Exhibit 99.2
MICROMEM TECHNOLOGIES INC.
MANAGEMENT DISCUSSOIN AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JANUARY 31, 2009
PREPARED AS OF MARCH 30, 2009
INTRODUCTION
The following sets out the Management's Discussion and Analysis ("MD&A") of the financial position and result of operations for the quarter ending January 31, 2009 of Micromem Technologies Inc. (the "Company", "Micromem" or "we"). The MD&A should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes for the fiscal year ending October 31, 2008 which are prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). Additional information regarding the Company is available on the SEDAR website at www.sedar.com.
Certain information provided by the Company in this MD&A and in other documents publicly filed throughout the year that are not recitation of historical facts may constitute forward-looking statements. The words "may", "would", "could", "will", "likely", "estimate", "believe", "expect", "forecast" and similar expressions are intended to identify forward-looking statements.
Readers are cautioned that such statements are only predictions and the actual events or results may differ materially. In evaluating such forward-looking statements, readers should specifically consider the various factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements.
This MD&A contains forward-looking statements and forward looking information within the meaning of applicable Canadian securities legislation (“forward looking statements”). Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions, potentials, future events or performance (often, but not always, using words or phrases such as “believes”, “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, or “intends” or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken or achieved) are not statements of historical fact, but are “forward-looking statements”. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or developments in the Company’s business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking statements include disclosure regarding possible events, conditions or results of operations that are based on assumptions about future conditions, courses of action and consequences. Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. The Company cautions you not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements relate to, among other things, the successful commercialization of our technology, comments about potential future revenues, joint development agreements and expectations of signed contracts with customers etc. A variety of inherent risks, uncertainties and factors, many of which are beyond the Company’s control, affect the operations, performance and results of the Company and its business, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. Some of these risks and uncertainties include the risk of not securing required capital in future, the risks of not successfully concluding agreements with potential partners on a timely basis, the risks associated with commercializing and bringing to market our technology etc. These risks are affected by numerous factors beyond the Company's control: the existence of present and possible future government regulation, the significant and increasing competition that exists in the Company's business sector, uncertainty of revenues, markets and profitability, as well as those other factors discussed in this MD&A report. This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements and reference should also be made to the Company’s Annual Information Form (prepared and filed in the form of a Form 20-F Annual Report pursuant to The Securities Exchange Act of 1934) for a description of additional risk factors.
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Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward –looking statements. The Company does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities law.
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MICROMEM TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS
QUARTER ENDING JANUARY 31, 2009
PREPARED AS OF MARCH 30, 2009
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III. | |
IV. | |
V. | |
VI. | |
VII. | |
VIII. | |
IX. | |
X. | |
XI. | |
XII. | |
XIII. | |
XIV. |
Tables
1. | Selected Information from Statement of Operations and Deficit |
2. | |
3. | |
4. | |
5. | Outstanding stock options and warrants |
Unless otherwise indicated, $ amounts reported are stated in U.S. dollars. |
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MICROMEM TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS
QUARTER ENDING JANUARY 31, 2009
PREPARED AS OF MARCH 30, 2009
Introduction:
The 2008 fiscal year was a year in which the Company was able to successfully make the transition from our research efforts conducted at the University of Toronto laboratory to industrial testing and optimization of our technology prototypes in commercial foundries in the United States. In the 2008 fiscal year the Company signed several joint development agreements ("JDAs") with potential strategic partners, in each case being a large US or international company that has begun and is continuing testing of our technology to their product specifications and for their own commercial use.
Technology Initiatives:
We have "bifurcated" our technology initiatives into two different streams:
a) | our magnetic sensor technology, to which we have devoted considerable time and expense through January 2009. Our sensors are very small but very powerful/sensitive and our cost structures to produce these sensors are anticipated to be favorable. The testing that we have completed to date to advance our sensor technology has been significant. We have optimized prototypes that are now being tested for specific end use applications by a number of large companies. |
The sensor business represents significant market opportunity to the Company in the short term. The Company believes that MAST Inc., a wholly-owned subsidiary of the Company charged with the responsibility of commercializing and developing our sensor technology, is well positioned to generate revenue from both sensor sales and by providing professional services aimed at creating solutions to clients unmet needs/clients with sensor technology consulting services. | |
b) | Our non-volatile, radiation-hardened memory applications, which we believe have a considerable value added proposition for the most demanding memory applications in different industry verticals. The prevailing platform for the majority of memory applications is a silicon- based substrate which can be "mass produced" inexpensively and which thus allows for application in all mass produced technologies – cell phones, computer screens, common electronic applications etc. Our memory applications have been built on a gallium arsenide substrate that affords higher performance attributes at a higher cost of manufacturing. Micromem is focusing our memory on high application niche markets that can afford a higher performance, higher cost memory. We are pursuing collaborative relationships with outside technology partners who have significant expertise in memory manufacturing including printing the memory cells with ink. This is expected to have both improved performance and cost saving implications in the production of our technology in the future. |
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The development of our memory to commercial application is a long and costly process that will span a minimum of several years into the future. We believe that the key to successful exploitation of this technology will be to attract a major corporation(s) to complete the testing, development and commercialization of this technology under licensing agreements whereby Micromem would assign certain intellectual property rights in exchange for fees and royalty consideration.
We expect that Micromem will realize revenues in fiscal 2009 from one or more of the following sources:
a) | revenues realized under joint development agreements for our sensors from strategic partners who will absorb additional development costs, |
b) | revenues realized from potential grants for our memory and our sensors for specific development initiatives which the Company is pursuing, |
c) | revenues from initial license agreement(s) which we hope to negotiate and conclude in 2009, and |
d) | revenues from initial sales of sensors to end users. |
Key Partners:
Our progress has been facilitated through the assistance provided by our technical advisors/partners including:
a) | Strategic Solutions:A California based engineering design firm that the Company has had on retainer since 2006. Strategic Solutions has been a key interface between the Company and GCS Foundry. We incurred approximately $72,000 of fees and expenses relating to Strategic Solutions in the quarter. |
b) | Global Communications Semiconductor Inc. ("GCS"):A California based semiconductor foundry that has been instrumental in producing and optimizing our memory and sensor prototypes to increasingly higher performance levels. We incurred approximately $96,000 in fees and expenses relating to GCS in the quarter. |
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c) | BAE Systems ("BAE"):In August 2008 we announced that we had entered into a development initiative with BAE whereby we began the testing of our prototype in their foundry facilities. BAE is evaluating our memory and sensors for multiple specific applications for their customers including companies in the avionics and defense sectors. The Company is optimistic that BAE will identify multiple specific applications for our sensors in different BAE product configurations. At that point we expect to negotiate a definitive foundry services agreement that will address, amongst other things, the licensing of our technology, future royalties and cost sharing agreements, exclusivity in specific vertical market applications, control over and ownership of intellectual property being developed etc. |
In early December we were advised of damage to a shipment of a production lot from Innovative Micro Technology (a subcontractor to MAST Inc.) to BAE, whereby the lot was destroyed in transit. We are advised that this has no impact/delay on our go forward plans with BAE in 2009. Micromem has received an insurance settlement of $250,000 U.S. funds. | |
d) | Dreifus Associates Ltd ("DAL"):A technical design/consultancy firm that has a demonstrated expertise in our technology processing on new product applications. The major shareholder of DAL is Mr. Henry Dreifus. Micromem engaged DAL to conduct an extensive review of our technology and the progress of our various initiatives in mid 2007. This work continued through March 2008 when the Company invited Mr. Dreifus to serve as a member of our Board of Directors. |
DAL has been instrumental in identifying new potential market applications for our sensors, introducing the Company to potential strategic partners based on its extensive list of industry contacts, assistance in prototype definition and scopes, development of product evaluation boards for end user testing under JDAs, developing new intellectual property assets over which the Company has sole ownership, and, finally, DAL has taken a technical support role in our application for specific grants to conduct new research and testing of future applications for our technology. | |
In the quarter ended January 31, 2009 we incurred approximately $168,000 to DAL for services rendered and also issued common stock options to Henry Dreifus and to certain of his DAL staff who have been active in assisting the Company as further discussed below. |
Intellectual Property:
We have added significantly to our intellectual property portfolio since 2007 during which period we filed provisional patents in multiple jurisdictions. We have utilized the services of US-based Morgan Lewis LLP ("Morgan Lewis") as our intellectual property legal advisors since 2005. In the quarter ended January 31, 2009 we incurred $66,000 of costs associated with these services provided by Morgan Lewis.
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Ex CTO Claims Settled:
As reported in our previous statutory filings and periodic press releases, our former Chief Technology Officer ("CTO"), Cynthia Kuper, filed a complaint against Micromem in February 2008 pursuant to Section 806 of the Sarbanes Oxley Act of 2002 ("SOX") with the Department of Labor, Occupational Safety and Health Administration ("OSHA").
Ms. Kuper was originally hired as Micromem's CTO under contract in January 2005. Her annual base remuneration was set at $260,000 per year with a 2 year term. That term was extended in January 2007 with the proviso that the contract could nonetheless be terminated at any time by the Company without cause by providing 4 months written notice.
Micromem terminated her services in November 2007 under the terms of the contract that we had executed by serving her with four months written notice without cause. In her complaint, she alleged that she had been terminated because of her "whistle-blower" activities which would have been in contravention of SOX regulations.
The Company vigorously denied the allegations made by Ms. Kuper. We submitted a series of position statements and supporting documents to OSHA through our counsel, between May-July 2008, and OSHA dismissed the claim against the Company in August as without foundation. Ms. Kuper appealed this decision in August.
In September, 2008, settlement discussions were initiated by Ms. Kuper's counsel. In November we settled the matter and Ms. Kuper retracted her allegations. This matter has now been dismissed by OSHA with prejudice to Ms. Kuper.
The Company paid a total of $80,166 which consisted of $54,962 payable to Ms. Kuper and constituting funds due to Ms. Kuper under the original notice terms of her contract, and $25,204 for fees and costs. These funds were released to Ms. Kuper's counsel once her retraction letter was received by OSHA and once the matter was finally dismissed by OSHA with prejudice to Ms. Kuper.
In total the Company incurred approximately $125,000 in legal fees associated with our dealings with the regulators on this matter.
SOX 404 Audit:
In 2008 our status advanced to that of "accelerated filer" under SOX legislation, which requires that the Company conduct a formal evaluation and review of its internal control procedures, have these controls independently tested and have an external audit completed of its internal control procedures.
In anticipation of becoming subject to these reporting responsibilities in 2005-2006 when we engaged an independent firm of accountants to complete "Level 1" documentation of our internal controls and procedures.
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In 2008 we engaged the same independent firm of accountants to review our procedures and controls, update their documentation, conduct testing and provide their report. We used this work to prepare our management report in accordance with SOX legislation. In 2008, the Company incurred approximately $100,000 with respect to the SOX reporting and compliance. Specific details have been provided in our MD&A filing as of October 31, 2008.
In the quarter ended January 31, 2009 we began to implement certain procedures designed to address the weakness cited in our 2008 audit of our internal controls.
Board/Governance Matters:
In March 2008 we added Mr. Henry Dreifus to our Board of Directors, as noted above.
We formed a Compensation Committee and a Disclosure Committee in 2008, chaired in each case by an independent outside director. We formed a Technical Advisory Committee in 2007 and our Audit Committee has been established since inception.
We held an audit committee meeting and a full board meeting in early February 2009 to approve our annual financial statement filings of October 31, 2008.
We appointed an outside director to supervise all of the Company's responses to the ex CTO's claims of SOX violations which she submitted in February 2008. This director worked with our CFO, our external counsel and an independent legal advisor whom we also engaged to deal with this matter. These claims were dismissed by the regulators in August 2008 and our ex CTO retracted her claims in November 2008.
Potential Strategic Partners and Product Development:
During the quarter ended January 31, 2009 we continued to work with several strategic partners including BAE, Norwegian EM Technology and Unotron Limited and continued our development efforts with respect to our prototypes for the mining industry sensor and our oil sensor as previously disclosed.
The Company has been developing prototype sensor applications for the mining sector, the oil and gas sector, the biometric medical device sector and the defense sector. Its expectation is that it will advance these projects in collaboration with the above-noted and other parties in 2009-2010.
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Financing:
We were active in raising financing to support all of our initiatives and undertakings during the quarter ended January 31, 2009. A total of $218,882 of cash was raised through the issuance of 368,854 common shares and we issued 75,000 shares for $54,250 consideration provided by an outside consultant as follows:
Source | Number of shares issued | $ Financing raised |
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Private placements | 336,053 | $194,465 |
Exercise of stock options | 32,801 | $24,417 |
Cashless shares for service | 75,000 | $54,250 |
| 443,854 | $273,132 |
Corporate Structure: | ||
The Company incorporated two new subsidiaries in 2008: |
a) | MAST Inc. as a wholly-owned, Delaware-based subsidiary, charged with the responsibility to develop and commercialize our technology with strategic partners. |
b) | 7070179 Canada Inc. as a wholly-owned Canadian subsidiary. In 2008, Micromem transferred certain of its intellectual property assets to this subsidiary as part of its overall strategic and financial planning in anticipation of future business developments. |
The Company’s other subsidiaries are inactive but remain in good standing.
Conclusion of Research at University of Toronto:
Our working relationship with the University of Toronto was concluded on amicable and satisfactory terms in 2008. The University of Toronto’s research team included Dr. Harry Ruda and his assistant, Simon Aouba, who have worked with Micromem under successive research initiatives since 2003.
Between 2003-2006, the Company incurred approximately $750,000 with respect to the work completed at the University of Toronto. In May 2008 it discharged all of its remaining obligations to the University of Toronto for additional work completed in 2007-2008 by a final payment of $125,000 (Canadian funds) and the issuance of 30,000 common shares with a market value at date of issue of $59,100.
The work completed at the University of Toronto since 2003 has set the foundation for the Company’s continuing progress in commercializing its prototypes in the US-based industrial foundries.
Tax Returns and Loss Carryforwards:
The Company brought all of its tax filings up to date in 2008 and is now current and in good standing with the regulatory authorities. It reports approximately $9.9 million of loss carryforwards available to reduce future taxable income. The potential tax benefit of these loss carry forwards, which could approximate up to $3.3 million in future tax savings, is fully reserved and reported at nil value in our balance sheet as of January 31, 2009.
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Financial Position / Non-Cash Expenses re Black Scholes:
The Company reports a deficit of $68,389,942 as of January 31, 2009. This deficit includes the cumulative results of operations since 1999 and there is a significant component of this total that consists of non-cash expenses pertaining to the cost of stock options, stock compensation and warrants issued; such costs calculated in accordance with the Black Scholes option pricing model.
Management is of the view that these non-cash costs measured via the Black Scholes model are highly judgmental in measurement and in interpretation.
An analysis of the components of the deficit, highlighting the pre-University of Toronto period (1999-2003) and the period of time thereafter through 2008 is as below ($000):
| 1999-2003 | 2004-2008 | 2009 | Total | ||||||||
| (3 mos | ) | ||||||||||
Research and development, Professional and consulting fees | $ | 8,899 | $ | 8,620 | $ | 843 | $ | 18,362 | ||||
Salaries | 9,337 | 1,084 | 86 | 10,507 | ||||||||
Royalty write-off | 10,000 | - | - | 10,000 | ||||||||
Administration related | 4,234 | 2,469 | 305 | 7,008 | ||||||||
Non-cash costs reported associated with Black Scholes pricing model | 15,700 | 6,463 | 355 | 22,518 | ||||||||
Cumulative deficit ($000): | 48,170 | 18,636 | 1,584 | 68,390 |
Contractual Obligations and Management Compensation:
The Company has entered into a number of employment contracts during 2008 relating to the employment of certain key executives. These contracts are for 2-3 year terms as follows:
| Annual Base Remuneration | Term Expiry | ||||
President | $ | 160,000 | (1) | May 2010 | ||
President, MAST | $ | 180,000 | May 2011 | |||
CFO | $ | 150,000 | (1) | May 2010 | ||
(1) Canadian funds; at 1/31/09 exchange rate to covert to $US was $0.80 |
In addition, the Company paid the Chairman a total of $416,171 in 2008 and $30,577 for the quarter ended January 31, 2009 under the terms of his contract which expires in September 2009.
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The total compensation paid to our key officers and directors in the quarter ended January 31, 2009 is summarized as below.
| Cash | Options | Total | ||||||
Chairman | $ | 30,577 | $ | - | $ | 30,577 | |||
President | 32,595 | 28,500 | 61,095 | ||||||
CFO | 30,830 | 28,500 | 59,330 | ||||||
President, MAST | 43,247 | 142,500 | 185,747 | ||||||
Chair, Audit Committee | - | 24,225 | 24,225 | ||||||
Chair, Compensation Committee | - | 24,225 | 24,225 | ||||||
Chair, Technical Advisory Committee | - | 24,225 | 24,225 | ||||||
Outside Director | - | 21,375 | 21,375 | ||||||
Other Director (DAL) | 76,578 | 13,117 | 89,695 |
Investor Relations Group (“IRG”):
In September 2008 the Company also entered into a contract with IRG, an investor relations firm in New York City, for a 12 month period. Under the terms of this contract, which can be terminated at any time without cause on 30 days notice, the Company pays $13,500 cash and issues 25,000 common shares per month for services provided.
2009 Outlook:
2009 is expected to be a positive year for the Company. Our business plan anticipates:
a) | successful completion/execution of multiple JDAs with strategic partners relating to our sensors, |
b) | initial sensor product sales, |
c) | initial license agreement(s) executed for our sensor and perhaps our memory technology, and |
d) | positive net income and cash flow from operations. |
* * * * * * * * *
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The Company’s consolidated financial statements have been prepared on the "going concern" basis, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.
We have incurred substantial losses to date. It will be necessary for us to raise additional funds in order to continue to develop, test and commercially exploit our technology. There is no certainty that such financing will be available in the future.
Our ability to continue as a going concern is dependent upon completing the development of our technology for particular applications, successfully bringing our technology to market, achieving profitable operations and obtaining additional financing. The outcome of these matters cannot be predicted at this time.
These consolidated financial statements do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business. If the "going concern" assumption was not appropriate for these consolidated financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.
III. OPERATING RESULTS AND FINANCIAL POSITION:
Table 1 sets forth selected information from the consolidated statements of operations and deficit for the fiscal years ending October 31, 2006-2008 and for the quarterly information through January 31, 2009.Table 2 sets forth selected information from the consolidated balance sheets for the fiscal years ending October 31, 2006-2008 and the quarterly information through January 31, 2009.
Financial Position at January 31, 2009:
The Company reports a working capital deficiency of $697,379 at January 31, 2009 (2008: $1,728,948).
The loss reported at January 31, 2009 was $1.58 million including the non-cash cost of stock options granted/vested during the quarter of $355,117 (2008 loss of $720,055 with non-cash stock options cost of $29,277).
To finance our operating loss in the quarter ended January 31, 2009, we raised $218,882 through the issuance of common shares relating to private placements and through the exercise of common share purchase warrants and shares for services.
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At January 31, 2009 the Company has:
a) | 10,747,199 stock options outstanding which expire, if unexercised, between 2009- 2013. If fully exercised, the Company would realize approximately $9.17 million of proceeds. |
b) | 637,128 common share purchase warrants which expire in 2009-2010 if unexercised. If fully exercised, the Company would realize approximately $662,000 of proceeds. |
Comparison of the quarter ended January 31, 2009 to the quarter ended January 31,2008:
a) | The Company remains in pre-revenue mode at January 31, 2009. It reports interest income of $5,637 in the first quarter (2008: $1,493); it successfully raised additional financing in 2008 and earned more interest income on temporarily available excess cash on hand during the quarter. |
b) | General and administrative expenses compare as follows ($000): |
2009 | 2008 | |||||||||
1) | Investor relations | $ | 128 | $ | - | |||||
2) | Shareholder information | 6 | 14 | |||||||
3) | Telephone | 4 | 7 | |||||||
4) | Insurance | 11 | 10 | |||||||
5) | Rent | (8 | ) | 7 | ||||||
6) | Exchange loss | 32 | 10 | |||||||
7) | MAST | 90 | - | |||||||
8) | All other | 17 | 21 | |||||||
| 280 | $ | 69 | |||||||
Commentary keyed to cost categories: |
1) | The Company engaged the Investor Relations Group (IRG) of New York in September 2008. We are committed to monthly payments of $13,500 plus 25,000 common shares per month under this one year contract. | |
5) | The Company has rebilled certain related companies who share office space with it and which have certain common officers and directors. At January 31, 2009 the Company has reserved the outstanding accounts receivable with certain of these parties given uncertainty of collection. |
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c) | Professional, Other fees and Salaries compare as follows: |
| 2009 | 2008 | ||||||||
1) | Legal – patents | $ | 50 | $ | - | |||||
2) | Legal – other | 16 | 23 | |||||||
3) | Salaries and benefits | 86 | 34 | |||||||
4) | Management fees | 94 | 141 | |||||||
5) | DAL | 77 | 58 | |||||||
6) | President, MAST Inc. | 43 | 32 | |||||||
7) | Other | - | 37 | |||||||
| 366 | 325 | ||||||||
8) | Stock compensation expense | 355 | 29 | |||||||
| $ | 721 | $ | 354 |
Commentary keyed to cost categories:
(2) | We incurred $125,000 in legal expenses in 2008 pertaining to the SOX violation allegations which claims were ultimately dismissed with prejudice to Ms. Kuper by OSHA and which claims were ultimately retracted by Ms. Kuper. We incurred approximately $75,000 of legal fees in 2008 relating to our application for listing on a Canadian stock exchange and additional costs relating to the adoption of a shareholders rights plan. | |
(3) | Salaries were increased in June 2008 for several employees. There was less rebilling of common salary costs to other related companies in 2008. | |
(4) | Management fees expense include in 2009 to Cynthia Kuper of $Nil prior to termination of her contract (2008 : $66,000); our President $33,000 (2008 : $18,000), our CFO $30,000 (2008 : $19,000) and our Chairman $30,000 (2008 : $38,000). The monthly fees for our President and CFO were adjusted in mid year. Our Chairman’s annual compensation is determined in keeping with the contract on file which extends through September 30, 2009. | |
(5) | DAL is a consulting firm owned by a Company director, Henry Dreifus, who provided services to the Company commencing in late 2007. | |
(6) | We signed a 3 year contract with the President of MAST Inc. our wholly-owned subsidiary, in mid 2008 at a base annual amount of $180,000. | |
(8) | In 2008 we decided to calculate the Black Scholes cost associated with stock compensation expense using 5 years as the expected weighted average life of options as reflecting a better current estimate of the expected life of such options. Previously, we used a weighted average life of 1.5 years. The term of options awarded is 5 years. The change in stock compensation expense using this estimate was not significantly different. |
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d) | Research and development expenses compare as follows ($000): |
2009 | 2008 | ||||||
1) Strategic Solutions | 89 | 165 | |||||
2) BAE | 215 | - | |||||
3) GCS | 106 | 68 | |||||
4) President, MAST Inc. | - | 10 | |||||
5) DAL | 96 | - | |||||
6) All other | 58 | 24 | |||||
$ | 564 | $ | 267 |
Commentary keyed to cost categories:
1) | Strategic Solutions was on contract for a base monthly amount of $45,600 in 2008 and was paid for additional work completed above and beyond the agreed upon base level of contract work. | |
2) | The payments to BAE are with respect to foundry services provided in the BAE facilities. | |
3) | The work performed by GCS relates to the prototype development work completed in the GCS foundry in 2008. | |
4) | A portion of the 2008 consulting payments made to Steven Van Fleet, President of MAST Inc. has been categorized as research and development costs. |
e) | Travel related expenses compare as follows ($000): |
2009 | 2008 | ||||||
1) Airfare | $ | 9 | 48 | ||||
2) Hotels | 3 | 27 | |||||
3) Meals | 6 | 32 | |||||
4) Transportation | 6 | 7 | |||||
5) Other | - | 1 | |||||
$ | 24 | $ | 115 |
Travel related costs have been curtailed during the first quarter of 2009. In 2008 we incurred significant additional costs pertaining primarily to travel by Steven Van Fleet, Henry Dreifus and Strategic Solutions, all in pursuit of our product development and commercialization efforts.
IV. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Tables 1 and 2 present certain quarterly information for the 2007 – 2009 fiscal years.
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V. LIQUIDITY AND CAPITAL RESOURCES
Liquidity:
Table 3 provides a summary of the financing that was raised between 2006-2009.
We currently have no cash flow from operations and will have none until we are in a position to either license or directly produce and sell products utilizing our technologies. As at January 31, 2009, our working capital deficiency was $697,379 (2008: $1,728,948).
We currently have no lines of credit in place, we must obtain financing from new investors or from investors who currently hold outstanding options and warrants in order to meet our cash flow needs until we generate revenues.
We have granted to our directors, officers and other employees options to purchase shares at prices that are at or above market price on the date of grant. A summary of the outstanding options and warrants is provided inTable 4.
Capital Resources:
We have no commitments for capital expenditures as of January 31, 2009.
VI. CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in Note 3 to our consolidated financial statements and should be read in conjunction with management’s discussion of the Company’s critical accounting policies and estimates as set forth below.
Canadian GAAP:
Our financial statements are prepared in conformity with Canadian GAAP which require our management to make estimates and assumptions which can affect the reported balances. In determining estimates of net recoverable amounts and net realizable values, or whether there has been a permanent impairment in value, we rely on assumptions regarding applicable industry performance and prospects, as well as general business and economic conditions that prevail and are expected to prevail. Assumptions underlying asset valuations are limited by the availability of reliable comparable data and the uncertainty of predictions concerning future events.
Our Canadian GAAP financial statements conform in all material respects with US GAAP. The exception to this is with respect to how we allocate proceeds received on Unit private placements. As noted below we allocate the full value of the proceeds realized on Unit private placements to the common shares issued as part of the Unit private placement and assign a nil value to the attached warrants. This is referred to as the residual approach to valuation. Under US GAAP, using standards which are analogous, the valuation of the shares and warrants would be determined using the relative fair value approach. In management’s opinion, as illustrated in Note 18 to the financial statements, the difference is not material and, in any event, there is no change in aggregate shareholders’ equity reported.
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Foreign Currency Translation:
Accounts recorded in foreign currency have been converted to United States dollars as follows:
Current assets and current liabilities, at the prevailing exchange rates at the end of the year;
Other assets at historical rates;
Revenues and expenses are translated at the 3 month average exchange rate which rate approximates the rate of exchange prevailing at the transaction dates; and,
Gains and losses resulting from the fluctuation of foreign exchange rates are included in the determination of income.
Research and Development Expenses:
Research costs are expensed in the period incurred. Development expenses are expensed as incurred unless they meet the criteria for deferral and amortization under Canadian GAAP which is the translation of research findings or other knowledge into a plan for the technology prior to commercial production or use. The Company has determined that no development costs have met these criteria at the financial reporting date. In that all costs have been expensed as incurred, our accounting policy also conforms with US GAAP.
Patents and Trademarks:
Patents and trademarks are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When circumstances dictate, an impairment loss is calculated as equal to the excess of the carrying value of the assets over their undiscounted estimated future net cash flow.
Stock-Based Compensation:
Stock-based compensation is recognized using the fair value method. Under this method, the Black Scholes option-pricing model is used to determine periodic stock option expense. Any compensatory benefit recorded is recognized initially as deferred share compensation in the consolidated statements of shareholders’ equity and then charged against income over the contractual or vesting period.
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As stock options are exercised, the Company records a charge to contributed surplus and a credit to share capital. The amount reported in each case is based on the original expense recorded when the related options were granted.
Unit Private Placements:
The Company has adopted the residual value approach in accounting for the value assigned to the common shares and the warrants which it has made available in a number of Unit private placement financings. In that the Unit private placement price is equal to the common share price at the issue date of the Unit, the Company has assigned 100% of the proceeds to the common shares and a nil value to the attached warrants.
Warrant Repricing:
In the 2006 and 2007 fiscal years the Company recorded a non-cash charge to share capital and an offsetting credit to contributed surplus at the point in time that certain outstanding common share purchase warrants were repriced. The amounts reported were calculated based on the Black Scholes option-pricing model.
Income Taxes:
The Company accounts for income taxes by the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted tax rates and laws that are expected to apply when the asset is realized or the liability settled. To the extent that it is estimated that a future income tax asset will not be realized, a valuation allowance is provided.
VII. COMMITMENTS AND CONTINGENCIES
Technology Development Agreement with Estancia:
To the extent that the Company generates revenue in future relating directly and specifically to the Vemram patents, we are obligated to pay Estancia 32% of the gross profit realized less expenses agreed to by the parities and 32% of any unit royalties realized less direct expenses. To date no revenues have been generated. We have discontinued the development of this patented technology after 2002.
Operating Leases:
We have operating lease commitments which expire in 2010 with respect to our head office. The future annual minimum lease payments are approximately $113,000.
18
Legal Matters:
There are currently no outstanding legal matters to which the Company is a party. We have agreed to indemnify our directors and officers and certain of our employees in accordance with our by-laws. We maintain insurance policies that may provide coverage against certain claims.
The Company resolved the matter with our ex CTO, Cynthia Kuper, shortly after October 31, 2008. Ms. Kuper has fully retracted her previous allegations made against the Company and the matter has been dismissed by OSHA with prejudice to Ms. Kuper.
Royalties:
The Company has obligations under the terms of the License Agreement signed with University of Toronto in June 2005. The total obligation could be $1 million tied to future product revenues. To date no royalty obligations have been incurred, as the Company has not generated any revenues.
Senior Management:
In 2005, we entered into an employment agreement with the Chairman of the Board of Directors, Salvatore Fuda (the "Chairman"), for a period from January 1, 2005 through September 30, 2009. Under the terms of the agreement, the Chairman has been retained to provide certain management services to the Company. We have agreed to provide compensation based on a percentage of the increase of the market capitalization on a year-over-year basis commencing as at December 31, 2005 and subject to a minimum annual compensation amount of $150,000 (Canadian funds). At our option, we can pay cash or issue common shares as compensation providing that the cumulative maximum shares that we can issue under the agreement is 2 million common shares. Under this contract, expense as reported for the quarter ended January 31, 2009 was $30,557 as compared to $37,500 in January 2008. The balance reported as due to the Chairman at January 31, 2009 was $439,281.
In May 2008, the Company entered into employment agreements with the President, the Chief Financial Officer and the President of the Company’s subsidiary, MAST Inc. These agreements stipulate obligations as below:
| Term | Annual Obligation |
President | 24 months | $160,000 Canadian Funds |
Chief Financial Officer | 24 months | $150,000 Canadian Funds |
President – MAST | 36 months | $180,000 |
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Short-Term Contracts:
The Company has entered into short-term consulting contracts as follows:
a. | Strategic Solutions, a U.S.-based engineering consulting firm, whereby it has committed to monthly payments of approximately $46,000; this contract expired in December 2008 and has since been extended on a month to month basis. | |
b. | DAL, a U.S.-based design/consulting firm (whose major shareholder is a director of the Company) whereby it has committed to monthly payments of approximately $38,000; this contract expired in December 2008 and has since been extended on a month to month basis. | |
c. | In September 2008 the Company entered into a 12 month contract with IRG, an arm’s length contractor. Under the terms of the contract, the Company pays a monthly cash amount of $13,500. As additional consideration, the Company has agreed to issue 25,000 common shares per month for a total of 300,000 common shares over the term of the contract. At January 31, 2009, the Company has issued 125,000 common shares under the contract and has recorded a non-cash expense and credit to share capital of $106,500 reflecting the market price of the shares of the issue dates. |
Supplier Commitments:
In 2008, the Company entered into an agreement with BAE, a supplier that provides industrial foundry services whereby the Company has committed to pay up to $1 million for production services to be provided through April 2009. At January 31, 2009 the Company has paid $600,000 under the terms of this supply agreement; an additional $200,000 was paid in November 2008.
VIII. DISCLOSURE CONTROLS / INTERNAL CONTROLS
Pursuant to National Instrument 52-109, Certification of Disclosures in Issuers Annual and Interim Filings of the Canadian Securities Administrators, management has evaluated the effectiveness of the Company's disclosure controls and procedures. Effective December 15, 2008, the Company will be required to provide an assessment and disclosure of the effectiveness of internal control over financial reporting, similar to the requirements of SOX 404a.
In 2008, we were required to have an external audit completed of our internal control procedures in accordance with SOX legislation. The report that was completed itemizes three Material Weaknesses in the Company's system of internal control and reporting systems:
(1) | The Company does not have a formal schedule of authority for approval of various expenditures based on the nature of the transaction. |
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(2) | There is inadequate segregation of duties in the travel and entertainment payment cycle, in the payables/purchases/cash cycle and in the approval of related party cross-charges for common overhead expenses. | |
(3) | The Company does not affect a timely and complete close of its year-end financial statements prior to the commencement of the year-end external audit. |
The first two Material Weakness were the product of the review conducted by the firm of independent accountants whom we engaged during 2008 to document, review and test our procedures and controls. Their report was issued on November 10, 2008. During the course of the 2008 year-end audit conducted by our external auditors, we identified the third Material Weakness in our reporting procedures.
In each case, we have reviewed the recommendation made to remedy these Material Weaknesses and we have also provided our response as to the compensating controls that already exist as well as management's plan to remedy these Material Weaknesses in 2009.
Management and the Board of Directors, primarily through the audit committee, have instituted rigorous review procedures on all of our periodic filings. We have established a disclosure committee consisting of outside directors (Messrs. Larry Blue and David Sharpless) and our Chief Information Officer (Jason Baun). A charter for the disclosure committee and a policy has been developed and has been ratified by our Board of Directors. We engage legal counsel and our external investor relations consultants, IRG, to provide guidance, commentary on all of our press releases.
Management has concluded that our disclosure controls and procedures meet required standards. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its various reports are recorded, processed, summarized and reported accurately. In spite of its evaluation, management does recognize that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives.
It is management's opinion that the Company is not exposed to significant interest rate and credit risks arising from financial instruments and that the fair value of financial instruments approximates the carrying value.
Fair values:The Company's financial instruments include: short-term investments, accounts receivable and accounts payable and accrued liabilities, the fair values of which approximate their carrying values due to their short-term maturity.
Credit risk:Financial instruments, which subject the Company to potential credit risk, consist of accounts receivable. The Company does not require collateral or other security for accounts receivable. The Company estimates its provision for uncollectible amounts based on an analysis of the specific amount and the debtor's payment history and prospects.
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Foreign exchange: The Company completes transactions denominated in Canadian and in United States dollars and, as such, is exposed to fluctuations in foreign exchange rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.
X. OFF-BALANCE SHEET ARRANGEMENTS:
The Company has no off-balance sheet financial commitments and does not anticipate entering into any contracts of such nature other than the addition of new operating leases for equipment and premises as may be required in the normal course of business.
XI. TRANSACTIONS WITH RELATED PARTIES:
The Company reports the following related party transactions:
1) | Compensation paid: |
Included in professional fees as reported are management and consulting fees paid or payable to individuals (or companies controlled by such individuals) who served as officers and directors of the Company. The total compensation paid to such parties during the quarters ended January 31, 2008-2009 is as follows (refer also to section XIII): |
Cash Compensation | Stock Option Expense | ||||||
2009 | $ | 214,000 | $ | 306,667 | |||
2008 | $ | 102,606 | - |
The above-noted compensation has been included in the Consolidated Statement of Operations, Comprehensive Loss and Deficit under the caption of Professional, Other Fees and Salaries. | |
2) | Cost sharing agreements: |
In the normal course of business, the Company has entered into cost sharing arrangements with companies with respect to which certain senior officers and directors of the Company exercise significant influence. These entities share space with the Company and these cost sharing agreements are with respect to office overhead expenses. These transactions, which were measured at the exchange amount on the date of the transaction, relate to salaries, rent and other expenses. | |
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The net expense reported by the Company in these expense categories is summarized as follows: | |
| Rent | Salaries | Other | Total | |||||||||
2009 (3 mos) | $ | (8,000 | ) | $ | 86,000 | $ | 1,000 | $ | 79,000 | ||||
2008 | 30,000 | 242,000 | 1,000 | 273,000 | |||||||||
2007 | 20,000 | 121,000 | 3,000 | 147,000 | |||||||||
2006 | 1,000 | 154,000 | 3,000 | 158,000 |
In 2008 the gross amount of these expenses was $447,000 and the Company rebilled $174,000 of these costs to the related companies. At January 31, 2009 the Company reports $128,000 of balances due from such parties for these expenses and has reserved $82,000 due to uncertainty of collection. | |
3) | Accounts receivable, payable and accruals: |
At January 31, 2009 the Company reports the following accounts receivable and payable balances with related parties: |
| $ | 46,875 | ||
| $ | 439,281 | ||
| $ | 168,340 |
At January 31, 2009 the Company reports 83,380,521 common shares outstanding (2008:73,950,067). Additionally, the Company has 10,747,199 stock options outstanding with a weighted average exercise price of $.85 per share (2008: 10,325,000 options outstanding with a weighted average exercise price of $.53 per share) and a total of 637,128 outstanding warrants to acquire common shares with a weighted average exercise price of $1.04 per share (2008: 4,571,328 outstanding warrants with a weighted average exercise price of $.41 per share).
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Our management team and directors, along with their remuneration for the quarter ended January 31, 2009 is presented as below:
Individual | Position | 2009 remuneration | ||
Cash | Options(4) | Total | ||
Salvatore Fuda(1) | Chairman, Director | 30,577 | - | 30,577 |
Joseph Fuda(2) | President, Director | 32,595 | 28,500 | 61,095 |
Henry Dreifus | Director | 76,578 | 13,117 | 89,695 |
Steven Van Fleet(3) | President, Mast Inc./ Director | 43,247 | 142,500 | 185,747 |
David Sharpless | Director | - | 24,225 | 24,225 |
Andrew Brandt | Director | - | 24,225 | 24,225 |
Oliver Nepomuceno | Director | - | 21,375 | 21,375 |
Larry Blue | Director | - | 24,225 | 24,225 |
Dan Amadori(2) | CFO | 30,830 | 28,500 | 59,330 |
(1) | contract extends to September 2009 | |
(2) | 2 year contract extends to May 2010 | |
(3) | 3 year contract extends to May 2011 | |
(4) | Based on options vested during the fiscal year and calculated in accordance with Black Scholes option pricing model |
The following subsequent events are noted:
a. | In February 2009 the Company completed a series of private placement financings with arm’s length investors pursuant to prospectus and registration exemptions set forth in applicable securities laws. The Company secured a total of $623,077 as subscription proceeds and issued a total of 1,153,846 common units. Each unit consists of one common share and one warrant with an exercise price of $0.70. |
b. | The Company extended the contracts referred to in the financial statement footnotes (Note 15(d)(a) and Note 15(d)(b)) on a month to month basis on similar payment terms. |
c. | The matter disclosed previously pertaining to allegations of the Company’s former CTO were resolved in November 2008 when the former CTO retracted her allegations and the matter was dismissed by OSHA with prejudice to the CTO. |
**********
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Micromem Technologies Inc |
Management Discussion and Analysis |
January 31, 2009 |
Fiscal year ending October 31 | Interest and other income | Net Loss | Loss per share (basic and fully diluted) | |||
2008 |
| 11,762 |
| (5,416,725) |
| (0.07) |
2007 |
| 2,586 |
| (2,811,378) |
| (0.04) |
2006 |
| 9,930 |
| (4,058,180) |
| (0.06) |
2005 |
| 8,703 |
| (4,035,483) |
| (0.07) |
2004 |
| 4,746 |
| (2,314,298) |
| (0.043) |
2003 |
| 20,121 |
| (1,767,965) |
| (0.038) |
Quarter ending | ||||||
January 31, 2009 |
| 5,637 |
| (1,583,629) |
| (0.02) |
October 31, 2008 |
| 4,023 |
| (2,236,419) |
| (0.03) |
July 31, 2008 |
| 3,258 |
| (1,280,143) |
| (0.02) |
April 30, 2008 |
| 2,988 |
| (1,180,108) |
| (0.02) |
January 31, 2008 |
| 1,493 |
| (720,055) |
| (0.01) |
October 31, 2007 |
| - |
| (1,328,604) |
| (0.02) |
July 31, 2007 |
| - |
| (660,675) |
| (0.01) |
April 30, 2007 |
| 420 |
| (1,326,587) |
| (0.02) |
January 31, 2007 |
| 2,166 |
| (844,766) |
| (0.01) |
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Table 2 | |||||
Micromem Technologies Inc | |||||
Management Discussion and Analysis | |||||
January 31, 2009 |
Selected Balance Sheet Information (all amounts in United States dollars)
|
| Capital |
|
|
|
Fiscal year ending | Working capital | asssets at | Other |
| Shareholders |
October 31 | (deficiency) | NBV | Assets | Total Assets | equity (deficit) |
2008 | (338,079) | 26,321 |
| 630,467 | (311,759) |
2007 | (1,531,855) | - | - | 329,232 | (1,531,855) |
2006 | (448,923) | - | - | 465,440 | (448,923) |
2005 | (74,831) | - | - | 728,375 | (74,831) |
2004 | 34,685 | 2,925 | - | 474,234 | 37,610 |
2003 | 100,670 | 3,768 | - | 350,138 | 104,438 |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ending |
|
|
|
|
|
|
|
|
|
|
|
January 31, 2009 | (697,379) | 28,927 | - | 509,567 | (668,452) |
October 31, 2008 | (338,080) | 26,321 | - | 630,467 | (311,759) |
July 31, 2008 | 726,529 | 27,868 | - | 1,569,288 | 754,397 |
April 30, 2008 | 209,329 | 8,857 | - | 1,066,373 | 218,186 |
January 31, 2008 | (1,728,948) | - | - | 214,854 | (1,728,948) |
October 31, 2007 | (1,531,855) | - | - | 329,232 | (1,531,855) |
July 31, 2007 | (964,838) | - | - | 88,331 | (964,837) |
April 30, 2007 | (477,651) | - | - | 273,695 | (477,651) |
January 31, 2007 | (451,689) | - | - | 299,877 | (451,689) |
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Table 3 | ||||||
Micromem Technologies Inc | ||||||
Management Discussion and Analysis | ||||||
January 31, 2009 |
Summary of financing raised by Company
Date of financing | 2006 | 2007 | |||||||||
Shares | Price / share | $ | Shares | Price / share | $ | ||||||
Exercise of options | |||||||||||
January 2006 | 150,000 | 0.30 | 45,000 | ||||||||
Feb.-March 2006 | 1,600,000 | 0.30 | 480,000 | ||||||||
May-July 2006 | 1,100,000 | 0.30 | 329,980 | ||||||||
Aug.-Oct. 2006 | 700,000 | 0.30 | 210,000 | ||||||||
January 2007 | 1,000,000 | 0.30 | 300,000 | ||||||||
March 2007 | 600,000 | 0.30 | 180,000 | ||||||||
September 2007 | 100,000 | 0.72 | 72,000 | ||||||||
Exercise of warrants | |||||||||||
June 2006 | 771,850 | 0.63 | 485,548 | ||||||||
April 2007 | 417,500 | 0.40 | 167,000 | ||||||||
July 2007 | 60,000 | 0.40 | 24,000 | ||||||||
Private placements | |||||||||||
May 2006 | 150,000 | 0.50 | 75,000 | ||||||||
October 2007 | 1,577,368 | 0.45 | 716,230 | ||||||||
4,471,850 | 1,625,528 | 3,754,868 | 1,459,230 | ||||||||
2008 | 2009 | ||||||||||
Shares | Price / share | $ | Shares | Price / share | $ | ||||||
Exercise of options | |||||||||||
April 2008 | 1,370,000 | 0.70 | 964,500 | ||||||||
July 2008 | 45,000 | 0.62 | 28,000 | ||||||||
October 2008 | 25,000 | 0.72 | 18,000 | ||||||||
January 2009 | 32,801 | 0.74 | 24,417 | ||||||||
Exercise of warrants | |||||||||||
April 2008 | 83,500 | 0.40 | 33,400 | ||||||||
July 2008 | 1,667,818 | 0.40 | 667,127 | ||||||||
October 2008 | 1,920,000 | 0.41 | 793,000 | ||||||||
Private placements | |||||||||||
January 2008 | 1,003,900 | 0.49 | 493,685 | ||||||||
April 2008 | 2,450,508 | 0.68 | 1,673,752 | ||||||||
July 2008 | 285,000 | 1.29 | 368,750 | ||||||||
October 2008 | 412,888 | 1.07 | 443,844 | ||||||||
January 2009 | 336,053 | 0.58 | 194,465 | ||||||||
9,263,614 | 5,484,058 | 368,854 | 218,882 |
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Micromem Technologies Inc |
Management Discussion and Analysis |
January 31, 2009 |
Outstanding options | Strike price | Expiry date | |||
20,000 | 1.12 | 02/15/09 | |||
50,000 | 2.31 | 02/15/09 | |||
1,180,000 | 0.65 | 06/16/09 | |||
50,000 | 0.91 | 06/17/09 | |||
200,000 | 0.30 | 07/18/09 | |||
50,000 | 0.63 | 11/15/09 | |||
300,000 | 0.60 | 03/22/10 | |||
1,927,199 | 0.72 | 05/27/10 | |||
4,290,000 | 0.80 | 07/13/11 | |||
350,000 | 0.36 | 04/15/12 | |||
30,000 | 0.50 | 05/31/12 | |||
225,000 | 0.60 | 10/31/12 | |||
325,000 | 1.01 | 02/15/13 | |||
350,000 | 1.20 | 02/15/13 | |||
1,400,000 | 1.50 | 08/28/13 | |||
10,747,199 | 0.85 | ||||
Total proceeds if all options exercised: | $ | 9,165,733 | |||
Outstanding Warrants | |||||
100,000 | 0.50 | 02/18/09 | |||
200,000 | 1.17 | 07/31/09 | |||
75,000 | 0.95 | 08/28/09 | |||
200,000 | 1.17 | 08/28/09 | |||
62,128 | 1.17 | 09/02/09 | |||
637,128 | 1.04 | ||||
Total proceeds if all warrants exercised: | $ | 661,940 |
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