Condensed Consolidated Financial Statements of
MICROMEM TECHNOLOGIES INC.
For the three and nine months ended July 31, 2018 and 2017
(Expressed in United States Dollars)
MICROMEM TECHNOLOGIES INC.
Condensed Consolidated Interim Financial Statements of
For the nine months ended July 31, 2018
(Expressed in United States Dollars)
Notice of No Auditors Review of Interim Financial Statements
In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited financial statements for the nine months ended July 31, 2018 which have been prepared by and are the responsibility of the Company’s management.
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
| TABLE OF CONTENTS |
| 1. | Reporting Entity and Nature of Business |
| 2. | Going Concern |
| 3. | Basis of Presentation |
| 4. | Continuity of Significant Accounting Policies and Reporting Procedures |
| 5. | Deposits and Other Receivables |
| 6. | Development Costs |
| 7. | Patents |
| 8. | Share Capital, Stock Options and Income (Loss) per Share |
| 9. | Bridge Loans |
| 10. | Income Taxes |
| 11. | Expenses |
| 12. | Management Compensation and Related Party Transactions |
| 13. | Commitments |
| 14. | Contingencies |
| 15. | Subsequent Events |
2
MICROMEM TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Expressed in United States dollars)
| July 31, | October 31, | |||||
| 2018 | 2017 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash | $ | 79,921 | $ | 9,189 | ||
| Deposits and other receivables (Note 5) | 90,934 | 466,170 | ||||
| 170,855 | 475,359 | |||||
| Property and equipment, net | 7,275 | 9,822 | ||||
| Patents, net (Note 7) | 427,179 | 431,462 | ||||
| $ | 605,309 | $ | 916,643 | |||
| Liabilities and Shareholders' Deficiency | ||||||
| Current liabilities: | ||||||
| Accounts payable and accrued liabilities | $ | 1,069,084 | $ | 1,361,998 | ||
| Bridge loans (Note 9) | 2,741,190 | 2,489,017 | ||||
| Derivative liability (Note 9) | 883,082 | 489,734 | ||||
| $ | 4,693,356 | $ | 4,340,749 | |||
| Shareholders' Deficiency | ||||||
| Share capital: (Note 8) Authorized: 2,000,000 special preference shares, redeemable, voting Unlimited common shares without par value Issued and outstanding: 244,445,175 common shares (2017: 228,562,711) (Note 8) | $ | 81,365,010 | $ | 80,198,194 | ||
| Equity component of bridge loans (note 9) | 152,056 | 62,050 | ||||
| Contributed surplus | 27,501,288 | 27,360,676 | ||||
| Deficit | (113,106,401 | ) | (111,045,026 | ) | ||
| (4,088,047 | ) | (3,424,106 | ) | |||
| $ | 605,309 | $ | 916,643 |
Going Concern (Note 2)
Commitments (Note 13)
Contingencies (Note 14)
"Joseph Fuda" (Signed)
Joseph Fuda, Director
"Alex Dey" (Signed)
Alex Dey, Director
See accompanying notes.
3
MICROMEM TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Expressed in United States dollars)
For the three and nine months ended July 31,
| Three months Ended July 31 | Nine months Ended July 31 | |||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||
| Costs and expenses : | ||||||||||||
| Administration (Note 11) | $ | 63,119 | $ | 91,624 | $ | 213,930 | $ | 238,195 | ||||
| Professional, other fees and salaries (Note 11) | 180,528 | 323,746 | 571,778 | 1,226,921 | ||||||||
| Stock based compensation (Note 8) | 140,612 | - | 140,612 | 442,206 | ||||||||
| Development costs (Note 6) | (126,170 | ) | 49,156 | (56,884 | ) | 270,013 | ||||||
| Travel and entertainment | 21,075 | 28,533 | 69,221 | 92,649 | ||||||||
| Amortization of property and equipment | 842 | 921 | 2,545 | 3,045 | ||||||||
| Amortization of patents (Note 7) | 41,134 | 33,555 | 118,253 | 94,620 | ||||||||
| Foreign exchange translation | 44,552 | 17,406 | 121,143 | 114,415 | ||||||||
| Loss from operations | 365,692 | 544,941 | 1,180,599 | 2,482,064 | ||||||||
| Other (income) expense | ||||||||||||
| Interest expense (Note 9) | 123,254 | 173,553 | 346,232 | 488,667 | ||||||||
| Accretion expense (Note 9) | 533,494 | 166,958 | 1,428,108 | 464,717 | ||||||||
| Financing costs (Note 9) | 33,977 | - | 181,435 | - | ||||||||
| (Gain) loss on revaluation of derivative liability (Note 9) | (1,122,960 | ) | (485,171 | ) | (1,079,690 | ) | (727,747 | ) | ||||
| Net (gain) loss on extinguishment of debt (Note 9) | 43,832 | - | 4,691 | - | ||||||||
| Net income (loss) before income taxes | 22,711 | (400,281 | ) | (2,061,375 | ) | (2,707,701 | ) | |||||
| Income taxes (Note 10) | - | - | - | - | ||||||||
| Net income (loss) and comprehensive income (loss) | $ | 22,711 | $ | (400,281 | ) | $ | (2,061,375 | ) | $ | (2,707,701 | ) | |
| Loss per share - basic and diluted (Note 8) | - | - | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average number of shares (Note 8) | 237,596,150 | 206,057,850 | 233,464,703 | 205,115,725 | ||||||||
See accompanying notes.
4
MICROMEM TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
For the three and nine months ended July 31,
| Three Months Ended July 31 | Nine Months Ended July 31 | |||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 22,711 | $ | (400,281 | ) | $ | (2,061,375 | ) | $ | (2,707,701 | ) | |
| Adjustments to reconcile income to net cash used in operating activities: | ||||||||||||
| Foreign exchange translation | - | - | - | - | ||||||||
| Amortization of patents and intangible assets | 41,134 | 33,555 | 118,253 | 94,620 | ||||||||
| Amortization of property and equipment | 842 | 921 | 2,545 | 3,045 | ||||||||
| Development costs | 49,156 | 270,013 | ||||||||||
| Accretion expense | 533,494 | 166,958 | 1,428,108 | 464,717 | ||||||||
| Net (gain) loss on extinguishment of bridge loans | 43,832 | - | 4,691 | - | ||||||||
| (Gain) on revaluation of derivative liabilities | (1,122,960 | ) | (485,171 | ) | (1,079,690 | ) | (727,747 | ) | ||||
| Stock based compensation | 140,612 | - | 140,612 | 442,206 | ||||||||
| Increase (decrease) in deposits and other receivables | 40,880 | (12,857 | ) | 603,186 | (24,569 | ) | ||||||
| (Decrease) increase in accounts payable and accrued liabilities | (87,773 | ) | 220,888 | (438,535 | ) | 141,480 | ||||||
| Net cash used in operating activities | (387,228 | ) | (426,831 | ) | (1,282,205 | ) | (2,043,936 | ) | ||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of property and equipment | - | - | - | (3,807 | ) | |||||||
| Patents | (29,588 | ) | (37,902 | ) | (113,970 | ) | (105,544 | ) | ||||
| Net cash used in investing activities | (29,588 | ) | (37,902 | ) | (113,970 | ) | (109,351 | ) | ||||
| Cash flows from financing activities: | ||||||||||||
| Issue of common shares | 270,011 | 367,739 | 541,372 | 649,232 | ||||||||
| Bridge loans advances | 453,760 | 83,500 | 1,370,036 | 1,076,482 | ||||||||
| Bridge loan repayments | (369,615 | ) | (82,361 | ) | (775,733 | ) | (237,941 | ) | ||||
| Bridge loan interest accrued | 123,254 | 173,553 | 346,232 | 488,667 | ||||||||
| Subscription received | - | - | - | - | ||||||||
| Bridge loan converted in common shares | (78,808 | ) | - | (78,808 | ) | |||||||
| Repayment of advance from related party | - | - | (15,000 | ) | ||||||||
| Net cash provided by financing activities | 477,410 | 463,623 | 1,466,907 | 1,897,632 | ||||||||
| Increase (decrease) in cash | 60,594 | (1,110 | ) | 70,732 | (255,655 | ) | ||||||
| Cash, beginning of period | 19,327 | 33,583 | 9,189 | 288,128 | ||||||||
| Cash, end of period | $ | 79,921 | $ | 32,473 $ | 79,921 $ | 32,473 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid (classified in operating activities) | 84,666 | 82,361 | 237,714 | 237,941 | ||||||||
| Shares issued on settlement of accounts payable | - | - | ||||||||||
See accompanying notes.
5
MICROMEMTECHNOLOGIES INC.
CondensedConsolidatedStatements ofChanges inShareholders'Equity
(Expressed inUnitedStatesdollars)
| Number of | Share capital | Subscription | Contributed | Equity component | Deficit | Total | |||||||||||||||
| Shares | received | Surplus | of Bridge loan | ||||||||||||||||||
| Balance as at November 1, 2016 | 204,388,569 | $ | 75,855,139 | $ | - | $ | 26,918,470 | $ | 23,075.00 | $ | (106,698,826 | ) | $ | (3,902,142 | ) | ||||||
| Private placement of units for cash | 3,333,914 | 649,232 | 649,232 | ||||||||||||||||||
| Common shares issued against trade payable | 307,643 | 60,108 | 60,108 | ||||||||||||||||||
| Stock based compensation | - | - | 442,206 | 442,206 | |||||||||||||||||
| Subscription received | - | - | - | - | - | ||||||||||||||||
| Common shares issued against compensation | 132,381 | 21,909 | 21,909 | ||||||||||||||||||
| Bridge loan converted into common shares | 379,476 | 78,808 | 78,808 | ||||||||||||||||||
| Treasury shares cancelled | (750,000 | ) | - | ||||||||||||||||||
| Net loss and comprehensive loss | - | - | - | - | - | (2,707,701 | ) | (2,707,701 | ) | ||||||||||||
| Balance at July 31, 2017 | 207,791,983 | 76,665,196 | - | 27,360,676 | 23,075 | (109,406,527 | ) | (5,357,580 | ) | ||||||||||||
| Balance at November 1, 2017 | 228,562,711 | 80,198,194 | - | 27,360,676 | 62,050 | (111,045,026 | ) | (3,424,106 | ) | ||||||||||||
| Private placement of units for cash | 6,409,009 | 541,372 | 541,372 | ||||||||||||||||||
| Common shares issued against trade payable | 79,765 | 10,649 | 10,649 | ||||||||||||||||||
| Bridge loan converted into common shares | 9,393,690 | 614,795 | 614,795 | ||||||||||||||||||
| Stock compensation expense | 140,612 | 140,612 | |||||||||||||||||||
| Bridge loan renewal | 90,006 | 90,006 | |||||||||||||||||||
| Net loss and comprehensive loss | - | - | - | - | - | (2,061,375 | ) | (2,061,375 | ) | ||||||||||||
| Balance at July 31, 2018 | 244,445,175 | 81,365,010 | - | 27,501,288 | 152,056 | (113,106,401 | ) | (4,088,047 | ) |
6
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 1. | REPORTING ENTITY AND NATURE OF BUSINESS |
Micromem Technologies Inc. (“Micromem” or the “Company”) is incorporated under the laws of the Province of Ontario, Canada. The principal business address of the Company is 121 Richmond Street West, Suite 304, Toronto, Ontario, Canada.
The Company develops, based upon proprietary technology, customized magnetic sensor applications for companies (referred to as “development partners”) operating internationally in various industry segments.
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries:
| (i) | Micromem Applied Sensors Technology, Inc. (“MAST”) incorporated in November 2007 and domiciled in Delaware, United States. MAST has the primary responsibility for the exploitation of the Company’s technologies in conjunction with various strategic partners and customers. | |
| (ii) | 7070179 Canada Inc., incorporated in October 2008 under the Canada Business Corporations Act in Ontario, Canada. The Company has assigned to this entity its rights, title and interests in certain patents which it previously held, directly in exchange for common shares of this entity. | |
| (iii) | Memtech International Inc., Bahamas; Memtech International (USA) Inc., Delaware, United States; Pageant Technologies (USA) Inc., United States; Pageant Technologies Inc., Barbados; and Micromem Holdings (Barbados) Inc., Barbados. All of these entities are inactive. |
These consolidated financial statements were authorized for issuance and release by the Company’s Board of Directors on September 29, 2018.
7
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 2. | GOING CONCERN |
These consolidated financial statements have been prepared on the “going concern” basis in accordance with International Financial Reporting Standards (“IFRS”), which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
There are material uncertainties related to conditions and events that cast significant doubt about the Company’s ability to continue as a going concern for a reasonable period of time in future. During the nine months ended July 31, 2018, the Company reported a net loss and comprehensive loss of $2,061,375 (2017 - $2,707,701) and negative cash flow used in operations of $1,282,205 (2017 - $2,043,936). The Company’s working capital deficiency as at July 31, 2018 is $4,522,501 (as at October 31, 2017 – $3,865,390).
The Company’s success depends on the profitable commercialization of its proprietary sensor technology. There is no assurance that the Company will be successful in the profitable commercialization of its technology. Based upon its current operating and financial plans, management of the Company believes that it will have sufficient access to financial resources to fund the Company’s planned operations through fiscal 2018; however, the ability of the Company to continue as a going concern is dependent upon its ability to secure additional financing and/or to profitably commercialize its technology. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
If the “going concern” assumption were not appropriate for these consolidated financial statements then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used; in such cases, these adjustments would be material.
| 3. | BASIS OF PRESENTATION |
| a) | Statement of compliance: | |
These condensed consolidated financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”). The condensed consolidated interim financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the year ended October 31, 2017 issued on March 2, 2018 and which have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the IASB. |
8
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
These condensed consolidated interim financial statements were approved by the Board of Directors of the Company and authorized for issuance on September 29, 2018. | ||
| b) | Basis of measurement: | |
The consolidated financial statements have been prepared on the historical cost basis, except for financial instruments designated at fair value through profit and loss, which are stated at their fair value. | ||
| c) | Functional and presentation currency: | |
These consolidated financial statements are presented in United States dollars (“U.S. dollars”), which is also the Company’s and wholly-owned subsidiaries functional currency. | ||
| d) | Use of estimates and judgments: | |
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. | ||
Information about judgments, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment are as reported in the audited consolidated financial statements for the year ended October 31, 2017 and unchanged at July 31, 2018. These include estimates and assumptions utilized in determining fair values as required under IFRS, estimates related to the recovery of deferred development costs, capitalization criteria for patents, impairment of long-lived assets, deferred income taxes, functional currency and the assessment of material uncertainties. |
| 4. | CONTINUITY OF SIGNIFICANT ACCOUNTING POLICIES AND REPORTING PROCEDURES |
| a) | Accounting Policies: | |
These unaudited interim condensed consolidated financial statements follow the same accounting policies and methods of application as set in the audited consolidated financial statements for the year ended October 31, 2017 and should be read in conjunction with the audited consolidated financial statements. There have been no changes in accounting policies or methods of application of accounting policies in the period ending July 31, 2018. | ||
| b) | Fair Values: | |
There were no changes in the methods and assumptions used in estimating the fair value of the Company’s financial instruments and no changes to the classification of financial instruments in terms of the levels of financial hierarchy during the quarter ending July 31, 2018 from those disclosed at October 31, 2017 |
9
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| c) | Capital Management: | |
There have been no changes to the objectives, policies and procedures that the Company has adopted and implemented with respect to capital management during the period ending July 31, 2018 from those disclosed at October 31, 2017. | ||
| d) | Financial Risks: | |
The Company is exposed to and evaluates a variety of financial risks relative to its activities: market risk (including foreign exchange risk and interest rate risk), liquidity risk and credit risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects financial performance. Risk management is carried out under policies approved by the Board of Directors. Management is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated in accordance with the approved policies. Based on management’s assessment as of July 31, 2018, the financial risks have not significantly changed since October 31, 2017. The Company continues to closely monitor its working capital position. | ||
e) | New standards and interpretations issued but not yet adopted: The disclosures reported at October 31, 2017 relating to IFRS 15, IFRS 9, IAS7 and IFRS 16 remain valid at July 31, 2018. The Company is currently assessing the impact of these standards which are effective for future reporting periods. |
| 5. | DEPOSITS AND OTHER RECEIVABLES |
The balance reported as deposits and other receivables consists of:
| July 31, | October 31, | |||||
| 2018 | 2017 | |||||
| Accounts receivable | $ | 10,000 | $ | 415,857 | ||
| Prepaid insurance and other | 80,934 | 50,313 | ||||
| $ | 90,934 | $ | 466,170 |
The allowance for doubtful accounts on deposit and other receivable was $Nil at July 31, 2018 (at October 31, 2017 $Nil).
10
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 6. | DEVELOPMENT COSTS |
To date, the Company has recovered from its development partners a portion of the costs it has incurred as development costs coincident with meeting milestones as stipulated in development contracts.
The Company anticipates that it may realize commercial economic benefits from the exploitation of these development projects in the future. Development costs incurred since August 2016 have been charged to expense in the period incurred; previously development costs incurred were capitalized. In the nine months ended July 31, 2018 the Company incurred $383,472 (2017: $566,013) of development costs and recovered $ 509,642 (2017: $296,000) from its development partners.
The net recovery of costs reported arises from the timing of when costs are incurred by the Company relative to the timing of reimbursement of such costs by our customers.
11
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 7. | PATENTS |
| MICROMEM TECHNOLOGIES INC. | |||
| Patents | |||
| Cost | |||
| At November 1, 2016 | $ | 621,181 | |
| Additions | 161,647 | ||
| Year ended October 31, 2017 | $ | 782,828 | |
| At November 1, 2017 | $ | 782,828 | |
| Additions 6 months to April 30 | 84,382 | ||
| Additions 3 months to July 31 | 29,588 | ||
| Nine months ended July 31, 2018 | $ | 896,798 | |
| At November 1, 2016 | $ | 217,581 | |
| Amortization for the year | 133,785 | ||
| Year ended October 31, 2017 | $ | 351,366 | |
| At November 1, 2017 | $ | 351,366 | |
| Amortization 6 months to April 30 | 77,719 | ||
| Amortization 3 months to July 30 | 40,534 | ||
| Nine months ended July 31, 2018 | $ | 469,619 | |
| Net book value at October 31, 2017 | $ | 431,462 | |
| Net book value at July 31, 2018 | $ | 427,179 |
12
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 8. | SHARE CAPITAL, STOCK OPTIONS AND INCOME (LOSS) PER SHARE |
| a) | Share Capital |
Authorized and outstanding:
The Company has two classes of shares as follows:
| i) | Special redeemable voting preference shares, 2,000,000 authorized, none are issued and outstanding. | |
| ii) | Common shares without par value – an unlimited number authorized. |
| Number of | Amount | |||||
| Shares | $ | |||||
| Balance at October 31, 2016 | 204,388,569 | $ | 75,855,139 | |||
| Private placement of common shares for cash | 3,873,223 | 719,403 | ||||
| Common shares issued on settlement of accounts payable | 547,643 | 107,708 | ||||
| Common shares issued on settlement of compensation | 132,381 | 21,909 | ||||
| Treasury shares cancelled | (750,000 | ) | - | |||
| Bridge loans converted | 20,370,895 | 2,536,963 | ||||
| Reallocation from derivative liability for loan converted | - | 20,970 | ||||
| Loss on conversion of bridge loan | - | 936,102 | ||||
| Balance at October 31, 2017 | 228,562,711 | $ | 80,198,194 | |||
| Private placement of common shares for cash | 6,409,009 | 541,372 | ||||
| Bridge loans converted (Note 9) | 9,393,690 | 614,794 | ||||
| Shares issued to settle accounts payable | 79,765 | 10,649 | ||||
| Balance at July 31, 2018 | 244,445,175 | $ | 81,365,010 |
In the three months ended July 31, 2018 the Company completed $ CDN private placements with arms’ length investors in July 2018 and realized proceeds of $335,319 ($270,011 USD). It issued 3,471,122 shares with respect to these private placements. It issued 4,964,881 common shares with respect to the conversion of bridge loans totaling $239,402.
13
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 8. | SHARE CAPITAL, STOCK OPTIONS AND INCOME (LOSS) PER SHARE (Cont’d) |
| b) | Stock Options |
Stock option plan:
The Company has a fixed stock option plan. Under the Company’s stock option plan (the “Plan”), the Company may grant options for up to 18,840,000 shares of common stock to directors, officers, employees or consultants of the Company and its subsidiaries. The exercise price of each option is equal to or greater than the market price of the Company’s shares on the date of grant unless otherwise permitted by applicable securities regulations. An option’s maximum term under the Plan is 10 years. Stock options are fully vested upon issuance by the Company unless the Board of Directors stipulates otherwise by Directors’ resolution.
A summary of the status of the Company’s fixed stock option plan through July 31, 2018 and changes during the periods is as follows:
| Weighted | |||||||||
| average | |||||||||
| exercise | Proceeds | ||||||||
| Options | price | realized | |||||||
| (000 | ) | $ | |||||||
| Outstanding, November 01, 2016 | 4,395 | 0.45 | |||||||
| Granted | 2,890 | 0.25 | |||||||
| Expired | (690 | ) | (0.35 | ) | |||||
| Outstanding, October 31, 2017 | 6,595 | 0.37 | |||||||
| Granted | 2,200 | 0.03 | |||||||
| Expired | (1,860 | ) | 0.35 | ||||||
| Outstanding ,July 31, 2018 | 6,935 | 0.29 |
14
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 8. | SHARE CAPITAL, STOCK OPTIONS AND INCOME (LOSS) PER SHARE (Cont’d) |
The Company has the following stock options outstanding at July 31, 2018:
| Weighted | ||||||||||||
| average | ||||||||||||
| remaining life | ||||||||||||
| Date of issue | # Issued | Strike Price | (in years) | Expiry Date | ||||||||
| February 10, 2014 | 350,000 | 0.85 | 0.5 | February 10, 2019 | ||||||||
| April 25, 2014 | 205,000 | 0.64 | 0.7 | April 25, 2019 | ||||||||
| June 4, 2015 | 300,000 | 0.49 | 1.8 | June 4, 2020 | ||||||||
| August 20, 2015 | 940,000 | 0.46 | 2.1 | August 20, 2020 | ||||||||
| September 30, 2015 | 250,000 | 0.40 | 2.2 | September 30, 2020 | ||||||||
| December 30, 2016 | 2,690,000 | 0.25 | 3.4 | December 30, 2021 | ||||||||
| June 29, 2018 | 2,200,000 | 0.10 | 4.9 | June 29, 2023 | ||||||||
| 6,935,000 | 0.26 |
All outstanding options at July 31, 2018 are exercisable. In the 3 months ended July 31, 2018 the Company recorded an expense of $140,612 (2017 – Nil) with respect to stock options issued during the 3 month period. The cost of options issued for the 9 month period ended July 31, 2018 was $140,612 (2017 - $442,206).
The underlying assumptions in the Black Scholes option-pricing model were as follows:
| 2017 | 2018 | |||||
| Share price | $ | 0.22 | $ | 0.09 | ||
| Volatility factor (based on historical vol | 102% | 95% | ||||
| Risk free interest rate | 0.72% | 2.07% | ||||
| Expected life | 5 years | 5 years | ||||
| Dividend yield | 0% | 0% | ||||
| Forfeiture rate | 0% | 0% |
| b) | Income (Loss) Per Share |
The calculation of basic and diluted income (loss) per share for the three and nine months ended July 31, 2018 was based on the loss attributable to common shareholders divided by the weighted average number of common shares outstanding. Diluted income (loss) per share does not include the effect of 6,935,000 stock options outstanding as they are anti-dilutive.
15
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 9. | BRIDGE LOANS |
2017 Bridge Loans:
| 1) | The bridge loans outstanding at October 31, 2017 and for the year then ended are summarized as below. |
| October 31,2017 | |||||||||
| $ USD | $ CDN | Total | |||||||
| denominated loans | denominated loans | ||||||||
| ($US) | ($US) | ||||||||
| Debt obligations | 855,297 | 1,633,720 | 2,489,017 | ||||||
| Equity portion of bridge loans | 62,050 | - | 62,050 | ||||||
| Derivative Liability | 207,855 | 281,879 | 489,734 | ||||||
| Interest payable at October 31, 2017 | 4,034 | 45,829 | 49,863 | ||||||
| Year ended October 31, 2017 | |||||||||
| $ USD | $ CDN | Total | |||||||
| denominated loans | denominated loans | ||||||||
($US) | ($US) | ||||||||
| Accretion expense | 109,895 | 1,248,206 | 1,358,101 | ||||||
| Interest expense | 165,061 | 501,184 | 666,245 | ||||||
| (Gain)/loss on conversion/ extinguishment of debt | 71,059 | 938,621 | 1,009,680 | ||||||
| (Gain)/loss on revaluation of derivatives | (93,500 | ) | (1,521,322 | ) | (1,614,822 | ) | |||
| 2) | The Company completed the following bridge loan transactions in the 2017 fiscal year: |
| (a) | Certain the 2016 bridge loan were extended on several occasions during 2017, ultimately through October 31, 2017 and thereafter. These exclusions were treated, as appropriate, as either modifications or as extinguishment of the loans with the requisite prescribed accounting measurements reflected. |
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MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| (b) | Six of the 2016 bridge loans were converted, into common shares during 2017. The Company reflected a loss on conversion of the bridge loans as appropriate, with the requisite prescribed accounting measurements reflected. | |
| (c) | The Company secured a total of 15 additional $CDN denominated bridge loans in 2017 and realized gross proceeds of $1,223,524. One of these bridge loans was repaid in October 2017. | |
| (d) | The Company secured three additional $USD bridge loans in 2017 and realized gross proceeds of $501,500. |
2018 Bridge loans
| 3) | The bridge loans outstanding at July 31, 2018 and for the three months then ended are summarized as below: |
| July 31,2018 | |||||||||
| $ USD | $ CDN | Total | |||||||
| denominated loans | denominated loan | ||||||||
| ($US) | ($US) | ||||||||
| Debt obligations | 1,168,311 | 1,466,502 | 2,634,813 | ||||||
| Equity portion of bridge loans | 152,056 | - | 152,056 | ||||||
| Derivative Liability | 668,577 | 214,505 | 883,082 | ||||||
| Interest payable at July 31, 2018 | 38,778 | 67,600 | 106,377 | ||||||
17
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| Three months July 31, 2018 | |||||||||
| $ USD | $ CDN | Total | |||||||
| denominated loans | denominated loans | ||||||||
| ($US) | ($US) | ||||||||
| Accretion expense | 152,988 | 380,506 | 533,494 | ||||||
| Interest expense | 54,652 | 68,602 | 123,254 | ||||||
| Net (gain)/loss on extinguishment of debt(1) | 48,435 | (153,258 | ) | (104,823 | ) | ||||
| (Gain)/loss on revaluation of derivatives | (156,617 | ) | (966,343 | ) | (1,122,960 | ) | |||
| (1) | In the statement of net income (loss) and comprehensive income (loss) this balance is reported net of the foreign exchange loss on conversion/extinguishment of debt. The three month net loss reported at July 31, 2018 is $43,832 (2017: nil). | |
In 2018 the Company incurred finance fees relating to certain convertible debentures issued to institutional investors; these costs totaled $33,977 for the 3 months ended July 31, 2018 (2017: nil) and $181,435 for the 9 months ended July 31, 2018 (2017: nil). |
The Company completed the following loan transactions in the quarter ending July 31, 2018:
| a. | It secured five new bridge loans for total gross proceeds of $312,100 from US investors, each loan with a one year term. These loans are convertible at the option of the lender. | |
| b. | It secured three new bridge loans from Canadian investors for total gross proceeds of $197,258, each of the loans have a term of between 4 months and 12 months and are convertible at the option of the lender. | |
| c. | It repaid two loans from Canadian investors at their maturity dates totaling $55,000. | |
| d. | It extended the maturity date of loans from various investors for a period of 4-12 months. | |
| e. | It issued 9,393,690 common shares with respect to the conversion of bridge loans totaling $614,795. |
18
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 10. | INCOME TAXES |
| (a) | At October 31, 2017 the Company had non-capital losses of approximately $28 million available to reduce future taxable income, the benefit of which has not been recognized in these consolidated financial statements. As of July 31, 2018 the tax losses expire as follows: |
| Other | |||||||||
| Canada | foreign | Total | |||||||
| 2026 | 1,899,204 | - | 1,899,204 | ||||||
| 2027 | 1,597,082 | - | 1,597,082 | ||||||
| 2028 | - | 55,419 | 55,419 | ||||||
| 2029 | 1,636,797 | 463,510 | 2,100,307 | ||||||
| 2030 | 2,208,466 | 1,880,897 | 4,089,363 | ||||||
| 2031 | 1,330,532 | 18,526 | 1,349,058 | ||||||
| 2032 | 1,474,575 | 325,793 | 1,800,368 | ||||||
| 2033 | 1,787,330 | 157,463 | 1,944,793 | ||||||
| 2034 | 2,585,661 | 679,089 | 3,264,750 | ||||||
| 2035 | 2,922,022 | 570,901 | 3,492,923 | ||||||
| 2036 | 3,429,163 | 441,019 | 3,870,182 | ||||||
| 2037 | 2,416,427 | 238,033 | 2,654,460 | ||||||
| $ | 23,287,259 | $ | 4,830,650 | $ | 28,117,909 |
| (b) | In addition the Company has available capital loss carry forwards of approximately $1.3 million to reduce future taxable capital gains, the benefit of which has not been recognized in these consolidated financial statements. These losses carry forward indefinitely. |
19
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 11. | EXPENSES |
Administration
The components of general and administration expenses are as follows:
| 2018 | 2017 | |||||
| General and administrative | $ | 30,664 | $ | 67,836 | ||
| Rent and occupancy cost | 54,052 | 53,493 | ||||
| Office insurance | 79,422 | 54,023 | ||||
| Telephone | 7,846 | 9,951 | ||||
| Investor relations, listing and filling fees | 41,946 | 52,892 | ||||
| $ | 213,930 | $ | 238,195 |
Professional, Other Fees and Salaries
The components of professional, other fees and salaries expenses are as follows:
| 2018 | 2017 | |||||
| Professional fees | $ | 125,309 | $ | 232,264 | ||
| Consulting fees | 244,009 | 661,231 | ||||
| Salaries and benefits | 202,460 | 333,426 | ||||
| $ | 571,778 | $ | 1,226,921 |
20
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 12. | MANAGEMENT COMPENSATION AND RELATED PARTY TRANSACTIONS |
The Company reports the following related party transactions:
| (a) | Management and consulting fees: |
Included in professional fees, other fees and salaries as reported are management fees and consulting fees paid or payable to individuals (or companies controlled by such individuals) who serve as officers, directors and employees of the Company. The total compensation expense to such parties is summarized as:
| Q3 | Q3 | |||||
| 2018 | 2017 | |||||
| Cash compensation | $ | 208,938 | $ | 567,354 | ||
| Stock based compensation | 44,740 | 315,968 | ||||
| $ | 253,678 | $ | 883,322 |
| (b) | In nine months ended July 31, 2018, these parties were awarded a total of 700,000 options at an exercise price of $0.10 (2017: 1,950,000 options at an exercise price of $0.25 per option). | |
| (c) | The CEO of the Company provided a $150,000 bridge loan to the Company in December 2017. This loan is included in the bridge loan summary in Note 9. |
| 13. | COMMITMENTS |
The Company has extended its lease for premises through July 2022. The lease term is for 5 years and stipulates base monthly rental expenses of $4,005 CDN. Lease commitments are as follows – commitments less than one year of $48,060 CDN, years 2-5: $144,178 CDN.
The Company has certain commitments to 3rdparty subcontractors with respect to development projects. These commitments are as follows:
| (a) | Commitments due in less than 12 months – approximately $200,000; of which we expect to receive funding from our customers of approximately $260,000. | |
| (b) | The Company entered into a contract with an automotive Tier 1 supplier in 2013 for project development work at an overall cost of approximately $1.8 million. That project was suspended in 2015 and we have not yet recommissioned this work. The Company incurred $262,000 of costs on this project before it was suspended. If the project is reinstated, the Company will have to incur the balance of these costs. |
21
MICROMEM TECHNOLOGIES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in United States dollars)
| For the three and nine months ended July 31, 2018 and 2017 |
| 14. | CONTINGENCIES |
| (a) | The Company has agreed to indemnify its directors and officers and certain of its employees in accordance with the Company’s by-laws. The Company maintains insurance policies that may provide coverage against certain claims. | |
| (b) | In addition to the above, the Company may be subject to litigation, claims and governmental and regulatory proceedings arising in the ordinary course of business. In such cases, the Company accrues a loss contingency for these matters when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. |
| 15. | SUBSEQUENT EVENTS |
The Company reports the following subsequent events:
| 1. | Steven Van Fleet resigned as an officer and director of the Company on August 17, 2018 with an effective date of August 31st. As reported in the body of our current reporting, the Company has developed an alternative go forward business plan utilizing other resources. | |
| 2. | The Company issued approximately 3 million common shares upon the conversion of $106,000 of convertible debentures. | |
| 3. | 3 debentures were renewed at their maturity dates representing a total of $118,000 $CDN denominated debentures ($91,450 USD). | |
| 4. | The Company secured 2 additional debentures denominated in $CDN for $125,000 (approximately $97,000 USD) and one US denominated debenture for $50,000. |
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