Annual Report
September 30, 2017
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
For purposes of this management discussion and analysis (“MD&A”), “Nanotech”, the “Company”, “we”, or “us”
refers to Nanotech Security Corp. and its subsidiaries. This year and 2017 mean the fiscal year ended September
30, 2017. Last year and 2016 mean the fiscal year ended September 30, 2016, and 2015 means the fiscal year
ended September 30, 2015. This quarter means the three months ended September 30, 2017.
ADVISORY
This MD&A, dated December 19, 2017, should be read in conjunction with the cautionary statement regarding
forward-looking statements below and the Company’s Consolidated Financial Statements for the year ended
September 30, 2017. The results reported herein have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and are
presented in Canadian dollars. All quarterly information disclosed in the MD&A is unaudited.
Additional information relating to the Company is filed on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the financial conditions and results of operations contains forward-looking
statements concerning anticipated developments in the Company’s operations in future periods, the adequacy of
Nanotech’s financial resources, and the events or conditions that may occur in the future. Forward-looking
statements are frequently, but not always, identified by words such as “expects”, “anticipates”, “believes”, “intends”,
“estimates”, “predicts”, “potential”, “targeted” “plans”, “possible” and similar expressions, or statements that events,
conditions, or results “will”, “may”, “could” or “should” occur or be achieved.
These forward-looking statements include, without limitation, statements about the Company’s market
opportunities, strategies, competition, and the Company’s views that its optics based technologies will continue to
show promise for large scale production. Other forward-looking statements imply that the Company will remain
capable of being financed and/or will be able to partner development until profitability is eventually realized. The
principal risks related to these forward-looking statements are that the Company’s products receive market
acceptance, that its intellectual property claims will be sufficiently broad or enforceable to provide the necessary
protection or attract the necessary capital.
These forward-looking statements are based on the beliefs, expectations and opinions of management on the date
the statements are made. Consequently, all forward-looking statements made in this discussion and analysis of
the financial conditions and results of operations or the documents incorporated by reference, are qualified by this
cautionary statement and there can be no certainty that actual results or developments the Company anticipates
will be realized. For additional information with respect to certain of these risks or factors reference should be made
to the “Business Risks and Uncertainties” section of this MD&A and notes to the Consolidated Financial Statements,
as well as with the Company’s continuous disclosure materials filed from time to time with Canadian securities
regulatory authorities, which are available online at www.sedar.com. Nanotech disclaims any intention or obligation
to update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise, other than as required by law. Caution needs to be used when taking forward-looking statements into
account when evaluating the Company.
1
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
GENERAL OVERVIEW
Nanotech is incorporated under the laws of British Columbia, is listed on the TSX Venture Exchange (trading
symbol: NTS) and quoted in the United States on the OTCQX Market (trading symbol: NTSFF). The Company’s
head office is located at #505 - 3292 Production Way, Burnaby, BC, Canada V5A 4R4. The Company’s registered
and records office is #1500 - 1055 West Georgia, Vancouver, BC, Canada V6E 4N7.
Nanotech designs, manufactures and markets nano-optic products that have brand protection and enhancement
applications across a wide range of markets including banknotes, tax stamps, secure government documents,
commercial branding, and the pharmaceutical industry.
The Company’s KolourOptik® technology employs arrays of billions of nano-indentations that are impressed or
embossed onto a substrate material such as polymer, paper, metal, or fabric. By using sophisticated algorithms to
direct an electron beam, the Company creates visual images with colour-shifting effects such as 3D, perceived
movement, and can also display high-definition colours including skin tones, and whites and blacks, which are not
possible using holographic technology.
The Company’s optical thin film (“OTF”) security features are manufactured using precision engineered nanometer
thick layers of metals and ceramics to form filters designed to uniquely manipulate visible and non-visible light. This
unique manipulation of light properties is used to create specialized security features in the form of threads, stripes
and patches that are applied to banknotes and other secure documents. By using sophisticated electron beam and
sputtered deposition methods, Nanotech precisely controls the construction and inherent properties to provide
custom tailored colour-shifting solutions. An individual looking at these threads, stripes and patches sees an
obvious colour-shift (e.g. green to magenta) when it is tilted or rotated.
On September 21, 2017, the Directors of the Company made the determination that it would pursue the possible
sale of its subsidiary Tactical Technologies Inc. (“Tactical”) to a third party. The Company is actively pursuing
potential purchasers and has engaged a business broker to pursue interested parties. At September 30, 2017,
Tactical was classified as a separate disposal group held for sale and as a discontinued operation. Accordingly,
the Company’s Comparative Consolidated Statements of Operation have been restated to exclude the discontinued
operations.
2
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
RESULTS OF OPERATIONS
Select financial information for the years ended September 30, 2017, 2016 and 2015:
Select Financial Information
Revenue
Cost of sales
Expenses
Research and development
General and administration
Sales and marketing
Depreciation and amortization
$
2016
2017
2015
7,343,791 $ 2,888,896 $ 3,098,322
1,397,618
1,429,371
1,700,704
5,914,420
884,132
2,004,764
1,475,437
2,308,846
2,043,514
2,755,882
8,583,679
1,996,715
2,307,368
2,078,612
3,010,263
9,392,958
980,070
2,949,681
1,569,912
2,188,460
7,688,123
Loss from continuing operations before other expenses
(2,669,259)
(7,388,194)
(5,987,419)
Other expenses (income)
1,184,594
433,513
(1,450,826)
Loss from continuing operations before income taxes
(3,853,853)
(7,821,707)
(4,536,593)
Deferred income tax recovery
Net loss from continuing operations
Loss from discontinued operations
Net loss
Adjusted EBITDA(1)
$
$
-
(3,853,853)
(900,279)
-
(4,536,593)
(134,240)
(4,754,132) $ (7,829,805) $ (4,670,833)
162,797
(7,658,910)
(170,895)
1,168,222 $ (3,648,411) $ (2,962,431)
(1)Adjusted EBITDA is a non-IFRS measure as described in the Non-IFRS Financial Measures section of this MD&A.
Financial Position as at September 30,
Cash
Total debt
2017
$ 10,883,919
-
$ 10,883,919
2016
2015
$ 3,312,691 $ 3,021,928
3,000,000
$ (3,282,451) $ 21,928
6,595,142
Total assets
Total liabilities
Total equity
$ 30,059,624
1,860,086
28,199,538
$ 24,511,586 $ 27,783,859
4,858,986
22,924,873
8,089,503
16,422,083
3
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Revenue
Revenues for the year ended September 30, 2017 increased by $4,454,895 or 154% to $7,343,791, compared to
$2,888,896 in the same period last year. Revenue growth was primarily due to increased revenue from paid
development contracts, and an increase in OTF revenue from our Thurso facility. During the year, the Company
disclosed a development contract for up to $30.0 million over a period of up to five years. These development
activities incorporate both nano-optic and OTF technologies and are focused on developing authentication features
for future banknotes.
Gross Margin
Gross margin for the year ended September 30, 2017 increased by $3,909,656 or 195% to $5,914,420, compared
to $2,004,764 in the same period last year. Overall, the gross margin percentage improved to 81% for the year
ended September 30, 2017, an increase from 69% in the same period last year. Gross margins continue to reflect
strong margins from both development contracts and OTF deliveries.
Research and Development
Research and development expenditures for the year ended September 30, 2017 decreased by $521,278, or 26%
to $1,475,437 compared to $1,996,715 in the same period last year, due to a larger portion of salaries and other
expenses being allocated to cost of sales for increased development projects activities.
General and Administration
General and administration expenditures for the year ended September 30, 2017 were $2,308,846, an increase of
$1,478, consistent with the same period last year.
Sales and Marketing
Sales and marketing expenditures for the year ended September 30, 2017 were $2,043,514, a decrease of $35,098
or 2% compared to $2,078,612 in the same period last year. The decrease mainly relates to a reduction in travel
and marketing expenses.
Depreciation and Amortization
Depreciation and amortization included in operating expenditures for the year ended September 30, 2017 was
$2,755,882, compared to $3,010,263 in the same period last year. Depreciation included in cost of sales for the
year ended September 30, 2017 was $160,401 compared to $67,734 for the same period last year. The reduction
in depreciation and amortization expenditures reflects the Company’s declining balance depreciation policy and
fewer fixed asset additions.
As of September 30, 2107, the Company has fully amortized its intangible assets, which will result in a reduction in
annual amortization of $1,361,239 going forward.
Other Expenses
Other expenses for the year ended September 30, 2017 were $1,184,594, an increase of $751,081 compared to
$433,513 in the same period last year. The 2017 results contain $1,014,779 of interest expense including, $589,858
of accretion that was a result of the Company’s decision to repay the convertible debentures and an increase in
foreign exchange loss during the year.
Adjusted EBITDA
Adjusted EBITDA for the year ended September 30, 2017 was $1,168,222, compared to negative $3,648,411 during
the same period last year. The improvement reflects an increase in revenues, reduced expenses, and higher
margins.
Net Loss
Net loss for the year ended September 30, 2017 was $4,754,132, compared to $7,829,805 during the same period
last year. The decrease in net loss also reflects an increase in revenues, higher margins, and lower expenses.
4
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
QUARTERLY RESULTS
($ thousands, except common share amounts)
Revenue
Income (loss) from continuing operations
Net loss
Adjusted EBITDA(1)
Basic earnings (loss) per share:
Continuing operations
Net loss
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
$ 2,662 $ 2,569 $ 1,419 $ 694 $ 1,177 $ 497 $ 645 $ 570
(749) (1,559) (1,673) (1,566) (1,976) (2,280) (1,837)
(905) (1,695) (1,853) (1,677) (1,957) (2,450) (1,746)
(444) (1,088) (1,091) (1,025)
858
127
(301)
1,132
(554)
(268)
0.00
0.00
(0.01)
(0.02)
(0.03)
(0.03)
(0.03)
(0.03)
(0.03)
(0.03)
(0.04)
(0.04)
(0.04)
(0.05)
(0.03)
(0.03)
Diluted earnings (loss) per share:
Continuing operations
Net loss
(1)Adjusted EBITDA is a non-IFRS measure as described in the Non-IFRS Financial Measures section of this MD&A.
(0.01)
(0.02)
(0.03)
(0.03)
(0.03)
(0.03)
0.00
0.00
(0.03)
(0.03)
(0.04)
(0.04)
(0.04)
(0.05)
(0.03)
(0.03)
There are no seasonal effects or other trends in the Company’s business over the quarters presented.
RELATED PARTY TRANSACTIONS
For the year ended September 30, 2017, the Company had no transactions with related parties as defined in IAS
24, Related Party Disclosures, except those pertaining to transactions with key management personnel in the
ordinary course of their employment, or as disclosed below.
(a) Remuneration of key management personnel:
Salaries, accrued bonuses, and employee benefits
Share-based payments
2017
$ 1,233,741
699,138
$ 1,932,879
2016
$ 1,110,792
487,925
$ 1,598,717
(b) As of September 30, 2017, amounts owing to a company controlled by an officer and director of the Company
included in accounts payable and accrued liabilities were $262,854 (2016 - $285,509).
(c) Legal and professional fees, taxes and disbursements totaling $160,664 for the year ended September 30,
2017 (2016 - $137,059) were incurred with a law firm of which a director of the Company is a partner. As of
September 30, 2017, amounts owing to this company included in accounts payable and accrued liabilities were
$93,219 (2016 - $52,826).
(d) During the year ended September 30, 2016, certain directors and officers of the Company participated in the
convertible debenture financing amounting to $350,000.
The above transactions are in the normal course of business and are measured at the exchange amount which is
the amount of consideration established and agreed to by the related parties.
5
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
LIQUIDITY AND CAPITAL RESOURCES
The Company’s principal sources of liquidity are cash provided by operations, including collection of accounts
receivable, and access to equity capital resources. The Company’s primary short-term cash requirement is to fund
operations, working capital, including customer receivables, inventory, supplier payables, capital expenditures, and
fixed overhead costs. Cash is also used to finance other long-term strategic business initiatives.
Summary of Statements of Cash Flows
Cash used in continuing operations
Cash used in discontinued operations
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
Effect of foreign exchange on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2017
$ (172,904)
(574,313)
(747,217)
2016
$ (3,657,646)
(245,182)
(3,902,828)
(106,944)
8,339,784
85,605
3,312,691
$ 10,883,919
(148,752)
4,317,689
24,654
3,021,928
$ 3,312,691
Operating Activities
Cash used in operating activities was $747,217 for the year ended September 30, 2017, compared to $3,902,828
for the same period last year. This improvement was a result of increased development revenue, strong margins
and a working capital decrease during the year.
Investing Activities
Cash used in investing activities was $106,944 for the year ended September 30, 2017, compared to $148,752
used in the same period last year. This reflects reduced expenditures on production equipment in the current period
as our production equipment upgrades were concluded early in the previous year.
Financing Activities
Cash provided by financing activities was $8,339,784 for the year ended September 30, 2017, compared to
$4,317,689 during the same period last year. This reflects the proceeds of a private placement, the repayment of
convertible debentures, the repayment of the note payable and the exercise of stock options during the year.
Capital Resources
The Company’s objectives when managing capital are to safeguard the ability to continue as a going concern, to
provide adequate return to shareholders, to meet external capital requirements, and preserve financial flexibility in
order to benefit from potential opportunities that may arise. Our principal cash requirements are for operations,
working capital, and capital expenditures.
The Company’s officers are responsible for managing the Company’s capital and do so through quarterly meetings
and regular review of financial information. The Board of Directors is responsible for overseeing this process. In
managing its capital, the Company considers changes in economic conditions, risks that impact consolidated
operations, and future significant capital investment opportunities. For the year ended September 30, 2017 there
were no changes in our approach to capital management.
As at September 30, 2017, cash and cash equivalents amounted to $10,883,919, compared to $3,312,691 as at
September 30, 2016. On May 18, 2017, the Company completed a bought deal private placement with a syndicate
of underwriters whereby a total of 11,586,870 common shares of the Company were issued at a price of $1.15 per
share, for total gross proceeds of $13,324,901.
During the year, the Company had convertible debentures outstanding with a face value amounting to $4,185,000
with a maturity date of May 31, 2018. The convertible debentures accrued interest at a rate of 12% per annum
payable quarterly in arrears and were convertible into common shares of the Company at a price of $1.25 per share.
On May 18, 2017, the Company provided notice to the debenture holders of the Company’s intention to repay the
6
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
convertible debentures on June 21, 2017. Most debenture holders elected to convert their debentures into common
shares at $1.25 per share. As a result, the Company issued 2,252,000 common shares valued at $2,815,000. The
remaining $1,370,000 was repaid.
The Company also had a note payable that was fully secured against the assets of the Company and required
interest payments at a fixed rate of 4% per annum, with payment of the principal due on September 16, 2017. On
August 21, 2017, the note payable was repaid in full and all security released.
The Company had no lines of credit and no exposure to asset backed commercial paper.
The Company had commitments of $2,605,795 as of September 30, 2017. Management has reviewed its projected
funding requirements and expects that through the generation and collection of revenues that the Company will
maintain sufficient liquidity to meet its requirements through September 30, 2018.
Non-IFRS Financial Measures
In addition to results reported in accordance with IFRS, the Company discloses Adjusted EBITDA as a supplemental
indicator of its financial performance.
The Company defines Adjusted EBITDA as net loss excluding the impact of interest and financing costs (net of
interest income), income taxes, depreciation and amortization, share-based compensation, the loss from
discontinued operations, and foreign exchange (gain) loss. The Company believes Adjusted EBITDA is a useful
measure because it provides information to management about the operating and financial performance of the
Company and its ability to generate operating cash flow to fund future working capital needs, and fund future growth.
Adjusted EBITDA may also be used by investors and analysts for the purpose of valuing the Company.
Readers are cautioned that these non-IFRS definitions are not recognized measures under IFRS, do not have
standardized meanings prescribed by IFRS, and should not be construed to be alternatives to net earnings
determined in accordance with IFRS or as indicators of performance or liquidity or cash flows. The Company’s
method of calculating these measures may differ from methods used by other entities and accordingly our measures
may not be comparable to similarly titled measures used by other entities or in other jurisdictions. The Company
uses these measures because it believes they provide useful information to both management and investors with
respect to the operating and financial performance of the Company.
Net loss
Finance expense
Foreign exchange loss
Deferred income tax recovery
Depreciation and amortization
Share-based compensation
Loss from discontinued operations
Adjusted EBITDA
Years ended
September 30,
2016
2017
$ (4,754,132) $ (7,829,805)
354,720
78,793
(162,797)
3,077,997
661,786
170,895
$ 1,168,222 $ (3,648,411)
1,014,779
169,815
-
2,916,283
921,198
900,279
7
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Financial Instruments
The Company considers the management of financial risk to be an important part of its overall corporate risk
management policy. The nature and extent of risks arising from financial instruments and their related risk
management are described in note 12 of the Consolidated Financial Statements for the year ended September 30,
2017. In the year ended September 30, 2017, there was no material change to the nature of the risks arising from
our classification of financial instruments, or related risk management objectives.
CAPITAL STRUCTURE AND OUTSTANDING SHARE DATA
The Company maintains an equity incentive plan consisting of a stock option plan and a restricted share unit (“RSU”)
plan to grant options and RSUs to eligible participants. The maximum number of shares that may be reserved for
issuance under the option plan at any point in time is 7% of the Company’s issued and outstanding shares. As of
February 21, 2017, there were 940,030 RSUs granted but not converted and 216,369 outstanding available for
grant. On March 30, 2017, shareholders approved an additional 600,000 RSUs available for grant. As at September
30, 2017, 806,169 RSUs remain available to be granted. The obligations under the RSU plan can be settled at the
Company’s discretion through either cash or issuance of common shares. The Company intends to settle the
obligation through the issuance of common shares.
During the year ended September 30, 2017, 413,500 options (2016 – 796,500) and 499,200 RSUs (2016 – 387,900)
were granted. During the year ended September 30, 2017, 590,000 (2016 – 50,000) were forfeited or expired
during the year.
The common shares, options, and RSUs outstanding and exercisable as at the following dates are:
September 30, 2017
September 30, 2016
Number
Weighted average
exercise price
Number
Weighted average
exercise price
Common shares outstanding
Options
Outstanding
Exercisable
RSUs
Outstanding
68,395,825
2,040,000
1,770,125
529,560
$
$
1.35
1.37
N/A
53,864,285
2,488,500
1,954,625
451,030
$
$
1.29
1.35
N/A
As at December 19, 2017, the Company has 68,395,825 common shares issued and outstanding. There are no
preferred shares issued and outstanding.
SIGNIFICANT ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of financial statements in accordance with IFRS requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets,
liabilities, revenues, and expenses. Estimates and assumptions are continually evaluated and are based on
historical experience and various factors that management believes to be reasonable under the circumstances.
However, due to the nature of estimates, actual results may differ from estimates.
The Company’s significant accounting policies are contained in note 3 to the consolidated financial statements.
Significant areas requiring the use of judgment in application of accounting policies and assumptions and estimates
are discussed below.
Going Concern
Financial statements are prepared on a going concern basis unless management either intends to liquidate the
Company or to cease trading, or has no realistic alternative to do so. Assessment of the Company’s ability to
continue as a going concern requires the consideration of all available information about the future, which is at least,
but not limited to, twelve months from the end of the reporting period. This information includes estimates of future
8
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
cash flows and other factors, the outcome of which is uncertain. When management is aware, in making its
assessment of material uncertainties related to events or conditions that may cast significant doubt upon the
Company’s ability to continue as a going concern, those uncertainties are disclosed.
Fair Valuation of Financial Instruments
IFRS requires financial instruments to be measured at fair value as at the balance sheet date. In determining fair
value, the Company must estimate the price that market participants would sell for, or buy at, in an active liquid
market, if there was one. Current market conditions, in which some financial instruments may lack an active market,
make it more difficult for the Company to estimate fair value. While management believes the estimates of fair
values at the balance sheet date are reasonable, differences in estimates could have an impact on the financial
position and results of operations of the Company.
Impairment of Non-financial Assets
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of
the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is not
amortized and is tested for impairment at least annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Goodwill is considered to be impaired when the carrying amount of the
cash generating unit or group of cash generating units to which the goodwill has been allocated exceeds its fair
value. An impairment loss, if any, would be recognized as a separate line item in the statement of earnings.
Intangible assets, acquired individually or with a group of other assets, are initially recognized and measured at
cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business
combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets
acquired based on their relative fair values. Intangible assets with finite useful lives are amortized over their
estimated useful lives, and are tested for impairment when events or changes in circumstances indicate that an
asset might be impaired. The amortization methods and estimated useful lives of intangible assets are reviewed
annually. Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, or
more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment
test compares the carrying amount of the intangible asset with its fair value, and an impairment loss would be
recognized in income for the excess of carrying value over fair value, if any.
The Company performs impairment tests for goodwill, intangible assets with indefinite lives, and other assets
periodically as described above. Impairment tests involve considerable use of judgment and require management
to make estimates and assumptions. The fair values of cash generating units are derived from certain valuation
models, which consider various factors such as discount rates, future earnings, and perpetual growth rates.
Changes in estimates and assumptions can affect the reported value of goodwill and intangible assets with indefinite
useful lives.
Provisions
The Company records a provision when an obligation to a third party exists, the payment is probable, and the
amount can be reasonably estimated. The Company records a provision based upon the best estimate of the
expenditure required to settle the present obligation at the balance sheet date. While management believes these
estimates are reasonable, differences in actual results or changes in estimates could have an impact on the
liabilities and results of operations recorded by the Company.
Share-based Compensation
The Company measures the fair value of its share-based compensation awards using the Black-Scholes option
pricing model and recognizes the fair value expense on a straight-line basis over the relevant vesting period.
Management uses judgment to determine the inputs to the Black-Scholes option pricing model including expected
plan lives, underlying share price volatility and forfeiture rates. Changes in these assumptions could have a material
impact on the calculation of fair value and the amount of compensation expense recorded in earnings.
9
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Investment Tax Credits
The Company recognizes investment tax credits when there is reasonable assurance that they will be realized.
Investment tax credits may be carried forward to reduce future Canadian federal and provincial income taxes
payable. The Company applies judgment when determining whether the reasonable assurance threshold has been
met to recognize investment tax credits in the Consolidated Financial Statements. The Company must interpret
eligibility requirements in accordance with Canadian income tax laws and must assess whether future taxable
income will be available against which the investment tax credits can be utilized. Any changes in these
interpretations and assessments could have a material impact on the amount and timing of investment tax credits
recognized in the Consolidated Financial Statements.
Income Taxes
The Company is subject to taxation in numerous jurisdictions and exercises judgment in estimating the provision
for federal, provincial, and foreign income taxes. Income tax laws and regulations can be complex and are
potentially subject to different interpretation between the Company and the respective tax authority. Provisions for
tax are made using the Company’s best estimate of the amount of tax expected to be paid or recovered based on
an assessment of all relevant factors. However, the precision and reliability of the estimates are subject to
uncertainty and may change as additional information becomes known.
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future
periods against which deductible temporary differences may be utilized. The recognition of deferred income tax
assets involves considerable use of judgment and requires management to make estimates and assumptions,
including estimates of projected taxable income, the timing of the reversal of temporary differences, the tax rates
and laws in each respective jurisdiction, and the impact of tax planning strategies. The amount of recognized
deferred tax assets may change from period to period due to the uncertainties surrounding these assumptions.
Inventory
Inventory is measured at the lower of cost and net realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less the estimated costs of completion and selling expenses taking into
account the most reliable evidence available at each reporting date. The future realization of the inventory may be
affected by future technology or other market-driven changes that may reduce future selling prices. While
management believes that the estimates of net realizable value as at the balance sheet date are reasonable,
differences in estimates could have an impact on the inventory valuation and results of operations of the Company.
Property, Plant, and Equipment
Property, plant, and equipment is measured at cost less accumulated depreciation and accumulated impairment
losses. Depreciation expense is recognized based on management’s best estimate of the useful lives of the
depreciable assets. The Company reviews the estimated useful life annually and recognizes any adjustment as
appropriate. While management believes that the estimates of useful lives of depreciable assets as at the balance
sheet date are reasonable, differences in estimates could impact the valuation of depreciable assets and the results
of operations of the Company.
NEW ACCOUNTING STANDARDS
In July 2014, the IASB issued IFRS 9 - Financial Instruments, which replaces the earlier versions of IFRS 9 (2009,
2010, and 2013) and completes the IASB’s project to replace IAS 39 - Financial Instruments: Recognition and
Measurement. IFRS 9 includes a logical model for classification and measurement of financial assets; a single,
forward-looking ‘expected credit loss’ impairment model and a substantially-reformed approach to hedge
accounting to better link the economics of risk management with its accounting treatment. IFRS 9 is effective for
annual periods beginning on or after January 1, 2018 and must be applied retrospectively, with some exceptions.
Earlier adoption is permitted. The Company is currently evaluating the impact of IFRS 9 on its financial statements,
and plans to adopt the new standard on the required effective date.
In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers, which supersedes IAS 18 -
Revenue, IAS 11 - Construction Contracts and other interpretive guidance associated with revenue recognition.
IFRS 15 provides a single, principles-based five-step model to be applied to all contracts with customers to
determine how and when an entity should recognize revenue. The standard also provides guidance on whether
10
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
revenue should be recognized at a point in time or over time as well as requirements for more informative, relevant
disclosures. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption
permitted. The Company has completed an assessment of the impact that the initial application of IFRS 15 will have
on its financial statements and does not expect that there will be a significant impact, other than additional required
disclosures. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on
October 1, 2018.
In January 2016, the IASB issued IFRS 16 - Leases, which supersedes IAS 17 - Leases. IFRS 16 establishes
principles for the recognition, measurement, presentation and disclosure of leases. The standard establishes a
single model for lessees to bring leases on balance sheet while lessor accounting remains largely unchanged and
retains the finance and operating lease distinctions. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019 with earlier adoption permitted, but only if also applying IFRS 15 - Revenue from Contracts with
Customers. The Company is currently evaluating the impact of IFRS 16 on its financial statements, and plans to
adopt the new standard on the required effective date.
BUSINESS RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that can significantly affect its business, financial
condition and future financial performance. The Company has a comprehensive process to identify, manage, and
mitigate risk, wherever possible. The risks and uncertainties described below are not necessarily the only risks the
Company faces. Additional risks and uncertainties that are presently unknown to the Company or deemed
immaterial by the Company may adversely affect the Company’s business.
History of Operating Losses and Negative Cash Flow
We continue to be an expenditure-based entity, and have incurred substantial losses since our inception and
continue to incur losses and experience negative cash flows. We cannot predict if or when we will operate profitably
or generate positive cash flows or if we will be able to implement our business strategy successfully. Pursuing our
business strategy requires us to incur significant expenditures for research and product development, marketing,
and general administrative activities. As a result, we need to continue to grow our revenues and gross margins to
achieve and sustain profitability and positive operating cash flows, and we may need to raise additional capital.
Financing Arrangements
Execution of our business plan and our commercial viability could be jeopardized if we are unable to raise additional
funds for our working capital, R&D projects, sales, marketing and product development activities, and other
business opportunities. We attempt to mitigate this risk by generating funds from a variety of sources including
through debt financing, the sale of common equity, government funding, collaboration partners, vendor financing
and revenues from our commercial products.
If the cash generated from the Company’s business continues to be insufficient to fund future capital requirements,
the Company will require additional financing. The Company’s ability to access capital markets on terms that are
acceptable will be dependent on prevailing market conditions, as well as the Company’s future financial condition.
Although the Company does not have any reason to anticipate unusual difficulties in raising funds in the future,
there can be no assurance that capital will be available on suitable terms and conditions or at all.
Government Contracts and Funding
Changes in government policies, priorities or regulations, funding levels through agency or program budget
reductions, the imposition of budgetary constraints or the lack of government appropriations, the delay and/or
deferment in governmental contract approvals or government programs could have a material adverse effect on the
Company’s financial condition, results of operations, or future growth. A decline in governmental support and
funding for programs in which the Company or its customers participate could result in contract terminations, delays
in contract rewards, the failure to exercise contract options, the cancellation of planned procurements and fewer
new business opportunities, any of which could have a material adverse effect on the Company’s financial condition
and results of operation.
11
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Quality Issues and Contract Performance
The Company sells complex products that could contain defects in design, manufacture and implementation. The
products the Company develops and manufactures are technologically advanced and complex. Defects may also
occur in components and products that the Company purchases from third parties. The Company employs
sophisticated design and testing processes. However, there can be no assurance that the Company’s products will
be successfully implemented or will pass required acceptance criteria. There can be no assurance that the
Company will be able to detect and fix all defects in the products it sells. Failure to do so could result in lost revenue,
harm to reputation, significant warranty and other expenses, and could have a material adverse impact on the
Company’s financial condition and operating results. In addition, a failure with respect to any product may adversely
affect the perception by the Company’s customers of the quality of its products and may materially and adversely
affect the Company’s ability to win new contracts.
Acquisitions
The Company has in the past and may continue to expand its operations and business by acquiring additional
businesses, products, or technologies. There can be no assurance that the Company will be able to identify,
acquire, obtain the required regulatory approvals, or profitably manage additional businesses or successfully
integrate any acquired businesses, products or technologies into the Company without substantial expenses, delays
or other operational, regulatory, or financial problems. Furthermore, acquisitions may involve a number of additional
risks, including diversion of management’s attention, failure to retain key personnel, unanticipated events or
circumstances, unidentified pre-closing liabilities and other legal liabilities, some or all of which could have an
adverse effect on the Company’s business, results of operations and financial condition. In addition, there can be
no assurance that any acquired businesses, products, or technologies will achieve anticipated revenues and income
growth. Acquisitions could also result in potentially dilutive issuances of equity securities. The failure of the
Company to manage its acquisitions strategy successfully could have a material adverse effect on the Company’s
business, results of operations and financial condition.
Fixed Costs
The Company requires a staff of specialized workers, as well as specialized manufacturing and test facilities, to
perform under its contracts. In order to maintain its ability to compete, the Company must continuously retain the
services of a core group of specialists. This reduces the Company’s flexibility to reduce workforce costs in the
event of a slowdown or downturn in its business. In addition, the manufacturing and test facilities that the Company
owns or leases under long-term agreements are fixed costs that cannot be adjusted quickly to account for significant
variance in production requirements or economic conditions.
Dependence on Key Personnel
The success of the Company is largely dependent on the abilities and experience of its executive officers and other
key personnel. Competition for highly skilled management, technical, research and development, and other
personnel is intense in the Company’s industry. There can be no assurance that the Company can retain its current
executive officers or key personnel, or attract and retain additional executive officers or key personnel as needed.
The loss of certain executive officers or key personnel could have an adverse impact upon the Company’s growth,
operations and profitability.
Technological Change
The banknote, branding and security markets in which the Company operates are characterized by changing
technology and evolving industry standards. The Company’s actual and planned products embody complex
technology and may not always be compatible with current and evolving technical standards developed by others.
Failure or delays by the Company to meet or comply with the requisite and evolving industry or user standards
could have a material adverse effect on the Company’s business, results of operations and financial condition. The
Company’s ability to anticipate changes in technology, technical standards and the needs of the industries it serves
or proposes to serve will be a significant factor in the Company’s ability to compete or expand into new markets.
12
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Retention of Markets and Development of New Offerings
The Company may experience design, manufacturing, marketing and other difficulties that could delay or prevent
the development, introduction or acceptance of new products and enhancements. There can be no assurance that
the Company will be able to anticipate and achieve the technological advances necessary to remain competitive
and profitable, that new products or enhancements will be developed and manufactured on schedule or on a cost-
effective basis, or that the Company’s existing products will not become technologically obsolete. The Company’s
failure to accurately predict the needs of current and prospective customers, and to develop products or
enhancements that address those needs, may result in the loss of current customers or the inability to secure new
customers.
Significant Competition
Many of the Company’s competitors are larger and have substantially greater resources than the Company.
Furthermore, it is possible that other domestic or foreign companies or governments, some with greater experience
in the industry in which the Company operates and many with greater financial resources than the Company
possesses, could seek to produce products that compete with the Company’s products, including the use of new
technology which could render the Company’s products less competitively viable. Some of the Company’s foreign
competitors currently benefit from, and others may benefit in the future from, subsidies or protective measures by
their home countries. Furthermore, government agencies may at any time decide to perform similar work as the
Company either for themselves or for other government agencies, effectively competing with the Company.
The Company’s financial performance is dependent on its ability to generate a sustainable order rate for its
manufacturing operations. This can be challenging and may fluctuate on an annual and quarterly basis as the
number of contracts awarded varies and is difficult to predict. There is also competitive pressure on pricing and
other material contractual terms, such as those allocating risk between the manufacturer and its customers.
Intellectual Property Rights
To protect the Company’s proprietary rights, the Company relies on a combination of patent protections, copyrights,
trade secrets, trademark laws, confidentiality agreements with employees and third parties, and protective
contractual provisions such as those contained in licence agreements with consultants, subcontractors, vendors
and customers. Despite these efforts, the Company’s intellectual property rights may be invalidated, circumvented,
challenged, infringed or required to be licensed to others, which could have a material adverse effect on the
Company’s business, financial condition or operating results. An infringement or misappropriation could harm any
competitive advantage the Company currently derives or may derive from its proprietary rights. Litigation may be
necessary to enforce or protect the Company's intellectual property rights, protect its trade secrets or determine the
validity and scope of the proprietary rights of others. Such litigation may be time-consuming and expensive to
prosecute or defend and could result in the diversion of the Company's time and resources.
If any of the Company’s technology violates proprietary rights, including copyrights and patents, third parties may
assert infringement claims against the Company. Any claims from third parties may also result in limitations on the
Company's ability to use the intellectual property subject to these claims. The Company may be required to
redesign its products or obtain licences from third parties to continue offering the Company’s products without
substantially re-engineering such products or defending itself and its customers against infringement claims and
liability for damages. This may affect the Company’s operations and, in addition, the Company could suffer
substantial costs in defending itself against infringement claims.
Economic and Political Conditions
Customer demand for the Company’s products may be affected by economic and political conditions on an
international, national and/or regional level. For example, changes in interest rates, foreign exchange rates, credit
availability, the level of government spending, the cyclical nature of the market, and political decisions may
adversely influence the Company’s sales or the Company’s ability to access certain funding.
Security Environment
Many of the Company’s customers have specific security requirements relating to the work that can be performed
for it. These requirements can change quickly and with little notice causing reduction or even elimination of potential
work for the Company and the ability of the Company to participate in future business. Any reduction or elimination
of work could have an adverse effect on the revenues and margins of the Company.
13
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2017
Insurance
The Company maintains an extensive program of insurance coverage in the normal course of business, consistent
with similar businesses. In addition, the insurance program covers some of the unique risks encountered by the
Company. Although the limits and deductibles of such insurance have been established through risk analysis and
the recommendation of professional advisors, there can be no assurance that such insurance will remain available
to the Company at commercially reasonable rates or that the amount of such coverage will be adequate to cover
all liability incurred by the Company. If the Company is held liable for amounts exceeding the limits of its insurance
coverage or for claims outside the scope of that coverage, its business, results of operations and financial condition
could be adversely affected.
ADDITIONAL INFORMATION
Outlook
Nanotech is a leader in next-generation anti-counterfeiting products. These products have brand protection and
enhancement applications across a wide range of markets including banknotes, secure government documents,
commercial branding, and the pharmaceutical industry. Nanotech is initially focusing its efforts on the banknote
market due to its strong margins and established customer base. With the recent signing of the $30 million
development contract, the Company is focusing on further developing business with its established customer base
and, as a result, is well positioned to expand its authentication development contract revenue and other nano-optic
and OTF opportunities in the years ahead.
In 2017, management established goals to double its revenue and make significant progress towards becoming
cash flow positive. Management is pleased that it has exceeded both goals for 2017 with revenue growth of 154%
and achieving positive Adjusted EBITDA of $1,168,222 for the year. In addition, the Company has developed many
significant market opportunities in the banknote, tax stamp and commercial markets.
Looking ahead to 2018, the Company is well positioned financially to pursue these opportunities. With a strong
balance sheet including $10,883,919 in cash and no debt, management has established the following goals for
2018:
1. Grow revenues by 20% to 40% (which excludes the potential Asian OTF order);
2. Begin to collect licensing revenue from the tax stamp and commercial markets;
3. Maintain a strong focus on earnings with a target of 15% to 20% Adjusted EBITDA margin;
4. Continue to pursue a volume OTF partnering opportunity with Hueck Folien for Asian banknotes;
5.
Invest in several key marketing hires to ensure internal resources are in place to develop the products,
sales channels, and marketing materials necessary to penetrate potential commercial markets; and
6. Continue to open new corporate development opportunities by partnering with established companies to
enable Nanotech to enter new markets.
Achieving these results is not certain and involves known and unknown risks that may cause actual results to differ
materially from this goal. These risks and uncertainties include, among other things, risks related to uncertainty of
amount and timing of purchase orders, the ability of Hueck Folien to successfully deliver volume production, and
our ability to expand our development revenue. These and other risk factors are further discussed under the
“Business Risks and Uncertainties” segment of this MD&A.
Public Securities Filings
Additional information about Nanotech, is available on the Company’s website at www.nanosecurity.ca, or on
SEDAR at www.sedar.com.
14
Consolidated Financial Statements of
Nanotech Security Corp.
Years ended September 30, 2017 and 2016
Nanotech Security Corp.
September 30, 2017 and 2016
Table of Contents
Independent Auditor’s Report ................................................................................................................. 1
Consolidated Statements of Operations and Comprehensive Loss ....................................................... 3
Consolidated Statements of Financial Position....................................................................................... 4
Consolidated Statements of Changes in Equity ..................................................................................... 5
Consolidated Statements of Cash Flows ................................................................................................ 6
Notes to the Consolidated Financial Statements .............................................................................. 7-33
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Nanotech Security Corp.
We have audited the accompanying consolidated financial statements of Nanotech Security Corp., which
comprise the consolidated statements of financial position as at September 30, 2017 and September 30,
2016, the consolidated statements of operations and comprehensive loss, changes in equity and cash flows
for the years then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada
provides services to KPMG LLP.
1 Shareholders
Nanotech Security Corp.
Independent Auditors’ Report
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Nanotech Security Corp. as at September 30, 2017 and September 30, 2016, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance
with International Financial Reporting Standards.
Chartered Professional Accountants
December 21, 2017
Vancouver, Canada
2
Nanotech Security Corp.
Consolidated Statements of Operations and Comprehensive Loss
Years ended September 30, 2017 and 2016
(In Canadian dollars)
Revenue
Cost of sales (note 16)
Gross profit
Expenses (note 16)
Research and development
General and administration
Sales and marketing
Depreciation and amortization
2017
2016
$
7,343,791
1,429,371
5,914,420
$
2,888,896
884,132
2,004,764
1,475,437
2,308,846
2,043,514
2,755,882
8,583,679
1,996,715
2,307,368
2,078,612
3,010,263
9,392,958
Loss from continuing operations before other expenses
(2,669,259)
(7,388,194)
Other expenses
Foreign exchange loss
Finance expense (note 9)
169,815
1,014,779
1,184,594
78,793
354,720
433,513
Loss from continuing operations before income taxes
(3,853,853)
(7,821,707)
Deferred income tax recovery (note 13)
Net loss from continuing operations
Loss from discontinued operations (note 18)
Net loss
Other comprehensive income:
Items that may be subsequently reclassified to earnings:
Unrealized foreign exchange gain
on translation of foreign operation
Total comprehensive loss
Basic and diluted loss per share:
Continuing operations
Discontinued operations
Net loss
Weighted average number of common shares
Basic and diluted
See accompanying notes to Consolidated Financial Statements.
-
(3,853,853)
162,797
(7,658,910)
(900,279)
(4,754,132)
(170,895)
(7,829,805)
85,605
(4,668,527)
$
24,654
(7,805,151)
$
$
$
$
(0.07)
(0.01)
(0.08)
$
$
$
(0.14)
(0.01)
(0.15)
59,056,353
53,524,646
3
Nanotech Security Corp.
Consolidated Statements of Financial Position
as at September 30, 2017 and 2016
(In Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (note 12(b))
Inventory (note 5)
Prepaid expenses and other assets
Assets held for sale (note 18)
Property, plant and equipment (note 6)
Goodwill (note 7(a))
Intangible assets (note 7(b))
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Deferred revenue
Liabilities directly associated with assets held for sale (note 18)
Note payable (note 8)
Non-current liabilities:
Convertible debentures (note 9)
Tenant inducement
Shareholders’ equity
Share capital (note 10(a))
Contributed surplus (note 9)
Deficit
Accumulated other comprehensive loss
Related party transactions (note 14).
Commitments (note 17).
See accompanying notes to Consolidated Financial Statements.
Approved on behalf of the Board of Directors:
"Doug Blakeway"
Doug Blakeway, Director
"Ken Tolmie"
Ken Tolmie, Director
2017
2016
$
10,883,919
1,374,442
151,708
187,874
216,225
12,814,168
$
3,312,691
597,414
385,753
127,719
-
4,423,577
15,856,998
1,388,458
-
30,059,624
$
17,338,312
1,388,458
1,361,239
24,511,586
$
$
1,431,466
157,171
200,226
-
1,788,863
$
1,395,568
-
-
3,000,000
4,395,568
-
71,223
1,860,086
3,595,142
98,793
8,089,503
61,426,483
2,715,137
(35,873,177)
(68,905)
28,199,538
30,059,624
$
45,210,507
2,485,131
(31,119,045)
(154,510)
16,422,083
24,511,586
$
4
Nanotech Security Corp.
Consolidated Statements of Changes in Equity
Years ended September 30, 2017 and 2016
(In Canadian dollars)
Balance as at October 1, 2015
Net loss
Unrealized foreign exchange gain on translation
Fair value of equity component of convertible debentures on issuance,
net of transaction costs (note 9)
Deferred tax liability relating to convertible debentures (note 9)
Share-based payments (note 10(c) and (d))
RSUs vested (note 10(d))
Options exercised (note 10(c))
Balance as at September 30, 2016
Net loss
Unrealized foreign exchange gain on translation
Shares issued, net of issuance costs (note 10(a))
Shares issued on conversion of convertible debentures (note 9)
Share-based payments (note 10(c) and (d))
RSUs vested (note 10(d))
Options exercised (note 10(c))
Balance as at September 30, 2017
See accompanying notes to Consolidated Financial Statements.
Number
of shares
53,387,215
-
-
-
-
-
237,070
240,000
53,864,285
-
-
11,586,870
2,252,000
-
420,670
272,000
68,395,825
$
Share
capital
44,666,497
-
-
-
-
-
258,406
285,604
45,210,507
$
-
-
12,486,784
2,815,000
-
567,905
346,287
61,426,483
$
$
Contributed
surplus
1,726,780
-
-
605,972
(162,797)
661,786
(258,406)
(88,204)
2,485,131
$
-
-
-
-
921,198
(567,905)
(123,287)
2,715,137
$
$
Deficit
(23,289,240)
(7,829,805)
-
-
-
-
-
-
(31,119,045)
$
(4,754,132)
-
-
-
-
-
-
(35,873,177)
$
Accumulated
other
comprehensive
loss
(179,164)
-
24,654
$
-
-
-
-
-
(154,510)
$
-
85,605
-
-
-
-
-
(68,905)
$
Total
shareholders’
equity
22,924,873
(7,829,805)
24,654
$
605,972
(162,797)
661,786
-
197,400
16,422,083
$
(4,754,132)
85,605
12,486,784
2,815,000
921,198
-
223,000
28,199,538
$
5
Nanotech Security Corp.
Consolidated Statements of Cash Flows
Years ended September 30, 2017 and 2016
(In Canadian dollars)
Cash flows provided by (used in):
Operating activities:
Net loss from continuing operations
Items not involving cash:
Depreciation and amortization
Share-based compensation
Accretion of convertible debentures
Other
Deferred income taxes
Non-cash working capital changes (note 15(a))
Discontinued operations (note 18):
Net loss from discontinued operations
Depreciation
Items not involving cash
Cash used in operating activities
Investing activities:
Purchase of property and equipment
Cash used in investing activities
Financing activities:
Issuance of shares for options exercised
Proceeds on financing, net of costs (note 10(a))
Repayment of note payable (note 8)
Repayment of convertible debentures (note 9)
Proceeds on issuance of convertible debentures, net of costs
Cash provided by financing activities
2017
2016
$
(3,853,853)
$
(7,658,910)
2,917,883
921,198
589,858
(27,570)
-
(720,420)
(172,904)
3,077,997
661,786
80,825
(27,570)
(162,797)
371,023
(3,657,646)
(900,279)
12,804
313,162
(747,217)
(170,895)
17,689
(91,976)
(3,902,828)
(106,944)
(106,944)
(148,752)
(148,752)
223,000
12,486,784
(3,000,000)
(1,370,000)
-
8,339,784
197,400
-
-
-
4,120,289
4,317,689
Effect of foreign exchange on cash and cash equivalents
85,605
24,654
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
7,571,228
290,763
3,312,691
10,883,919
$
3,021,928
3,312,691
$
See supplementary cash flow information (note 15).
See accompanying notes to Consolidated Financial Statements.
6
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
1. Summary of business:
Nanotech Security Corp. (the “Company” or “Nanotech”) is incorporated under the laws of British Columbia with
common shares listed on the TSX Venture Exchange (trading symbol: NTS) and quoted in the United States
on the OTCQX Market (trading symbol: NTSFF). The Company’s head office is located at #505 - 3292
Production Way, Burnaby, British Columbia, Canada V5A 4R4.
Nanotech designs, produces and markets nano-optic products that have brand protection and enhancement
applications across a wide range of markets including banknotes, tax stamps, and commercial branding.
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The
financial statements were approved by the Company’s Board of Directors and authorized for issue on
December 19, 2017.
Certain comparative figures in the consolidated statements of operations and comprehensive loss have
been reclassified to conform to the current period’s presentation. This reclassification had no impact on the
net loss from continuing operations, the net loss, or total comprehensive loss.
(b) Basis of measurement:
These consolidated financial statements are presented in Canadian dollars and have been prepared on a
historical cost basis, except for certain financial instruments which are measured at fair value.
(c) Use of estimates, assumptions and judgments:
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The estimates and underlying assumptions are
reviewed by management on an ongoing basis. Revisions to accounting estimates are accounted for
prospectively. The key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the carrying amounts of assets and liabilities are discussed below:
(i) Valuation of goodwill:
Goodwill arising on an acquisition of a business is carried at cost, as established at the date of
acquisition of the business less impairment losses, if any. For purposes of impairment testing, goodwill
is allocated to each of the Company’s cash-generating units (“CGU”) that is expected to benefit from
the synergies of the combination. A CGU to which goodwill has been allocated is tested for impairment
annually, or more frequently when there is an indication that the CGU may be impaired.
7
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
2. Basis of preparation (continued):
(c) Use of estimates, assumptions and judgments (continued):
(i) Valuation of goodwill (continued):
Management evaluates goodwill for impairment annually as of September 30th. While management
uses their best estimate and assumptions to assess goodwill impairment, there are inherent
uncertainties in projecting future cash flows.
(ii) Judgments:
Management uses judgment when applying accounting policies and when making estimates and
assumptions as described above. The most significant areas that require judgment include
determination of functional currency, the estimated useful life of property, plant and equipment,
goodwill, and determination of CGUs and segments.
(d) Basis of consolidation:
These consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Tactical Technologies Inc. (“TTI”). All intercompany balances and transactions are eliminated
on consolidation. The financial statements of the subsidiaries are included in the consolidated financial
statements from the date that control commences.
(e) Foreign currency translation:
The consolidated financial statements of the Company are presented in Canadian dollars. The functional
currency of the Company is the Canadian dollar. TTI’s functional currency is the U.S. dollar.
(i) Transactions in foreign currency:
Each entity within the consolidated group records transactions using its functional currency, being the
currency of the primary economic environment in which it operates. Foreign currency transactions are
translated into the respective functional currency of each entity using the foreign currency rates
prevailing at the date of the transaction. Period end balances of monetary assets and liabilities in foreign
currency are translated to the respective functional currencies using period end foreign currency rates.
Foreign currency gains and losses arising from settlement of foreign currency transactions are
recognized in earnings.
(ii) Foreign operations translation:
The assets and liabilities of foreign operations are translated into Canadian dollars at period end foreign
currency rates. Revenues and expenses of foreign operations are translated into Canadian dollars at
average rates for the period. Foreign currency translation gains and losses are recognized in other
comprehensive loss. The relevant amount in accumulated other comprehensive loss is reclassified into
earnings upon disposition of a foreign operation.
8
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies:
(a) Revenue recognition:
Revenue is measured at the fair value of consideration received or receivable, net of discounts and after
eliminating intercompany sales.
The Company’s contracts with customers may include multiple deliverables that fall within one or more of
the revenue categories described below. Where revenue arrangements have separate identifiable
components, the consideration received is allocated to each identifiable component and the applicable
revenue recognition criteria are applied to each of the components.
Revenue from the sale of products is recognized when all of the following conditions have been met:
•
•
•
•
•
title and risk involving the products are transferred to the buyer;
the Company's managerial involvement over the goods ceases to exist;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Company; and
the costs incurred in respect of the transaction can be measured reliably.
If there is a requirement for customer acceptance of any products shipped, revenue is recognized only after
customer acceptance has been received. Payments received in advance of the satisfaction of the
Company’s revenue recognition criteria are recorded as deferred revenue.
Revenue from development contracts are recognized by reference to the stage of completion based on
services performed to date as a percentage of total services to be performed or on a straight-line basis over
the term of the contract, if revenue is determined to be earned evenly.
(b) Earnings per common share:
Basic net loss per common share is calculated using the weighted average number of common shares
outstanding during the year.
Diluted net loss per share reflects the potential dilution of common share equivalents, such as outstanding
stock options and warrants, in the weighted average number of common shares outstanding during the
year, if dilutive. For this purpose, the “treasury stock method” is used for the assumed proceeds upon the
exercise of outstanding stock options that are used to purchase common shares at the average market
price during the period. For the periods presented, basic and diluted figures are the same, as the exercise
of all warrants, stock options and restricted share units (“RSU”) would be anti-dilutive.
(c) Research and development:
Research costs are expensed in the period incurred. Development costs are capitalized and recorded as
an intangible asset only if technical feasibility has been established and the Company expects to generate
probable future economic benefits from the asset created on completion of development. The costs
capitalized include materials, direct labour, directly attributable overhead
9
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(c) Research and development (continued):
expenditures, and borrowing costs on qualifying assets. Other development costs are expensed in the
period incurred. During the years ended September 30, 2017 and 2016, all development costs have been
expensed.
(d) Government assistance and investment tax credits:
Government assistance includes government grants and investment tax credits and is recognized when
there is reasonable assurance that the Company will comply with the relevant conditions and that the
government assistance will be received. Government assistance that meets the recognition criteria and
relates to current expenses is recorded as a reduction of research and development expense.
Government assistance that meets the recognition criteria and relates to the acquisition of an asset is
recorded as a reduction of the cost of the related asset. If government assistance becomes repayable, the
inception to date impact of assistance previously recognized in earnings is reversed immediately in the
period that the assistance becomes repayable.
Investment tax credits are recorded using the cost-reduction method whereby the credits are deducted from
the cost of the related asset or expenditure when there is reasonable assurance that the investment tax
credit will be realized. Where a valuation allowance has been recorded against prior year’s investment tax
credits, the Company applies the credits on a first-in first-out basis with a recovery of prior year’s investment
tax credits recognized as an income tax recovery.
(e) Financial instruments:
Financial assets and financial liabilities are initially measured at fair value and are subsequently re-
measured based on their classification as described below. Transaction costs that are directly attributable
to the acquisition or issuance of a financial asset or liability, other than financial assets and liabilities
recorded at fair value through earnings, are added or deducted from the fair value of the respective financial
asset or financial liability on initial recognition. Transaction costs that are directly attributable to the
acquisition of a financial asset or financial liability recorded at fair value through earnings are recognized
immediately in earnings.
Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial
Position when there is a legally enforceable right to offset the recognized amounts and there is an intention
to settle on a net basis or realize the asset and settle the liability simultaneously.
(i) Financial assets:
Financial assets are classified into the following categories: financial assets at fair value through
earnings, loans and receivables, and available-for-sale. The classification depends on the nature and
purpose of the financial asset and is determined at the time of initial recognition.
10
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(e) Financial instruments (continued):
(i) Financial assets (continued):
• Financial assets at fair value through earnings:
Financial assets are classified as at fair value through earnings when held for trading or if
designated into this category. Financial assets classified as financial assets at fair value through
earnings are measured at fair value with any gains or losses arising on remeasurement recognized
in earnings. The Company does not have any financial assets classified as fair value through
earnings.
• Loans and receivables:
Loans and receivables include cash and cash equivalents, and other receivables. Loans and
receivables are initially measured at fair value and are subsequently remeasured at amortized cost
using the effective interest method, less any impairment losses. The Company has classified cash
and cash equivalents and accounts receivables as loans and receivables.
• Available-for-sale financial assets:
Available-for-sale financial assets are non-derivative financial assets that are either designated in
this category or not classified into any of the other categories. Available-for-sale financial assets
are measured at fair value with any gains or losses on remeasurement recognized in other
comprehensive income until the financial asset is derecognized or is determined to be permanently
impaired, at which time the gain or loss accumulated in equity is transferred to earnings. The
Company does not have any financial assets classified as available-for-sale assets.
Financial assets are derecognized when the rights to receive cash flows from the assets have expired
or have been transferred, and the Company has transferred substantially all of the risks and rewards
of ownership.
(ii) Financial liabilities:
Financial liabilities are classified as either financial liabilities at fair value through earnings or as other
financial liabilities.
• Other financial liabilities:
Other financial liabilities include trade and other payables, non-trade payables, contingent liabilities,
and long-term debt. They are initially measured at fair value and are subsequently measured at
amortized cost using the effective interest method. The Company has classified accounts payables
and accrued liabilities, and a secured note payable as other financial liabilities.
(iii) Compound instruments:
The liability and equity components of compound instruments (including convertible debentures) issued
by the Company are presented separately on the Consolidated Statements of Financial Position.
The liability component is recognized initially at fair value; calculated by discounting the stream of future
payments of interest and principal at the prevailing market rate for a similar non-convertible liability of
comparable credit status and providing substantially the same cash flows as the instrument.
Subsequent to initial recognition, the liability component is measured at amortized cost using the
11
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(e) Financial instruments (continued):
(iii) Compound instruments (continued):
effective interest method, and increased by accretion of the discounted amounts to reach the nominal
value of the convertible debentures at maturity.
The carrying amount of the conversion option, classified as equity, is calculated by deducting the
amount of the liability from the fair value of the instrument as a whole. The equity component is
presented in shareholders’ equity and is shown net of income tax effects. The equity component is not
re-measured subsequent to initial recognition, and will remain in equity until the conversion option is
exercised.
Transaction costs are allocated on a pro-rata basis to each separately accounted component.
(iv) Embedded derivatives:
Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they
meet the definition of a derivative, their risks and characteristics are not closely related to those of the
host contracts and the contracts are not measured at the fair value through earnings. Embedded
derivatives are recorded at the fair value through earnings. During the years ended September 30,
2017 and 2016, the Company did not have any embedded derivatives.
(f) Cash and cash equivalents:
Cash and cash equivalents is comprised of cash on hand, cash balances with banks and similar institutions,
and term deposits redeemable within three months or less from the date of acquisition with banks and
similar institutions.
(g) Inventory:
Inventory is measured at the lower of cost and net realizable value and consists primarily of raw materials
used in the manufacturing of optical thin film. Raw materials cost is determined on a weighted average
basis. The cost of work in progress and finished goods includes the cost of raw material, direct labour and
an allocation of related overheads. Net realizable value is the estimated selling price in the ordinary course
of business, less the estimated costs of completion and selling expenses.
12
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(h) Property, plant and equipment:
Property, plant and equipment are measured at cost less accumulated depreciation and accumulated
impairment losses. The initial cost of an asset comprises its purchase price and any costs directly
attributable to bringing the asset into working condition for its intended use. Assets acquired in a business
combination are measured at the fair value of the assets at the time of acquisition. Repairs and maintenance
costs are charged directly to the statement of operations as incurred. Depreciation is calculated using the
following methods and annual rates:
Software
Laboratory and office equipment
Manufacturing equipment
Building
Leasehold improvements
Estimated useful life
100% declining balance
20 - 55% declining balance
10% declining balance
4% declining balance
5 year straight-line
The Company reviews the estimated useful lives and the depreciation methods of its property, plant and
equipment annually.
(i)
Intangible assets and goodwill:
(i)
Intangible assets:
Intangible assets with finite lives consist of acquired intellectual property and are measured at cost less
accumulated amortization and accumulated impairment losses. Cost for intangible assets acquired in
a business combination represents the fair value of the asset at the time of the acquisition. Intangible
assets with finite lives are amortized over four years. At September 30, 2017 and 2016, the Company
did not have any indefinite life intangible assets other than goodwill.
(ii) Goodwill:
Goodwill arising on an acquisition of a business is carried at cost, as established at the date of
acquisition of the business less accumulated impairment losses, if any. Goodwill is not amortized but
is tested for impairment annually or whenever there is an indication of impairment.
(j)
Impairment:
(i) Financial assets:
Financial assets not carried at fair value through earnings are assessed for impairment at each
reporting date. A financial asset is impaired if objective evidence indicates that a loss event which
negatively affected the estimated future cash flows has occurred after the initial recognition of the asset.
For financial assets measured at amortized cost, the impairment loss is the difference between the
carrying amount and the present value of the estimated future cash flows, discounted at the original
effective interest rate. If an impairment has occurred, the carrying amount of the asset is reduced to its
13
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(j)
Impairment (continued):
(i) Financial assets (continued):
recoverable amount, with the amount of the loss recognized in earnings. A permanent impairment loss
for an available-for-sale investment is recognized by transferring the cumulative loss previously
recognized in other comprehensive income to earnings.
(ii) Non-financial assets:
Goodwill and non-financial assets are tested for impairment annually, or whenever events or changes
in circumstances indicate that an asset's carrying amount may be less than its recoverable amount.
Management uses judgment to estimate the inputs to these assessments and any changes to these
inputs could have a material impact on the impairment calculation. For impairment testing, non-financial
assets that do not generate independent cash flows are grouped together into a CGU, which represent
the level at which largely independent cash flows are generated. Goodwill is allocated to groups of
CGUs based on the level at which it is monitored for internal reporting purposes. An impairment loss is
recognized in earnings to the extent that the carrying value of an asset, CGU or group of CGUs exceeds
its estimated recoverable amount. The recoverable amount of an asset, CGU or group of CGUs is the
greater of its value in use and its fair value less cost to sell. Value in use is calculated as the present
value of the estimated future cash flows discounted at appropriate discount rates. An impairment loss
relating to a specific asset reduces the carrying value of the asset. An impairment loss relating to a
CGU or group of CGUs reduces the carrying value of the goodwill allocated to the CGU or group of
CGUs, then reduces the carrying value of the other assets of the CGU or group of CGUs on a pro-rata
basis. An impairment loss in respect of goodwill is not reversed. A previously recognized impairment
loss related to other non-financial assets is assessed at each reporting date for any indications that the
loss has decreased or no longer exists. An impairment loss related to other non-financial assets is
reversed if there is a subsequent increase in recoverable amount. An impairment loss is reversed only
to the extent that the asset's carrying value does not exceed the carrying value that would have been
determined, net of depreciation or amortization, if no impairment loss had been recognized.
(k) Provisions:
Provisions represent liabilities for which the amount or timing is uncertain. Provisions are recognized when
the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that
an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable
estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates
are adjusted to reflect risks specific to the liability.
(l) Share-based payments:
The Company makes share-based payments to directors, consultants and employees. The compensation
expense for share-based payment is determined based on the fair value at the grant date using the Black-
Scholes option-pricing model and is recorded in the statement of operations over the vesting period.
Management uses judgment to determine the inputs to the Black-Scholes option-pricing model including
the expected plan lives, underlying share price volatility and forfeiture rates. Volatility is estimated by
considering the Company’s historic share price volatility over similar periods to the expected life of the
awards under consideration. Changes in these assumptions will impact the calculation of fair value and the
14
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(l) Share-based payments (continued):
amount of compensation expense recognized in earnings. When stock options are exercised, any
consideration paid by directors, consultants and employees, as well as the related stock-based
compensation, is credited to share capital.
(m) Restricted share units:
During the year ended September 30, 2015, the Company adopted a RSU plan. The obligations under the
RSU plan can be settled at the Company’s discretion through either cash or the issuance of common
shares. The Company measures the cost of equity-settled share-based transactions by reference to the
fair value of the equity instruments at the date at which they are granted and is recorded in the statement
of operations over the vesting period. For RSUs, the Company uses the TSXV share price at the grant date
as fair value of the RSUs. The resulting fair value is then adjusted for an estimated forfeiture amount.
Determination of the forfeiture rate is based on historical experience. The actual number of RSUs that vest
is likely to be different from estimation.
(n) Income taxes:
Income tax expense is comprised of current and deferred tax. Current and deferred tax are recognized into
earnings except to the extent that it relates to a business combination or items recognized directly in other
comprehensive income or share capital.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax
rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect
of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognized for the following temporary differences; the initial recognition of assets or
liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable
earnings, and differences relating to investments in subsidiaries and jointly controlled entities to the extent
that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not
recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is
measured at the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax
assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets,
and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different
tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and
liabilities will be realized simultaneously.
Deferred tax assets are recognized for unused tax losses, tax credits and deductible temporary differences,
to the extent that it is probable that future taxable profits will be available against which they can be utilized.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realized.
15
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(o) Leases:
Leasing contracts are classified as either finance or operating leases based on the substance of the
contractual arrangement at inception date. A lease is classified as a finance lease if it transfers substantially
all of the risks and rewards of ownership of the leased asset. Where the contracts are classified as finance
leases, upon initial recognition, the asset and liability are recorded at the lower of fair value and the present
value of the minimum lease payments, net of executory costs. Finance lease payments are apportioned
between interest expense and repayments of the liability. Where the contracts are classified as operating
leases, they are not recognized in the Company’s Consolidated Statements of Financial Position and lease
payments are charged to earnings as they are incurred on a straight-line basis over the lease term.
(p) Segment reporting:
The Company’s continuing operations currently consists of one operating segment.
(q) Assets held for sale and discontinued operations:
(i) Assets held for sale:
The Company classifies assets, or disposal groups, as held for sale when it expects to recover their
carrying amounts primarily through sale rather than through continuing use. To meet criteria to be held
for sale, the sale must be highly probable, and the assets or disposal groups must be available for
immediate sale in their present condition. The Company must be committed to a plan to sell the assets
or disposal group, and the sale should be expected to qualify for recognition as a completed sale within
one year from the date of classification.
The Company measures assets or disposal groups at the lower of their carrying amount and fair value
less costs to sell. Any impairment loss on a disposal group is first allocated to goodwill, and then to
remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories or
financial assets. Impairment losses on initial classification as held for sale and subsequent gains and
losses on remeasurement are recognized in the statement of income; however, gains are not
recognized in excess of any cumulative impairment loss. Upon classifying asset or disposal groups as
held for sale, the Company presents the assets separately as a single amount and the associated
liabilities separately as a single amount on the Consolidated Statement of Financial Position.
Comparative period Consolidated Statements of Financial Position are not restated. Assets held for
sale are not depreciated, depleted, or amortized.
(ii) Discontinued operations:
A discontinued operation is a component of the Company’s business that represents a separate major
line of business or geographical area of operations that has been disposed of or classified as held for
sale. The operations and cash flows can be clearly distinguished from the rest of the Company, both
operationally and for financial reporting purposes. When the Company classifies an operation as a
discontinued operation, it re-presents the comparative Consolidated Statements of Operations as if the
operation had been discontinued from the start of the comparative year. In doing this, the Company
excludes the results for the discontinued operations and any gain or loss from disposal from the
consolidated statements of operations from continuing operations and presents them on a separate
line as profit or loss (net of tax) from the discontinued operation. Per share information and changes to
16
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
3. Significant accounting policies (continued):
(q) Assets held for sale and discontinued operations (continued):
(ii) Discontinued operations (continued):
other consolidated comprehensive loss related to discontinued operations are presented separately
from continuing operations. Cash flows from discontinued operations are presented separately from
cash flows from continuing operations in the Consolidated Statements of Cash Flows.
4. New standards and interpretations not yet adopted:
(a) IFRS 9 – Financial Instruments:
In July 2014, the IASB issued IFRS 9 – Financial Instruments, which replaces the earlier versions of IFRS
9 (2009, 2010, and 2013) and completes the IASB’s project to replace IAS 39 – Financial Instruments:
Recognition and Measurement. IFRS 9 includes a logical model for classification and measurement of
financial assets; a single, forward-looking ‘expected credit loss’ impairment model and a substantially-
reformed approach to hedge accounting to better link the economics of risk management with its accounting
treatment. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and must be applied
retrospectively, with some exceptions. Earlier adoption is permitted. The Company is currently evaluating
the impact of IFRS 9 on its financial statements, and plans to adopt the new standard on the required
effective date.
(b) IFRS 15 – Revenue from contracts with customers:
In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers, which supersedes IAS
18 – Revenue, IAS 11 – Construction Contracts and other interpretive guidance associated with revenue
recognition. IFRS 15 provides a single, principles-based five-step model to be applied to all contracts with
customers to determine how and when an entity should recognize revenue. The standard also provides
guidance on whether revenue should be recognized at a point in time or over time as well as requirements
for more informative, relevant disclosures. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. The Company has completed an assessment of the impact
that the initial application of IFRS 15 will have on its financial statements, and does not expect that there
will be a significant impact, other than additional required disclosures. The Company intends to adopt IFRS
15 in its financial statements for the annual period beginning on October 1, 2018.
(c) IFRS 16 – Leases:
In January 2016, the IASB issued IFRS 16 – Leases, which supersedes IAS 17 – Leases. IFRS 16
establishes principles for the recognition, measurement, presentation and disclosure of leases. The
standard establishes a single model for lessees to bring leases on balance sheet while lessor accounting
remains largely unchanged and retains the finance and operating lease distinctions. IFRS 16 is effective
for annual periods beginning on or after January 1, 2019 with earlier adoption permitted, but only if also
applying IFRS 15 – Revenue from Contracts with Customers. The Company is currently evaluating the
impact of IFRS 16 on its financial statements, and plans to adopt the new standard on the required effective
date.
17
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
5.
Inventory:
Raw materials
Work in progress
2017
$ 123,619
28,089
$ 151,708
2016
$ 309,055
76,698
$ 385,753
At September 30, 2017, work in progress includes $1,600 of depreciation (2016 - $nil).
During the year ended September 30, 2017, there were no write-downs of inventories to net realizable value.
During the year ended September 30, 2016, the write-down of inventories to net realizable value amounted to
$104,524.
For the year ended September 30, 2017, the Company recognized inventories of $1,429,371 (2016 - $884,132)
through cost of sales.
18
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
6. Property, plant and equipment:
Land
Building and
leasehold
improvement
Manufacturing
equipment
Laboratory,
software,
and office
equipment
Total
141,700
-
-
3,807,861
-
-
15,780,777
142,179
-
554,760
6,573
(35,372)
20,285,098
148,752
(35,372)
-
(483)
-
(5,548)
(6,031)
141,700
-
-
3,807,378
92,009
(27,809)
15,922,956
-
-
520,413
14,935
(290,293)
20,392,447
106,944
(318,102)
$ 141,700
$ 3,871,578 $ 15,922,956
$ 245,055
$ 20,181,289
-
-
-
-
-
-
-
185,095
169,516
-
802,580
1,504,929
-
376,027
56,851
(35,372)
1,363,702
1,731,296
(35,372)
(483)
-
(5,008)
(5,491)
354,128
167,144
(27,810)
2,307,509
1,361,544
-
392,498
27,956
(258,678)
3,054,135
1,556,644
(286,488)
$ -
$ 493,462 $ 3,669,053 $ 161,776
$ 4,324,291
$ 141,700
$ 141,700
$ 3,378,116 $ 12,253,903
$ 83,279
$ 3,453,250 $ 13,615,447 $ 127,915
$ 15,856,998
$ 17,338,312
Cost:
Balance as at
October 1, 2015
Additions
Disposals
Foreign currency
translation
Balance as at
September 30, 2016
Additions
Assets held for sale
Balance as at
September 30, 2017
Accumulated
depreciation:
Balance as at
October 1, 2015
Depreciation expense
Disposals
Foreign currency
translation
Balance as at
September 30, 2016
Depreciation expense
Assets held for sale
Balance as at
September 30, 2017
Net book value:
September 30, 2017
September 30, 2016
Additions, disposals and depreciation for the year ended September 30, 2017 are for continuing operations.
The amounts relating to assets held for sale were based on balances as at September 30, 2016.
19
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
7.
Intangible assets and goodwill:
(a) Goodwill impairment:
The Company performs a goodwill impairment test at least annually on September 30 and whenever there
is an indication of impairment. No impairment of goodwill was identified as a result of the Company’s most
recent annual impairment test.
The key assumptions used in performing the impairment tests:
Valuation method
Discount rate
2017
2016
Perpetual growth rate
2017
2016
Value in use
12%
12%
1.0% - 2.0%
1.0% - 2.0%
• Recoverable amount:
Management’s past experience and future expectations of the business’ performance are used to make
a best estimate of the expected revenues, earnings before interest, taxes, depreciation and
amortization, and operating cash flows covering a five year forecast period, with a terminal value
extrapolated into the future over the estimated useful life of the CGU using a steady growth rate.
• Discount rate:
The discount rate applied is a pre-tax rate which reflects the time value of money and risk associated
with the business. Management has determined its discount rate to reflect the risk of an emerging
technology company.
• Perpetual growth rate:
The perpetual growth rate is management’s current assessment of the long-term growth prospect of
the Company in the jurisdictions in which it operates.
• Sensitivity analysis:
Management performs sensitivity analysis on the key assumptions. Sensitivity analysis indicates
reasonable changes to key assumptions will not result in an impairment loss.
20
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
7.
Intangible assets and goodwill (continued):
(b) Finite life intangible assets:
Cost:
Balance as at October 1, 2015
Dispositions
Balance as at September 30, 2017 and 2016
Accumulated amortization:
Balance as at October 1, 2015
Amortization expense
Dispositions
Balance as at September 30, 2016
Amortization expense
Dispositions
Balance as at September 30, 2017
Net book value:
September 30, 2017
September 30, 2016
8. Note payable:
$ 5,476,359
(31,405)
$ 5,444,954
$ 2,750,730
1,364,390
(31,405)
4,083,715
1,361,239
-
$ 5,444,954
$
-
$ 1,361,239
The note payable was fully secured against the assets of the Company. The Company had a requirement to
pay interest at a fixed rate of 4% per annum, interest only, with payment of the principal due on September 16,
2017. On August 21, 2017, the note payable was repaid in full and all security released.
9. Convertible debentures:
On June 9, 2016, the Company completed an initial tranche of a non-brokered private placement of unsecured
subordinated convertible debentures in the amount of $2,505,000, with a second and final tranche closing on
June 21, 2016 in the amount of $1,680,000 for total gross proceeds of $4,185,000, which were payable upon
maturity on May 31, 2018.
The convertible debentures accrued interest at a rate of 12% per annum payable quarterly in arrears and were
convertible into common shares of the Company at a price of $1.25 per share. The debentures were convertible
into shares at the Company’s option, at a price equal to their principal amount provided that the Company’s
common shares traded and closed on the TSXV at or above $2.00 for ten consecutive days any time after four
months from issuance.
The Company had the option to pre-pay the principal sum, in whole or in part, twelve months following the
closing, after providing twenty business days notice to the holder.
21
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
9. Convertible debentures (continued):
The convertible debentures are compound financial instruments and the gross proceeds at the issuance date
were allocated between each component of the instrument, first based on fair value of liability and the residual
to equity. Transaction costs related to the issuance in the amount of $64,711 were allocated proportionately
and each of the components were recorded in the financial statements net of allocated transaction costs. The
Company identified three components; a debt-host instrument, an equity conversion option encompassing the
holder’s option, and the Company’s embedded call option.
The Company determined that on the date of issuance, the fair value of the debt-host instrument, determined
with reference to market interest rates and credit spreads for similar debt without the equity conversion options,
was $3,569,511. The embedded call option was determined to have a fair value of $nil at the issuance date.
The remaining value of $615,489 was allocated to the equity conversion option and included in contributed
surplus (net of allocated issuance costs) as prescribed under IFRS.
On May 18, 2017, the Company provided notice to the debenture holders of the Company’s intention to repay
the convertible debentures on June 21, 2017. On May 18, 2017, the Company recorded accretion expense to
bring the carrying value of the debentures to face value of $4,185,000.
Several debenture holders elected to convert their debentures into common shares at $1.25 per share. As a
result the Company issued 2,252,000 common shares valued at $2,815,000. The remaining $1,370,000 was
repaid.
A continuity of the amounts recorded for the total convertible debentures issued and the related equity
component was as follows:
Gross proceeds on issuance
Transaction costs
Net proceeds on issuance
Deferred tax liability
Interest expense
Interest paid
Balance as at September 30, 2016
Interest expense
Interest paid
Common shares issued
Convertible debentures repaid
Balance as at September 30, 2017
Convertible
debentures
$ 3,569,511
(55,194)
3,514,317
-
233,352
(152,527)
3,595,142
945,827
(355,969)
(2,815,000)
(1,370,000)
-
$
Equity
component
of convertible
debentures
$ 615,489
(9,517)
605,972
(162,797)
-
-
443,175
-
-
-
-
$ 443,175
Total
$ 4,185,000
(64,711)
4,120,289
(162,797)
233,352
(152,527)
4,038,317
945,827
(355,969)
(2,815,000)
(1,370,000)
$ 443,175
22
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
9. Convertible debentures (continued):
Interest expense related to the convertible debentures for the year was as follows:
Years ended
September 30,
2017
$ 355,969
589,858
$ 945,827
2016
$ 152,527
80,825
$ 233,352
Interest paid
Accretion of convertible debentures
Interest expense
10. Share capital:
(a) Share capital:
Authorized:
Unlimited number of common shares with no par value
Unlimited number of preferred shares with no par value
Common shares issued and fully paid:
Balance as at October 1, 2015
RSUs vested
Options exercised
Balance as at September 30, 2016
Debentures converted
Private placement
RSUs vested
Options exercised
Balance as at September 30, 2017
Number of shares
53,387,215
237,070
240,000
53,864,285
2,252,000
11,586,870
420,670
272,000
68,395,825
Amount
$ 44,666,497
258,406
285,604
$ 45,210,507
2,815,000
12,486,784
567,905
346,287
$ 61,426,483
There are no preferred shares issued and outstanding.
On May 18, 2017, the Company completed a bought deal private placement with a syndicate of underwriters
pursuant to which the Company issued 11,586,870 common shares at a price of $1.15 per share, for gross
proceeds to the Company of $13,324,901. The Company incurred share issue costs of $838,117.
(b) Share-based payment plans:
(i) Share option plan
On January 28, 2015, the Company revised its share option plan. Under the plan the maximum number
of shares that may be reserved for issuance at any point in time is 7.0% of the outstanding shares.
(ii) Restricted share unit plan
On January 28, 2015, the Company adopted a RSU plan. Under the plan the maximum number of
shares that may be reserved for issuance was fixed at 1,500,000. As of February 21, 2017, there were
940,030 RSUs granted but not converted and 216,369 outstanding available for grant. On March 30,
23
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
10. Share capital (continued):
(b) Share-based payment plans (continued):
(ii) Restricted share unit plan (continued)
2017, shareholders approved an additional 600,000 RSUs available for grant. As at September 30,
2017, 806,169 RSUs remain available to be granted. The obligations under the RSU plan can be settled
at the Company’s discretion through either cash or issuance of common shares. The Company intends
to settle the obligation through the issuance of common shares.
(c) Stock option plan:
Stock options outstanding as at September 30, 2017:
Balance as at October 1, 2015
Granted
Exercised
Expired
Balance as at September 30, 2016
Granted
Exercised
Forfeited or expired
Balance as at September 30, 2017
Number
of options
1,982,000
796,500
(240,000)
(50,000)
2,488,500
413,500
(272,000)
(590,000)
2,040,000
$
Weighted average
exercise price
1.30
1.14
0.82
1.70
$
$
1.29
1.48
0.82
1.42
1.35
The following table summarizes information pertaining to the Company’s stock options outstanding as at
September 30, 2017:
Range of
exercise
prices
$1.01 - $1.25
$1.26 - $1.65
Options outstanding
Options exercisable
Weighted
average
remaining
contractual life
(years)
3.18
2.43
2.79
Number of
options
outstanding
976,500
1,063,500
2,040,000
Weighted
average
exercise
price
$ 1.12
1.56
$ 1.35
Number of
options
exercisable
850,875
919,250
1,770,125
Weighted
average
exercise
price
$ 1.14
1.58
$ 1.37
The exercise price of all stock options granted during the period are equal to the closing market price at the
grant date. The Company calculates the fair value of the options at the grant date using the Black-Scholes
option-pricing model with assumptions noted below.
24
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
10. Share capital (continued):
(c) Stock option plan (continued):
The weighted average assumptions used to estimate the fair value of options granted during the years
ended September 30, 2017 and 2016:
Risk free interest rate
Expected life
Vesting period
Expected volatility
Expected dividends
Average fair value
Forfeiture rate
2017
1.21%
4.4
1.5 years
46%
Nil
$0.58
11.4%
2016
0.66%
4.3
1.5 years
50%
Nil
$0.47
10.2%
The Company charged the following share-based payments to expenses in connection with the Company’s
stock option plan, with a corresponding increase in contributed surplus:
Total compensation - stock options
(d) Restricted share unit plan:
2017
$ 364,649
2016
$ 290,280
During the year ended September 30, 2016, the Company granted 387,900 RSUs to employees and
directors with a fair value of $1.26 per share. 25% of these RSUs vested on September 1, 2016, 35%
vested on September 1, 2017, and the remaining 40% will vest on September 1, 2018.
During the year ended September 30, 2017, the Company granted 499,200 RSUs to employees and
directors with a weighted average fair value of $1.48 per share. 25% of these RSUs vested on September
1, 2017, 35% will vest on September 1, 2018, and the remaining 40% will vest on September 1, 2019.
RSUs outstanding as at September 30, 2017:
Balance as at October 1, 2015
Granted
Forfeited
Vested
Balance as at September 30, 2016
Granted
Vested
Balance as at September 30, 2017
Number
of RSUs
319,598
387,900
(19,398)
(237,070)
451,030
499,200
(420,670)
529,560
25
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
10. Share capital (continued):
(d) Restricted share unit plan (continued):
Using an estimated forfeiture rate of 10% for the years ended September 30, 2017 and 2016, the Company
charged the following share-based payments to operating expenses in connection with the Company’s RSU
plan, with a corresponding increase in contributed surplus:
Total compensation - RSUs
(e) Warrants:
Warrants outstanding as at September 30, 2017:
Balance as at September 30, 2016
Expired, February 26, 2017
Balance as at September 30, 2017
11. Capital risk management:
2017
$ 556,549
2016
$ 371,506
Number of
warrants
1,327,500
(1,327,500)
-
Weighted
average
exercise price
$ 1.50
1.50
-
$
The Company’s objectives and policies for managing capital are to maintain a strong capital base to maintain
investor, creditor and market confidence, sustain future development of the business and to safeguard the
Company’s ability to support the Company’s normal operating requirements on an ongoing basis.
The capital of the Company consists of the items included in the Consolidated Statements of Financial Position
in the shareholders’ equity section, the secured note payable and convertible debenture. The Company
manages its capital structure and makes changes based on economic conditions, risks that impact the
consolidated operations and future significant capital investment opportunities. To manage the Company’s
capital requirements, the Company has in place a planning and budgeting process which helps determine the
funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives.
The Company’s officers are responsible for managing the Company’s capital and do so through quarterly
meetings and regular review of financial information. The Board of Directors is responsible for overseeing this
process.
12. Financial instruments and risk exposures:
(a) Fair value measurement:
The Company’s financial assets include cash and cash equivalents and accounts receivable. The
Company’s financial liabilities include accounts payable and accrued liabilities, secured note payable and
convertible debentures.
Cash and cash equivalents and accounts receivable are classified as loans and receivables, measured at
amortized cost using the effective interest rate method. Accounts payable and accrued liabilities, secured
note payable, and the convertible debentures are classified as other financial liabilities, measured at
amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly
26
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
12. Financial instruments and risk exposures (continued):
(a) Fair value measurement (continued):
discounts the estimated future cash payments or receipts through the expected life of the financial
instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or
liability.
The carrying value of the Company’s financial assets and liabilities is considered to be a reasonable
approximation of fair value due to their immediate or short-term maturity, or their ability for liquidation at
comparable amounts.
(b) Credit risk:
Credit risk is the risk of a financial loss if a customer or counterparty to a financial instrument fails to meet
its obligations under a contract. This risk primarily arises from the Company’s receivables from customers.
The Company’s exposure to credit risk is dependent upon the characteristics of each customer. Each
customer is assessed for credit worthiness, using third party credit scores and through direct monitoring of
their financial well-being on a continual basis. In some cases, where customers fail to meet the Company’s
credit worthiness benchmark, the Company may choose to transact with the customer on a prepayment
basis or to seek other means of guarantees.
The Company does not have credit insurance or other financial instruments to mitigate its credit risk as
management has determined that the exposure is minimal due to the composition of its customer base.
The Company regularly reviews the collectability of its accounts receivable and establishes an allowance
account for credit losses based on its best estimate of any potentially uncollectable accounts. As at
September 30, 2017, the balance of the allowance account for credit losses was $nil (2016 - $nil).
Pursuant to their respective terms, accounts receivable was aged as at September 30, 2017 and 2016:
0 – 30 days
31 – 60 days
61 – 90 days
Greater than 90 days
Total accounts receivable
$
2017
754,381
397,102
-
222,959
$ 1,374,442
2016
$ 399,771
57,638
140,005
-
$ 597,414
Accounts receivable greater than 90 days are collectible from government agencies.
There is a possibility of increased customer credit risk due to the ongoing global recessionary trends. As at
September 30, 2017, the Company’s accounts receivable are made up of approximately 70% (2016 - 37%)
government trade receivables and the balance of the outstanding accounts receivable are spread over
several other customers.
During the year ended September 30, 2017, the Company had two customers who represented greater
than 10% of total revenues. These customers represented approximately 75% and 21% of total revenues
(2016 - two customers represented approximately 32% and 14%).
The Company may also have credit risk relating to cash and cash equivalents, which it manages by dealing
with large banks and investing in highly liquid investments. The Company’s objective is to minimize its
27
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
12. Financial instruments and risk exposures (continued):
(b) Credit risk (continued):
exposure to credit risk in order to prevent losses on financial assets by placing its investments in highly
liquid instruments such as guaranteed investment funds. The Company’s cash and cash equivalents
carrying value as at September 30, 2017 totaled $10,883,919 (2016 - $3,312,691), and accounts
receivables of $1,374,442 (2016 - $597,414), representing the maximum exposure to credit risk of these
financial assets.
(c) Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company has in place a planning and budgeting process which helps determine the funds required to
ensure the Company has the appropriate liquidity to meet its operating and growth objectives.
As at September 30, 2017, the Company had cash and cash equivalents of $10,883,919 (2016 -
$3,312,691) and accounts receivable of $1,374,442 (2016 - $597,414) for a total of $12,258,361 (2016 -
$3,910,105). The liquidity and additional financing are adequate for the settlement of short-term financial
obligations.
(d) Currency risk:
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to
changes in foreign exchange rates.
The Company is exposed to currency risk as a result of components of cost being denominated in
currencies other than the Canadian dollar, primarily the United States dollar. The Company holds cash and
has liabilities (primarily accounts payable and accrued liabilities) in currencies other than the Canadian
dollar, primarily the United States dollar. In addition, the Company also has United States dollar
denominated accounts receivable that are subject to currency risk.
The Company manages currency risk by holding cash in foreign currencies to support forecasted foreign
currency denominated liabilities and does not use derivative instruments to reduce its exposure to foreign
currency risk.
(e) Interest rate risk:
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The Company’s exposure to the risk of changes in market
interest rates relate primarily to the secured note payable. The Company does not enter into any interest
rate swaps to mitigate interest rate risk.
28
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
13. Income taxes:
(a) Income tax expense:
Income tax expense differs from the expected expense if the Canadian federal and provincial statutory
income tax rates were applied to earnings from continuing operations before income taxes. The principal
factors causing these differences are shown below:
Loss from continuing operations before income taxes
Statutory tax rate
Expected tax recovery
Effective tax rate change and other
Permanent differences
Changes recognized in equity
Change in unrecognized deferred tax assets
Income tax recovery
2017
(3,853,853)
26.53%
(1,022,427)
(30,450)
260,525
(224,463)
1,016,815
-
$
$
2016
(7,992,602)
26.45%
(2,114,043)
(137,202)
182,051
-
1,906,397
(162,797)
$
$
The recovery represents a deferred income tax recovery and is a result of the application of the Company’s
previously unrecognized deferred tax assets subsequent to the issuance of the convertible debentures by
the Company in June 2016.
(b) Recognized deferred tax assets and liabilities:
The Company has recognized deferred taxes in respect of the following:
Deferred tax assets:
Non-capital losses carried forward
2017
2016
$ 2,890,617
$ 3,241,390
Deferred tax liabilities:
Property, plant, and equipment and intangible assets
Convertible debentures
Net deferred tax asset
(2,890,617)
-
-
(3,085,593)
(155,797)
-
$
$
(c) Deferred income tax assets and liabilities:
The Company did not recognize deferred tax assets for the following deductible temporary differences:
Non-capital loss carry forwards
Net capital loss carry forwards
Other temporary differences
Unrecognized deferred income tax assets
2017
$ 8,789,958
2,385,221
8,223,233
$ 19,398,412
2016
$ 8,386,489
2,385,221
6,398,843
$ 17,170,553
29
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
13. Income taxes (continued):
(d) Loss carry forwards:
As at September 30, 2017, the Company has Canadian tax loss carry forwards of approximately
$19,583,000 (2016 - $19,160,000). The Company’s tax loss carry forwards will expire, if not utilized,
commencing in 2026. The Company recognizes the benefit of tax losses only to the extent of anticipated
future taxable income in the relevant jurisdiction.
(e) Discontinued operations:
As at September 30, 2017, the Company has United States loss carry forwards of approximately
$2,248,000 (2016 - $1,390,000). A deferred tax asset is not recognized on the benefit of tax losses based
on management forecast of future profitability of the operations in the United States.
(f) R&D and tax credit attributes:
As at September 30, 2017, the Company had unclaimed tax deductions of scientific research and
experimental development expenditures of $1,908,000 (2016 - $1,550,000) that is available to reduce
taxable income in future years and may be carried forward indefinitely. As at September 30, 2017, the
Company has federal investment tax credits of $418,000 (2016 - $340,000) that may be carried forward to
apply against future years’ income tax payable. These investment tax credits begin to expire in 2030.
14. Related party transactions:
(a) The remuneration of key management personnel:
Salaries, accrued bonuses, and employee benefits
Share-based payments
2017
$ 1,233,741
699,138
$ 1,932,879
2016
$ 1,110,792
487,925
$ 1,598,717
(b) As of September 30, 2017, amounts owing to a company controlled by an officer and director of the
Company included in accounts payable and accrued liabilities were $262,854 (2016 - $285,509).
(c) Legal and professional fees, taxes and disbursements totaling $160,664 for the year ended September 30,
2017 (2016 - $137,059) were incurred with a law firm of which a director of the Company is a partner. As
of September 30, 2017, amounts owing to this company included in accounts payable and accrued liabilities
were $93,219 (2016 - $52,826).
(d) During the year ended September 30, 2016, certain directors and officers of the Company participated in
the convertible debenture financing amounting to $350,000.
The above transactions are in the normal course of business and are measured at the exchange amount which
is the amount of consideration established and agreed to by the related parties.
30
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
15. Supplementary cash flow information:
(a) Change in non-cash working capital:
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred revenue
(b) Interest and income taxes:
2017
$ (904,902)
150
(85,143)
112,304
157,171
$ (720,420)
2016
$ 373,423
601,496
(50,745)
(553,151)
-
$ 371,023
During the year ended September 30, 2017, the Company paid $461,980 in interest (2016 - $276,253).
The Company did not pay any income taxes during the years ended September 30, 2017 and 2016.
(c) Cash and cash equivalents:
Cash and cash equivalents are comprised of:
Cash
Term deposit
$
September 30, 2017
914,378
9,969,541
$ 10,883,919
$
September 30, 2016
644,490
2,668,201
3,312,691
$
(d) Supplemental disclosure of non-cash financing activities:
Shares issued on conversion of convertible
debentures (note 9)
September 30, 2017
September 30, 2016
$
2,815,000
$
-
16. Nature of expenses:
The expenses presented below represent total cost of sales, sales and marketing, research and development,
general and administration expenses, and depreciation and amortization.
Salaries and benefits
Share-based compensation
Depreciation and amortization
Travel and entertainment
Professional fees and insurance
Public company costs
Rent and utilities
Maintenance and office expenses
Materials consumed
2017
$ 3,452,013
921,198
2,916,283
282,233
613,837
668,058
520,957
278,353
360,118
$ 10,013,050
2016
$ 3,213,635
661,786
3,077,997
425,196
811,591
626,788
675,372
192,320
592,405
$ 10,277,090
31
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
17. Commitments:
(a) As at September 30, 2017, the Company is committed under operating leases, primarily related to office
space, and capital equipment purchases for the following amounts:
2018
2019
2020
$ 2,288,093
200,654
117,048
$ 2,605,795
(b) Certain nano-optic products are subject to a 3% sales royalty in favor of Simon Fraser University where
certain elements of the nano-optic technology originated. No royalties were paid during the year (2016 -
$nil).
18. Discontinued operations:
On September 21, 2017, the Directors of the Company made the determination that it would pursue the possible
sale of the assets of its subsidiary, TTI, to a third party. The Company is actively pursuing potential purchasers
and has engaged a business broker to pursue interested parties. At September 30, 2017, TTI was classified
as a separate disposal group held for sale and as a discontinued operation.
The major classes of assets and liabilities of TTI classified as held for sale as at September 30, 2017 are as
follows:
Cash
Accounts receivable
Inventory
Prepaid expenses
Property, plant and equipment
Assets held for sale
Accounts payable and accrued liabilities
Liabilities directly associated with assets held for sale
$
$
$
$
30,280
116,538
54,525
12,401
2,481
216,225
200,226
200,226
Cumulative loss in accumulated other comprehensive loss
$
(68,905)
32
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2017 and 2016
18. Discontinued operations (continued):
Net loss on discontinued operations, net of income taxes, is as follows:
Revenue
Cost of sales
Gross Profit
Expenses
Research and development
General and administration
Sales and marketing
Depreciation
2017
2016
$ 1,259,066 $ 2,237,213
1,419,855
817,358
874,133
384,933
269,310
542,227
246,630
12,804
1,070,971
321,042
366,575
290,646
3,774
982,037
Loss before other expenses
(686,038)
(164,679)
Other expense
Finance costs
Loss on remeasurement to fair value less costs to dispose
3,465
210,776
214,241
6,216
-
6,216
Net loss from discontinued operations
$ (900,279)
$ (170,895)
Other comprehensive income (loss):
Unrealized foreign exchange gain on translation of foreign
operation
85,605
24,654
Net comprehensive loss from discontinued operations
$ (814,674)
$ (146,241)
Net cash flows from discontinued operations activities amounted to $(574,313) (2016 - $(245,182)).
33