Micromem Technologies Inc.: Exhibit 99.3 - Filed by newsfilecorp.com
Exhibit 99.3
| MICROMEM TECHNOLOGIES INC. |
| MANAGEMENT’S DISCUSSION AND ANALYSIS |
| FOR THE FISCAL YEAR ENDED OCTOBER 31, 2011 |
| PREPARED AS OF FEBRUARY 24, 2012 |
| |
INTRODUCTION
The following sets out the Management's Discussion and Analysis
("MD&A") of the financial position and result of operations for the fiscal
year ending October 31, 2011 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, 2011 and 2010 which are prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). Other than financial statement data for the years ended October 31, 2011
and 2010, which are audited, all financial analysis, data and information set
out in this MD&A are unaudited. 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.
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. 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.
1
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.
************************************************
2
| MICROMEM TECHNOLOGIES INC. |
| MANAGEMENT’S DISCUSSION AND ANALYSIS |
| FISCAL YEAR ENDING OCTOBER 31, 2011 |
| PREPARED AS OF FEBRUARY 24, 2012 |
| (Unless other indicated dollar amounts reported are
stated in U.S. dollars) |
| |
TABLE OF CONTENTS:
| 1. |
Corporate History |
|
| 2. |
Overview of 2011 Fiscal Year and Status at
Year-End |
|
| 3. |
Going Concern |
|
| 4. |
Select Financial Information and Disclosures |
|
|
a.
|
Financial Position at October 31, 2011 |
|
|
b. |
Discussion of Operating Results |
|
|
c.
|
Unaudited Quarterly Financial Information |
|
| 5. |
Liquidity and Capital Resources |
|
| 6. |
Risks and Uncertainties Overview |
|
| 7. |
Critical Accounting Policies |
|
| 8. |
Recent Canadian Accounting Policies Not Yet
Adopted |
|
| 9. |
Financial Instruments |
|
| 10. |
Commitments and Contingencies |
|
| 11. |
Disclosure Controls/Internal Controls |
|
| 12. |
Off Balance Sheet Arrangements |
|
| 13. |
Transactions with Related Parties |
|
| 14. |
Share Capital |
|
| 15. |
Management and Board of Directors |
|
| 16. |
Subsequent Events |
|
Refer also to attached Tables 1-4 as supplementary information.
*************************
3
| MICROMEM TECHNOLOGIES INC. |
| MANAGEMENT’S DISCUSSION AND ANALYSIS |
| FISCAL YEAR ENDING OCTOBER 31, 2011 |
| PREPARED AS
OF FEBRUARY 24, 2012 |
1. CORPORATE HISTORY THROUGH 2010
Micromem Technologies Inc. (“Micromem” or “the Company”) is a
development stage company that has developed proprietary MRAM technology for
both memory and sensor applications. The Company’s shares are traded on the
NASDAQ over the counter Bulletin Board (OTCBB) under the symbol MMTIF and on the
CNSX under the symbol MRM. In 2007, the Company incorporated Micromem Applied
Sensor Technologies Inc. (“MAST”) for the purpose of moving forward with the
planned commercialization of its technology.
The chronology of the Company’s activity over the past six
years through 2010 is highlighted as below:
| (a) |
Between 2005 – 2008, we consolidated our research
activities at the University of Toronto with Professor Harry Ruda. This
was under the supervision of our then Chief Technology Officer, Dr.
Cynthia Kuper, who worked with the Company under contract between 2005 and
2007. |
| |
|
|
During this timeframe, advances were made in the
development of our memory technology and IP portfolio was expanded, under
the direction of Morgan Lewis LLP, a large U.S.-based legal
firm. |
| |
|
|
During this timeframe, the Company had initial dialogue
with potential strategic partners including Omron Inc., Hewlett Packard
and Lockheed Martin. |
| |
|
| (b) |
MAST was incorporated in 2007. Steven Van Fleet was
appointed as President of MAST to lead the next phase of the Company’s
product development activities. By this point, the Company had begun to
engage outside design and engineering services, notably Strategic
Solutions Inc., a California-based firm and Dreifus Associates, Limited, a
Florida-based firm – to assist in the development of the Company’s
prototype sensor technology. |
| |
|
|
By 2008, the Company began to engage foundry services to
advance the testing of its memory technology and to build the initial
sensors which the Company planned to commercialize. It engaged BAE and
Global Semiconductor, two U.S.- based foundries for these purposes.
Between 2008 – 2009, the Company spent approximately $1 million on foundry
related services in this context. |
| |
|
| (c) |
By 2009, the Company began to deemphasize the pursuit and
commercialization of its memory technology. The Company concluded that the
memory technology that was being advanced by stronger competitors with
their greater financial resources would put the Company at a continued
disadvantage going forward. It thus shifted its focus and energies towards the
commercialization of its sensor technology. The Company determined, in its
work to date, that its sensor technology had great potential for use in
high value added applications and could be produced
inexpensively. |
4
| (d) |
In 2009 – 2010, the Company sought out strategic
development partners to begin the process of commercializing its sensor
technology for specific industry vertical applications. In
particular: |
| |
i) |
In 2009 it entered into development agreements with
Unotron Inc. to produce a sensor for a washable keyboard application that
Unotron was building for a major IT company that had worldwide commercial
reach. Micromem invested $200,000 as a secured debenture in Unotron in
February 2009 and spent an additional $530,000 in the development work
thereafter. Unotron had provided the Company with a significant purchase
order with delivery to begin after the prototype products were fully
tested and accredited. |
| |
|
|
| |
|
The progress that the Company experienced in working with
Unotron was uneven through 2010, and by year-end, the Company decided to
reserve all of the costs that it had incurred to date and to fully reserve
the outstanding debenture. |
| |
|
|
| |
ii) |
In 2009, the Company began discussions with LifeMed
Technologies Inc. (LifeMed) and ultimately signed a manufacturing
agreement and purchase order to commercialize a breast cancer detection
application for LifeMed customers in the medical sector in the United
States and in South America. It was also intended that the Company and
LifeMed would jointly pursue an FDA application to certify the prototype
device that Micromem was developing. |
| |
|
|
| |
|
Over the course of 2010, the Company was unable to engage
LifeMed in a meaningful way to complete these initiatives. At October 31,
2010 the Company reserved $115,000 of costs that it had incurred with
respect to these development initiatives. |
| |
|
|
| |
|
In late 2009, the Company engaged a manufacturing of
hearing aid equipment, Unitron Inc., who were seeking an alternative
supplier of sensors for their hearing aid products. The Company spent
approximately $242,000 in the development of a suitable application for
Unitron. Ultimately, it did not get production orders from Unitron who
retained their incumbent supplier for these purposes. |
| |
|
|
| |
iii) |
In 2009, the Company engaged a New Jersey-based
development and research facility to complete a concentrator application
for its server technology. The contracted cost of this development work
was approximately $1 million. NanoOpto experienced financial difficulties
in 2010 and, ultimately, was liquidated
by its parent company. Micromem had invested approximately $373,000 on this
development initiative at that point and the project was then stopped. |
5
The Company’s initial dealings with
these development partners have provided it with considerable and expanded
product knowledge and ultimately, a stronger IP portfolio and technology
knowhow. These dealings in 2009 – 2010 allowed the Company to engage in
development contracts in 2011 with larger, world class companies to pursue
sophisticated applications for the Company’s sensor technology.
To finance to its initiatives between
2006 – 2010, the Company relied on private placement financings, the exercise of
stock options, common share purchase warrants and bridge loans. In total, the
Company secured approximately $15 million of financing for its operations
between 2006 – 2010.
From a reporting standpoint the
Company qualified as an accelerated filer for U.S. reporting purposes between
2008 – 2010 fiscal years. Accordingly, it completed the required audit
procedures under SOX 404 legislation in each of those years. The Company devoted
significant resources to the continued development of its internal control
reporting structure and by the 2010 fiscal year, its SOX audited opinion was
unqualified.
2. HIGHLIGHTS – FISCAL YEAR ENDED OCTOBER 31,
2011
Review of 2011 fiscal year highlights:
In 2011 the Company concentrated its development activities on
a number of initiatives as further discussed below.
The Company defined three broad market verticals as priority
segments for which to concentrate its efforts in commercialization of its
technology. These sectors included the commercial device market, the natural
resources exploration market and the medical device market.
The Company executed several development contracts with
strategic partners in 2011 and began the process of completing proof of concept
on specific applications proceeding towards the completion of prototype
manufactured devices. In executing these development contracts, the strategic
partner, in each case has committed to and has made payments towards the costs
incurred in these development contracts.
The key developments and activities in 2011 included dealings
with the following parties:
| |
(a) |
GSI Westwind Air Bearings (www.westwind-airbearings.com). Under
the terms of the contract, the Company will design test and deliver
manufactured quantities of the Company’s Hall sensor technology for high speed
motor control applications. The Company has received initial payments
under the contract with GSI and has submitted mechanical and electrical
design drawings and pre- manufacturing devices which have met with GSI’s
specifications. The Company anticipates that it will receive its first
commercial order from GSI in the current fiscal year. |
6
| |
(b) |
International Oil Company: The Company signed a
development contract with a major international energy company for an
application based on its technology. It executed the contract in February
2011 and received at that time the initial payment under the contract from
that customer. The initial design work relating to this project has been
completed and a proof of concept is now underway. The Company has
successfully met the performance measurement tolerance stipulated by that
customer. |
| |
|
|
| |
|
The Company anticipates that the development contract
will extend through the end of fiscal 2012 and anticipates initial
commercial revenues under this contract in the 2013 fiscal year. |
| |
|
|
| |
(c) |
Subsequent to October 31, 2011, the Company has pursued a
development contract with a major corporation in the automotive sector and
anticipates that this will result in a development contract in the current
fiscal year. |
| |
|
|
| |
(d) |
The Company continues its working relationship with NEMT
as it relates to the prototype exploration device in the natural resources
sector. It has commenced discussions with an international mining
organization with respect to the customization of this technology for a
specific mining vertical application. The Company expects to secure a
development contract in the current fiscal year for this
application. |
| |
|
|
| |
(e) |
Since mid-2011, the Company has been dealing with a
U.S.-based marketing organization to source new potential contract
applications. The Company continues to work with this marketing group and
has submitted multiple proposals under this arrangement. It anticipates
that this process will result in new development contracts for the Company
in the current fiscal year. |
| |
|
|
| |
(f) |
The Company is investigating potential licensing and
marketing opportunities for its breast care and medical monitoring
technology and its keyboard applications, developed over the past several
years, for market opportunities in Europe, Asia and Africa. |
| |
|
|
| |
(g) |
During 2011, the Company suspended further discussions
and activities with Unotron Inc. pending the collection of the remaining
outstanding balance on the secured promissory note that it holds. In
mid-2011, the Company served notice to LifeMed Technology that its working
relationship was terminated. |
7
The Company raised approximately $2.4
million in private placement financings in 2011 and also secured approximately
$500,000 of bridge loan financing during the year. This funding covered the
operating expenses and development costs that it incurred in 2011. Its working
capital position remains negative and the company continues to seek additional
financing for its go forward activities.
The Company has engaged legal counsel
to assist it in furthering its IP portfolio during 2011.
At the date of this MD&A document,
the Company has a substantial pipeline of development opportunities that it
anticipates will translate into additional development contracts and future
licensing and sale opportunities.
3. GOING CONCERN
These consolidated financial statements have been prepared on
the “going concern” basis, 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 adverse 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 year
ended October 31, 2011, the Company incurred a net loss of $2,573,544 (2010:
$4,674,861) and, as of that date, the Company has an accumulated deficit of
$78,844,241 (2010: $75,792,113), a working capital deficiency of $1,047,228
(2010: $1,459,460) and negative cash flows from operations of $1,453,508 (2010:
$1,616,133).
The Company will focus its development effort on existing
projects in order to develop commercial applications for these projects and will
continue to raise financing for operations as outlined in Notes 11 and 20 to the
financial statements at October 31, 2011.
It will be necessary for the Company to raise additional funds
for the continued development, testing and commercial exploitation of its
technologies. To date, the Company has raised financing through successive unit
private placements, through the exercise of common share stock options and
through the exercise of common share purchase warrants. It has also secured
periodic term loans.
In the ensuing fiscal year, the Company anticipates that (i) it
will realize initial revenues from commercialization efforts with current
strategic development partners, (ii) it will monitor the timing of incurring
additional expenses in keeping with its ongoing working capital position, and
(iii) it will continue to secure financing in the same manner in which it has
raised financing to date.
The consolidated financial statements have been prepared on a
going concern basis and do not include any adjustments to the amounts and
classifications of the assets and liabilities that might be necessary should the
Company be unable to continue in business.
8
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. Such adjustments may be material.
4. SELECT FINANCIAL INFORMATION AND
DISCLOSURES
(a) Financial Position at October 31,
2011:
The following table sets out select financial information for
the three most recently completed financial year-ends prepared in accordance
with Canadian general accepted accounting principles:
|
Year ended
October 31, 2011 |
Year ended
October 31, 2010 |
Year ended
October 31, 2009 |
| Interest and other income |
963 |
22,886 |
88,047 |
| Total expenses |
2,573,302 |
4,688,239 |
4,398,986 |
| Income taxes |
1,205 |
9,508 |
- |
| Net loss |
(2,573,544) |
(4,674,861) |
(4,310,939) |
| Loss per share and diluted loss per share
|
(0.03) |
(0.05) |
(0.05) |
| Weighted average number of shares outstanding |
102,301,168 |
92,225,645 |
86,400,439 |
| Total assets |
906,346 |
568,336 |
2,562,479 |
| Cash and cash
equivalents |
44,062 |
26,039 |
106,110 |
| Working capital |
(1,047,228) |
(1,459,460) |
(650,044) |
| Shareholders' equity (deficiency) |
(217,278) |
(1,019,226) |
1,522,839 |
The net loss reported at October 31, 2011 was $2.573 million
(2010: $4.675 million) which included $928,497 of non cash expenses relating to
the issuance of stock options – this expense calculated in accordance with the
Black Scholes pricing model (2010: $95,038).
9
The net loss reported in 2010 included a reserve of $201,333
for the Unotron promissory note; in 2011 the Company realized $110,000 of
proceeds of repayment on the promissory note and reported this as a recovery on
the promissory note in the statement of income.
In 2010, the Company reserved $2,711,392 of development costs
which it had previously capitalized against specific development projects. In
2011, the Company capitalized $425,085 of development costs against specific
projects reporting these costs as deferred development costs in the balance
sheet at year-end. The total reported deferred development costs at October 31,
2011 are $646,606 (2011: $221,521).
In 2011, the Company wrote-down its patents by $129,033 which
relate to technology which the company has no immediate plans to develop. The
Company reports $37,678 (2010: $202,027) of patents at October 31, 2011.
In 2011, the Company has capitalized $135,465 of direct costs
incurred for technical expertise and know-how relating to commercialization
efforts for its sensor technology, which expertise significantly advanced during
2011. These costs will be amortized over a 7 year period.
At October 31, 2011 the Company has:
| |
a) |
11,175,000 stock options outstanding which expire, if
unexercised, between 2012- 2016. The average exercise price of these
options is $0.47 per option (2010: 10,022,199 stock options with an
average exercise price of $0.89 per option); and, |
| |
|
|
| |
b) |
26,672,637 common share purchase warrants which expire
throughout 2013 if unexercised. The average exercise price of these
warrants is $0.23 (2010: 6,198,885 common share purchase warrants with an
average exercise price of $0.51). |
Refer also to Tables 1 and 2 which are appended to this
MD&A. Table 1 sets forth selected information from the consolidated
statements of operations and deficit for the fiscal years ending October 31,
2008-2011 and for the related quarterly information through October 31, 2011.
Table 2 sets forth selected information from the consolidated balance sheets for
the fiscal years ending October 31, 2008-2011 and the related quarterly
information through October 31, 2011.
10
(b) Discussion of Operating
Results
The following table summarizes the Company’s operating results
for the years ended October 31, 2011, 2010, 2009.
| |
Years ended October 31, |
| |
2011 |
2010 |
2009 |
| |
$000
|
$000
|
$000
|
| Interest and other income |
1 |
23 |
88 |
| General and
administration |
452
|
349
|
937
|
| Professional fees and salaries |
1,066 |
1,251 |
1,289 |
| Stock-based
compensation |
928
|
95
|
1,952
|
| Research |
(76) |
(106) |
13 |
| Travel and
entertainment |
92
|
146
|
224
|
| Foreign exchange (gain) loss |
43 |
32 |
(28) |
| Amortization of
property and equipment |
6 |
9 |
11
|
| Amortization of patents |
43 |
|
|
| Write-down of
deferred development costs |
- |
2,711
|
-
|
| Write-down of patents |
129 |
- |
- |
| Recovery of bad
debt |
(110)
|
201
|
-
|
| Total expenses |
2,573 |
4,688 |
4,398 |
| Income taxes |
1 |
10
|
-
|
| Net loss |
(2,573) |
(4,675) |
(4,310) |
| Loss per share |
(0.03) |
(0.05) |
(0.05) |
Interest and other income: The Company remains in
pre-revenue mode at October 31, 2011. It reports $963 of interest income on
outstanding cash balances in 2011; additionally it recovered $110,000 of the
Unotron promissory note which it had fully reserved at October 31, 2010. The
interest that the Company continues to charge on the Unotron note in 2011 was
$20,220; this amount has been fully reserved. In 2010, the Company reported
$22,886 of interest income on outstanding cash balances and with respect to cash
interest payments received on the Unotron promissory note. In 2009, the Company
reported $11,382 of interest income and $76,665 of recoveries of tax credits
from prior years.
Income taxes: The Company brought its income tax filings
for all of its subsidiaries up to date in 2010 - 2011. It reports a small income
tax expense in 2011 and 2010 relating to its subsidiaries’ obligations from
prior years. These subsidiaries are now inactive.
11
Write-down of patents: In the fourth quarter of the 2011
fiscal year, the Company wrote-down $129,033 (2010: nil) of patents related to
its magnetic memory. At October 31, 2011 the Company reports $37,678 (2010:
$202,027) of patents related to its sensory technology.
Write-down of development costs: In the third and fourth
quarters of the 2010 fiscal year, the Company booked impairment reserves against
the project development costs it had capitalized commencing in 2009 and
continuing in the first and second quarters of 2010. A continuity schedule with
respect to development costs incurred, capitalized and reserved is presented as
below:
| 2010 |
|
| |
|
|
|
|
|
|
|
Impairment |
|
|
|
|
| Projects |
|
10/31/09 |
|
|
Additions |
|
|
reserve |
|
|
10/31/10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Project A |
$ |
337,237 |
|
$ |
192,258 |
|
$ |
(529,494 |
) |
$ |
1 |
|
| Project B |
|
38,683 |
|
|
75,960 |
|
|
(114,642 |
) |
|
1 |
|
| Project C |
|
587,349 |
|
|
210,445 |
|
|
(797,793 |
) |
|
1 |
|
| Project D |
|
750,367 |
|
|
46,819 |
|
|
(797,185 |
) |
|
1 |
|
| Project E |
|
131,033 |
|
|
90,480 |
|
|
- |
|
|
221,513 |
|
| Project F |
|
155,942 |
|
|
23,452 |
|
|
(179,393 |
) |
|
1 |
|
| Project G |
|
- |
|
|
19,035 |
|
|
(19,034 |
) |
|
1 |
|
| Project H |
|
- |
|
|
242,464 |
|
|
(242,463 |
) |
|
1 |
|
| Project I |
|
- |
|
|
31,389 |
|
|
(31,388 |
) |
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
$ |
2,000,611 |
|
$ |
932,302 |
|
$ |
(2,711,392 |
) |
$ |
221,521 |
|
| 2011 |
|
|
|
|
| |
|
|
|
|
Net Additions/ |
|
|
|
|
|
|
|
| Projects |
|
10/31/2010 |
|
|
Recoveries |
|
|
10/31/2011 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Project A |
$ |
1 |
|
$ |
- |
|
$ |
1 |
|
|
|
|
| Project B |
|
1 |
|
|
- |
|
|
1 |
|
|
|
|
| Project C |
|
1 |
|
|
15,000 |
|
|
15,001 |
|
|
|
|
| Project D |
|
1 |
|
|
- |
|
|
1 |
|
|
|
|
| Project E |
|
221,513 |
|
|
251,725 |
|
|
473,238 |
|
|
|
|
| Project F |
|
1 |
|
|
- |
|
|
1 |
|
|
|
|
| Project G |
|
1 |
|
|
141,200 |
|
|
141,201 |
|
|
|
|
| Project H |
|
1 |
|
|
- |
|
|
1 |
|
|
|
|
| Project I |
|
1 |
|
|
- |
|
|
1 |
|
|
|
|
| Project J |
|
- |
|
|
17,160 |
|
|
17,160 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
$ |
221,521 |
|
$ |
425,085 |
|
$ |
646,606 |
|
|
|
|
12
General and administrative expenses compare as follows
($000):
| |
|
2011
|
2010
|
2009
|
| 1) |
Investor relations |
5 |
14 |
279 |
| 2) |
AGM Expense |
24 |
46 |
58 |
| 3) |
Reserve, doubtful accounts |
18 |
(68) |
49 |
| 4) |
Shareholder information |
26 |
20 |
24 |
| 5) |
Telephone |
13 |
18 |
21 |
| 6) |
Insurance |
78 |
87 |
53 |
| 7) |
Rent |
56 |
28 |
17 |
| 8) |
Exchange loss |
29 |
(10) |
34 |
| 9) |
MAST |
26 |
68 |
323 |
| 10) |
Interest expense |
141 |
77 |
- |
| 11) |
All other |
36 |
69 |
79 |
| |
|
452
|
349
|
937
|
Investor relations: The Company engaged Investor
Relations Group (“IRG”) of New York in September 2008 to provide investor
relations services to the Company. We were committed to monthly payments of
$13,500 plus 25,000 common shares per month. In May 2009 the contract was
renegotiated to payments of $7,500 and 12,500 common shares per month under this
one year contract. The Contract expired in September 2009 and was not renewed
thereafter.
MAST: In 2009 the activity in MAST increased
significantly. The major components of the MAST G&A expenses as reported
include market research ($140,000) investor relations ($112,000) and travel
expenses ($66,000). Activity in 2010 and 2011 was significantly curtailed and
minimal new business development expenditures were undertaken as a result of
cash flow constraints encountered.
Reserves: The Company rebills certain related companies
for a portion of its overhead expenses. Given uncertainty of collection the
Company will reserve the amounts that are rebilled as these charges are
recorded. The reserves reflected in 2009 represent such amounts. In 2010 the
reserve for doubtful accounts includes the recovery of approximately $68,000 of
amounts billed to related parties and collected in 2010 after these amounts were
originally reserved.
In 2011 the Company recovered $110,000 of the Unotron debenture
which was fully reserved at October 31, 2010. It reserved a net $38,000 of
current year charges to related parties for overhead charges which it billed to
such parties.
Insurance: Insurance related expense increased in 2010
as the Company increased the extent of its basic D&O coverage. It dropped
cargo insurance in 2011.
Interest expense: Interest expense in 2010 and 2011
relates to the interest which was incurred with respect to the bridge loans
secured by the Company.
13
Professional, Other Fees and Salaries compare as follows
($000):
| |
|
2011 |
2010 |
2009 |
| 1) |
Audit and related
services |
90 |
135 |
139 |
| 2) |
Legal |
65 |
101 |
126 |
| 3) |
Salaries and
benefits |
424 |
500 |
444 |
| 4) |
Management fees |
467 |
441 |
444 |
| 5) |
President, MAST
|
- |
- |
58 |
| 6) |
Other |
19 |
73 |
79 |
| |
|
1,065 |
1,250 |
1,290 |
| 7) |
Stock compensation expense |
928 |
95 |
1,951 |
| |
|
1,993 |
1,345 |
3,241 |
Audit: Our audit fees included the audit of our
financial statements, and in 2009 – 2010, a full audit relating to our SOX 404
filings. In 2011, we incurred additional fees with respect to our quarterly
reporting procedures and with respect to initial IFRS preparation for conversion
in fiscal 2012.
Legal: Legal costs incurred in 2011 relate to
information circulars and other routine legal matters. There is no outstanding
litigation initiated by or against the Company. In 2010, the Company also
incurred legal expenses related to the preparation of its FDA filing material
for the LMTI project. In 2009, it incurred additional legal expense relating to
the CNSX listing that it secured that year.
Salaries: We reduced our staffing by 1 ½ full time
equivalents in 2011.
Management fees: Management fees include payments to the
Chairman, the President and the CFO and the President of MAST. Commencing in
2008, the Company entered into a 3 year contract through 2011 with the President
of MAST at a base annual remuneration of $180,000. The bulk of these expenses in
2009 and all of these costs incurred in 2010 and 2011 have been allocated to
Projects under Development or intangible assets and were capitalized.
Stock compensation: In 2011 and 2009 the Company awarded
stock options to officers, directors and employees and reported the expense
calculated in accordance with the Black Scholes option-pricing model. The stock
compensation expense in 2010 relates to the extension of certain options
previously granted for an additional year.
14
Net Research and Development Costs compare as follows
($000):
The Company capitalized development costs incurred 2009, 2010
and in 2011. At October 31, 2010 it wrote down $2,711,392 of development costs
previously capitalized and reports this write down separately in the statement
of income. In 2010 and in 2011 it recorded recoveries of costs previously
expensed with respect to certain suppliers where original invoiced charges were
renegotiated subsequently.
Net research and development costs compare as:
| 2011 |
$ (75,896) |
| 2010 |
$
(106,007) |
| 2009 |
$ 13,880 |
The continuity of deferred development costs between 2009 –
2011 is as below:
| Deferred costs at October 31, 2009 |
$ |
2,000,611 |
|
| Capitalized in 2010 |
|
932,302 |
|
| Impairment reserve |
|
(2,711,392 |
) |
| Deferred costs at October 31, 2010 |
$ |
221,521 |
|
| Net costs capitalized in 2011 |
|
425,085 |
|
| Deferred costs at
October 31, 2011 |
$ |
646,606 |
|
Travel related expenses compare as follows ($000):
| |
|
2011 |
2010 |
2009 |
| 1) |
Airfare |
55 |
58 |
84 |
| 2) |
Hotel |
13 |
23 |
54 |
| 3) |
Meals |
10 |
31 |
51 |
| 4) |
Transportation |
14 |
34 |
35 |
| |
|
92 |
146 |
224 |
As business development activity was curtailed in 2010 and
2011, travel-related costs decreased from the level reported in 2009.
15
C) Unaudited Quarterly Financial Information -
Summary
Three months ended
(unaudited) |
Interest and other
income
$ |
Expenses (including tax
expense)
$
|
Loss in period
$ |
Loss per share
$ |
| January 31, 2009 |
5,637 |
1,589,266 |
(1,583,629) |
(0.02) |
| April 30, 2009 |
536
|
1,273,986 |
(1,273,450) |
(0.02) |
| July 31, 2009 |
113 |
1,522,071 |
(1,521,958) |
(0.02) |
| October 31, 2009
|
81,762 |
13,664 |
68,098 |
-
|
| January 31, 2010 |
5,099 |
411,498 |
(406,399) |
- |
| April 30, 2010 |
5,009
|
531,769 |
(526,760) |
(0.01) |
| July 31, 2010 |
5,000 |
1,942,819 |
(1,937,819) |
(0.02) |
| October 31, 2010
|
7,778
|
1,811,661 |
(1,803,883) |
(0.02) |
| January 31, 2011 |
339 |
580,107 |
(579,768) |
(0.01) |
| April 30, 2011 |
39
|
507,264 |
(507,225) |
(0.01) |
| July 31, 2011 |
585 |
238,380 |
(237,795) |
(0.00) |
| October 31, 2011
|
- |
1,248,756 |
(1,248,756) |
(0.01) |
Refer also to Tables 1 and 2 for summarized quarterly
information.
16
Unaudited Quarterly Information – 3 Months Ended October 31,
2011
Fourth quarter general and administrative related expenses
compare as follows ($000):
| |
2011 |
2010 |
2009 |
| General and administrative: |
|
|
|
| Investor relations |
- |
14 |
20 |
| AGM
expense |
24 |
46 |
- |
| Reserve, doubtful
accounts |
(11) |
196 |
49 |
|
Telephone |
4 |
4 |
11 |
| Insurance |
17 |
22 |
17 |
| Rent
|
17 |
7 |
13 |
| Interest |
27 |
37 |
- |
| All
other |
25 |
11 |
(24) |
| |
103 |
337 |
86 |
The costs associated with the Annual General Meeting were
incurred in Q4 in 2010 and 2011 versus in Q3 in each of 2009. Annual costs
associated with the AGM were reduced in 2011 as more of the administration
related tasks were completed in-house.
The Company reserved the Unotron debenture amount of $200,000
in Q4 2010. The reserves reported in 2011 and 2009 relate to intercompany
charges.
Interest expense in Q4 2010 and 2011 relates to the bridge
loans which the Company has secured.
Fourth quarter professional, other fees and salaries related
expenses compare as follows ($000):
| |
2011 |
2010 |
2009 |
| Professional, other fees and salaries: |
|
|
|
| Audit and related
services |
(19) |
22 |
106 |
| Legal
|
1 |
(7) |
(94) |
| Salaries and benefits
|
104 |
118 |
118 |
|
Management fees |
114 |
111 |
106 |
| Other |
(85) |
24 |
(83) |
| |
115 |
268 |
153 |
| Stock compensation
expense |
882 |
- |
912 |
| |
997 |
268 |
1,065 |
In Q4 2009 the Company adjusted its audit related accruals for
additional work performed at year-end by the external auditors in completing
their certification work, in particular with respect to the SOX 404 audit.
17
In Q4 2009 the Company capitalized legal costs incurred during
the year with respect to its patents. Accordingly it reported a net credit in Q4
2009 in this expense category.
The net other recovery of $85,000 in 2011 and $83,000 in 2009
relates to the capitalization of costs in Q4.
Stock compensation expense in 2011 and 2009 relates to stock
options declared in Q4 of each of those years. No options were granted in 2010.
Fourth quarter travel related expenses compare as follows
($000):
| |
2010 |
2009 |
2008 |
| Travel: |
|
|
|
| Airfare |
7 |
20 |
48 |
| Hotel
|
5 |
16 |
28 |
| Meals |
2 |
22 |
19 |
|
Transportation |
6 |
10 |
10 |
| |
20 |
68 |
105 |
Travel related costs have been reduced since 2009 as business
development initiatives were curtailed due to cash flow constraints.
5. LIQUIDITY AND CAPITAL RESOURCES
Liquidity:
Table 3 provides a summary of the financing that was
raised during the 2009-2011 fiscal years.
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 October 31, 2011, our working capital
deficiency was $1,047,228 (2010: $1,459,460).
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 in
Table 4.
Capital Resources:
We have no commitments for capital expenditures as of October
31, 2011.
18
6. RISKS AND UNCERTAINTIES OVERVIEW
There are a number of material risks which may individually or
in the aggregate effect the long-term commercial success of the Company, both
known and unknown. An investment in the Company should be considered highly
speculative due to the nature of the Company’s activities and its current stage
of development:
Stage of Development of Technology:
The Company has made significant strides in developing its
prototype products over the past several years in its attempt to commercialize
its products with its various strategic development partners. Nonetheless, the
Company at this stage has not completed such efforts to the point that it has
product available for sale and their remains uncertainties as to the Company’s
ultimate ability to complete the development of a product that is saleable.
Customers’ Willingness to Purchase:
We have entered into multiple joint development agreements
whereby our prototype products are being subjected to rigorous testing by our
partners. We have not as yet received unequivocal and firm purchase orders for
our product. Some of the joint development partners that we are dealing with are
private companies and there is a potential risk of those companies having to
secure all of their requisite financing to support their orders and their
working capital requirement.
Patent Portfolio:
The Company has spent a considerable amount of time, effort and
incurred significant costs with respect to the maintenance and development of
our intellectual property portfolio. However, given the nature of IP
development, the Company is subject to continuing risks that our patents could
be successfully challenged, that our patent pending files may not ultimately be
granted full patent status. While we continue to make specific efforts to
broaden our IP claims, this is an ongoing process and requires continued effort
and vigilance. The Company does not have extensive in-house resources so as to
manage its IP portfolio in this environment and has traditionally relied heavily
on its patent attorneys for these services. In October 2010, the Company’s
working relationship with its patent attorneys, Morgan Lewis, was discontinued.
The Company has secured an alternative service provider in 2011. In the fourth
quarter of 2011, the Company wrote-down the value of patent asset by $129,033
which relates to older technology which the Company has no immediate plans to
further develop.
Financing:
The Company has successfully raised funding over the past
several years to continue to support its development initiatives and fund the
Company’s corporate structure and overheads. The financing environment for early
stage technology companies remains challenging and there is no certainty that the Company will be
able to continue to raise financing as it has in the past to continue to support
its business initiatives.
19
Competitors:
The Company is subject to competition from other larger
entities who have greater financial resources and more in-house technical
expertise.
Management Structure:
The Company is highly dependent on the services of a small
number of senior management team members. If one of these individuals were
unavailable, the Company could encounter difficult transition processes.
Foreign Currency Exposure:
The Company expects to sell its products and license
technologies in the United States, in Canada and abroad. The Company has not
hedged its foreign currency exposure, which has not been significant to date. In
future, foreign currency fluctuations could present a risk to the business.
7. 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 requires 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.
The Company’s consolidated financial statements have been
prepared in accordance with Canadian GAAP which, in the case of the Company,
conform in all material with respect to U.S. GAAP except for the accounting for
development expenditures, prior valuations of Unit private placements, warrant
modification and modification of conversion feature of bridge loans reported in
the fiscal year ended October 31, 2011.
Under U.S. GAAP, development expenditures are expensed as
incurred. In 2009, the Company capitalized $2,000,611 of development costs in
accordance with Canadian GAAP. In 2010, the Company capitalized an additional $932,302
of development costs; it recorded an impairment reserve of $2,711,392 due to the
uncertain timing relating to project completion. At October 31, 2010 the Company
reported $221,521 of development costs on the balance sheet.
20
In 2011 the Company capitalized $425,085 of development costs
in accordance with Canadian GAAP and reports $646,606 as deferred development
costs on the balance sheet. The Company also capitalized $135,465 of intangible
assets which are expensed under U.S. GAAP.
In the year ended October 31, 2009, the Company changed the
estimates that it used to value the common shares and the warrants included in
the Unit private placement financings which it completed in the fiscal year then
ended. It assigned value to the warrants which formed part of these Unit private
placements calculated in accordance with the Black Scholes option-pricing model.
Under U.S. GAAP, using standards which are analogous, the valuation of the
shares and warrants are determined using this relative fair value approach.
There is no change in aggregate shareholders equity reported.
In the year ended October 31, 2011, the Company modified the
expiration date of warrants which would have otherwise expired in 2011. Under
U.S. GAAP, this amount has been recorded as an increase in paid in capital and a
corresponding offset to retained earnings. Under Canadian GAAP a charge of
$293,020 is included below net loss in the determination of shareholders’
equity.
In the year ended October 31, 2011, the Company modified the
conversion feature of two bridge loans. Under Canadian GAAP, the first loan was
considered an extinguishment and issuance of new debt but no gain or loss was
recognized as the carrying value of the extinguished debt was not materially
different from the modified debt instrument. The second loan did not meet the
criteria for extinguishment and as such was treated as a renegotiation. Under
U.S. GAAP, the Company evaluated whether the change in conversion feature
represented an embedded derivative that required separation. Under U.S. GAAP, no
beneficial conversion feature exists and under Canadian GAAP a $185,564 charge
was recorded to retained earnings with an offsetting charge to contributed
surplus to reflect the value of the more favourable conversion feature.
A reconciliation of the financial statements between US and
Canadian GAAP is presented in Note 18 to the financial statements.
Foreign Currency Translation:
Accounts recorded in foreign currency have been converted to
United States dollars as follows: Monetary current assets and current
liabilities, at the prevailing exchange rates at the end of the year;
non-monetary 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.
21
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.
Patents:
Patents 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. Until October 31, 2008, the Company expensed all current expenditures
for patent-related activities. In the fiscal year ended October 31, 2009,
Company determined that it met the criteria for capitalizing patent-related
costs incurred during the current fiscal year. Amortization expenses recorded on
a straight line basis over the estimated useful life of 10 years. In the quarter
ended October 31, 2010, the company changed its estimated useful life for
patents prospectively to 5 years. In the quarter ended October 31, 2011, the
Company wrote-down the value of its patents by $129,033 which relates to older
technology which the Company has no immediate plans to further develop.
Intangible Assets:
Intangible assets 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. During the fiscal year ended October 31, 2011,
the Company determined that it met the criteria for capitalizing development
costs related to the general sensor technology the Company is pursuing and
reports $135,465 of such costs as intangible assets at year end. Amortization is
provided on a 7 year straight-line basis.
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.
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.
22
Unit Private Placements:
Until October 31, 2008, the Company had applied the residual
value approach in accounting for the value assigned to the common shares and the
warrants which it made available in the number of Unit private placement
financings. Under this residual value approach, the Company assigned 100% of the
proceeds from the Unit private placement to the common shares and a nil value to
the attached warrants. In the year ended October 31, 2009, the Company started
to estimate the value of the common shares and the warrants included in the Unit
private placement financings which it completed in the fiscal year using the
relative fair value approach. It assigned a value to the warrants which formed
part of these Unit Private placements, calculated in accordance with 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 substantively 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.
8. RECENT CANADIAN ACCOUTING POLICIES NOT YET
ADOPTED
International Financial Reporting Standards (IFRS):
In February 2008, the Accounting Standards Board ("AcSB")
confirmed that the use of IFRS will be required in 2011 for publicly accountable
enterprises in Canada. The adoption date of November 1, 2011 will require the
restatement, for comparative purposes, of amounts reported by the Company for
its year ended October 31, 2011, and of the opening balance sheet as at November
1, 2010. The Company is continuing to assess the financial reporting impacts of
the adoption of IFRS and, at this time, the impact on future financial position
and results of operations is not reasonably determinable or estimable. The
Company does anticipate a significant increase in disclosure resulting from the
adoption of IFRS and is continuing to assess the level of disclosure required,
as well as system changes that may be necessary to gather and process the
required information.
23
9. FINANCIAL INSTRUMENTS
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: cash and cash equivalents, other 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 other 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.
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.
10. 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
technology after 2002.
Operating Leases:
The Company had operating lease commitments which expired in
2012 in respect of its head office. The monthly obligations is $4,690 plus the
proportionate cost of operating costs and taxes.
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.
24
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.
Senior Management:
In 2005, we entered into an employment agreement with the
Chairman of the Board of Directors, Salvatore Fuda, for a period from January 1,
2005 through December 31, 2009, which contract has been extended to December 31,
2010. Under the terms of the agreement, the Chairman was retained to provide
certain management services to the Company. The contract stipulated 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 ($143,877 U.S. funds at
average exchange rates). Under this contract, the 2010 expense as reported was
$143,877 as compared to $129,149 in 2009. In January 2011, the Board of
Directors extended the Chairman’s contract on a month-month-basis at an annual
rate of $150,000 Canadian funds.
In May 2008, the Company entered into two year employment
agreements with the President and the CFO and a three year agreement with the
President of the Company’s subsidiary, MAST Inc. These agreements have now
expired and the Company has continued these on a month-to-month basis since
expiry date. These agreements stipulated monthly obligations as below:
| President |
$13,333 |
Canadian Funds |
| Chief Financial
Officer |
$12,500 |
Canadian Funds |
| President – MAST |
$15,000 |
U.S. Funds |
In July 2009, the Company executed a purchase order for
approximately $1 million of services to be provided by a supplier between July
2009 – April 2010. During 2010, the purchase order was cancelled. Over the
course of the 2009 - 2010, the Company paid approximately $373,000 in respect of
these working arrangements.
11. DISCLOSURE CONTROLS / INTERNAL CONTROLS
During the 2008 – 2010 fiscal years, the Company was classified
as an accelerated filer and accordingly was required to complete its initial
audit on its internal controls under the requirements of the Sarbanes Oxley
legislation.
In 2009, we identified a material weakness in certain of its
procedures to effect the timely and complete close of its year-end financial
statements. A series of journal entries over the course of the audit were posted to finalize the financial
statements. We adapted on procedures to remedy this material weakness in
2010.
25
In 2010 we took a top-down approach as defined by the Committee
of Sponsoring Organizations of the Treadway Commission’s framework (“COSO”), to
our evaluation and testing of internal controls over financial reporting. Using
this approach, we evaluated on a company wide basis, all controls and focusing
on the high risk areas. We reported no material weaknesses in 2010 as a result
of a number of internal controls initiatives undertaken over the course of the
fiscal year.
The Company was not classified as accelerated filer in 2011 and
did not complete an external audit on its internal controls in 2011.
Management and the Board of Directors, primarily through the
Audit Committee, have instituted review procedures on all of our periodic
filings. We have established a disclosure committee consisting of independent
directors and our Chief Information Officer. 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, 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.
12. 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.
13. TRANSACTIONS WITH RELATED PARTIES
The Company reports the following related party transactions:
| (a) |
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 fiscal
years ending October 31, 2009-2010 is as follows: |
26
| |
|
Cash
Compensation |
Stock
Option Expense |
| |
2011 |
$ 647,132 |
$ 590,191 |
| |
2010 |
$
621,223 |
$
64,653 |
| |
2009 |
$ 625,576 |
$ 407,040 |
| (b) |
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. |
| |
|
|
The net expense reported by the Company in these expense
categories is summarized as follows: |
| |
|
|
Rent
|
|
|
Salaries |
|
|
Other
|
|
|
Total
|
|
| |
2011 |
$ |
55, 800 |
|
$ |
424,306 |
|
$ |
11,482 |
|
$ |
491,588 |
|
| |
2010 |
|
27,610 |
|
|
499,886 |
|
|
13,112 |
|
|
540,608 |
|
| |
2009 |
|
17,177 |
|
|
289,897 |
|
|
11,541 |
|
|
318,615 |
|
In 2011 the gross amount of these
expenses was $571,345 and the Company re-billed $79,760 of these costs to these
related companies. At October 31, 2011 the Company reports $64,869 of balances
due from such parties for these expenses and has reserved this amount due to
uncertainty of collection.
| (c) |
Accounts receivable, payable and
accruals: |
At October 31, 2011 the Company reports
the following accounts receivable and payable balances with related parties:
| |
• |
Payable to Company's Chairman under terms of
employment contract: |
$ 37,624 |
| |
• |
Payable to officer under the terms of employment contracts
(1): |
$ 102,512
|
| |
(1) |
The Company assigned the Unotron promissory note to an
officer of the Company during 2011. Of the total of $110,000 of funds
recovered from Unotron in 2011, $80,000 was paid directly to that officer
under this assignment. The balance due to the officer at October 31, 2011
is $102,512. |
27
14. SHARE CAPITAL
At October 31, 2011 the Company reports 116,149,718 common
shares outstanding (2010: 95,324,511). Additionally, the Company has 11,175,000
stock options outstanding with a weighted average exercise price of $.47 per
share (2010: 10,022,199 options outstanding with a weighted average exercise
price of $.89 per share) and a total of 26,672,637 outstanding warrants to
acquire common shares with a weighted average exercise price of $.23 per share
(2010: 6,198,885 outstanding warrants with a weighted average exercise price of
$.51 per share).
15. MANAGEMENT AND BOARD OF DIRECTORS
Our management team and directors, along with their 2011
remuneration, is presented as below:
Individual |
Position |
2011 remuneration |
| Cash |
Options |
Total |
| Salvatore Fuda (1) |
Chairman, Director |
152,326 |
118,038 |
270,364 |
| Joseph Fuda (2) |
President, Director |
162,480 |
236,007 |
398,487 |
| Steven Van Fleet (3) |
President, MAST Inc., Director |
180,000 |
118,038 |
298,038 |
| David Sharpless |
Director |
- |
53,117 |
53,117 |
| Andrew Brandt |
Director |
- |
41,313 |
41,313 |
| Oliver Nepomuceno |
Director |
- |
41,313 |
41,313 |
| Larry Blue |
Director |
- |
59,019 |
59,019 |
| Alex
Dey |
Director |
- |
24,229 |
24,229 |
| Dan Amadori (2) |
CFO |
152,326 |
118,038 |
270,364 |
| (1) |
contract was extended after December, 2010 on a month to
month basis. |
| (2) |
contract was extended on a month to month basis in May
2010. |
| (3) |
contract was extended on a month-to-month basis in May
2011. |
16. SUBSEQUENT EVENTS
| |
a) |
The Company raised an additional $388,997 through Unit
private placements and issued 2,979,450 Units. Each Unit consists of one
common share and one share purchase warrant. Of this amount, the Chairman
subscribed for 625,000 units at a price of $0.10 per unit, an officer for
142,858 units at price of $0.35 per unit. |
| |
|
|
| |
b) |
The convertible loan of $106,783 outstanding at October
31, 2011, was repaid in December 2011. |
| |
|
|
| |
c) |
The Company secured $284,513 of bridge loans from a group
of arm’s length investor in December 2011 with maturities of six months.
The loans are unsecured, bear interest at a rate of 2% per month and are
convertible at the holder’s option at $0.12 per unit. Each unit includes
one common share and one common share purchase warrant with a one year expiry and
an exercise price of $0.12. |
28
| |
d) |
The Company secured a $98,058 bridge loan from an arm’s
length investor in January 2012 with a maturity of six months. The loan is
unsecured, bears interest at a rate of 2% per month and is convertible at
the holder’s option at $0.10 per unit. Each unit includes one common share
and one common share purchase warrant with a one year expiry and an
exercise price of $0.12. |
| |
|
|
| |
e) |
The Company secured $20,092 bridge loan from an arm’s
length investor in February 2012 with a maturity of six months. The loan
is unsecured, bears interest at a rate of 2% per month and is convertible
at the holder’s option at $0.12 per unit. Each unit includes one common
share and one common share purchase warrant with a one year expiry and an
exercise price of $0.15. |
| |
|
|
| |
f) |
The Company secured $184,554 bridge loan from an arm’s
length investor in February 2012 with a maturity of six months. The loan
is unsecured, bears interest at a rate of 2% per month and is convertible
at the holder’s option at $0.17 per unit. Each unit includes one common
share and one common share purchase warrant with a one year expiry and an
exercise price of $0.20. |
| |
|
|
| |
g) |
On December 2, 2011 the Company revised the expiration
date of 1,015,000 warrants expiring during the months of January, March
and April 2012 by extending them for a further period of one
year. |
**********
29
Table 1
Micromem Technologies Inc
Management
Discussion and Analysis
October 31, 2011
|
| Fiscal year ending |
|
Interest and other |
|
|
|
Loss per share (basic |
| October 31 |
|
income |
|
Net
Loss |
|
and
fully diluted) |
| 2011 |
|
963 |
|
(2,573,544) |
|
(0.03) |
| 2010 |
|
22,886 |
|
(4,674,861) |
|
(0.05) |
| 2009 |
|
88,047 |
|
(4,310,939) |
|
(0.05) |
| |
|
|
|
|
|
|
| Quarter ending |
|
|
|
|
|
|
| October 31, 2011 |
|
- |
|
(1,248,756) |
|
(0.01) |
| July 31, 2011 |
|
585 |
|
(237,795) |
|
- |
| April 30, 2011 |
|
39 |
|
(507,225) |
|
(0.01) |
| January 31, 2011 |
|
339 |
|
(579,768) |
|
(0.01) |
| October 31, 2010 |
|
7,778 |
|
(1,803,883) |
|
(0.02) |
| July 31, 2010 |
|
5,000 |
|
(1,937,819) |
|
(0.02) |
| April 30, 2010 |
|
5,009 |
|
(526,760) |
|
(0.01) |
| January 31, 2010 |
|
5,099 |
|
(406,399) |
|
- |
| October 31, 2009 |
|
81,762 |
|
68,098 |
|
- |
30
Table 2
Micromem Technologies Inc
Management Discussion and
Analysis October 31, 2011
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) |
| 2011 |
(1,047,228) |
10,201 |
819,749 |
906,346 |
(217,278) |
| 2010 |
(1,459,460) |
16,686 |
423,548 |
568,336 |
(1,019,226) |
| 2009 |
(650,044) |
24,422 |
2,148,461 |
2,562,479 |
1,522,839 |
| |
|
|
|
|
|
| Quarter ending |
|
|
|
|
|
| October 31, 2011 |
(1,047,228) |
10,201 |
819,749 |
906,346 |
(217,278) |
| July 31, 2011 |
(1,465,803) |
11,800 |
622,640 |
717,188 |
(831,363) |
| April 30, 2011 |
(1,986,534) |
13,451 |
584,470 |
723,762 |
(1,388,613) |
| January 31, 2011 |
(1,429,020) |
15,102 |
415,945 |
592,430 |
(997,973) |
| October 31, 2010 |
(1,459,460) |
16,686 |
423,548 |
568,336 |
(1,019,226) |
| July 31, 2010 |
(1,131,126) |
18,808 |
1,596,876 |
1,984,874 |
484,558 |
| April 30, 2010 |
(918,937) |
20,981 |
2,699,602 |
3,060,200 |
1,801,646 |
| January 31, 2010 |
(341,756) |
23,156 |
2,461,488 |
3,010,357 |
2,142,888 |
| October 31, 2009 |
(650,044) |
24,422 |
2,148,461 |
2,562,479 |
1,522,839 |
31
Table 3
Micromem Technologies Inc
Management Discussion and
Analysis
October 31, 2011 |
Summary of financing raised by Company
| Date of
financing |
|
2009 |
|
2010 |
| |
|
|
|
|
|
|
|
|
| |
|
Shares |
Price
/ share |
$ |
|
Shares |
Price
/ share |
$
|
| Exercise of options |
|
|
|
|
|
|
|
|
| January 2009 |
|
32,801 |
0.74 |
24,417 |
|
|
|
|
| April 2009 |
|
631,000 |
0.64 |
403,500 |
|
|
|
|
| July 2009 |
|
889,000 |
0.57 |
504,500 |
|
|
|
|
| August 2009 |
|
100,000 |
0.60 |
60,000 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Exercise of warrants |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| July 2009 |
|
200,000 |
1.17 |
234,000 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Private placements |
|
|
|
|
|
|
|
|
| January 2009 |
|
336,053 |
0.58 |
194,465 |
|
|
|
|
| April 2009 |
|
2,777,878 |
0.58 |
1,620,397 |
|
|
|
|
| July 2009 |
|
779,604 |
0.98 |
763,980 |
|
|
|
|
| October 2009 |
|
500,000 |
0.76 |
380,000 |
|
|
|
|
| January 2010 |
|
|
|
|
|
2,204,276 |
0.476 |
1,049,062 |
| April 2010 |
|
|
|
|
|
289,899 |
0.448 |
130,000 |
| July 2010 |
|
|
|
|
|
1,730,026 |
0.321 |
556,078 |
| October 2010 |
|
|
|
|
|
1,717,307 |
0.196 |
335,910 |
| |
|
|
|
|
|
|
|
|
| |
|
6,246,336 |
|
4,185,259 |
|
5,941,508 |
|
2,071,050 |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
2011 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Shares |
Price / share |
$ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Private placements |
|
|
|
|
|
|
|
|
| January 31, 2011 |
|
2,525,000 |
0.199 |
503,140 |
|
|
|
|
| April 30, 2011 |
|
250,000 |
0.120 |
30,000 |
|
|
|
|
| July 31, 2011 |
|
8,355,045 |
0.112 |
932,554 |
|
|
|
|
| October 31, 2011 |
|
9,695,162 |
0.104 |
1,012,987 |
|
|
|
|
| |
|
20,825,207 |
|
2,478,681 |
|
|
|
|
32
Table 4
Micromem Technologies Inc
Management Discussion and
Analysis
October 31, 2011 |
| Outstanding
options |
Strike price |
Expiry date |
| |
|
|
| 350,000 |
0.36 |
04/17/12 |
| 190,000 |
0.60 |
10/25/12 |
| 315,000 |
0.55 |
12/20/12 |
| 325,000 |
1.01 |
03/03/13 |
| 10,000 |
1.12 |
03/10/13 |
| 1,100,000 |
1.50 |
08/28/13 |
| 1,285,000 |
1.00 |
08/25/14 |
| 125,000 |
0.35 |
04/05/16 |
| 7,475,000 |
0.20 |
10/31/16 |
| 11,175,000
|
0.47 |
|
| |
|
|
| Total proceeds if all options exercised: |
|
$
5,226,450 |
| Outstanding
Warrants |
|
|
| |
|
|
| 123,276 |
0.7500 |
5/11/2012 |
| 600,000 |
0.7600 |
6/14/2012 |
| 815,000 |
0.5600 |
6/16/2012 |
| 25,000 |
0.5500 |
7/15/2012 |
| 300,000 |
0.5500 |
7/26/2012 |
| 111,111 |
0.5600 |
8/1/2012 |
| 133,333 |
0.5600 |
8/12/2012 |
| 429,686 |
1.2000 |
5/14/2012 |
| 765,188 |
0.4100 |
5/25/2012 |
| 339,838 |
0.4000 |
6/15/2012 |
| 312,500 |
0.3900 |
7/12/2012 |
| 312,500 |
0.4000 |
7/23/2012 |
| 200,000 |
0.2800 |
8/26/2012 |
| 1,325,000 |
0.2400 |
10/15/2011 |
| 500,000 |
0.2200 |
11/5/2011 |
| 400,000 |
0.2200 |
11/30/2011 |
| 300,000 |
0.2200 |
12/20/2011 |
| 250,000 |
0.2000 |
1/4/2013 |
| 750,000 |
0.2200 |
1/11/2012 |
| 325,000 |
0.2200 |
1/31/2012 |
| 20,000 |
0.2000 |
12/17/2011 |
| 10,000 |
0.2100 |
3/4/2012 |
| 5,000 |
0.2100 |
3/4/2012 |
| 250,000 |
0.1500 |
4/27/2012 |
| 5,100,000 |
0.1250 |
5/4/2012 |
| 100,000 |
0.1500 |
5/20/2012 |
| 300,000 |
0.1230 |
5/20/2012 |
| 790,000 |
0.1600 |
5/30/2012 |
| 1,454,545 |
0.1400 |
6/15/2012 |
| 298,000 |
0.2096 |
7/18/2012 |
| 312,500 |
0.2105 |
7/22/2012 |
| 20,000 |
0.2080 |
7/18/2012 |
| 89,813 |
0.2076 |
8/3/2012 |
| 703,125 |
0.2076 |
8/3/2012 |
| 75,000 |
0.1600 |
8/5/2012 |
| 1,666,667 |
0.1528 |
8/16/2012 |
| 1,275,000 |
0.1212 |
9/12/2012 |
| 150,000 |
0.1174 |
9/29/2012 |
| 250,000 |
0.1200 |
9/29/2012 |
| 200,000 |
0.1174 |
9/29/2012 |
| 3,730,000 |
0.1100 |
10/21/2012 |
| 277,778 |
0.1100 |
10/21/2012 |
| 277,778 |
0.1100 |
10/21/2012 |
| 277,778 |
0.1100 |
10/21/2012 |
| 277,778 |
0.1100 |
10/21/2012 |
| 277,778 |
0.1100 |
10/21/2012 |
| 166,667 |
0.1485 |
10/26/2011 |
| 26,672,639
|
0.22 |
|
| |
|
|
| Total proceeds if all warrants exercised: |
|
$ 5,898,373
|
33
