asset is written down to its recoverable amount. An impairment loss is charged to profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows ("cash generating units" or "CGU"s). These are typically individual properties or projects.

(h) Share capital

Financial instruments issued by the Company are treated as equity only to the extent that they do not meet the definition of a financial liability. Common shares are classified as equity instruments. Costs incurred to issue shares are deferred until the shares are issued, at which time these costs are charged against share capital.

(i) Share-based payments

The Company grants stock options and warrants to employees, directors, officers and consultants pursuant to the stock option plan described in Note 12. The fair value method of accounting for share-based compensation transactions is used.

For graded vested share options, IFRS 2, Share-based Payment ("IFRS 2") requires the use of the attribution method, which requires that the Company treat each installment as a separate share option grant with a different fair value.

The fair value of share-based payments to non-employees is based on the fair value of the goods or services received, when these can be measured reliably. In the event that no reliable measurement can be made, the fair value of the options and warrants granted will be used.

(j) Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income (loss).

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(k) Provisions

Provisions are recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of resources will be required to settle the obligation. Provisions are determined by discounting the expected future cash outflows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Management uses judgment to estimate the amount, timing and probability of the liability based on facts known at the reporting date. The unwinding of the discount is recognized as a finance cost.

(l) Revenue recognition

The Company generates revenues from sales of hardware and consumables. Hardware sales consist of lasers. Consumable sales consist of single use disposable treatment kits. Product revenues are derived primarily from standard direct order product sales. The Company has contracts with customers to deliver both lasers and consumables as part of a single arrangement.

Revenue is allocated to the respective performance obligation based on relative transaction prices and is recognized as goods are delivered to the customer. Revenue is measured as an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Revenue from the sale of products in the normal course of activities is measured at the fair value of the consideration received or receivable, net of returns and trade discounts. The Company recognizes revenue when customers obtain control of the product, which is when transfer of title of ownership of goods have passed and when there is a present right to payment. Invoices are generated and revenue is recognized at that point in time. 

(m) Government grants and subsidies

Government grants related to income are presented as part of profit or loss as incurred, either as other income or deducted from the related expense. A forgivable loan from the government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan. When the criteria for forgiveness has been satisfied and forgiveness can be reasonably assured, the loan balance is released to the consolidated statement of comprehensive income.

(n) Research and development

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in the Company's consolidated statements of loss and comprehensive loss as incurred.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized will include the cost of materials, direct labor and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditures are expensed as incurred. Capitalized development expenditures will be measured at cost less accumulated amortization and accumulated impairment losses.

To date, all of the research and development ("R&D") costs have been expensed as all of the criteria for capitalization have not yet been met. 

(o) Loss per share

Basic loss per share is calculated by dividing the loss for the year attributable to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflects the potential dilution of securities that could share in earnings of an entity. For years, where the issue of shares upon the exercise of stock options and/or warrants would be anti-dilutive, diluted loss per common share is the equivalent to basic loss per common share.

(p) New and amended standards adopted by the group

The Company adopted the narrow-scope amendments to IAS 8 - Accounting Policies, Change in Accounting Estimates and Errors effective February 1, 2023. These amendments clarify how companies distinguish changes in accounting policies from changes in accounting estimates. These amendments had no material impact on the financial statements.

The Company adopted the narrow-scope amendments to IAS 1 - Presentation of Financial Statements effective February 1, 2023. These amendments improve accounting policy disclosures. These amendments had no material impact on the financial statements.

(q) New standards and interpretations not yet adopted

Certain amendments to accounting standards have been published that are not mandatory for January 1, 2024 reporting periods and have not been early adopted by the group. These amendments are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

4.     Accounts and other receivables

5.     Inventory

During the year ended December 31, 2023, raw materials, work-in-progress and finished goods included in cost of goods sold amounted to $472 (December 31, 2022 - $252). During the year ended December 31, 2023 and 2022, inventory valued at $11 and $69, respectively, was written off and reflected within cost of goods sold.

6.     Prepaids and deposits, and non-current assets

During the year ended December 31, 2023, the Company wrote-off $nil of prepaid assets that are unlikely to be realized (December 31, 2022 - $1,330).