Interim Consolidated Financial Statements
(unaudited)

Oncolytics Biotech® Inc.
September 30, 2018 and 2017





ONCOLYTICS BIOTECH INC.
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)

As at
Notes
September 30,
2018
$
December 31,
2017
$
Assets
 
 

 

Current assets
 
 

 

Cash and cash equivalents
4
16,214,347

11,836,119

Contract receivable
8

4,767,100

Other receivables
 
56,895

37,726

Prepaid expenses
 
1,450,030

1,176,063

Total current assets
 
17,721,272

17,817,008

Non-current assets
 
 

 

Property and equipment

428,588

333,441

Total non-current assets
 
428,588

333,441







Total assets
 
18,149,860

18,150,449

Liabilities And Shareholders’ Equity
 
 

 

Current Liabilities
 
 

 

Accounts payable and accrued liabilities

2,239,514

3,684,023

Contract liability
8
927,400

1,545,645

Other liabilities
9
76,529


Total current liabilities
 
3,243,443

5,229,668

Non-current liabilities
 
 
 
Contract liability
8
5,802,887

4,636,935

Other liabilities
9
54,128


Total non-current liabilities

5,857,015

4,636,935

 
 
 
 
Total liabilities

9,100,458

9,866,603

Commitments and contingencies
9




Shareholders’ equity
 
 

 

Share capital
  Authorized: unlimited
  Issued:
September 30, 2018 – 16,915,325
December 31, 2017 – 141,805,722 pre-consolidation
December 31, 2017 – 14,926,840 post-consolidation
5
283,742,409

271,710,138

Warrants
5
3,617,570

3,617,900

Contributed surplus
6
27,894,420

27,028,238

Accumulated other comprehensive income

459,142

373,730

Accumulated deficit

(306,664,139
)
(294,446,160
)
Total shareholders’ equity
 
9,049,402

8,283,846

Total liabilities and equity
 
18,149,860

18,150,449

See accompanying notes



2






ONCOLYTICS BIOTECH INC.
INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(unaudited)


Notes
Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$
 
 
 
 
 
 
Expenses
 
 
 
 

 

   Research and development
6, 13, 14
1,929,405

1,726,726

6,909,713

6,913,470

   Operating
6, 13, 14
1,468,262

1,309,607

4,869,617

4,054,450

Loss before the following
 
(3,397,667
)
(3,036,333
)
(11,779,330
)
(10,967,920
)
   Interest
 
61,880

31,759

109,308

96,637

Loss before income taxes
 
(3,335,787
)
(3,004,574
)
(11,670,022
)
(10,871,283
)
   Income tax (expense) recovery

(79
)
168

(547,957
)
16

Net loss
 
(3,335,866
)
(3,004,406
)
(12,217,979
)
(10,871,267
)
Other comprehensive (loss) income items that may be reclassified to net loss

 
 




  Translation adjustment

(49,238
)
(126,846
)
85,412

(192,334
)
Net comprehensive loss

(3,385,104
)
(3,131,252
)
(12,132,567
)
(11,063,601
)
Basic and diluted loss per common share
7
(0.20
)
(0.20
)
(0.78
)
(0.80
)
Weighted average number of shares (basic and diluted)
7
16,540,612

14,685,871

15,646,117

13,625,411

See accompanying notes

3




ONCOLYTICS BIOTECH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)

Notes
Share Capital
$
Warrants
$
Contributed Surplus
$
Accumulated Other Comprehensive Income
$
Accumulated Deficit
$
Total
$
As at December 31, 2016
 
262,321,825


26,643,044

554,060

(278,829,309
)
10,689,620

Net loss and other comprehensive loss
 



(192,334
)
(10,871,267
)
(11,063,601
)
Issued pursuant to "At the Market" agreement
5
1,479,065





1,479,065

Issued pursuant to public offering
5
7,893,600

3,617,900




11,511,500

Issued pursuant to stock option plan
6
536,949


(193,509
)


343,440

Share based compensation
6


438,044



438,044

Share issue costs
5
(1,331,770
)




(1,331,770
)
As at September 30, 2017
 
270,899,669

3,617,900

26,887,579

361,726

(289,700,576
)
12,066,298


 











As at December 31, 2017
 
271,710,138

3,617,900

27,028,238

373,730

(294,446,160
)
8,283,846

Net loss and other comprehensive income
 



85,412

(12,217,979
)
(12,132,567
)
Issued pursuant to "At the Market" agreement
5
553,650





553,650

Issued pursuant to public offering
5
11,606,882





11,606,882

Issued pursuant to Common Stock Purchase Agreement
5
1,906,152





1,906,152

Issued pursuant to stock option plan
6
178,322


(66,635
)


111,687

Issued pursuant to warrant agreement
5
1,747

(330
)



1,417

Share based compensation
6


932,817



932,817

Share issue costs
5
(2,214,482
)




(2,214,482
)
As at September 30, 2018
 
283,742,409

3,617,570

27,894,420

459,142

(306,664,139
)
9,049,402

See accompanying notes


4






ONCOLYTICS BIOTECH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
 
Notes
Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$

 
 
 
 

 

Operating Activities
 
 
 
 

 

Net loss for the period
 
(3,335,866
)
(3,004,406
)
(12,217,979
)
(10,871,267
)
Depreciation - property and equipment
13
26,698

20,591

67,682

70,315

Share based compensation
6, 13, 14
236,607

148,447

932,817

438,044

Unrealized foreign exchange loss (gain)

82,643

(6,414
)
(19,702
)
(119,058
)
Onerous lease contract
9, 13
67,588


67,588


Amortization - lease incentive liability
9, 13
12,494


12,494


Net change in non-cash working capital
12
(596,779
)
(331,590
)
3,630,991

(1,186,142
)
Cash used in operating activities
 
(3,506,615
)
(3,173,372
)
(7,526,109
)
(11,668,108
)
Investing Activities
 
 
 
 

 

Acquisition of property and equipment
 
(40,094
)
(9,451
)
(120,156
)
(95,337
)
Redemption of short-term investments
 



2,088,800

Cash (used in) provided by investing activities
 
(40,094
)
(9,451
)
(120,156
)
1,993,463

Financing Activities
 
 
 
 

 

Proceeds from "At the Market" equity distribution agreement
5

733,171

520,315

1,292,698

Proceeds from public offering
5


10,188,526

10,366,098

Proceeds from Common Stock Purchase Agreement
5
1,143,361


1,143,361


Proceeds from exercise of options
6
87,777

48,090

111,687

343,440

Proceeds from exercise of warrants
5


1,417


Cash provided by financing activities
 
1,231,138

781,261

11,965,306

12,002,236

(Decrease) increase in cash
 
(2,315,571
)
(2,401,562
)
4,319,041

2,327,591

Cash and cash equivalents, beginning of period
 
18,741,347

16,676,298

11,836,119

12,034,282

Impact of foreign exchange on cash and cash equivalents
 
(211,429
)
(241,092
)
59,187

(328,229
)
Cash and cash equivalents, end of period
 
16,214,347

14,033,644

16,214,347

14,033,644

See accompanying notes

5


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018


Note 1: Incorporation and Nature of Operations
 
Oncolytics Biotech Inc. was incorporated on April 2, 1998 under the Business Corporations Act (Alberta) as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech Inc.

Our interim consolidated financial statements for the period ended September 30, 2018, were authorized for issue in accordance with a resolution of the Board of Directors (the "Board") on November 8, 2018. We are a limited company incorporated and domiciled in Canada. Our shares are publicly traded and our registered office is located at 210, 1167 Kensington Crescent NW, Calgary, Alberta, Canada.

We are a development stage biopharmaceutical company that focuses on the discovery and development of pharmaceutical products for the treatment of cancers that have not been successfully treated with conventional therapeutics. Our lead product, pelareorep, is a potential immuno-oncology viral-agent that may be a novel treatment for certain types of cancer and may be an alternative to existing cytotoxic or cytostatic therapies. Our clinical development program for pelareorep emphasizes three programs: chemotherapy combinations to assist the escape of the virus from the vasculature and enhance its distribution in the tumor; immuno-therapy combinations to create an inflamed phenotype promoting synergies with immune checkpoint inhibitors; and immune modulator/targeted combinations to upregulate natural killer cells promoting synergies with targeted therapies.

Note 2: Basis of Financial Statement Presentation

Our interim consolidated financial statements include our financial statements and the financial statements of our subsidiaries as at September 30, 2018 and are presented in Canadian dollars, our functional currency.
Our accounts are prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"). The accounts are prepared on the historical cost basis, except for certain assets and liabilities which are measured at fair value as explained in the notes to these financial statements.
These interim consolidated financial statements have been prepared in compliance with International Accounting Standard 34 Interim Financial Reporting. The notes presented in these interim consolidated financial statements include only significant events and transactions occurring since our last fiscal year end and are not fully inclusive of all matters required to be disclosed in our annual audited consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with our most recent annual audited consolidated financial statements, for the year ended December 31, 2017. We have consistently applied the same accounting policies for all periods presented in these interim consolidated financial statements as those used in our audited consolidated financial statements for the year ended December 31, 2017, except for the adoption of new standards effective as of January 1, 2018.

Note 3: Significant Accounting Policies

Adoption of New Accounting Standards

IFRS 9 Financial Instruments
IFRS 9 Financial Instruments ("IFRS 9") replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018. IFRS 9 includes guidance on the classification and measurement of financial assets and financial liabilities and impairment of financial assets.

We have applied IFRS 9 retrospectively, with the initial application date of January 1, 2018. There were no changes to the measurement of our financial assets and liabilities or adjustments to comparative information as a result of the adoption of IFRS 9.

6


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018


(a)
Classification and measurement
Financial assets
Financial assets are initially measured at fair value. In the case of a financial asset not at fair value through profit or loss, the financial asset is initially measured at fair value plus or minus transaction costs.

Under IFRS 9, financial assets are subsequently measured at amortised cost, fair value through profit or loss (FVPL), or fair value through other comprehensive income (FVOCI). The classification is based on two criteria: the Company’s business model for managing the assets; and whether the financial asset’s contractual cash flows represent ‘solely payments of principal and interest’ on the principal amount outstanding (the ‘SPPI criterion’).

Our financial assets include cash and cash equivalents and other receivables. The classification and measurement of these financial assets are at amortized cost, as these assets are held within our business model with the objective to hold the financial assets in order to collect contractual cash flows that meet the SPPI criterion. Under IAS 39, our financial assets were classified as follows: cash and cash equivalents - held for trading and other receivables - loans and receivables. The accounting for our financial assets remained the same as it was under IAS 39.

Financial liabilities
Financial liabilities are initially measured at fair value and are subsequently measured at amortised cost. The accounting for our financial liabilities remained the same as it was under IAS 39.

(b)
Impairment
Under IFRS 9, accounting for impairment losses for financial assets uses a forward-looking expected credit loss (ECL) approach.

IFRS 9 requires that we record a loss allowance for ECLs on all financial assets not held at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.

We have applied the simplified approach permitted by IFRS 9 and calculated ECLs based on lifetime expected credit losses. We have established a provision matrix that is based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

There were no adjustments in impairment allowances of our financial assets as a result of the adoption of the ECL requirements of IFRS 9.

Accounting Standards Issued but Not Yet Effective

IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases ("IFRS 16"), which replaces IAS 17 Leases and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. The new standard is effective for annual periods beginning on or after January 1, 2019. We are assessing the impact of adoption of the standard on our consolidated financial statements.

Note 4: Cash Equivalents
 
Cash Equivalents
Cash equivalents consist of interest bearing deposits with our bank totaling $11,557,503 (December 31, 2017$9,204,919).  The current annual interest rate earned on these deposits is 2.12% (December 31, 20171.38%).



7


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 5: Share Capital
Authorized:
Unlimited number of no par value common shares

Share Consolidation:
On May 22, 2018, we completed the consolidation of our common shares on the basis of 9.5 pre-consolidation common shares for each one post-consolidation common share (the "Share Consolidation"). Fractional interests were rounded down to the nearest whole number of common shares. Outstanding stock options, restricted share units and performance share units were similarly adjusted by the consolidation ratio. Outstanding warrants were adjusted such that, following the Share Consolidation, 9.5 2017 warrants will entitle the holder to purchase one whole common share until June 1, 2022.
Issued:
Shares
Warrants
 
Number
Amount
$
Number
Amount
$
Balance, December 31, 2016
121,258,222

262,321,825



Issued pursuant to stock option plan
801,000

536,949



Issued pursuant to "At the Market" equity distribution agreement(a)
3,301,500

2,348,821



Issued pursuant to public offering(b)
16,445,000

7,893,600

16,445,000

3,617,900

Share issue costs

(1,391,057
)


Balance, December 31, 2017
141,805,722

271,710,138

16,445,000

3,617,900

Issued pursuant to "At the Market" equity distribution agreement(a)
519,500

553,650



Share issue costs

(33,335
)


Balance, March 31, 2018
142,325,222

272,230,453

16,445,000

3,617,900

Issued pursuant to stock option plan
71,000

38,269



Balance, May 22, 2018 - pre-consolidation
142,396,222

272,268,722

16,445,000

3,617,900

Balance, May 22, 2018 - post-consolidation
14,988,995

272,268,722

16,445,000

3,617,900

Issued pursuant to public offering(c)
1,532,278

11,606,882



Issued pursuant to warrant agreement(b)
157

1,747

(1,500
)
(330
)
Issued pursuant to stock option plan
30,119

140,053



Issued pursuant to Common Stock Purchase Agreement(d)
363,776

1,906,152



Share issue costs

(2,181,147
)


Balance, September 30, 2018
16,915,325

283,742,409

16,443,500

3,617,570


(a)
On February 25, 2016, we entered into an "at-the-market" ("ATM") equity distribution agreement with Canaccord Genuity Inc. acting as our sole agent with an aggregate offering value of up to $4.6 million which allows us to sell our common shares through the facilities of the Toronto Stock Exchange or other "marketplace” (as defined in National Instrument 21-101 Marketplace Operation) in Canada (our "Canadian ATM"). Subject to the terms of our Canadian ATM, we are able to determine, at our sole discretion, the timing and number of shares to be sold under this ATM facility. During the period ending September 30, 2018, we sold 519,500 pre-consolidation shares (approximately 54,684 post-consolidation shares) (2017 - 2,167,500 pre-consolidation shares (approximately 228,157 post-consolidation shares)) for gross proceeds of $553,650 (2017 - $1,479,065). We incurred share issue costs of $33,335 (2017 - $186,367).

(b)
On June 1, 2017, pursuant to an underwritten public offering, 16,445,000 units were sold at a purchase price of $0.70 per unit for gross proceeds of $11,511,500. Each unit included one pre-consolidation common share with an ascribed value of $0.48 (0.106 post-consolidation common share with an ascribed value of $4.56) and one pre-consolidation common share purchase warrant with an ascribed value of $0.22 (one post-consolidation common share purchase warrant with an ascribed value of

8


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

$2.09). Each pre-consolidation common share purchase warrant entitled the the holder to purchase one pre-consolidation common share at an exercise price of $0.95. Following the Share Consolidation, 9.5 pre-consolidation common share purchase warrants entitles the holder to purchase one post-consolidation common share in the capital of the Company until June 1, 2022, at an exercise price of approximately $9.025. The post-consolidation common share purchase warrants will be subject to acceleration if the volume weighted average price of the Company's common shares equals or exceeds $23.75 for 15 consecutive trading dates. The ascribed value was determined using the relative fair value method. The ascribed value of the common share purchase warrants was determined using the Black Scholes option pricing model. We incurred share issue costs of $1,145,402.

(c)
On June 5, 2018, pursuant to an underwritten public offering, 1,532,278 common shares were sold at a purchase price of US$5.83 per share for gross proceeds of US$8,933,181. We incurred share issue costs of $1,418,356.

(d)
On September 27, 2018, we entered into a Common Stock Purchase Agreement (the "Agreement") with Lincoln Park Capital Fund, LLC ("LPC"). Subject to the terms and conditions of the Agreement and at our sole discretion, we may sell up to US$26,000,000 worth of common shares to LPC over the 30-month term. The purchase price of the common shares will be based on the prevailing market prices immediately preceding the notice of sale without any fixed discount. Subject to the terms of the Agreement, we control the timing and amount of any future investment and LPC is obligated to make such purchases, if and when we elect. The Agreement does not impose any upper price limit restrictions, negative covenants or restrictions on our future financing activities. We can terminate the Agreement at any time at our sole discretion without any monetary cost or penalty.

Upon signing of the Agreement, LPC purchased 248,762 common shares for gross proceeds of US$1,000,000. In consideration for entering into the Agreement, we issued an initial commitment fee of 110,754 common shares to LPC valued at fair value of US$455,000. An additional 110,754 common shares will be issued on a pro rata basis under the terms of the Agreement as an additional commitment fee. We issued 4,260 additional commitment fee common shares valued at fair value of US$17,501. The initial commitment fee and additional commitment fee common shares were recorded as share issue costs in addition to cash share issue costs of $151,139.

Warrants

The following table summarizes our outstanding warrants at September 30, 2018:
Exercise Price
Outstanding, Beginning of the Period
Granted During the Period
Exercised During the Period
Outstanding, End of the Period
Weighted Average Remaining Contractual Life (years)
$
9.025

16,445,000


(1,500
)
16,443,500

3.67




9


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 6: Share Based Payments

On May 22, 2018, we completed our Share Consolidation (see Note 5), as a result, all stock option and share award disclosures have been retrospectively adjusted to reflect the Share Consolidation.
Stock Option Plan
We have issued stock options to acquire common stock through our stock option plan of which the following are outstanding at September 30:
 
2018
2017
 
Stock Options
Weighted Average Exercise Price
$
Stock Options
Weighted Average Exercise Price
$
Outstanding, beginning of the period
647,156

13.20
912,995

17.42
Granted during the period
327,467

7.38
31,049

4.30
Forfeited during the period
(90,817
)
11.74
(73,887
)
30.94
Expired during the period

(1,882
)
21.38
Exercised during the period
(37,592
)
2.97
(84,315
)
4.07
Outstanding, end of the period
846,214

11.56
783,960

17.05
Options exercisable, end of the period
598,222

13.56
636,752

20.16

The following table summarizes information about the stock options outstanding and exercisable at September 30, 2018:
Range of Exercise Prices
Number Outstanding
Weighted Average Remaining Contractual Life (years)
Weighted Average Exercise Price
$
Number Exercisable
Weighted Average Exercise Price
$
$2.47 - $3.99
293,037

7.7
3.36
256,247

3.29
$4.84 - $7.81
345,932

4.1
7.19
134,730

7.13
$13.77 - $19.00
95,535

4.8
16.90
95,535

16.90
$20.23 - $36.96
53,038

3.0
32.16
53,038

32.16
$38.09 - $63.84
58,672

3.2
50.92
58,672

50.92
 
846,214

5.3
11.56
598,222

13.56
Non-exercisable options vest annually over periods ranging from one to three years.
The estimated fair value of stock options issued during the period was determined using the Black Scholes Option Pricing Model using the following weighted average assumptions and fair value of options:
 
2018
2017
Risk-free interest rate
1.89%
1.06%
Expected hold period to exercise
3.0 years
 3.0 years
Volatility in the price of the Company's shares
83.94%
92.43%
Rate of forfeiture
3.67%
3.67%
Dividend yield
Nil
Nil
Weighted average fair value of options
$4.03
$2.52


10


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

We use historical data to estimate the expected dividend yield and expected volatility of our stock in determining the fair value of the stock options. The risk-free interest rate is based on the Government of Canada benchmark bond yield rates in effect at the time of grant and the expected life of the options represents the estimated length of time the options are expected to remain outstanding.
Incentive Share Award Plan
Restricted Share Units
We have issued restricted share units ("RSUs") to non-employee directors through our incentive share award plan. Grants of RSUs to non-employee directors vest either on the third anniversary date from the grant date or when the director ceases to be a member of the board. We have also issued RSUs to certain officers and employees of the Company. Grants of RSUs to certain officers and employees of the Company vest over a three year period. The following RSUs are outstanding at September 30:
 
2018
2017
Outstanding, beginning of the period
190,407

139,237

Granted during the period
8,891

21,593

Forfeited during the period
(2,105
)

Outstanding, end of the period
197,193

160,830

(1)The weighted average fair value of the RSUs granted was $6.27 in 2018 (2017 - $5.43).
Performance Share Units
We have also issued performance share units ("PSUs") to certain officers and employees of the Company. Grants of PSUs require completion of certain performance criteria and cliff vest after 3 years or vest over a three year period, depending on the grant. PSU grants to certain officers will vest immediately upon a change of control of the Company. If certain officers cease employment with the Company, vesting occurs on a pro rata basis prior to the third anniversary of the grant but after the first anniversary. The following PSUs are outstanding at September 30:
 
2018
2017
Outstanding, beginning of the period
94,734

88,419

Granted during the period

6,315

Forfeited during the period
(31,578
)

Outstanding, end of the period
63,156

94,734

(1) The weighted average fair value of the PSUs granted in 2017 was $3.33.

We have reserved 1,691,533 common shares for issuance relating to our outstanding equity compensation plans. Compensation expense related to stock options, RSUs and PSUs was $236,607 and $932,817 for the three and nine month periods ending September 30, 2018, respectively (2017 - $148,447 and $438,044, respectively).

Note 7: Loss Per Common Share
 
Loss per common share is calculated using net loss for the year and the weighted average number of common shares outstanding for the three and nine month periods ended September 30, 2018 of 16,540,612 and 15,646,117, respectively (September 30, 2017 - 14,685,871 and 13,625,411, respectively). The effect of any potential exercise of our stock options and warrants outstanding during the year has been excluded from the calculation of diluted loss per common share, as it would be anti-dilutive.





11


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 8: Contract Liability and Receivable

Regional licensing agreement
We entered into a regional licensing agreement (the "Licensing Agreement") with Adlai Nortye Biopharma Co., Ltd. ("Adlai") in November 2017. Under the terms of the Licensing Agreement, Adlai will have exclusive development and commercialization rights to pelareorep in China, Hong Kong, Macau, Singapore, South Korea and Taiwan. We are entitled to receive upfront license fees, development and regulatory milestone payments, royalties and sales-based milestone payments.

Warrant purchase agreement
We also entered into a warrant purchase agreement with Adlai. Under the terms of the warrant purchase agreement, we are entitled to receive two milestone payments totaling US$8 million made up of two common share purchase warrants:
One common share purchase warrant of US$2 million whereby, upon exercise, Adlai may purchase our common shares priced at a 20% premium to the five-day weighted average closing price immediately preceding the exercise date. We have the right to call this warrant when the first patient is enrolled in the phase 3 metastatic breast cancer study or six months after execution of the Agreement, whichever is later.
One common share purchase warrant of US$6 million whereby, upon exercise, Adlai may purchase our common shares priced at a 20% premium to the five-day weighted average closing price immediately preceding the exercise date. We have the right to call this warrant upon the enrollment of the 50th patient in the phase 3 metastatic breast cancer study.

Contract liability
Our contract liability balance, which we expect to record in revenue over the next five years, is as follows:
 
September 30,
2018
$
December 31,
2017
$
Balance, beginning of the period
6,182,580


Regional licensing agreement
547,707

6,182,580

Revenue recognized in the period


Balance, end of the period
6,730,287

6,182,580

 
 
 
Contract liability - current
927,400

1,545,645

Contract liability - non-current
5,802,887

4,636,935

 
6,730,287

6,182,580


Contract receivable
Our contract receivable due from Adlai at September 30, 2018 is nil (December 31, 2017 - $4,767,100 (US$3,800,000)). On collection of the contract receivable, an income tax expense of $547,707 was recorded with a corresponding credit to the contract liability.



12


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 9: Commitments
 
We are committed to payments totaling $5,850,832 for activities related to our clinical trial, manufacturing and collaboration programs which are expected to occur over the next two years.

We are committed to rental payments (excluding our portion of operating costs and rental taxes) under the terms of our office leases. In the third quarter of 2018, we entered into a new multi-year lease agreement which provided for lease incentives of $77,911 to be recognized over the lease term. We also recorded an onerous lease provision related to the old lease of $67,588 as a result of this lease agreement. Annual payments under the terms of our office leases are as follows:
 
Amount
$
Remainder of 2018
100,875

2019
407,020

2020
357,432

2021
160,268


1,025,595

 
Under a clinical trial agreement entered into with the Alberta Cancer Board (“ACB”), we have agreed to repay the amount funded under the agreement together with a royalty, to a combined maximum amount of $400,000 plus an overhead repayment of $100,000, upon sales of a specified product.  We agreed to repay the ACB in annual installments in an amount equal to the lesser of: (a) 5% of gross sales of a specified product; or (b) $100,000 per annum once sales of a specified product commence.

Note 10: Capital Disclosures
 
Our objective when managing capital is to maintain a strong statement of financial position. We achieve our objective by obtaining adequate cash resources to support planned activities which include the clinical trial program, product manufacturing, administrative costs and intellectual property expansion and protection. We include shareholders’ equity and cash and cash equivalents in the definition of capital.
 
September 30,
2018
$
December 31,
2017
$
Cash and cash equivalents
16,214,347

11,836,119

Shareholders’ equity
9,049,402

8,283,846

 
We do not have any debt other than trade accounts payable and we have potential contingent obligations relating to the completion of our research and development of pelareorep.

In managing our capital, we estimate our future cash requirements by preparing a budget and a multi-year plan annually for review and approval by our Board. The budget establishes the approved activities for the upcoming year and estimates the costs associated with these activities. The multi-year plan estimates future activity along with the potential cash requirements and is based on our assessment of our current clinical trial progress along with the expected results from the coming year’s activity.  Budget to actual variances are prepared and reviewed by management and are presented quarterly to the Board.

Historically, funding for our plan is primarily managed through the issuance of additional common shares and common share purchase warrants that upon exercise are converted to common shares.  Management regularly monitors the capital markets attempting to balance the timing of issuing additional equity with our progress through our clinical trial program, general market conditions, and the availability of capital.  There are no assurances that funds will be made available to us when required.

On May 4, 2018, we renewed our short form base shelf prospectus (the "Base Shelf") that qualifies for distribution of up to $150,000,000 of common shares, subscription receipts, warrants, or units (the "Securities") in either Canada, the US or both. Under a Base Shelf, we may sell Securities to or through underwriters, dealers, placement agents or other intermediaries and also may

13


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

sell Securities directly to purchasers or through agents, subject to obtaining any applicable exemption from registration requirements. The distribution of Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be subject to change, at market prices prevailing at the time of sale, or at prices related to such prevailing market prices to be negotiated with purchasers and as set forth in an accompanying Prospectus Supplement.

Renewing our Base Shelf provides us with additional flexibility when managing our cash resources as, under certain circumstances, it shortens the time period required to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our company. Funds received as a result of using our Base Shelf would be used in line with our Board approved budget and multi-year plan. Our renewed Base Shelf will be effective until May 25, 2020.

Our Base Shelf allowed us to enter into our Common Stock Purchase Agreement in the third quarter of 2018 (see Note 5) and our ATM equity offering sales agreement in October 2018 (see Note 15). We will use these equity arrangements to assist us in achieving our capital objective. Each arrangement provides us with the opportunity to raise capital at our sole discretion providing us with the ability to better manage our cash resources.

We are not subject to externally imposed capital requirements and there have been no changes in how we define or manage our capital in 2018.

Note 11: Financial Instruments
 
Our financial instruments consist of cash and cash equivalents, other receivables and accounts payable.  As at September 30, 2018, there are no significant differences between the carrying values of these amounts and their estimated market values.
 
Credit risk
Credit risk is the risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations.  We are exposed to credit risk on our cash and cash equivalents and contract receivable in the event of non-performance by counterparties, but we do not anticipate such non-performance. Our maximum exposure to credit risk at the end of the period is the carrying value of our cash and cash equivalents and contract receivable.
 
We mitigate our exposure to credit risk by maintaining our primary operating and investment bank accounts with Schedule I banks in Canada. For our foreign domiciled bank accounts, we use referrals or recommendations from our Canadian banks to open foreign bank accounts and these accounts are used solely for the purpose of settling accounts payable or payroll.
 
Interest rate risk
Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. We are exposed to interest rate risk through our cash and cash equivalents and our portfolio of short-term investments.  We mitigate this risk through our investment policy that only allows investment of excess cash resources in investment grade vehicles while matching maturities with our operational requirements.
 
Fluctuations in market rates of interest do not have a significant impact on our results of operations due to the short term to maturity of the investments held.
 
Currency risk
Currency risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. In the normal course of our operations, we are exposed to currency risk from the purchase of goods and services primarily in the U.S., the U.K. and the European Union. In addition, we are exposed to currency risk to the extent cash is held in foreign currencies from either the purchase of foreign currencies or when we receive foreign currency proceeds from operating and financing activities. As well, we are exposed to currency risk related to our regional licensing agreement. The impact of a $0.01 increase in the value of the U.S. dollar against the Canadian dollar would have decreased our net loss in 2018 by approximately $54,035.  The impact of a $0.10 increase in the value of the British pound against the Canadian dollar would have increased our net loss in 2018 by approximately $21,923. The impact of a $0.10 increase in the value of the Euro against the Canadian dollar would have increased our net loss in 2018 by approximately $8,978.
 

14


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

We mitigate our foreign exchange risk by maintaining sufficient foreign currencies, through the purchase of foreign currencies or receiving foreign currencies from financing activities, to settle our foreign accounts payable.
 
Balances in foreign currencies at September 30, 2018 are as follows:
 

US dollars
$

British pounds
£
Euro
Cash and cash equivalents
11,123,553

23,827

24,246

Accounts payable
(430,913
)
(46,510
)

 
10,692,640

(22,683
)
24,246


Liquidity risk
Liquidity risk is the risk that we will encounter difficulty in meeting obligations associated with financial liabilities. We manage liquidity risk through the management of our capital structure as outlined in Note 10. Accounts payable are all due within the current operating period.

Note 12: Additional Cash Flow Disclosures
 
Net Change In Non-Cash Working Capital
 
Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$
Change in:
 
 
 

 

Contract receivable


4,767,100


Other receivables
32,819

28,980

(19,169
)
21,277

Prepaid expenses
39,182

46,925

(273,967
)
(177,309
)
Accounts payable and accrued liabilities
(799,407
)
(529,016
)
(1,486,992
)
(1,286,732
)
Contract liability


547,707


Other liabilities
50,575


50,575


Non-cash impact of foreign exchange
80,052

121,521

45,737

256,622

Change in non-cash working capital related to operating activities
(596,779
)
(331,590
)
3,630,991

(1,186,142
)

Other Cash Flow Disclosures

Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$
Cash interest received
61,880

31,759

109,308

96,637

Cash taxes paid


3,752





15


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 13: Other Expenses and Adjustments

We present our expenses based on the function of each expense and therefore include realized foreign exchange gains and losses, unrealized non-cash foreign exchange gains and losses and non-cash stock based compensation associated with research and development activity as a component of research and development expenses and amortization of property and equipment and stock based compensation associated with operating activities as a component of operating expenses.

Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$
Included in research and development expenses:








Realized foreign exchange loss (gain)
43,104

(40,097
)
(4,401
)
(40,141
)
Unrealized non-cash foreign exchange loss (gain)
131,882

(88,738
)
(105,114
)
(135,894
)
Non-cash share based compensation
107,960

56,757

438,469

182,860










Included in operating expenses








Depreciation - property and equipment
26,698

20,591

67,682

70,315

Non-cash share based compensation
128,647

91,690

494,348

255,184

Office minimum lease payments
73,672

65,186

220,988

163,324

Onerous lease contract
67,588


67,588


Amortization - lease incentive liability
12,494


12,494



Note 14: Related Party Transactions

Compensation of Key Management Personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling our activities as a whole. We have determined that key management personnel consists of the members of the Board of Directors along with certain officers of the Company.

Three Month Period Ending September 30, 2018
$
Three Month Period Ending September 30, 2017
$
Nine Month Period Ending September 30, 2018
$
Nine Month Period Ending September 30, 2017
$
Short-term employee compensation and benefits
399,855

477,800

1,356,410

1,588,602

Termination benefits



779,666

Share-based payments
185,643

128,161

672,325

339,824


585,498

605,961

2,028,735

2,708,092


Assumption Agreement
In November 2017, with the signing of a regional licensing agreement with upfront license fees (see Note 8), the Company triggered a liability of US$178,125 to an officer as detailed in the Assumption Agreement (see Note 12 of our audited consolidated financial statements for the year ended December 31, 2017). As at September 30, 2018, the liability was fully paid.





16


ONCOLYTICS BIOTECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2018

Note 15: Subsequent Event

On October 24, 2018, we entered into an ATM equity offering sales agreement with Canaccord Genuity Inc. The ATM allows us, at our sole discretion, to issue common shares, at prevailing market price, with an aggregate offering value of up to US$30,000,000 over the next 19 months through the facilities of the NASDAQ in the United States.

17