September 30, 2018
Annual Report
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 2018 mean the fiscal year ended September 30,
2018. Last year and 2017 mean the fiscal year ended September 30, 2017, and 2016 means the fiscal year ended
September 30, 2016. This quarter or the current quarter means the three months ended September 30, 2018.
ADVISORY
This MD&A, dated December 18, 2018, 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, 2018. 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 the loss of a key customer, that the Company’s products receive market
acceptance and 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 the MD&A and the notes to the audited consolidated financial
statements for the year ended September 30, 2018, 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, 2018
GENERAL OVERVIEW
Nanotech is incorporated under the laws of British Columbia, 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 researches, creates, and produces nano-optic structures and colour-shifting materials used in
authentication and brand 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. 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 operations and comprehensive loss have been restated to exclude the discontinued
operations for the year ended September 30, 2017. On June 29, 2018, the assets used in connection with Tactical’s
surveillance equipment and van conversion business were sold to an employee of Tactical for a nominal amount,
and on September 28, 2018, Tactical was wound up and struck from the corporate register.
Report on 2018 Goals
Management established the following goals for the 2018 fiscal year:
1. Grow revenues by 20% to 40%. 2018 revenue was 25% higher than 2017.
2. Begin to collect licensing revenue from the tax stamp and commercial markets. Nanotech has entered into
distribution agreements in India with two suppliers to the tax stamp markets and are pursuing both tax stamp and
commercial market revenue from this geographic market.
3. Maintain a strong focus on earnings with a target of 15% to 20% Adjusted EBITDA margin. Achieved a
22% Adjusted EBITDA margin for 2018.
4. Continue to pursue a volume OTF partnering opportunity with Hueck Folien for banknotes. Management
continues to support its manufacturing partner Hueck Folien in an ongoing effort to improve the quality of their
high-volume production. Progress was made in 2018, however at this time the Company is no longer actively
trying to qualify as an OTF supplier for the Chinese 100 Yuan banknote, and instead will pursue other volume
and licensing opportunities with Hueck Folien.
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 commercial markets. Joe Vosburgh joined
the Company as Vice President Marketing, bringing over 20 years experience in the successful development and
commercialization of breakthrough technologies. Monika Russell, who has 15 years public company experience,
also joined as Vice President Finance, allowing Troy Bullock, President and CFO, to expand his responsibilities.
6. Continue to open new corporate development opportunities by partnering with established companies
to enable Nanotech to enter new markets. The Company announced a distribution agreement appointing
Holostik India Limited and Kumbhat Holographics Co. Ltd. as Nanotech’s authorized distributors and converters
for the non-banknote market in India.
2
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
RESULTS OF OPERATIONS
Select financial information for the years ended September 30, 2018, 2017 and 2016:
Select Financial Information
Revenue
Cost of sales
Expenses
Research and development
General and administration
Sales and marketing
Depreciation and amortization
$
2018
9,199,710
2,051,890
7,147,820
1,407,430
2,532,156
2,018,055
1,485,024
7,442,665
2017
$ 7,343,791
1,429,371
5,914,420
2016
$ 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
(294,845)
(2,669,259)
(7,388,194)
Other (income) expenses
(371,901)
1,184,594
433,513
Income (loss) from continuing operations before income
taxes
Deferred income tax recovery
Net income (loss) from continuing operations
Loss from discontinued operations
Net loss
Adjusted EBITDA(1)
77,056
(3,853,853)
(7,821,707)
-
77,056
(123,322)
(46,266)
-
(3,853,853)
(900,279)
(4,754,132)
$
162,797
(7,658,910)
(170,895)
$ (7,829,805)
1,998,785
$ 1,168,222
$ (3,648,411)
$
$
(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, cash equivalents and short-term investments
Total debt
Total assets
Total liabilities
Total equity
Revenue
2018
9,613,621
-
9,613,621
2017
$ 10,883,919
-
$ 10,883,919
$
$
2016
$ 3,312,691
6,595,142
$ (3,282,451)
$ 30,229,055
1,325,139
28,903,916
$ 30,059,624
1,860,086
28,199,538
$ 24,511,586
8,089,503
16,422,083
The Company currently derives a significant portion of its revenue from paid authentication development projects
with issuing authorities. During the year ended September 30, 2017, 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.
Revenues for the year ended September 30, 2018 increased by $1,855,919 or 25% to $9,199,710, compared to
$7,343,791 in the same period last year. Revenue growth was primarily due to increased revenue from paid
development activities, partially offset by a reduction in OTF revenue.
3
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
Gross Margin
Gross margin for the year ended September 30, 2018 increased by $1,233,400 or 21% to $7,147,820, compared to
$5,914,420 in the same period last year. Overall, the gross margin percentage was 78% for the year ended
September 30, 2018, a decrease from 81% in the same period last year.
Research and Development
Research and development expenditures for the year ended September 30, 2018 decreased by $68,007, or 5% to
$1,407,430 compared to $1,475,437 in the same period last year, due to a larger portion of salaries and other
expenses being allocated to cost of sales for increased paid development projects.
General and Administration
General and administration expenditures for the year ended September 30, 2018 increased $223,310, or 10% to
$2,532,156 compared to $2,308,846 in the same period last year, due to the expansion of Nanotech’s Burnaby, BC
laboratory and an increase in salaries expenses associated with additional staff hired in 2018.
Sales and Marketing
Sales and marketing expenditures for the year ended September 30, 2018 were $2,018,055, a decrease of $25,459
or 1% which was consistent with $2,043,514 in the same period last year.
Depreciation and Amortization
Depreciation and amortization included in operating expenditures for the year ended September 30, 2018 was
$1,485,024, compared to $2,755,882 in the same period last year. Depreciation included in cost of sales for the year
ended September 30, 2018 was $128,146, compared to $160,401 for the same period last year. The reduction in
depreciation and amortization expenditures reflects the Company’s declining balance depreciation policy and the
intangible assets being completely amortized as at September 30, 2017.
Other (Income) Expenses
Other income for the year ended September 30, 2018 was $371,901, an increase of $1,556,495, compared to other
expenses of $1,184,594 in the same period last year. The increase was primarily due to the repayment of the
convertible debentures and long-term debt in 2017, which reduced the interest expense by $1,053,254 in the current
year, while increased cash on hand resulted in a $83,002 increase in interest income in the current year. In addition,
foreign exchange gains recorded for the year to date were $419,838 higher than in the same period last year.
Adjusted EBITDA
Adjusted EBITDA for the year ended September 30, 2018 was $1,998,785, compared to $1,168,222 during the same
period last year. The improvement reflects an increase in development contract revenue, partially offset by an
increase in general and administration expenditures.
Net Loss from Discontinued Operations
Net loss from discontinued operations for the year ended September 30, 2018 was $123,322, compared to a net loss
of $900,279 during the same period last year. The decrease in net loss was primarily due a reduction in overall
expenses for the current year as Tactical was restructured following the Company’s decision to sell the business.
Net Loss
Net loss for the year ended September 30, 2018 was $46,266, compared to a net loss of $4,754,132 during the same
period last year. The decrease in net loss reflects an increase in Adjusted EBITDA in combination with lower interest
and amortization expenses.
4
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
QUARTERLY RESULTS
($ thousands, except per share data)
Revenue
Net income (loss) from continuing operations
Net income (loss)
Adjusted EBITDA(1)
Basic earnings (loss) per share:
Continuing operations
Net income (loss)
Q4
2018
Q3
2018
Q2
2018
Q1
2018
Q4
2017
Q3
2017
Q2
2017
Q1
2017
$ 3,085 $ 1,938 $ 1,943 $ 2,233 $ 2,662 $ 2,569 $ 1,419 $
770
770
1,306
(456)
(627)
100
(333)
(285)
133
96
96
460
127
(301)
1,132
(749)
(905)
858
(1,559)
(1,695)
(268)
694
(1,673)
(1,853)
(554)
0.01
0.01
(0.01)
(0.01)
0.00
0.00
0.00
0.00
0.00
0.00
(0.01)
(0.02)
(0.03)
(0.03)
(0.03)
(0.03)
Diluted earnings (loss) per share:
Continuing operations
Net income (loss)
(1)Adjusted EBITDA is a non-IFRS measure as described in the Non-IFRS Financial Measures section of this MD&A.
(0.01)
(0.01)
0.00
0.00
0.00
0.00
0.01
0.01
0.00
0.00
(0.01)
(0.02)
(0.03)
(0.03)
(0.03)
(0.03)
Revenue and Adjusted EBITDA were impacted by the timing of development contract revenue and recurring OTF
orders in the quarters presented, as there is an inherent variability in development contract revenue with government
organizations and in the receipt of recurring OTF orders. Net income (loss) from continuing operations and net income
(loss) were further affected by the repayment of the convertible debentures in the third quarter of 2017 and long-term
debt in the fourth quarter of 2017, which reduced interest expense. There are no seasonal effects in the Company’s
business over the quarters presented.
Comparison of Fourth Quarter Results, Year-over-year
Revenue for the fourth quarter of 2018 was $3,085,140, compared to $2,661,660 in the same period of 2017. The
difference is primarily due to increased paid development revenue and OTF revenue in the current quarter, which is
a result of the inherent variability in timing of development contract revenue and recurring OTF orders.
Net income from continuing operations for the fourth quarter of 2018 was $770,086, compared to $126,583 in the
fourth quarter of 2017. The difference was due to increased revenue, reduced depreciation and amortization
expenses and reduced foreign exchange loss in the current quarter.
Net income for the fourth quarter of 2018 was $770,086, compared to net loss of $300,694 in the fourth quarter of
2017. The difference was due to increased revenue, reduced depreciation and amortization expenses, reduced
foreign exchange loss in the current quarter and reduced loss from discontinued operations due to the wind up of
Tactical in the current quarter.
Adjusted EBITDA for the fourth quarter of 2018 was $1,305,841, compared to $1,132,249 in the same period of 2017.
The difference is primarily due to increased revenue in the current quarter.
5
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
RELATED PARTY TRANSACTIONS
For the year ended September 30, 2018, 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
2018
$ 1,208,306
493,881
$ 1,702,187
2017
$ 1,233,741
699,138
$ 1,932,879
(b) As of September 30, 2018, amounts owing to a company controlled by an officer and director of the Company
included in accounts payable and accrued liabilities were $191,433 (2017 - $262,854) in the ordinary course of
his employment arrangement.
(c) Legal and professional fees, taxes and disbursements totaling $81,776 for the year ended September 30, 2018
(2017 - $160,664) were incurred with a law firm of which a director of the Company is a partner. As of September
30, 2018, amounts owing to this company included in accounts payable and accrued liabilities were $50,780
(2017 - $93,219).
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.
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
any potential shortfall from operations, working capital, and capital expenditures. Cash is also used to finance other
long-term strategic business initiatives.
Summary of Statements of Cash Flows
Cash provided by (used in) continuing operations
Cash provided by (used in) discontinued operations
Cash provided by (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
Operating Activities
$
2018
1,453,736
76,694
1,530,430
$
2017
(172,904)
(574,313)
(747,217)
(10,300,677)
-
(98,908)
10,883,919
2,014,764
$
(106,944)
8,339,784
85,605
3,312,691
$ 10,883,919
Cash provided by operating activities was $1,530,430 for the year ended September 30, 2018, compared to cash
used in operating activities of $747,217 for the same period last year. This improvement was a result of increased
development revenue.
Investing Activities
Cash used in investing activities was $10,300,677 for the year ended September 30, 2018, compared to $106,944
used in the same period last year. During the year, management invested excess cash of $7,598,857 in cashable
term deposits held with a Canadian chartered bank to generate additional interest income. The term deposits have
maturity dates between October 23, 2018 and June 25, 2019. Interest rates range between 1.8% and 2.0%.
Equipment purchases in 2018 were related to a new electron beam lithography system, a revenue-generating steam
boiler for our Thurso facility, and a research and development embossing line.
6
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
Financing Activities
Cash provided by financing activities was $nil for the year ended September 30, 2018, compared to $8,339,784
during the same period last year. The prior year reflects the proceeds of a private placement, offset by the repayment
of convertible debentures and a note payable. In addition, cash flows for the prior year included proceeds upon the
exercise of stock options.
Capital Resources and Liquidity
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 to 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 operations, and
future significant capital investment opportunities. During the year ended September 30, 2018, management invested
excess cash in cashable term deposits to generate additional interest income. There were no other changes in our
approach to capital management.
Cash
Cash equivalents
Short-term investments
2018
292,688
1,722,076
7,598,857
9,613,621
$
2017
914,378
9,969,541
-
$ 10,883,919
$
$
As at September 30, 2018, the Company had no lines of credit and no exposure to asset-backed commercial paper.
The Company had commitments of $804,724 as at September 30, 2018 primarily under operating leases related to
office space. Management has reviewed its projected funding requirements for the next twelve months and expects
that, through the generation and collection of revenues, the Company will maintain sufficient liquidity to meet its
requirements.
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 income (loss) excluding the impact of interest and financing costs
(net of interest income), foreign exchange gain (loss), income taxes, depreciation and amortization, share-based
compensation, and net income (loss) from discontinued operations. The Company believes Adjusted EBITDA is a
useful measure as 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, as well as fund future
growth. Adjusted EBITDA may also be used by investors and analysts for the purpose of valuing the Company.
7
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 Nanotech’s 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.
2018
2017
Net loss
Finance (income) expense
Foreign exchange (gain) loss
Depreciation and amortization
Share-based compensation
Net loss from discontinued operations
Adjusted EBITDA
Financial Instruments
$
(46,266) $ (4,754,132)
1,014,779
169,815
2,916,283
921,198
900,279
1,168,222
(121,878)
(250,023)
1,611,891
681,739
123,322
$ 1,998,785 $
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,
2018. In the year ended September 30, 2018, there was no material change to the nature of the risks arising from
our classification of financial instruments, or related risk management objectives.
8
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 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, 2018, 567,500 options (2017 – 413,500) and 238,782 RSUs (2017 – 499,200)
were granted. During the year ended September 30, 2018, 22,060 RSUs and nil options (2017 – nil RSUs and
590,000 options) were forfeited or expired during the year.
The common shares, options, and RSUs outstanding and exercisable as at the following dates are:
September 30, 2018
Number
Weighted average
exercise price
September 30, 2017
Number
Weighted average
exercise price
Common shares outstanding
Options
68,771,501
Outstanding
Exercisable
RSUs
Outstanding
2,607,500
2,273,750
$
$
370,606
1.35
1.35
N/A
68,395,825
2,040,000
1,770,125
529,560
$
$
1.35
1.37
N/A
As at September 30, 2018, the following RSUs were available to grant:
Total RSUs approved by shareholders
Shares issued to date under the RSU plan
Reserved for issuance under the RSU plan
RSUs outstanding
RSUs available to grant
As at September 30, 2018, the following options were available to grant:
10.0% of common shares issued and outstanding
Shares reserved for issuance under the RSU plan
Options outstanding
Options available to grant
2,100,000
(1,139,947)
960,053
(370,606)
589,447
6,877,150
(960,053)
(2,607,500)
3,309,597
As at December 18, 2018, the Company has 68,771,501 common shares issued and outstanding. There are no
preferred shares issued and outstanding.
9
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 these 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 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.
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.
The Company performs impairment tests for goodwill and other non-financial 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 revenue growth rates. Changes in estimates and assumptions can affect
the reported value of goodwill and other non-financial assets.
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
award 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.
10
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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. 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 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 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 and a single,
forward-looking ‘expected credit loss’ impairment model. IFRS 9 is effective for annual periods beginning on or after
January 1, 2018 and must be applied retrospectively with some exemptions.
The Company will adopt the standard on October 1, 2018, using the modified retrospective application method under
which comparatives are not restated and a cumulative catch up adjustment is recorded on October 1, 2018, for any
differences identified including adjustments to opening retained earnings balances. The Company has analyzed the
impact of adopting IFRS 9 and anticipates there will not be any material changes as a result of adopting this new
standard.
11
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 there will be a significant impact, other than additional required disclosures. The Company will
adopt IFRS 15 in its financial statements for the annual period beginning on October 1, 2018, using the full
retrospective transitional approach.
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
Nanotech continues to be an expenditure-based entity which incurred substantial losses since inception and may
continue to incur losses and experience negative cash flows. The Company cannot predict if or when it will operate
profitably, reliably generate positive cash flows, or be able to implement its business strategy successfully. Pursuit
of the business strategy requires Nanotech to incur significant expenditures for research and product development,
marketing, and general administrative activities. As a result, there is a need to continue to grow revenues and gross
margins to achieve and sustain profitability and positive operating cash flows, and the Company may need to raise
additional capital.
Financing Arrangements
Execution of the business plan and commercial viability could be jeopardized if Nanotech is unable to raise additional
funds for working capital, R&D projects, sales, marketing and product development activities, as well as other
business opportunities. Mitigation of this risk is attempted 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 the Company’s commercial products.
If the cash generated from the Company’s business becomes 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.
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 required regulatory approvals, 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,
12
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 employees, 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 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.
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 terms allocating risk between the manufacturer and its customers.
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 capital markets, and political decisions may
adversely influence the Company’s sales or the Company’s ability to access certain funding.
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.
13
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
Market Acceptance
The Company cannot accurately predict whether its products and services will achieve significant market acceptance
or whether there will be a market for its products and services on terms the Company finds acceptable. Market
acceptance of the Company’s products and services depends on a number of factors, including the quality,
sophistication, price and availability of substitute products and services. Lack of significant market acceptance, delays
in acceptance, failure of certain markets to develop or the Company’s need to make significant investments to achieve
acceptance by the market would negatively affect its business, financial condition and results of operations.
Customer Dependence and Concentration
In 2018, one customer represented 79% of our total revenue (2017 – two customers represented 75% and 21% of
total revenues). The loss of a significant customer or any significant contract cancellations could negatively affect
revenue and results of operations.
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, failure to exercise contract options, 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
operations.
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.
Security Environment
Many of the Company’s customers have specific security requirements relating to the work that can be performed for
them. These requirements can change quickly and with little notice causing a 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.
Cyber Security
The Company faces the risk of a security breach or other significant disruption of its IT networks and related systems,
whether through cyber-attack or cyber intrusion via the internet, malware, computer viruses and email attachments
to persons with access to the Company’s systems. Security breaches or other significant disruptions of the
Company’s IT networks and related systems could have a material adverse effect on the Company’s business and
results of operations.
Although the Company makes significant efforts to maintain the security and integrity of its IT networks and related
systems, there can be no assurance that its security efforts and measures will be effective or that attempted security
breaches or disruptions will not be successful or damaging. The Company may also need to expend significant
resources to protect against security breaches.
14
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
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 which 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.
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 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.
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.
ADDITIONAL INFORMATION
Outlook
Nanotech’s position in the banknote market continues to improve. The Company’s strategy to disrupt the multibillion-
dollar banknote market and become a key supplier of banknote security features is on track, and the Company is
gaining recognition in the industry as having innovative technologies to address the needs of central banks around
the world.
In commercial markets, the Company continues to make advancements in positioning its KolourOptik technology as
an upgrade and replacement to traditional holograms. In 2019, the Company expects to introduce new and innovative
products into the banknote and commercial markets as well as make a significant investment into building out its
sales organization.
Management has established the following goals for the 2019 fiscal year:
• Create a direct salesforce. Nanotech will create a salesforce to accelerate the sales process by focusing on
direct sales in addition to working with key partners. The Company will also put in place a more scalable sales
process that will focus on diversifying its customer base and demonstrating its differentiation through commercial
15
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2018
sales. To date Nanotech has focused on large opportunities and developing customized offerings on
indeterminate timelines. The Company will develop a more traditional sales pipeline, creating the necessary
process and channel development strategies to target both small and large customers with defined products.
• Banknote market. The Company has two areas of focus in the banknote market:
o Contract development activities. Nanotech currently generates most of its revenue from development
contracts with a single customer, with the goal of incorporating a Nanotech security feature on their banknote.
This work is progressing well. The customer has narrowed the scope of development activities, which should
see the Company move to manufacturing production level volume samples in fiscal 2020.
o Expand and enhance our banknote product line. The Company plans to brand its currently unbranded
products such as OTF and extend the product line with a new version of the Company’s branded banknote
product, M2. This will enable central banking customers to have a menu of options for their needs and cost
parameters.
• Commercial markets. The Company plans to launch a new line of product offerings featuring KolourOptik
technology targeted directly at the commercial market. As well, the Company is in the process of securing a
reliable and timely manufacturing solution for commercial size quantities of KolourOptik labels. Previously,
Nanotech relied on large partners that were prohibitively expensive or took several months for delivery, making
selling to commercial customers difficult. By implementing these strategies, Nanotech will be able to sell directly
to commercial customers and deliver a complete security label to showcase customers’ brand identity.
• Financial outlook. Management continues to believe the Company’s technology has significant potential in
many markets. Successfully incorporating a security feature into a banknote will lead to longer-term recurring,
predictable revenue. Diversification into commercial markets is also expected to stabilize revenues and earnings.
In the short-term, while management builds out the sales strategy and product offering, the Company’s financial
performance may be highly variable. Management has forecasted the following for 2019:
o Based on current visibility and conservatively assuming no additional contracts that could be won
during the year, revenue may decrease by 10% to 20% compared to 2018. Nanotech will continue to
generate most of its 2019 revenue from development contracts with a single customer. While the Company
is getting closer to reaching the goal of incorporating a Nanotech security feature on this customer’s
banknote, advancement towards this goal corresponds with the customer narrowing the scope of
development activities with an intention to select a final security feature. This selection will see the Company
move to manufacturing production volume samples in fiscal 2020. While focusing on one security feature is
a positive development, because the scope of work has been reduced, overall 2019 revenues may be
negatively impacted. Nanotech continues to operate under an agreement to provide up to $30 million in
research and development services. Only $10.5 million of this revenue has been recognized as of September
30, 2018.
o Adjusted EBITDA loss of approximately $1.0 million. Potential declining revenue and increased
investment in the Company’s sales efforts and product offerings could reduce near-term profitability.
With a strong balance sheet, including $9,613,621 in cash and short-term investments and no debt, the Company is
well positioned to develop and pursue its sales strategies in 2019.
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.
16
Consolidated Financial Statements of
Nanotech Security Corp.
Years ended September 30, 2018 and 2017
Nanotech Security Corp.
September 30, 2018 and 2017
Table of Contents
Independent Auditors’ Report ................................................................................................................. 1
Consolidated Statements of Operations and Comprehensive Loss ....................................................... 3
Consolidated Statements of Financial Position....................................................................................... 4
Consolidated Statements of Changes in Shareholders’ Equity .............................................................. 5
Consolidated Statements of Cash Flows ................................................................................................ 6
Notes to the Consolidated Financial Statements .............................................................................. 7-30
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,
2018 and September 30, 2017, the consolidated statements of operations and comprehensive
loss, changes in shareholders’ 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
is
for
responsible
the preparation and
Management
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.
fair presentation of
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
consolidated financial statements are free from material misstatement.
to obtain reasonable assurance about whether
the audit
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 in our audits 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.
Nanotech Security Corp.
Page 2
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, 2018 and
September 30, 2017 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 18, 2018
Vancouver, Canada
Nanotech Security Corp.
Consolidated Statements of Operations and Comprehensive Loss
Years ended September 30, 2018 and 2017
(In Canadian dollars)
Revenue (note 16)
Cost of sales (note 17)
Expenses (note 17)
Research and development
General and administration
Sales and marketing
Depreciation and amortization (note 7 and 8(b))
2018
2017
$
9,199,710
2,051,890
7,147,820
$
7,343,791
1,429,371
5,914,420
1,407,430
2,532,156
2,018,055
1,485,024
7,442,665
1,475,437
2,308,846
2,043,514
2,755,882
8,583,679
Loss from continuing operations before other expenses
(294,845)
(2,669,259)
Other (income) expenses
Foreign exchange (gain) loss
Finance (income) expense (note 9)
Net income (loss) from continuing operations
Net loss from discontinued operations (note 19(c))
Net loss
Other comprehensive loss:
Items that may be subsequently reclassified to earnings:
Unrealized foreign exchange gain (loss)
on translation of foreign operation (note 19(c))
Total comprehensive loss
Basic and diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Net loss
Weighted average number of common shares
Basic and diluted
See accompanying notes to the consolidated financial statements.
(250,023)
(121,878)
(371,901)
169,815
1,014,779
1,184,594
77,056
(3,853,853)
(123,322)
(46,266)
(900,279)
(4,754,132)
(98,908)
(145,174)
$
85,605
(4,668,527)
$
$
$
$
0.00
0.00
0.00
$
$
$
(0.07)
(0.01)
(0.08)
68,425,673
59,056,353
3
Nanotech Security Corp.
Consolidated Statements of Financial Position
as at September 30, 2018 and 2017
(In Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Short-term investments (note 5)
Accounts receivable (note 12(b))
Inventory (note 6)
Prepaid expenses and other assets
Assets held for sale (note 19(a))
Property, plant and equipment (note 7)
Goodwill (note 8(a))
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Deferred revenue
Liabilities directly associated with assets held for sale (note 19(a))
Non-current liabilities:
Tenant inducement
Shareholders’ equity
Share capital (note 10(a))
Contributed surplus
Deficit
Accumulated other comprehensive loss
Related party transactions (note 14)
Commitments (note 18)
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Directors:
"Doug Blakeway"
Doug Blakeway, Director Ken Tolmie, Director
"Ken Tolmie"
2018
2017
$
2,014,764
7,598,857
1,962,969
173,636
125,514
-
11,875,740
$
10,883,919
-
1,374,442
151,708
187,874
216,225
12,814,168
16,964,857
1,388,458
30,229,055
$
15,856,998
1,388,458
30,059,624
$
$
1,265,282
-
16,204
1,281,486
$
1,431,466
157,171
200,226
1,788,863
43,653
1,325,139
71,223
1,860,086
61,892,395
2,930,964
(35,919,443)
-
28,903,916
30,229,055
$
61,426,483
2,715,137
(35,873,177)
(68,905)
28,199,538
30,059,624
$
4
Nanotech Security Corp.
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 2018 and 2017
(In Canadian dollars)
Balance as at October 1, 2016
Net loss
Unrealized foreign exchange gain on translation
Private placement
Shares issued on conversion of convertible debentures
Share-based compensation - options (note 10(b)(i))
Share-based compensation - RSUs (note 10(b)(ii))
Options exercised (note 10(b)(i))
RSUs vested (note 10(b)(ii))
Balance as at September 30, 2017
Number
of shares
53,864,285
-
-
11,586,870
2,252,000
-
272,000
420,670
68,395,825
$
Share
capital
45,210,507
-
-
12,486,784
2,815,000
-
346,287
567,905
61,426,483
$
Balance as at October 1, 2017
Net loss
Unrealized foreign exchange loss on translation
Share-based compensation - options (note 10(b)(i))
Share-based compensation - RSUs (note 10(b)(ii))
Foreign exchange reclassified upon disposal of foreign operation (note 19(c))
RSUs vested (note 10(b)(ii))
Balance as at September 30, 2018
68,395,825
-
-
$
61,426,483
-
-
-
-
375,676
68,771,501
-
-
465,912
61,892,395
$
See accompanying notes to the consolidated financial statements.
$
Contributed
surplus
2,485,131
-
-
-
-
364,649
556,549
(123,287)
(567,905)
2,715,137
$
$
2,715,137
-
-
264,627
417,112
-
(465,912)
2,930,964
$
Accumulated
other
comprehensive
loss
(154,510)
-
85,605
-
-
$
-
-
-
(68,905)
$
$
Deficit
(31,119,045)
(4,754,132)
-
-
-
-
-
-
(35,873,177)
$
$
(35,873,177)
(46,266)
-
$
(68,905)
-
(98,908)
-
-
-
(35,919,443)
$
-
167,813
-
$
-
$
Total
shareholders’
equity
16,422,083
(4,754,132)
85,605
12,486,784
2,815,000
364,649
556,549
223,000
-
28,199,538
$
$
28,199,538
(46,266)
(98,908)
264,627
417,112
167,813
-
28,903,916
$
5
Nanotech Security Corp.
Consolidated Statements of Cash Flows
Years ended September 30, 2018 and 2017
(In Canadian dollars)
Cash flows provided by (used in):
Operating activities:
Net income (loss) from continuing operations
Items not involving cash:
Depreciation and amortization
Share-based compensation
Accretion of convertible debentures
Other
Non-cash working capital changes (note 15(a))
Net cash provided by (used in) discontinued
operations (note 19(b))
Cash provided by (used in) operating activities
Investing activities:
Purchase of property and equipment (note 7 and 15(d))
Acquisition of short-term investments (note 5)
Cash used in investing activities
Financing activities:
Issuance of shares for options exercised
Proceeds on financing, net of costs (note 9)
Repayment of note payable (note 9)
Repayment of convertible debentures (note 9)
Cash provided by financing activities
2018
2017
$
77,056
$
(3,853,853)
1,611,891
681,739
-
(27,570)
(889,380)
1,453,736
2,917,883
921,198
589,858
(27,570)
(720,420)
(172,904)
76,694
1,530,430
(574,313)
(747,217)
(2,701,820)
(7,598,857)
(10,300,677)
(106,944)
-
(106,944)
-
-
-
-
-
223,000
12,486,784
(3,000,000)
(1,370,000)
8,339,784
Effect of foreign exchange on cash and cash equivalents
(98,908)
85,605
Increase (decrease) in cash and cash equivalents
(8,869,155)
7,571,228
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
10,883,919
2,014,764
$
3,312,691
10,883,919
$
See supplementary cash flow information (note 15)
See accompanying notes to the consolidated financial statements.
6
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
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 researches, creates, and produces nano-optic structures and colour-shifting materials used in
authentication and brand enhancement applications across a wide range of markets including banknotes, tax
stamps, secure government documents, commercial branding, and the pharmaceutical industry.
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 18, 2018.
(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, 2018 and 2017
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. Impairment tests
involve considerable use of judgement and require management to make estimates and assumptions.
The fair values of CGUs are derived from certain valuation models, which consider various factors such
as discount rates, future earnings, and revenue growth rates. 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, 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. (“Tactical”) up to September 28, 2018, the date of its dissolution (note
19). 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. Tactical’s functional currency was 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 (note 19(c)).
8
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
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 (loss) per common share:
Basic net earnings (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 restricted share units (“RSU”), 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 recording a loss, basic and diluted figures are the
same, as the exercise of all stock options and RSUs 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 expenditures, and borrowing costs
on qualifying assets. Other development costs are expensed in the period incurred. During the years ended
September 30, 2018 and 2017, all development costs have been expensed.
9
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(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.
• Financial assets at fair value through earnings:
Financial assets are classified as 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.
10
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(e) Financial instruments (continued):
(i) Financial assets (continued):
• Loans and receivables:
Loans and receivables include cash and cash equivalents, short-term investments, and accounts
receivable. 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, 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 as other financial liabilities.
(iii) 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,
2018 and 2017, the Company did not have any embedded derivatives.
(f) Cash and cash equivalents:
Cash and cash equivalents consist of cash balances with banks, investments with original maturities of
three months or less, and investments that are both readily convertible to cash and subject to insignificant
changes in market value.
11
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(g) Short-term investments
Short-term investments consist of short-term interest-bearing term deposits which are highly liquid with
maturity dates greater than three months but less than one year at the time of purchase.
(h) 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.
(i) 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
straight line over the lesser of lease
term or estimated useful life
The Company reviews the estimated useful lives and the depreciation methods of its property, plant and
equipment annually.
(j)
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, 2018 and 2017, 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.
12
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(k) 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
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.
(l) 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.
13
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(m) 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 award 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
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.
(n) 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 TSX Venture Exchange 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.
(o) 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.
14
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(o) Income taxes (continued):
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.
(p) 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.
(q) Segment reporting:
The Company’s continuing operations currently consists of one operating segment.
(r) 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 losses on
remeasurement are recognized in the statement of income. 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 Statements of Financial Position.
Comparative period Consolidated Statements of Financial Position are not restated. Assets held for
sale are not depreciated, depleted, or amortized.
15
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
3. Significant accounting policies (continued):
(r) Assets held for sale and discontinued operations (continued):
(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 represents 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
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 and a single, forward-looking ‘expected credit loss’ impairment model. IFRS 9 is effective
for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some
exemptions.
The Company will adopt the standard on October 1, 2018 using the modified retrospective application
method, under which comparatives are not restated and a cumulative catch up adjustment is recorded on
October 1, 2018, for any differences identified including adjustments to opening retained deficit balances.
The Company has analyzed the impact of adopting IFRS 9 and anticipates that there will not be any material
changes as a result of adopting this new standard.
(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 will adopt IFRS 15 in its
financial statements for the annual period beginning on October 1, 2018 using the full retrospective
transitional approach.
16
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
4. New standards and interpretations not yet adopted (continued):
(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.
5. Short-term Investments
Short-term investments of $7,598,857 (2017 - $nil) consist of cashable term deposits held with a Canadian
chartered bank. The term deposits have maturity dates between October 23, 2018 and June 25, 2019. Interest
rates range between 1.8% and 2.0%.
6.
Inventory:
Raw materials
Work in progress
2018
$ 160,550
13,086
$ 173,636
2017
$ 123,619
28,089
$ 151,708
As at September 30, 2018, work in progress includes $nil of depreciation (2017 - $1,600).
There were no inventory write-downs during the years ended September 30, 2018 and 2017.
For the year ended September 30, 2018, the Company recognized inventories of $2,051,890 (2017 -
$1,429,371) through cost of sales.
17
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
7. Property, plant and equipment:
Land
Building and
leasehold
improvement
Manufacturing
equipment
Laboratory,
software, and
office equipment
Total
$ 141,700
-
-
$ 3,807,378 $ 15,922,956
-
-
92,009
(27,809)
$ 520,413 $ 20,392,447
106,944
(318,102)
14,935
(290,293)
141,700
-
3,871,578
487,549
15,922,956
2,083,180
245,055
149,021
20,181,289
2,719,750
$ 141,700
$ 4,359,127 $ 18,006,136
$ 394,076 $ 22,901,039
$
-
-
-
-
-
$
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
203,203
3,669,053
1,329,549
161,776
79,139
4,324,291
1,611,891
$
-
$
696,665 $
4,998,602
$ 240,915 $
5,936,182
$ 141,700
$ 141,700
$ 3,662,462 $ 13,007,534
$ 3,378,116 $ 12,253,903
$ 153,161 $ 16,964,857
83,279 $ 15,856,998
$
Cost:
Balance as at
October 1, 2016
Additions
Assets held for sale
Balance as at
September 30, 2017
Additions
Balance as at
September 30, 2018
Accumulated
depreciation:
Balance as at
October 1, 2016
Depreciation expense
Assets held for sale
Balance as at
September 30, 2017
Depreciation expense
Balance as at
September 30, 2018
Net book value:
September 30, 2018
September 30, 2017
Additions, disposals and depreciation for the years ended September 30, 2018 and 2017 are for continuing
operations.
Included in amortization is an impairment charge of $29,872 recorded during the year against certain assets in
order to bring them down to their recoverable values (2017 - $nil).
18
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
8.
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:
• 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:
Management applied a discount rate of 12% (2017 – 12%) in calculating the value in use. This 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.
• Revenue growth:
Revenue growth is projected taking into account the average growth levels experienced over the past
five years and the estimated growth for the next five years based on projected market acceptance. It
is assumed that sales pricing and margins would decrease as volume orders are realized.
• 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.
(b) Finite life intangible assets:
Finite life intangible assets consist of intellectual property acquired by the Company in a 2013 business
acquisition. The estimated fair value of $5,444,954 was amortized over four years and was fully depreciated
by September 30, 2017. Amortization of $1,361,239 was recorded during the year ended September 30,
2017.
9. Finance (income) expense:
Interest income from cash and cash
equivalents and short-term investments
Other interest expenses
Interest on note payable
Interest on convertible debenture
Accretion of convertible debentures
2018
2017
$ (132,774)
10,896
-
-
-
$ (121,878)
$
(49,772)
11,950
106,774
355,969
589,858
$ 1,014,779
19
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
9. Finance (income) expense (continued):
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 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.
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 on June 21, 2017.
On August 21, 2017, the Company repaid a fully secured note payable in the amount of $3,000,000 which
required interest only payments at a fixed rate of 4% per annum.
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, 2016
Private placement
Debentures converted
Options exercised
RSUs vested
Balance as at September 30, 2017
RSUs vested
Balance as at September 30, 2018
Number of shares
53,864,285
11,586,870
2,252,000
272,000
420,670
$
Amount
45,210,507
12,486,784
2,815,000
346,287
567,905
68,395,825
375,676
68,771,501
$
$
61,426,483
465,912
61,892,395
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.
20
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
10. Share capital (continued):
(b) Share-based payment plans:
(i) Stock option plan:
Under the Company’s share incentive plan, the maximum number of shares that may be reserved for
grant of options at any point in time is 10.0% of the outstanding shares less any shares reserved for
issuance under the RSU plan. The following stock options were outstanding as at September 30, 2018:
Balance as at October 1, 2016
Granted
Exercised
Forfeited or expired
Balance as at September 30, 2017
Granted
Balance as at September 30, 2018
Number
of options
2,488,500
413,500
(272,000)
(590,000)
2,040,000
567,500
2,607,500
$
Weighted average
exercise price
1.29
1.48
0.82
1.42
$
$
1.35
1.35
1.35
The following table summarizes information pertaining to the Company’s stock options outstanding as
at September 30, 2018:
Options outstanding
Options exercisable
Range of
exercise
prices
$1.01 - $1.25
$1.26 - $1.65
Number of
options
outstanding
1,126,500
1,481,000
2,607,500
Weighted
average
remaining
contractual
life (years)
2.23
1.89
2.04
Weighted
average
exercise
price
1.14
1.52
1.35
$
$
Number of
options
exercisable
1,001,500
1,272,250
2,273,750
Weighted
average
exercise
price
1.13
1.53
1.35
$
$
The Company calculates the fair value of the options at the grant date using the Black-Scholes option-
pricing model. The table below outlines the weighted average assumptions used to estimate the fair
value of options granted during the years ended September 30, 2018 and 2017:
Risk free interest rate
Expected life
Vesting period
Expected volatility
Expected dividends
Average fair value
Forfeiture rate
2018
1.9%
4.6 years
1.6 years
43%
Nil
$ 0.52
10.2%
2017
1.2%
4.4 years
1.5 years
46%
Nil
$ 0.58
11.4%
21
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
10. Share capital (continued):
(b) Share-based payment plans (continued):
(i) Stock option plan (continued):
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
(ii) Restricted share unit plan:
2018
$ 264,627
2017
$ 364,649
Under the Company’s RSU plan, the maximum number of shares that may be reserved for issuance is
fixed at 2,100,000. As at September 30, 2018, 589,447 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.
RSUs outstanding as at September 30, 2018:
Balance as at October 1, 2016
Granted
Vested
Balance as at September 30, 2017
Forfeited
Granted
Vested
Balance as at September 30, 2018
Number
of RSUs
451,030
499,200
(420,670)
529,560
(22,060)
238,782
(375,676)
370,606
During the year ended September 30, 2017 the Company granted 499,200 RSUs. The weighted
average fair value was $1.48 per share. 25% of these RSUs vested on September 1, 2017, 35% vested
on September 1, 2018, and the remaining 40% will vest on September 1, 2019.
During the year ended September 30, 2018 the Company granted 238,782 RSUs. The weighted
average fair value was $1.40 per share. 25% of these RSUs vested on September 1, 2018, 35% will
vest on September 1, 2019, and the remaining 40% will vest on September 1, 2020.
22
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
10. Share capital (continued):
(b) Share-based payment plans (continued):
(ii) Restricted share unit plan (continued):
Using an estimated forfeiture rate of 10.0% for the years ended September 30, 2018 and 2017, 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
11. Capital risk management:
2018
$ 417,112
2017
$ 556,549
The Company’s objectives and policies for managing capital are to maintain a strong capital base to maintain
investor, creditor and market confidence, to 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 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, short-term investments, and accounts
receivable. The Company’s financial liabilities include accounts payable and accrued liabilities.
Cash and cash equivalents, short-term investments, and accounts receivable are classified as loans and
receivables, measured at amortized cost using the effective interest rate method. Accounts payable and
accrued liabilities 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 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.
23
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
12. Financial instruments and risk exposures (continued):
(b) Credit risk (continued):
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, 2018, the balance of the allowance account for credit losses was $nil (2017 - $nil).
Pursuant to their respective terms, accounts receivable was aged as at September 30, 2018 and 2017:
0 – 30 days
31 – 60 days
61 – 90 days
Greater than 90 days
Total accounts receivable
2018
$ 1,127,001
553,536
-
282,432
$ 1,962,969
$
2017
754,381
397,102
-
222,959
$ 1,374,442
There is a possibility of increased customer credit risk due to the ongoing global recessionary trends. As at
September 30, 2018, the Company’s accounts receivable are made up of approximately 46% (2017 - 70%)
government trade receivables and the balance of the outstanding accounts receivable are spread over
several other customers.
During the year ended September 30, 2018, the Company had one customer who represented greater than
10% of total revenues. This customer represents approximately 79% of total revenues (2017 - two
customers represented approximately 75% and 21%).
The Company may also have credit risk relating to cash and cash equivalents and short-term investments,
which it manages by dealing with large banks and investing in highly liquid investments. The Company’s
objective is to minimize its 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, 2018 totaled $2,014,764 (2017 - $10,883,919), short-
term investments of $7,598,857 (2017 - $nil) and accounts receivables of $1,962,969 (2017 - $1,374,442),
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.
24
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
12. Financial instruments and risk exposures (continued):
(c) Liquidity risk (continued):
As at September 30, 2018, the Company had cash and cash equivalents of $2,014,764 (2017 -
$10,883,919), short-term investments of $7,598,857 (2017 - $nil), and accounts receivable of $1,962,969
(2017 - $1,374,442) for a total of $11,576,590 (2017 - $12,258,361). 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 relates primarily to cash equivalents and short-term investments. The Company does not
enter into any interest rate swaps to mitigate interest rate risk.
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:
Income (loss) from continuing operations before income taxes
Statutory tax rate
$
Expected tax expense (recovery)
Effective tax rate change and other
Permanent differences
Non-refundable investment tax credits
Changes in deferred tax assets arising from discontinued
operations
Changes recognized in equity
Change in unrecognized deferred tax assets
Income tax recovery
2018
77,056
26.73%
2017
$ (3,853,853)
26.53%
20,597
(381,819)
171,849
(139,148)
(1,022,427)
(30,450)
260,525
-
(469,263)
-
797,784
-
$
-
(224,463)
1,016,815
-
$
25
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
13. Income taxes (continued):
(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
Deferred tax liabilities:
Property, plant, and equipment and intangible
assets
Net deferred tax asset
(c) Deferred income tax assets and liabilities:
2018
2017
$ 2,790,683
$ 2,890,617
(2,790,683)
(2,890,617)
$
-
$
-
The Company did not recognize deferred tax assets for the following deductible temporary differences:
Non-capital loss carry forwards
Net capital loss carry forwards
Non-refundable investment tax credits
Other temporary differences
Unrecognized deferred income tax assets
(d) Loss carry forwards:
2018
$ 8,520,026
5,732,539
668,251
7,345,635
$ 22,266,451
2017
$ 8,789,958
2,385,221
-
8,223,233
$ 19,398,412
As at September 30, 2018, the Company has tax loss carry forwards of approximately $18,948,528 (2017
- $19,583,000). The Company’s tax loss carry forwards will expire, if not utilized, commencing in 2029. The
Company recognizes the benefit of tax losses only to the extent of anticipated future taxable income. As at
September 30, 2018, the Company has capital losses of approximately $5,732,539 (2017 - $2,385,221)
that may be carried forward indefinitely to apply against future years’ capital gains.
(e) R&D and tax credit attributes:
As at September 30, 2018, the Company had unclaimed tax deductions of scientific research and
experimental development expenditures of $2,322,000 (2017 - $1,908,000) that is available to reduce
taxable income in future years and may be carried forward indefinitely. As at September 30, 2018, the
Company has federal investment tax credits of $555,000 (2017 - $418,000) and provincial investment tax
credits of $114,000 that may be carried forward to apply against future years’ income tax payable. These
investment tax credits begin to expire in 2031 and 2022 respectively.
26
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
14. Related party transactions:
(a) The remuneration of key management personnel:
Salaries, accrued bonuses, and employee benefits
Share-based payments
2018
$ 1,208,306
493,881
$ 1,702,187
2017
$ 1,233,741
699,138
$ 1,932,879
(b) As of September 30, 2018, amounts owing to a company controlled by an officer and director of the
Company included in accounts payable and accrued liabilities were $191,433 (2017 - $262,854) in the
ordinary course of his employment arrangement.
(c) Legal and professional fees, taxes and disbursements totaling $81,776 for the year ended September 30,
2018 (2017 - $160,664) were incurred with a law firm of which a director of the Company is a partner. As
of September 30, 2018, amounts owing to this company included in accounts payable and accrued liabilities
were $50,780 (2017 - $93,219).
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.
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 (note 15(d))
Deferred revenue
(b) Interest and income taxes:
Interest received
Interest paid
2018
$ (588,527)
(21,928)
62,360
(184,114)
(157,171)
$ (889,380)
2017
$ (904,902)
150
(85,143)
112,304
157,171
$ (720,420)
$
2018
98,892
2,905
$
2017
42,475
461,980
The Company did not pay any income taxes during the years ended September 30, 2018 and 2017.
(c) Cash and cash equivalents:
Cash and cash equivalents consist of cash balances with banks, investments with original maturities of
three months or less, and investments that are both readily convertible to cash and subject to insignificant
changes in market value:
Cash
Cash equivalents
$
2018
292,688
1,722,076
$ 2,014,764
$
2017
914,378
9,969,541
$ 10,883,919
27
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
15. Supplementary cash flow information (continued):
(d) Supplemental disclosure of non-cash financing activities:
As at September 30, 2018, property, plant and equipment included in accounts payable was $17,930 (2017
- $nil).
16. Segmented information
The Company’s continuing operations currently consist of one operating segment. For the year ended
September 30, 2018, sales within Canada were $1,113,177 (2017 - $328,531) and sales outside Canada were
$8,086,533 (2017 - $7,015,260).
17. 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
18. Commitments:
2018
$ 3,480,731
681,739
1,613,491
332,586
858,417
573,305
645,560
234,917
1,073,809
$ 9,494,555
2017
$ 3,452,013
921,198
2,916,283
282,233
613,837
668,058
520,957
278,353
360,118
$ 10,013,050
(a) As at September 30, 2018, the Company is committed under operating leases, primarily related to office
space, and other purchases for the following amounts:
2019
2020
2021
2022
2023
$
$
335,549
217,966
96,196
90,277
64,736
804,724
(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 years ended
September 30, 2018 and 2017.
28
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
19. 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, Tactical, to a third party. At September 30, 2017, Tactical was classified as
a separate disposal group held for sale and as a discontinued operation.
On June 29, 2018, the assets used in connection with Tactical’s surveillance equipment and van conversion
business were sold to an employee of Tactical for a nominal amount and on September 28, 2018, Tactical was
wound-up and struck from the corporate register.
The major classes of assets and liabilities of Tactical classified as held for sale as at September 30, 2018 are
as follows:
(a) Assets and liabilities of Tactical classified as held for sale:
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
Cumulative loss in accumulated other comprehensive loss
(b) Net cash flows provided by (used in) discontinued operations:
Net loss from discontinued operations
Depreciation
Foreign exchange reclassified upon disposal
of foreign operation
Non-cash working capital changes
2018
-
-
-
-
-
-
16,204
16,204
-
2018
(123,322)
-
167,813
32,203
76,694
$
$
$
$
$
$
$
2017
30,280
116,538
54,525
12,401
2,481
216,225
200,226
200,226
(68,905)
2017
(900,279)
12,804
-
313,162
(574,313)
$
$
$
$
$
$
$
29
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2018 and 2017
19. Discontinued operations (continued):
(c) 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
2018
$ 827,256
454,573
372,683
2017
$ 1,259,066
874,133
384,933
-
311,217
14,994
-
326,211
269,310
542,227
246,630
12,804
1,070,971
Income (loss) before other expenses
46,472
(686,038)
Other expenses
Gain on disposal of foreign operation (note 19(d))
Loss on remeasurement to fair value less costs to dispose
Foreign exchange reclassified on disposal of foreign
operation
3,419
(1,438)
-
167,813
169,794
3,465
-
210,776
-
214,241
Net loss from discontinued operations
$ (123,322)
$ (900,279)
Other comprehensive income (loss):
Unrealized foreign exchange gain (loss) on translation of
foreign operation
(98,908)
85,605
Net comprehensive loss from discontinued operations
$ (222,230)
$ (814,674)
(d) The effect of the disposal of Tactical on the financial position of the Company on June 28, 2018 is as follows:
Cash proceeds
Cash
Accounts receivable
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
Net assets disposed
Gain on disposal of foreign operations
$
1
(66,385)
(22,933)
(51,749)
(894)
143,400
1,439
$
(1,438)
30