1. DESCRIPTION OF BUSINESS

Response Biomedical Corp. (“Response” or the “Company”) was incorporated on August 20, 1980 under the predecessor to the Business Corporations Act (British Columbia). The Company’s wholly owned US subsidiary, Response Point of Care Inc., was incorporated on November 9, 2012 in the State of Delaware. The Company is engaged in the research, development, commercialization and distribution of diagnostic technologies for the medical point of care (POC), laboratory and on-site environmental testing markets. POC and on-site diagnostic tests (or assays) are simple, non-laboratory based tests performed using portable hand-held devices, compact desktop analyzers, single-use test cartridges and/or dipsticks. Since 1996, the Company has developed and commercialized a proprietary diagnostic system called RAMP^®.

The RAMP^® System is a portable fluorescence immunoassay-based diagnostic technology that combines the performance of a clinical lab with the convenience of a dipstick test, establishing a new paradigm in diagnostic testing. Immunoassays are extremely sensitive and specific tests used to identify and measure small quantities of materials, such as proteins. A large variety of biological molecules and inorganic materials can be targeted. Accordingly, the RAMP^® technology is applicable to multiple distinct market segments and many products within those segments. RAMP^® tests are now commercially available for use in the early detection of heart attack, congestive heart failure, influenza A+B, the respiratory syncytial virus, environmental detection of West Nile Virus and Dengue Virus, and biodefense applications including the rapid on-site detection of anthrax, smallpox, ricin and botulinum toxin.

2. BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY

These unaudited interim consolidated financial statements have been prepared by management in Canadian dollars in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all adjustments (which include reclassifications and normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The accompanying consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year then ended. The consolidated financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015 and filed with the United States Securities and Exchange Commission (“SEC”) on March 24, 2016.

Going Concern Uncertainty

The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business.

During the six month period ended June 30, 2016, the Company incurred a net loss of $2.6 million and negative cash flows of $0.9 million. As of June 30, 2016, the Company had a cash balance of $1.6 million, an accumulated deficit of $123.0 million, a shareholders’ deficit of $2.4 million, and a working capital deficit of $2.8 million. In addition, the Company has various operating leases and purchase commitments for inventory (refer to note 11). Included in current liabilities is a warrant liability in the amount of $964,000 that is required to be measured at fair value and is presented as a current liability in accordance with Accounting Standards Codification Topic 815 – Derivatives and Hedging (“ASC 815”). Each warrant may only be exercised on a net cashless exercise basis and no warrant may be exercised at a time when the exercise price equals or exceeds the current market price meaning the potential settlement of any warrant does not require any cash disbursement. Without taking into account the warrant liability mentioned above, current liabilities exceed current assets by $1.8 million.

Sales to the Company’s former national distributor in China represented 31% of product sales during the first half of 2016 and were 79% lower than sales to the same distributor in the comparable six month period in 2015. The purchases of products from the Company in the first six months of 2016 were in satisfaction of rebates that were accrued in 2015. The Company received the payment for these products in the first half of 2015 and therefore, no additional cash was received during 2016 for these products. No returns of the products purchased by the former national distributor are either expected or permitted under the terms of its distribution agreement. The Company converted this distributor’s national distribution rights to non-exclusive effective March 3, 2016. The Company has now contracted with new distributors in China, including Shanghai Runda Medical Technology Co., Ltd. (“Runda”), to attempt to improve our current sales levels.

The Company announced on June 16, 2016 that it has entered into a definitive arrangement agreement (the “Arrangement Agreement”) with 1077801 B.C. Ltd., a company owned by OrbiMed Asia Partners, LP, OrbiMed Private Investments III, LP and OrbiMed Associates III, LP and Runda pursuant to which 1077801 B.C. Ltd. will acquire all of the issued and outstanding common shares of the Company for cash consideration of $1.12 per share (except in the case of certain rollover shareholders who will instead receive shares of 1077891 B.C. Ltd. on a 1 to 1 basis). This transaction is subject to customary approvals, including but not limited to, the approval of at least 66 2/3% of the votes cast in person or by proxy at a Special Meeting and the approval of a majority of the shareholders’ votes cast in person or by proxy at the Special Meeting excluding shareholders whose votes may not be included pursuant to Multilateral Instrument 61-101. In addition, closing of this transaction is subject to the satisfaction of a number of conditions, including the receipt of certain regulatory, court and stock exchange approvals in addition to foreign approvals that are required. Following the closing of this transaction, the Company intends to de-list from the Toronto Stock Exchange (“TSX”).

Concurrent, with the above transaction, the Company entered into subscription agreements to undertake a non-brokered private placement financing of up to 1,785,716 common shares of the Company (the “Private Placement”) at a price of U.S. $0.56 per share for total gross proceeds of approximately U.S. $1,000,000. Pursuant to the Private Placement, Response has entered into subscription agreements with OrbiMed, where OrbiMed funds will subscribe for 892,858 Response Common Shares for total gross proceeds to the Company of approximately U.S. $500,000, and with Runda where Runda will subscribe for 892,858 Response Common Shares for total gross proceeds to the Company of approximately U.S. $500,000. The first tranche of U.S. $500,000 was closed on June 17, 2016 with the OrbiMed funds. The second tranche has not been completed yet.

To address the expected near term reduction in product sales in China during this transition period and the resulting significant deterioration of the Company’s near term cash position, in addition to the Private Placement, the Company has implemented several cash conservation and cost reduction initiatives including reducing staff levels and delaying certain research and development projects to extend its available cash resources. While the Company is pursuing these various initiatives, there is no assurance that these efforts will allow the available cash resources to be sufficient to fund the Company’s operations.

The ability of the Company to continue as a going concern is uncertain and dependent on the Company’s ability to complete the Arrangement Agreement, obtain additional financing, earn collaboration milestones and/or achieve sustained cash flow positive operations. Management has financed operations, thus far, through a series of equity financings, debt financing, and collaborative arrangements. The Company has received milestones totaling US$3.0 million to date from a collaborative agreement with Hangzhou Joinstar Biomedical Technology Co., Ltd. the (“Joinstar Agreements”) and is eligible to receive a further US$0.8 million from the last development milestone during the remaining project period. In addition, under the terms of a Supply Agreement with Joinstar, Response will receive a guaranteed US$1.78 million in revenue-based payments over the first five years of commercialization of the co-developed assays.

The Company is striving to meet its ongoing cash needs through continued efforts to improve sales in China and other markets, reduce costs and otherwise conserve cash, and raise additional financing through the private placement mentioned above. Without additional financing, the Company’s current cash may not be sufficient to allow the Company to continue as a going concern beyond the third quarter of 2016. Management believes that additional financing along with a combination of some or all of the various cost reduction, cash conservation, sales and marketing initiatives, and completion of our collaboration with Joinstar, including short term out of the ordinary cash management measures, will be required to meet its anticipated short term cash requirements. Due to the Company’s history of losses, recent significant decreases in China product sales, and current major transition of distributors in China, there is substantial doubt over the Company’s ability to continue as a going concern as it is dependent on obtaining additional financing and achieving profitable operations, the outcomes of which cannot be predicted at this time. The consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.

3. RECENT ACCOUNTING PRONOUNCEMENTS

 Newly Adopted Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”). ASU 2015-03 was issued to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this newly issued guidance resulted in the reclassification of the previously recorded Deferred Debt Financing Costs (both current and long term), which were previously included under the assets section of the consolidated balance sheet, as a deduction of the Term loan (both current and long term) on the consolidated balance sheet.

Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On July 9, 2015, the FASB decided to delay the effective date of the new standard by one year. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the impact of adopting this pronouncement.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” (Topic 330) (“ASU 2015-11”), which amends the guidelines for the measurement of inventory. Under the amendments, an entity should measure inventory valued using a first-in, first-out or average cost method at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company has not chosen early adoption for this ASU and is currently evaluating the impact of adopting this pronouncement.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 2015-40) (“ASU 2014-15”). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This new rule requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles currently in the U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires an express statement and other disclosures when substantial doubt is not alleviated, and (5) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This guidance is effective for annual periods ending after December 15, 2016. The Company is currently evaluating the potential effect of this ASU on its financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to put most leases on their balance sheets as a liability for the obligation to make lease payments and as a right-of-use asset, but recognize expenses on the income statements in a manner similar to today’s accounting. The guidance also eliminates the current real estate-specific provisions for all entities. This guidance is effective for annual period beginning after December 15, 2018. Early adoption is permitted for all entities. The Company has not chosen early adoption for this ASU and is currently evaluating its effect on the Company’s consolidated financial statements.

4. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. Fair value measurements of financial instruments are determined by using a fair value hierarchy that prioritizes the inputs to valuation techniques into three levels according to the relative reliability of the inputs used to estimate the fair values.

The three levels of inputs used to measure fair value are as follows:

Level 1 – Unadjusted quoted prices in active markets for identical financial instruments;

Level 2 – Inputs other than quoted prices that are observable for the financial instrument either directly or indirectly; and

Level 3 – Inputs that are not based on observable market data.

In determining fair value measurements, the Company uses the most observable inputs when available.

For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables, other receivables, and accounts payable and accrued liabilities the carrying amounts approximate fair values due to their short-term nature. The carrying value of the restricted deposits approximates its fair value due to the nature of the cash deposit. The fair value of the term loan approximates its carrying value as the effective interest rate in the term loan with Silicon Valley Bank ("SVB") approximates the current market rate for the term loan. The fair value of the repayable leasehold improvement allowance approximates its carrying value as the fixed interest rate of 11% is considered to approximate the current market rate.

 The fair value hierarchy level at which a financial instrument is categorized is determined on the basis of the lowest level input that is significant to the fair value measurement (in thousands):

Financial Instruments carried at fair value as of June 30, 2016

As of June 30, 2016, the warrant liability is recorded at its fair value of $1.0 million. The Company reassesses the fair value of the common stock warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, contractual term of the warrant, and risk-free interest rate (refer to note 9[g]). The computation of expected volatility is based on the historical volatility of the Company’s stock. A small change in the estimates used in the Black-Scholes pricing model may have a relatively large change in the estimated valuation of the common stock warrants.

The following table presents the changes in fair value of the Company’s total Level 3 financial liabilities for the six month period ended June 30, 2016 (in thousands):

Quantitative information about unobservable inputs used in Level 3 fair value measurements is presented below:

A 5% increase or decrease in stock price volatility would cause an approximate corresponding $60,000 increase or decrease to the Warrant Liability ($32,000 – December 31, 2015).

5. INVENTORIES

Inventories are comprised of the following (in thousands):

The carrying value of inventory as of June 30, 2016 includes a write-down and a provision for expired, obsolete, and damaged inventory in the amount of $23,000 [December 31, 2015 - $51,000]. For the three and six month period ended June 30, 2016, inventory write-downs and obsolescence charges were $15,000 and $49,000 [2015 - $47,000 and $128,000].

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities comprise (in thousands):

Accounts payable and accrued liabilities include $118,000 [December 31, 2015 - $8,000] of additions to property, plant, and equipment and $476,000 [December 31, 2015 – nil] of deferred transaction costs as at June 30, 2016. These amounts have been excluded from cash generated from investing activities and cash used in operating activities respectively on the consolidated statements of cash flows for the six months ended June 30, 2016, as the cash had not been disbursed.

7. TERM LOAN

On February 11, 2014, the Company entered into a loan and security agreement with SVB providing for up to a US$2.5 million term loan. The loan is secured by substantially all of the assets of the Company. The loan included financial covenants that were later removed in an amendment (refer to discussion below). The loan also includes certain non-financial covenants as well as a subjective acceleration clause. Under the terms of the original loan agreement, the loan bears an interest rate of Wall Street Journal Prime Rate plus 2.5% annually. Interest only payments were made until October 1, 2014 at which time, 32 equal monthly installments of principal plus accrued interest started to be made. On December 15, 2014, the Company entered into an amendment to the original loan agreement with SVB. Under the amendment, SVB agreed to continue to advance the remaining outstanding principal of US$1.4 million for the same term and interest rate under the original agreement. In addition, SVB waived its rights in respect of certain breaches and removed any future financial covenants. Interest only payments were made until April 1, 2015, at which time, 26 equal monthly installments of principal plus accrued interest are being made through to maturity on May 1, 2017. In addition, the Company will pay an additional final payment of up to 4% of the outstanding principal advanced upon repayment. The loan contains a voluntary prepayment option whereby the principal amount can be prepaid in whole, or in part, for a fixed fee if a prepayment is made on or before December 15, 2016.

In connection with the original loan and amendment discussed above, 107,701 warrants with exercise prices ranging from $1.00 to $1.831 per warrant and a term of 10 years were granted to SVB. These warrants were measured at their fair market value using the Black-Scholes model on the date of their grants and had a combined estimated fair market value of $113,000, which was recorded as a debt discount that is being amortized into income over the term of the loan using the effective interest method. In addition, there were $233,000 of fees related to the term loan that are also being amortized over the term of the loan using the effective interest method.

Amortization of the deferred financing costs for the three and six month periods ended June 30, 2016 were $12,000 and $27,000 (2015 – $24,000 and $50,000) and amortization of the debt discount for the three and six month periods ended June 30, 2016 was $7,000 and $16,000 (2015 – $14,000 and $29,000). Both of these amounts are included in interest expense and amortization of deferred financing costs and debt discount on the consolidated statements of loss and comprehensive loss.

The term loan is comprised of the following amounts (in thousands):

Future principal payments for the term loan as of June 30, 2016, are as follows (in thousands):

8. LEASE INDUCEMENTS

Lease agreements entered into by the Company for its offices provides for lease inducements to be provided by the landlord to the Company, which are summarized as follows (in thousands):

The lease inducements disclosed on the consolidated balance sheets as a result of these benefits is comprised of the following:

[i]      In 2007, the Company entered into a long-term facility lease agreement that included an eight and one half month rent-free period from May 17, 2007 to February 1, 2008. The lease inducement benefit arising from the rent-free period is being amortized on a straight-line basis over the term of the operating lease as a reduction to rental expense. Amortization expense for the three and six month periods ended June 30, 2016 amounted to $14,000 and $27,000 [2015 - $13,000 and $27,000].

[ii]     The Company received a non-repayable allowance for an amount of $1.7 million for expenditures related to general upgrades to the facility. The lease inducement benefit arising from the non-repayable leasehold improvement allowance is being amortized on a straight-line basis over the balance of the term of the lease beginning April 1, 2008 as a reduction to rental expense. Amortization expense for the three and six month periods ended June 30, 2016 amounted to $29,000 and $57,000 [2015 - $29,000 and $58,000].

[iii]     The Company received a repayable leasehold improvement for an amount of $7.8 million used for additional improvements to the facility. This lease inducement is being repaid over the term of the operating lease commencing February 1, 2008 at approximately $89,000 per month including interest calculated at an interest rate negotiated between the Company and the landlord. Principal repayments for the three and six month periods ended June 30, 2016 amounted to $127,000 and $250,000 [2015 - $114,000 and $224,000]. Interest payments for the three and six month periods ended June 30, 2016 amounted to $139,000 and $281,000 [2015 - $152,000 and $307,000].

To secure the lease, the Company is maintaining a security deposit with the landlord in the form of an irrevocable letter of credit in the amount of $317,000 collateralized by a term deposit with a market value of $317,000 that is presented as part of restricted deposits in the long-term asset section of the balance sheets. The face value of the letter of credit was reduced by 67% in March 2016 from its original face value due to the Company achieving an operating profit during the year ended December 31, 2015. The reduction of $584,000 is included in cash generated from investing activities in the consolidated statements of cash flows.

9. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL

[a]     Authorized - Unlimited common shares without par value.

[b]     Issued

2016 Private Placement

On June 17, 2016, the Company closed the first tranche of a non-brokered private placement of 892,858 common shares at a price of U.S. $0.56 (the “Private Placement”) with a group of investment funds controlled by OrbiMed Advisors, LLC (“OrbiMed”), the Company’s majority shareholder. The net proceeds were $599,000 after deduction of $44,000 of financing costs.

[c]     Stock option plan

At the Annual General Meeting held September 3, 2008, the Company’s shareholders approved a stock option plan (“2008 Plan”). Under the plan, the Company may grant options to purchase common shares in the Company to employees, directors, officers and consultants of the Company. The exercise price of the options is determined by the Board to be equal to the fair market value of the commons shares on the grant date. The Company estimates the fair value of options on the date of the grant. The options vest over the requisite service period in accordance with terms as determined by the Board, typically over four years. Stock options expire no later than ten years from the date of grant.

At the Annual General and Special Meeting held on June 18, 2013, the Company’s shareholders’ approved a change to the Company’s 2008 stock option plan permitting the maximum shares authorized to be issued under the plan to be up to 20% of the issued and outstanding common shares outstanding at any point in time. At the Annual General and Special Meeting held on June 13, 2016, the Company’s shareholders’ approved all unallocated options, rights and other entitlements under the 2008 Plan and the ability of the Company to continue granting options under the plan.

Of the 2,183,453 stock options authorized for grant under the 2008 Plan as at June 30, 2016, options for 1,378,161 shares were outstanding and 805,292 stock options were available for future grant.

The following assumptions were used to estimate the fair value of options granted during the six month period ended June 30, 2016, and 2015 using a Black-Scholes option-pricing model:

The expected volatility reflects the assumption that the historical volatility of common stock of the Company over a period similar to the expected life of the options is indicative of future trends. The Company estimates the risk-free interest rate using the Bank of Canada bond yield with a remaining term equal to the expected life of the option. The Company uses the simplified method for estimating the stock option term for stock option grants during the six month period ended June 30, 2016 as the Company has determined that the stock options are “plain vanilla” and historical share option exercises do not apply as the vesting term and contractual lives have significantly changed from those stock options exercised previously.

At June 30, 2016, the following stock options were outstanding:

The options expire at various dates from April 2, 2022 to March 23, 2026.

Stock option transactions and the number of stock options outstanding are summarized below:

[d]     Restricted share unit plan

At the Annual General and Special Meeting held on June 18, 2013, the Company’s shareholders approved a new restricted share unit plan (“RSU Plan”). At the Annual General and Special Meeting held on June 13, 2016, the Company’s shareholders’ approved all unallocated entitlements under the RSU Plan and the ability of the Company to continue granting Restricted Share Units (“RSUs”) under the RSU Plan. Under the plan, the Company may grant RSUs to employees, directors, and eligible consultants which entitle each participant to either one common share of the Company on a time vested basis or a cash payout equal to the number of vested RSUs multiplied by the then current market value of the RSUs. The fair market value of the RSUs is determined based upon the number of RSUs granted and the quoted closing price of the Company’s stock on the trading day immediately preceding the date of determination. The duration of the vesting period and other vesting terms applicable to the grant of the RSUs shall be determined by the Board.

The restricted share units that were granted during the six month period ended June 30, 2016 were to settle a director compensation liability that was recorded in accounts payable and accrued liabilities. The $100,000 liability has been excluded from the change in accounts payable and accrued liabilities on the consolidated statement of cash flows.

Of the 272,931 RSUs authorized for grant under the RSU Plan as at June 30, 2016, 141,070 RSUs are available for grant.

[e]     Deferred share unit plan

At the Annual General and Special Meeting held on June 18, 2013, the Company’s shareholders approved a new non-employee director deferred share unit plan (“DSU Plan”). At the Annual General and Special Meeting held on June 13, 2016, the Company’s shareholders’ approved all unallocated entitlements under the DSU Plan and the ability of the Company to continue granting Deferred Share Units (“DSUs”) under the DSU Plan. A DSU is a right granted to non-employee directors which entitle each participant to either one common share of the Company on a time vested basis or a cash payout equal to the number of DSUs multiplied by the then current market value of the DSUs. The fair market value of the DSU’s is determined based upon the number of DSUs granted and the quoted price of the Company’s stock on the trading day immediately preceding the determination date. The duration of the vesting period and other vesting terms applicable to the grant of the DSU’s shall be determined by the Board. 

The deferred share units that were granted during the six month period ended June 30, 2016 were to settle a director compensation liability that was recorded in accounts payable and accrued liabilities. The $74,000 liability has been excluded from the change in accounts payable and accrued liabilities on the consolidated statement of cash flows.

Of the 272,931 DSUs authorized for grant under the DSU Plan as at June 30, 2016, 186,013 are available for grant.

[f]     Stock-based compensation

The following table shows stock-based compensation allocated by type of cost (in thousands):

As of June 30, 2016, the total unrecognized compensation related to stock options granted amounts to $323,000, which is expected to be recognized over a weighted average service period of 2.45 years.

[g]     Common share purchase warrants

At June 30, 2016, there were 86,848,002 warrants outstanding to purchase shares of common stock, with expiry dates ranging from November 7, 2016 to December 15, 2024. Of the total 86,848,002 warrants outstanding, 86,103,744 warrants (the warrants related to the 2011 financing) entitle the holder thereof to purchase 1/20th of a common share of the Company at a price of $1.461 per whole common share; 636,557 warrants (the private placement warrants) entitle the holder thereof to purchase one common share of the Company at a price of $3.58 per common share; 52,796 warrants entitle the holder thereof to purchase one common share of the Company at a price of $1.831 per common share; and 54,905 warrants entitle the holder thereof to purchase one common share of the Company at a price of $1.00 per common share.

 There has been no common share purchase warrant transactions during the three months ended June 30, 2016.

The estimated fair value of the warrants related to the 2011 financing is reassessed at each balance sheet date using the Black-Scholes option pricing model. The following assumptions were used to value the warrants on the following balance sheet dates:

[h]     Earnings per common share

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding warrants, stock options, restricted share units and deferred share units.

86,848,002 warrants, 1,378,161 stock options, 131,861 restricted share units, and 86,918 deferred share units have been excluded from the computation of diluted earnings per share for the three and six month periods ended June 30, 2016 as the Company has incurred a net loss during the periods and their inclusion would be anti-dilutive to the loss per share (2015 – 86,865,691 warrants, 1,333,835 stock options and 112,489 restricted share units were excluded).

10. RELATED PARTY TRANSACTIONS

On June 17, 2016, the Company closed the Private Placement for common shares with a group of investment funds controlled by OrbiMed, the Company’s majority shareholder. The net proceeds were $599,000 after deduction of $44,000 of financing costs.

The Company received US$1.28 million from Joinstar upon signing of the Technology Development Agreement and Collaboration Agreement. These upfront payments are being recognized into income over the expected development period and for the three and six month periods ended June 30, 2016, $56,000 and $169,000 was recognized (2015 – 246,000 and $515,000). These development fees are included under collaborative revenue in the consolidated statements of loss and comprehensive loss. The unrecognized portion of the development fees are included under deferred revenue on the consolidated balance sheet.

11. COMMITMENTS

[a]     License agreements

The Company entered into a non-exclusive license agreement, effective July 2005, as amended June 2008, to use and sublicense certain technology (“Technology”) for one of the Company’s cardiac tests. In consideration for these rights, the Company paid a non-refundable license issuance fee of $2.0 million in the first two years after execution of the agreement and is required to pay quarterly royalties on the sale of products that incorporate the Technology. For the three and six month periods ended June 30, 2016, the Company incurred an expense of $15,000 and $193,000 [2015 - $248,000 and $465,000] for royalties. Royalty and license fees incurred are included in cost of sales.

[b]     Supply agreement

The Company entered into a supply agreement, effective September 2003 for certain reagents for the Company’s RAMP^® West Nile Virus Test. In addition to paying for the reagent purchased, the Company is required to pay the supplier semi-annual royalties equal to 10% of net revenue generated from the sale of the Company’s RAMP^® West Nile Virus Test. The initial term of the agreement was three years from the effective date and is automatically renewed for successive periods of one year until either party terminates the agreement. For the three and six month periods ended June 30, 2016, the Company incurred an expense of $20,000 and $34,000 [2015 – $27,000 and $35,000] for royalties to the supplier. These royalties are included in cost of sales.

[c]     Lease agreements

[i]      The Company entered into a long-term agreement to lease a single tenant 46,000 square foot facility to house all of the Company’s operations. Rent is payable from February 1, 2008 to January 31, 2023. The Company is required to pay the landlord total gross monthly payments of approximately $175,000, which is comprised of base rent, administrative and management fees, estimated property taxes and repayments of the repayable leasehold improvement allowance [note 8[iii]].

[ii]      The Company has entered into a new lease agreement for new office space in Shanghai, China as of December 01, 2015 that expires on November 30, 2017. The Company is required to make monthly payments of approximately $5,000 for base rent and management fees under the new lease agreement.

[iii]     The Company has entered into operating leases for administrative equipment.

For the three and six month periods ended June 30, 2016, $218,000 and $407,000 [2015 - $211,000 and $406,000] was incurred for expenses related to base rent, administrative and management fees and estimated property taxes offset by amortization of both the rent-free inducement [note 8[i]] and non-repayable leasehold improvement allowance [note 8[ii]]. These expenses are allocated to cost of sales, research and development, general and administrative, and sales and marketing expenses.

[d]     Purchase Commitments

As at June 30, 2016, the Company has outstanding purchase commitments of $2.1 million to purchase inventory and capital equipment over the next five years of which $1.5 million will be completed within the next twelve months.

[e]     Indemnification of directors and officers

Under the Articles of the Company, applicable law and agreements with its directors and officers, the Company, in circumstances where the individual has acted legally, honestly and in good faith, may, or is required to indemnify its directors and officers against certain losses.  The Company's liability in respect of the indemnities is not limited. The maximum potential of the future payments is unlimited. However, the Company maintains appropriate liability insurance that limits the exposure and enables the Company to recover any future amounts paid, less any deductible amounts pursuant to the terms of the respective policies, the amounts of which are not considered material.

[f]     Indemnification of third parties

The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary in the industry. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party claims for damages arising from these transactions. The nature of the indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount that it could be required to pay. To date, the Company has not made any indemnification payments under such agreements and no amount has been accrued in these consolidated financial statements with respect to these indemnification obligations.

12. SEGMENTED INFORMATION

The Company operates primarily in one business segment, the research, development, commercialization and distribution of diagnostic technologies, with primarily all of its assets and operations located in Canada. The Company’s revenues are generated from product sales primarily in Asia, the United States and Europe. Expenses are primarily incurred from purchases made from suppliers in Canada and the United States.

Customers that represent a concentration risk are those whose outstanding receivable is 10% or greater than the total balance or those customers who represent 10% or greater of our total revenue. For the three month period ended June 30, 2016, $0.8 million (63%) in product sales were generated from four customers of which one customer represented 19%, one customer represented 18%, one customer represented 14%, and one customer represented 13% [2015 - $2.5 million (70%) from one customer]. For the six month period ended June 30, 2016, $1.9 million (55%) in product sales were generated from three customers of which one customer represents 31%, one customer represents 13%, and the other customer represents 11% [2015 - $4.8 million (71%) from one customer].

Sales attributable to a geographic area based upon the customer’s country of domicile. Sales in a country that represent 5% or more of total product sales, in to sales in Canada, are as follows (in thousands):

Product sales by type of product were as follows (in thousands):

13. COMPARATIVE FIGURES

Certain comparative figures have been reclassified from the amounts previously reported to conform to the presentation adopted in the current year. As mentioned in Note 3, deferred financing costs have been reclassified from current and long term assets to the term loan in the liabilities section on the consolidated balance sheet.