September 30, 2019
ANNUAL
REPORT
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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 2019 mean the fiscal year ended
September 30, 2019. Last year and 2018 mean the fiscal year ended September 30, 2018, and 2017 means
the fiscal year ended September 30, 2017. This quarter or the current quarter means the three months
ended September 30, 2019.
ADVISORY
This MD&A, dated December 11, 2019, 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, 2019. 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,
2019, 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.
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 #1200 - 200 Burrard Street, Vancouver, BC, Canada V7X 1T2.
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, and commercial branding.
1
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
The Company’s nano-optic technology employs arrays of billions of nano-indentations that can be
impressed or embossed onto a wide range of substrate materials including polymer, paper, metal, or fabric.
By using sophisticated algorithms to direct an electron beam lithography system, the Company creates
visual images with effects such as 3D, perceived movement, and the display of high-definition colours.
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 Board of Directors made the determination that the Company 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.
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 dissolved and struck from the corporate register.
Report on 2019 Strategic Initiatives
In 2019, the Company shifted its focus to near-term revenue growth by commercializing its technology into
products specifically designed for the banknote and secure document market and for the brand protection
market. The Company expanded its sales and marketing team with the addition of experienced sales
leaders to pursue near-term revenue opportunities in both of its key markets.
Banknote security feature market. The Company has two areas of focus in the banknote market:
1. Advancement of contract services for a G10 central bank. The confidential customer, a central
bank, confirmed in July that the security feature developed by Nanotech will advance to the next
stage, which involves demonstrating that the security feature can be manufactured. While the
Company does not currently have visibility on if or when Nanotech’s feature might be integrated
into the customer’s banknotes, the Company has made major advancements in its development of
a unique and novel security feature in 2019.
2. Expansion of Nanotech’s security feature product line. The Company successfully pursued
new sales opportunities for OTF in the banknote and secure documents market. As announced on
August 1, 2019 and September 10, 2019, the Company expanded its business with two long-term
OTF customers in 2019. In addition, Nanotech developed KolourDepth™, a new banknote security
feature using the Company’s nano-optic technology that was launched on October 1, 2019.
Brand protection market. The Company launched its first brand protection products, LiveLogo™ and
LivePortrait™ in April and completed its first sale in the brand protection market this year. The sales team
participated in targeted industry tradeshows and events to promote Nanotech’s brand protection product
line. Nanotech’s products have garnered strong interest from the industry, with several opportunities added
to the sales pipeline and the announcement of a multi-year brand protection contract subsequent to year
end.
2
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
RESULTS OF OPERATIONS
Select financial information for the years ended September 30, 2019, 2018 and 2017:
Select Financial Information
Revenue (1)
Cost of sales (1)
Expenses
Research and development
General and administration
Sales and marketing
Depreciation and amortization
Restructuring costs
$
2019
2018
6,402,702 $ 8,247,414
1,510,101
1,511,865
6,737,313
4,890,837
2017
$ 7,116,291
1,429,371
5,686,920
1,477,668
2,307,021
2,161,056
1,481,388
787,575
8,214,708
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
(3,323,871)
(705,352)
(2,896,759)
Other (income) expenses (1)
(488,617)
(782,408)
957,094
Income (loss) from continuing operations before
income taxes
Net income (loss) from continuing operations
Loss from discontinued operations
Net loss
(2,835,254)
(2,835,254)
-
$
(2,835,254) $
77,056
77,056
(123,322)
(46,266)
(3,853,853)
(3,853,853)
(900,279)
$ (4,754,132)
Adjusted EBITDA(2)
$
(1)Revenue, cost of sales and other income for 2018 and 2017 have been adjusted to reflect the reclassification of
tenant and steam income from revenue to other income under the full retrospective application of IFRS 15 – Revenue
from Contracts with Customers, which was adopted October 1, 2018. Quarterly revenue adjusted for these
reclassifications can be found in the “Quarterly Results” section of this MD&A. For further information, see note 4(b) of
the consolidated financial statements for the year ended September 30, 2019.
(118,519) $ 1,998,785
$ 1,168,222
(2)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 $ 10,289,264 $
2019
2018
2017
9,613,621 $ 10,883,919
Total assets
Total liabilities
Total equity
Revenue
$ 28,523,244 $ 30,229,055 $ 30,059,624
1,860,086
28,199,538
1,791,610
26,731,634
1,325,139
28,903,916
The Company currently derives the majority of its revenue from contract services with a G10 central bank.
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 contract services incorporate both nano-optic and OTF
technologies and are focused on developing authentication features for future banknotes. There is inherent
variability in the timing and scope of contract services, particularly as the Company transitions from the
development of security features toward production of a final selected security feature. While the Company
is progressing toward 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. Although focusing on one security feature is a
positive development, revenues from this customer are variable and there was a decline in the year ended
September 30, 2019, compared to the same period last year.
3
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
Revenue for the year ended September 30, 2019 decreased by $1,844,712 or 22% to $6,402,702,
compared to $8,247,414 in the same period last year primarily due to reduced contract services revenue in
the current period, partially offset by increased revenue from products.
Gross Margin
Gross margin for the year ended September 30, 2019 decreased by $1,846,476 or 27% to $4,890,837,
compared to $6,737,313 in the same period last year. Overall, the gross margin percentage was 76% for
the year ended September 30, 2019, a decrease from 82% in the same period last year primarily due to
the decrease in higher margin contract services revenue in the current period.
Research and Development
Research and development expenditures for the year ended September 30, 2019 increased by $70,238,
or 5% to $1,477,668 compared to $1,407,430 in the same period last year. This increase was primarily due
to increased equipment maintenance costs and the write-down of inventory in the current year, partially
offset by reduced patent expenses in the current period due to timing of patent filings.
General and Administration
General and administration expenditures for the year ended September 30, 2019 decreased $225,135, or
9% to $2,307,021 compared to $2,532,156 in the same period last year. The decrease was primarily due
to executive transition in 2019, partially offset by an increase in professional fees and rent expense in the
current period.
Sales and Marketing
Sales and marketing expenditures for the year ended September 30, 2019 were $2,161,056, an increase
of $143,001 or 7% compared to $2,018,055 in the same period last year. The increase was related to salary
expenses as headcount was higher in the current period and increased marketing expenditures, partially
offset by reduced investor relations expenses in the current period.
Depreciation and Amortization
Depreciation and amortization included in operating expenditures for the year ended September 30, 2019
was $1,481,388, compared to $1,485,024 in the same period last year. Depreciation included in cost of
sales for the year ended September 30, 2019 was $84,734, compared to $128,146 for the same period last
year, which reflects higher sales in the previous year.
Restructuring Costs
On December 21, 2018, the Board implemented an executive transition plan, under which Mr. Doug
Blakeway, the former CEO, transitioned his responsibilities to Mr. Troy Bullock. Under the terms of this
transition plan, Mr. Blakeway’s executive services consulting agreement was terminated, triggering early
termination benefits as laid out in the agreement: two years base salary, a pro-rated performance bonus,
and vesting of all outstanding share-based awards. The Company incurred restructuring costs of $787,575
as at September 30, 2019 (September 30, 2018 - $nil), of which $92,200 represented share-based
compensation related to the accelerated vesting of Mr. Blakeway’s restricted share units (“RSUs”).
In January 2019, termination benefits were paid and 187,500 shares were issued to Mr. Blakeway upon
vesting of his RSUs. Restructuring costs of $84,375 remain accrued as at September 30, 2019 (September
30, 2018 - $nil).
Other Income
Other income for the year ended September 30, 2019 was $488,617, a decrease of $293,791, compared
to other income of $782,408 in the same period last year. The decrease was primarily due to a reduced
foreign exchange gain in the current period as a result of higher fluctuations in foreign exchange in the prior
year. In addition, other income from rent and steam decreased compared to the prior year as the tenant
renting warehouse space in the Thurso facility experienced financial difficulties, resulting in a write down of
certain rent and steam receivables. This decrease in the other income was partially offset by increased
finance income due to higher interest rates in the current year.
4
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
Adjusted EBITDA
Adjusted EBITDA for the year ended September 30, 2019 was negative $118,519, compared to positive
$1,998,785 during the same period last year. The decrease was primarily due to reduced revenue and
margins in the current year.
Net Loss
Net loss for the year ended September 30, 2019 was $2,835,254, compared to a net loss of $46,266 during
the same period last year. The increase in net loss was primarily due to decreased revenue in the current
period in combination with restructuring costs related to the executive transition.
QUARTERLY RESULTS
($ thousands, except per
share data)
Revenue(1)
Net income (loss) from
continuing operations
Net income (loss)
Adjusted EBITDA(2)
Basic earnings (loss) per
share:
Continuing operations
Net income (loss)
Q4
2019
Q3
2019
Q2
2019
Q1
2019
Q4
2018
Q3
2018
Q2
2018
Q1
2018
$
1,450 $
(705)
1,827 $
(521)
1,594 $
(477)
1,532 $
(1,132)
3,000 $
770
1,769 $
(456)
1,486 $
(333)
1,992
96
(705)
(299)
(521)
17
(477)
45
(1,132)
118
770
1,306
(627)
100
(285)
133
96
460
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.02)
(0.02)
0.01
0.01
(0.01)
(0.01)
0.00
0.00
0.00
0.00
Diluted earnings (loss)
per share:
Continuing operations
0.00
Net income (loss)
0.00
(1) Revenue has been adjusted to reflect the full retrospective application of IFRS 15, which was adopted October 1,
2018. Revenue for the previous seven quarters has been adjusted from the quarterly filings to reflect the reclassification
of steam from revenue to other income under IFRS 15. For further information, see note 4(b) of the consolidated
financial statements for the year ended September 30, 2019.
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.02)
(0.02)
0.00
0.00
0.01
0.01
(2) Adjusted EBITDA is a non-IFRS measure as described in the “Non-IFRS Financial Measures” section of this
MD&A.
Revenue and Adjusted EBITDA were impacted by the timing and scope of contract services and the timing
of recurring OTF orders in the quarters presented. There is an inherent variability in 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 restructuring costs in the first quarter of 2019.
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 2019 was $1,449,687, compared to $3,000,839 in the same period of
2018. The decrease is primarily due to decreased contract services revenue in the current quarter, which
was a result of the inherent variability in timing of development contract revenue.
Net loss from continuing operations for the fourth quarter of 2019 was $704,848, compared to net income
of $770,086 in the fourth quarter of 2018. Revenue decreased in the current quarter, while sales and
marketing and research and development expenses increased in the current quarter.
Adjusted EBITDA for the fourth quarter of 2019 was negative $298,542, compared to positive $1,305,841
in the same period of 2018. The difference is primarily due to decreased revenue in the current quarter.
5
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
RELATED PARTY TRANSACTIONS
For the year ended September 30, 2019, 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) The remuneration of key management personnel
Salaries, accrued bonuses, employee benefits and
director fees
Share-based payments
Restructuring costs
2019
2018
$
712,298
255,476
787,575
$ 1,755,349
$ 1,330,306
493,881
-
$ 1,824,187
(b) As at September 30, 2019, amounts owing to a company controlled by a director of the Company
included in accounts payable and accrued liabilities were $90,938 (2018 - $191,433). These payables
represent amounts owing under the terms of an executive services consulting agreement, including
payments owing upon early termination of this agreement.
(c) Legal and professional fees, taxes and disbursements totaling $42,485 for the year ended September
30, 2019 (2018 - $81,776) were incurred with a law firm of which a director of the Company is a partner.
As at September 30, 2019, amounts owing to this company included in accounts payable and accrued
liabilities were $nil (2018 - $50,780). During the year ended September 30, 2019, the Company
retained new legal counsel and moved its registered and records office.
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 continuing operations
Cash provided by (used in) discontinued operations
Cash provided by operating activities
Cash used in investing 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
2019
942,269 $
(16,204)
926,065
2018
1,453,736
76,694
1,530,430
(187,814)
(1,013)
2,014,764
2,752,002 $
(10,300,677)
(98,908)
10,883,919
2,014,764
$
$
Cash provided by operating activities was $926,065 for the year ended September 30, 2019, compared to
cash provided by operating activities of $1,530,430 for the same period last year. The difference was a
result of increased net loss during the current period, offset by a decrease in accounts receivable in the
current period.
Investing Activities
Cash used in investing activities was $187,814 for the year ended September 30, 2019, compared to
$10,300,677 used in the same period last year. The current period represents investment in minor capital
6
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
projects and the net disposal of short-term investments, whereas the prior period reflects the purchase of
an electron beam lithography system, a steam boiler, and an embossing line, as well as the acquisition of
short-term investments.
Capital Resources
The Company’s objectives when managing capital are to safeguard the ability to continue as a going
concern, to provide adequate return to shareholders, to meet external capital requirements, and 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. For the year ended September
30, 2019, there were no changes in our approach to capital management.
Cash
Cash equivalents
Short-term investments
$
2019
752,911
1,999,091
7,537,262
$ 10,289,264
$
$
2018
292,688
1,722,076
7,598,857
9,613,621
The Company had no lines of credit and no exposure to asset-backed commercial paper.
The Company had commitments of $997,732 as at September 30, 2019, primarily under operating leases
related to office space and contracted equipment maintenance. Subsequent to September 30, 2019, the
Company renewed office leases for a 5-year term ending in 2025.
Management has reviewed its projected funding requirements for the next 12 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, restructuring costs 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, 2019
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.
2019
2018
Net loss
Finance income
Foreign exchange gain
Restructuring costs
Depreciation and amortization
Share-based compensation
Net loss from discontinued operations
Adjusted EBITDA
Financial Instruments
$ (2,835,254) $
(46,266)
(121,878)
(250,023)
-
1,611,891
681,739
123,322
$ (118,519) $ 1,998,785
(192,752)
(14,982)
787,575
1,566,122
570,772
-
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 13 of the consolidated financial statements for the year ended
September 30, 2019. In the year ended September 30, 2019, there was no material change to the nature
of the risks arising from our classification of financial instruments, or related risk management objectives.
CAPITAL STRUCTURE AND OUTSTANDING SHARE DATA
The Company maintains an equity incentive plan consisting of a stock option plan and an 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, 2019, 1,677,500 options (2018 – 567,500) and 298,640 RSUs (2018
– 238,782) were granted. During the year ended September 30, 2019, 15,120 RSUs and 750,000 options
(2018 – 22,060 RSUs and nil 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, 2019
Number
Weighted average
exercise price
September 30, 2018
Number
Weighted average
exercise price
Common shares outstanding
Options
Outstanding
Exercisable
RSUs
Outstanding
69,200,125
68,771,501
3,535,000
2,628,750
$
$
0.95
1.05
2,607,500
2,273,750
$
$
225,502
N/A
370,606
1.35
1.35
N/A
8
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
As at September 30, 2019, 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, 2019, 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
2,700,000
(1,568,571)
1,131,429
(225,502)
905,927
6,920,012
(1,131,429)
(3,535,000)
2,253,583
As at December 11, 2019, the Company has 69,200,125 common shares issued and outstanding. There
are no preferred shares issued and outstanding.
SIGNIFICANT ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of financial statements in accordance with IFRS requires management to make judgments,
estimates, and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, revenues, and expenses. Estimates and assumptions are continually evaluated and are
based on historical experience and various factors that management believes to be reasonable under the
circumstances. However, due to the nature of estimates, actual results may differ from 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, 12 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 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
9
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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.
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
10
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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.
CHANGE IN ACCOUNTING POLICY
(a) IFRS 9 – Financial Instruments
In July 2014, the IASB issued IFRS 9 – Financial Instruments, which replaces 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.
The Company adopted IFRS 9 on October 1, 2018. The adoption of IFRS 9 did not have an impact on the
Company’s consolidated financial statements and related disclosures. With respect to classification and
measurement, the Company has applied the exemption not to restate comparative information for prior
periods. The determination of the business model within which a financial asset is held has been made on
the basis of facts and circumstances that existed at the date of initial application.
The following table explains the original measurement categories under IAS 39 and the new measurement
categories under IFRS 9 for each class of financial assets as at October 1, 2018.
Financial assets
IAS 39
Cash and cash equivalents
Short-term investments
Trade and other receivables
Loans & receivables
Loans & receivables
Loans & receivables
IFRS 9
Amortized cost
Amortized cost
Amortized cost
There was no change in classification of financial liabilities as a result of the adoption of IFRS 9. There are
no differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption
of IFRS 9.
(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.
The Company adopted IFRS 15 on October 1, 2018. Its adoption did not have a material impact on the
Company’s consolidated financial statements and related disclosures, except for the reclassification of
tenant and steam income, as described below. The Company has applied IFRS 15 in accordance with the
full retrospective transitional approach without applying any practical expedients.
IFRS 15 requires entities to recognize revenue when ‘control’ of goods or services transfers to the customer
whereas the previous standard, IAS 18, required entities to recognize revenue when the ‘risks and rewards’
of goods or services transfer to the customer. The Company concluded there is no change in the timing of
11
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
revenue recognition under IFRS 15 compared to the previous standard as the point of transfer of risks and
rewards of goods and services and transfer of control occur at the same time. However, the Company
identified that tenant and steam income do not arise from the entity’s ordinary activities, and therefore does
not meet the definition of revenue under IFRS 15. As a result, tenant and steam income has been
reclassified to other income retrospectively.
For the year ended September 30, 2018, revenue was previously reported as $9,199,710 and restated as
$8,247,414, due to a reclass of $257,548 to tenant income and $694,748 to steam income. Cost of sales
was previously reported as $2,051,890 and restated as $1,510,101, due to a reclass of $19,725 to tenant
income and $522,064 to steam income. There was no impact on net loss and loss per share.
(c) Other
The Company has adopted narrow scope amendments/interpretations to IFRIC 22 – Foreign Currency
Transactions and Advance Consideration and IFRS 2 – Share Based Payments, which did not have an
impact on the Company’s consolidated financial statements.
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
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 will adopt the standard on
October 1, 2019, using the modified retrospective approach. The modified retrospective approach applies
the requirements of the standard retrospectively with the cumulative effects of initial application recorded
in opening accumulated deficit as at October 1, 2019, and no restatement of the comparative period.
Based on the information available at September 30, 2019, as a result of the initial application of IFRS 16
as at October 1, 2019, the Company anticipates recognizing the following on its statement of financial
position: right-of-use assets of approximately $800,000 (including approximately $16,000 tenant
inducement), and a lease liability of approximately $816,000. The right-of-use assets will be depreciated
on a straight-line basis over the remaining lease term. The lease liability will be carried at amortized cost
with a finance charge recorded from the amortization of the lease liability discount. The depreciation
expense of the right-of-use assets and the finance charge of the lease liability will partially replace the
lease-related expenses recorded in general and administration expense.
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 has 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.
12
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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, 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.
13
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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, 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.
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 2019, two customers represented 80% and 14% respectively of our total revenues (2018 – one customer
represented 81% 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 develops, manufactures, and sells technologically advanced complex products that could
contain defects in design, manufacture and implementation. 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
14
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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.
Manufacturing
The Company has limited experience manufacturing KolourOptik products on a commercial scale. The
Company outsources certain parts of the manufacturing process to a limited number of third parties and
depends on these manufacturers to meet the Company’s needs in a timely and satisfactory manner at a
reasonable cost. Disruptions in the supply chain and manufacturing process could negatively affect the
Company’s revenues, costs, and margins.
The OTF manufacturing process is completed in-house at the Thurso facility. This facility is dependent upon
electricity supplied by a neighbouring pulp mill owned by Fortress Global Enterprises (“Fortress”). Recent
events, such as Fortress’ corporate news and going concern note, indicate that there is a risk that the pulp
operations will be curtailed for a significant period of time. At this time management believes it is very
unlikely that the electrical supply will be disrupted. However, a disruption in the supply of electricity from
Fortress could have a material adverse effect on costs and cash flows, as temporary electricity generation
solutions may be costly and an independent electrical solution may require significant capital investment in
equipment with long order lead times.
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 security and the 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.
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 may 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.
15
Nanotech Security Corp.
Management’s Discussion and Analysis
For the year ended September 30, 2019
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
2020 Outlook
In 2020, the Company will pursue revenue growth by focusing on product sales opportunities with short
sales cycles in both key markets. Management has set the following targets for 2020:
• Develop strategic sales relationships. The Company will expand its sales reach by partnering
with more established OEMs in both the banknote and brand protection market to promote
Nanotech’s products to their existing customer bases.
• Develop strategic manufacturing and product partnerships. Management plans to partner with
select manufacturers who have a proven track record of excellence. These partnerships will reduce
the manufacturing risk associated with scaling up product sales and will also allow the Company to
expand its brand protection product line.
• Revenue diversification. Management believes there are further growth opportunities for OTF
and its KolourOptik®-based products are generating strong interest from banknote and brand
protection customers. Management has set a strategic goal to increase product revenue in fiscal
2020. Contract services awarded for fiscal 2020 at $5.0 million are comparable to fiscal 2019, with
some opportunities for additional awards and revenue growth in fiscal 2020.
The Company will continue to expand its product line and make further investments in its sales and
marketing team and initiatives in order to expand Nanotech’s market reach. In the near-term, management
expects that Adjusted EBITDA losses will persist as cost increases will outpace revenue growth in fiscal
2020. However, these additional expenditures are expected to support revenue growth beyond 2020.
With a strong balance sheet, including $10.3 million in cash and short-term investments and no debt, the
Company is well positioned to continue to develop and pursue its product-based sales and marketing
strategies in 2020.
Recent Events
In September 2019 Mr. Neil McDonnell was appointed to Chair of the Board, replacing Mr. Doug Blakeway,
who continues to serve as a director. In October 2019 Mr. Brian Donnelly was promoted to Executive Vice
President, Sales and Marketing and Ms. Monika Russell was appointed as Chief Financial Officer.
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, 2019 and 2018
Nanotech Security Corp.
September 30, 2019 and 2018
Table of Contents
Independent Auditors’ Report ................................................................................................................. 1
Consolidated Statements of Operations and Comprehensive Loss ....................................................... 4
Consolidated Statements of Financial Position....................................................................................... 5
Consolidated Statements of Changes in Shareholders’ Equity .............................................................. 6
Consolidated Statements of Cash Flows ................................................................................................ 7
Notes to the Consolidated Financial Statements .............................................................................. 8-28
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. (“the Entity”), which comprise:
•
the consolidated statements of financial position as at September 30, 2019 and
September 30, 2018
the consolidated statements of operations and comprehensive loss for the years then
ended
the consolidated statements of changes in shareholders’ equity for the years then ended
the consolidated statements of cash flows for the years then ended
•
•
• and notes to the consolidated financial statements, comprising a summary of significant
•
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated financial position of the Entity as at September 30, 2019 and September 30,
2018, and its consolidated financial performance and its consolidated cash flows for the years
then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards.
Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
•
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
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 Securities Corp.
Page 2
•
the information, other than the financial statements and the auditors’ report thereon,
included in the “Annual report”.
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with
the relevant Canadian Securities Commissions as at the date of this auditors’ report. If,
based on the work we have performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to report that fact in the
auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s
ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
Nanotech Securities Corp.
Page 3
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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.
• Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity's ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditors’ report. However,
future events or conditions may cause the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is Konstantin
Polyakov.
Vancouver, Canada
December 11, 2019
Nanotech Security Corp.
Consolidated Statements of Operations and Comprehensive Loss
Years ended September 30, 2019 and 2018
(In Canadian dollars)
Revenue (notes 4(b) and 17)
Cost of sales (note 18)
Expenses (note 18)
Research and development
General and administration
Sales and marketing
Depreciation and amortization
Restructuring costs (note 20)
2019
2018
$
6,402,702
1,511,865
4,890,837
$
Restated
note 4(b)
8,247,414
1,510,101
6,737,313
1,477,668
2,307,021
2,161,056
1,481,388
787,575
8,214,708
1,407,430
2,532,156
2,018,055
1,485,024
-
7,442,665
Loss from continuing operations before other income
(3,323,871)
(705,352)
Other income
Foreign exchange gain
Finance income (note 10)
Tenant income (note 4(b))
Steam income (note 4(b))
(14,982)
(192,752)
(214,519)
(66,364)
(488,617)
(250,023)
(121,878)
(237,823)
(172,684)
(782,408)
Net income (loss) from continuing operations
(2,835,254)
77,056
Net loss from discontinued operations (note 21(c))
Net loss
-
(2,835,254)
(123,322)
(46,266)
Other comprehensive loss:
Items that may be subsequently reclassified to earnings (loss):
Unrealized foreign exchange loss
on translation of foreign operation (note 21(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.
-
(2,835,254)
$
(98,908)
(145,174)
$
$
$
$
(0.04)
0.00
(0.04)
$
$
$
0.00
0.00
0.00
68,916,001
68,425,673
4
Nanotech Security Corp.
Consolidated Statements of Financial Position
As at September 30, 2019 and 2018
(In Canadian dollars)
Assets
Current assets:
Cash and cash equivalents (note 16(c))
Short-term investments (note 6)
Accounts receivable (note 13(b))
Inventory (note 7)
Prepaid expenses and other assets
Property, plant and equipment (notes 8 and 16(d))
Goodwill (note 9)
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Deposit
Liabilities directly associated with assets held for sale (note 21(a))
Non-current liabilities:
Tenant inducement
Shareholders’ equity
Share capital (note 11(a))
Contributed surplus (note 11(b))
Deficit
Related party transactions (note 15)
Commitments (note 19)
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Directors:
2019
2018
$
2,752,002
7,537,262
503,660
237,264
419,753
11,449,941
$
2,014,764
7,598,857
1,962,969
173,636
125,514
11,875,740
15,684,845
1,388,458
28,523,244
$
16,964,857
1,388,458
30,229,055
$
$
1,232,159
543,368
-
1,775,527
$
1,265,282
-
16,204
1,281,486
16,083
1,791,610
43,653
1,325,139
62,355,479
3,130,852
(38,754,697)
26,731,634
28,523,244
$
61,892,395
2,930,964
(35,919,443)
28,903,916
30,229,055
$
"Neil McDonnell"
Neil McDonnell, Director
"Ronan McGrath"
Ronan McGrath, Director
5
Nanotech Security Corp.
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 2019 and 2018
(In Canadian dollars)
Balance as at October 1, 2017
Net loss
Unrealized foreign exchange loss on translation
Share-based compensation - options (note 11(b)(i))
Share-based compensation - RSUs (note 11(b)(ii))
Foreign exchange reclassified upon disposal of foreign operation (note 21(c))
RSUs vested (note 11(b)(ii))
Balance as at September 30, 2018
Balance as at October 1, 2018
Net loss
Share-based compensation - options (note 11(b)(i))
Share-based compensation - RSUs (notes 11(b)(ii) and 20)
RSUs vested (note 11(b)(ii))
Balance as at September 30, 2019
See accompanying notes to the consolidated financial statements.
Number
of shares
68,395,825
-
-
-
-
-
375,676
68,771,501
68,771,501
-
-
-
428,624
69,200,125
$
$
$
Share
capital
61,426,483
-
-
-
-
-
465,912
61,892,395
61,892,395
-
-
-
463,084
62,355,479
$
$
Contributed
surplus
2,715,137
-
-
264,627
417,112
-
(465,912)
2,930,964
2,930,964
-
362,583
300,389
(463,084)
3,130,852
$
$
Deficit
(35,873,177)
(46,266)
-
-
-
-
-
(35,919,443)
(35,919,443)
(2,835,254)
-
-
-
(38,754,697)
$
$
$
$
$
$
Accumulated
other
comprehensive
loss
(68,905)
-
(98,908)
-
-
167,813
-
$
-
$
-
-
-
-
-
$
-
$
Total
shareholders’
equity
28,199,538
(46,266)
(98,908)
264,627
417,112
167,813
-
28,903,916
$
$
$
28,903,916
(2,835,254)
362,583
300,389
-
26,731,634
6
Nanotech Security Corp.
Consolidated Statements of Cash Flows
Years ended September 30, 2019 and 2018
(In Canadian dollars)
Cash flows provided by (used in):
Operating activities:
Net income (loss) from continuing operations
Items not involving cash:
Depreciation and amortization (note 18)
Share-based compensation (notes 18 and 20)
Unrealized foreign exchange gain
Interest income (note 10)
Other
Non-cash working capital changes (note16(a))
Interest received
Net cash provided by (used in) discontinued
operations (note 21(b))
Cash provided by operating activities
Investing activities:
Purchase of property and equipment (notes 8 and 16(d))
Disposal of short-term investments
Net acquisition of short-term investments
Cash used in investing activities
2019
2018
$
(2,835,254)
$
77,056
1,566,122
662,972
(2,448)
(201,332)
(27,223)
1,578,505
200,927
942,269
1,611,891
681,739
-
(132,774)
6,312
(889,380)
98,892
1,453,736
(16,204)
926,065
76,694
1,530,430
(249,468)
203,314
(141,660)
(187,814)
(2,701,820)
-
(7,598,857)
(10,300,677)
Effect of foreign exchange on cash and cash equivalents
(1,013)
(98,908)
Increase (decrease) in cash and cash equivalents
737,238
(8,869,155)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2,014,764
2,752,002
$
10,883,919
2,014,764
$
See supplementary cash flow information (note 16)
See accompanying notes to the consolidated financial statements.
7
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
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, and commercial branding.
2. Basis of preparation
(a) Statement of compliance
These consolidated financial statements are prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These
consolidated financial statements were approved and authorized for issue by the Company’s Board of
Directors on December 11, 2019.
Certain comparative figures in the consolidated statements of operations and comprehensive loss have
been reclassified to conform to the current period’s presentation. This reclassification had no impact on the
net loss or total comprehensive loss.
(b) Basis of measurement
These consolidated financial statements are presented in Canadian dollars and have been prepared on a
historical cost basis, except for certain financial instruments which are measured at fair value.
(c) Use of estimates, assumptions, and judgments
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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.
Management evaluates goodwill for impairment annually as at September 30th. Impairment tests
involve considerable use of judgment 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 its 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.
8
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
2. Basis of preparation (continued)
(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 Tactical’s
dissolution (note 21). All intercompany balances and transactions are eliminated on consolidation. The
financial statements of subsidiaries are included in 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 profit or loss.
(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
profit or loss upon disposition of a foreign operation (note 21(c)).
3. Significant accounting policies
(a) Revenue recognition
The Company recognizes revenue when control of goods or services has been transferred to the customer.
Revenue is measured at the fair value of consideration to which the Company expects to be entitled to,
including variable consideration, if any, to the extent that it is highly probable that a significant reversal will
not occur.
Revenue from contract services is recognized over time as those services are provided. Invoices for
contract services are issued on a monthly basis and are usually payable within 30 days. Revenue from the
sale of products is recognized when customers obtain control, which occurs when products are shipped.
Invoices are generated at that point in time and are usually payable within 30 days. The Company does not
offer any discounts or returns.
(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.
9
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(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, 2019 and 2018, all development costs have been expensed.
(d) Government assistance and investment tax credits
Government assistance includes government grants and investment tax credits and is recognized when
there is reasonable assurance the Company will comply with the relevant conditions and that 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 profit or loss is reversed immediately in the
period that the assistance becomes repayable.
Refundable 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. Non-refundable investment tax credits are recorded using the flow-
through method, whereby the credits are accounted for as a reduction of tax expense and recognized as a
tax asset to the extent that it is probable that taxable profits will be available against which they can be
utilized.
(e) Financial instruments
The Company adopted IFRS 9 – Financial instruments on October 1, 2018. The accounting policies listed
below reflect IFRS 9. See Note 4(a) for a discussion of comparisons to IAS 39 – Financial Instruments
Recognition and Measurement, which was in effect for the comparative period.
Financial assets and financial liabilities are recognized when the Company becomes a party to the
contractual provision of a financial instrument. Financial assets are derecognized when the contractual
rights to receive cash flows from the financial asset expire. Financial liabilities are derecognized when
obligations under the contract expire, are discharged, or canceled.
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 an intention to settle on a
net basis or realize the asset and settle the liability simultaneously.
(i) Financial assets
The following accounting policies apply to the classification of financial assets:
• Amortized Cost – the asset is held within a business model whose objective is to collect contractual
cash flows, and the contractual terms give rise to cash flows that are solely payments of principal
and interest.
• Fair Value Through Other Comprehensive Income – cash flows arising from the asset are solely
payments of principal and interest, and the asset is held in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets.
• Fair Value Through Profit and Loss – all financial assets not classified as measured at Amortized
Cost or Fair Value Through Other Comprehensive Income are measured at Fair Value Through
Profit and Loss. On initial recognition, the Company may irrevocably designate a financial asset as
10
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(e) Financial instruments (continued)
(i) Financial assets (continued)
Fair Value Through Profit and Loss if doing so eliminates or significantly reduces an accounting
mismatch that would otherwise arise under Amortized Cost or Fair Value Through Other
Comprehensive Income.
A financial asset (unless it is a trade receivable without a significant financing component that is initially
measured at the transaction price) is initially measured at fair value plus transaction costs that are
directly attributable to its acquisition (except items at Fair Value Through Profit and Loss, which do not
include transaction costs).
The following accounting policies apply to the subsequent measurement of financial assets:
• Amortized Cost – the asset is subsequently measured at amortized cost using the effective interest
method. Interest income, foreign exchange gains or losses and impairment are recognized in profit
or loss. Any gain or loss on derecognition is recognized in profit or loss.
• Fair Value Through Other Comprehensive Income – the asset is subsequently measured at fair
value. Interest income calculated using the effective interest rate method, foreign exchange gains
or losses and impairment are recognized in profit or loss. Other net gains and losses are recognized
in other comprehensive income. On derecognition, gains and losses accumulated in other
comprehensive income are reclassified to profit or loss.
• Fair Value Through Profit and Loss – the asset is subsequently measured at fair value. Net gains
and losses, including any interest income, are recognized in profit or loss.
The Company’s financial assets, which include cash and cash equivalents, short-term investments,
and accounts receivable, are classified as amortized cost.
(ii) Financial liabilities
Financial liabilities are classified as either financial liabilities at fair value through profit or loss or as
other financial liabilities.
Other financial liabilities include trade and other payables and non-trade payables. 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 profit or loss. Embedded
derivatives are recorded at fair value through profit or loss. During the years ended September 30, 2019
and 2018, the Company did not have any derivative instruments or 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.
(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.
11
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(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, 2019 and 2018, 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.
(k) Impairment
(i) Financial assets
The Company recognizes loss allowances for expected credit losses on financial assets measured at
amortized cost. Loss allowances for trade receivables are measured at an amount equal to lifetime
expected credit losses. Lifetime expected credit losses are the result of all possible default events over
the expected life of a financial instrument. Expected credit losses are a probability-weighted estimate
of credit losses and credit losses are measured as the present value of cash shortfalls from a financial
asset. The Company determines whether the credit risk of a financial asset has increased significantly
since initial recognition and when estimating lifetime expected credit losses, by considering reasonably
available quantitative and qualitative information based on the Company’s credit risk experience,
forward looking information, and other reasonable estimates.
12
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(k) Impairment (continued)
(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 a CGU or
groups of CGUs based on the level at which it is monitored for internal reporting purposes. An
impairment loss is recognized in profit or loss 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 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 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.
(m) Share-based compensation – stock options
The Company issues stock options to directors, consultants, and employees pursuant to its stock option
plan. 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 profit or loss. When stock options are
exercised, any consideration paid by directors, consultants, and employees, as well as the related share-
based compensation, is credited to share capital.
13
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(n) Share-based compensation - restricted share units
During the year ended September 30, 2019, the Company issued RSUs pursuant to its 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
profit or loss 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 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 offset on
different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax
assets and liabilities will be realized simultaneously.
Deferred tax assets are recognized for unused tax losses, tax credits, and deductible temporary differences,
to the extent that it is probable that future taxable profits will be available against which they can be utilized.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realized.
(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 substantially transfers
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 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 profit or loss 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.
14
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
3. Significant accounting policies (continued)
(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.
(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. 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. Change in accounting policy
(a) IFRS 9 – Financial Instruments
In July 2014, the IASB issued IFRS 9 – Financial Instruments, which replaces 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.
The Company adopted IFRS 9 on October 1, 2018. The adoption of IFRS 9 did not have an impact on the
Company’s consolidated financial statements and related disclosures. With respect to classification and
measurement, the Company has applied the exemption not to restate comparative information for prior
periods. The determination of the business model within which a financial asset is held has been made on
the basis of facts and circumstances that existed at the date of initial application.
The following table explains the original measurement categories under IAS 39 and the new measurement
categories under IFRS 9 for each class of financial assets as at October 1, 2018.
15
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
4. Change in accounting policy (continued)
(a) IFRS 9 – Financial Instruments (continued)
Financial assets
IAS 39
Cash and cash equivalents
Loans & receivables
Short-term investments
Loans & receivables
Trade and other receivables
Loans & receivables
IFRS 9
Amortized cost
Amortized cost
Amortized cost
There was no change in classification of financial liabilities as a result of the adoption of IFRS 9. There are
no differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption
of IFRS 9.
(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.
The Company adopted IFRS 15 on October 1, 2018. Its adoption did not have a material impact on the
Company’s consolidated financial statements and related disclosures, except for the reclassification of
tenant and steam income, as described below. The Company has applied IFRS 15 in accordance with the
full retrospective transitional approach without applying any practical expedients.
IFRS 15 requires entities to recognize revenue when ‘control’ of goods or services transfers to the customer
whereas the previous standard, IAS 18, required entities to recognize revenue when the ‘risks and rewards’
of goods or services transfer to the customer. The Company concluded there is no change in the timing of
revenue recognition under IFRS 15 compared to the previous standard as the point of transfer of risks and
rewards of goods and services and transfer of control occur at the same time. However, the Company
identified that tenant and steam income do not arise from the entity’s ordinary activities, and therefore does
not meet the definition of revenue under IFRS 15. As a result, tenant and steam income have been
reclassified to other income retrospectively.
For the year ended September 30, 2018, revenue was previously reported as $9,199,710 and restated as
$8,247,414, due to a reclass of $257,548 to tenant income and $694,748 to steam income. Cost of sales
was previously reported as $2,051,890 and restated as $1,510,101, due to a reclass of $19,725 to tenant
income and $522,064 to steam income. There was no impact on net loss and loss per share.
(c) Other
The Company has adopted narrow scope amendments/interpretations to IFRIC 22 – Foreign Currency
Transactions and Advance Consideration and IFRS 2 – Share Based Payments, which did not have an
impact on the Company’s consolidated financial statements.
16
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
5. New standards and interpretations not yet adopted
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 will adopt the standard on October 1, 2019, using the modified
retrospective approach. The modified retrospective approach applies the requirements of the standard
retrospectively with the cumulative effects of initial application recorded in opening accumulated deficit as at
October 1, 2019, and no restatement of the comparative period.
Based on the information available at September 30, 2019, as a result of the initial application of IFRS 16 as at
October 1, 2019, the Company anticipates recognizing the following on its statement of financial position: right-
of-use assets of approximately $800,000 (including approximately $16,000 tenant inducement), and a lease
liability of approximately $816,000. The right-of-use assets will be depreciated on a straight-line basis over the
remaining lease term. The lease liability will be carried at amortized cost with a finance charge recorded from
the amortization of the lease liability discount. The depreciation expense of the right-of-use assets and the
finance charge of the lease liability will partially replace the lease-related expenses recorded in general and
administration expense.
6. Short-term investments
Short-term investments of $7,537,262 (2018 - $7,598,857) consist of cashable term deposits held with a
Canadian chartered bank. The term deposits have maturity dates between December 18, 2019 and December
23, 2019. Interest rates range between 1.94% and 1.97%.
7.
Inventory
Raw materials
Work in progress
Finished goods
2019
$ 134,435
100,087
2,742
$ 237,264
2018
$ 160,550
13,086
-
$ 173,636
There were inventory write-downs of $47,513 during the year ended September 30, 2019 (2018 - $nil).
For the year ended September 30, 2019, the Company recognized inventories of $351,734 (2018 - $290,864) as
expensed through cost of sales.
17
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
8. Property, plant and equipment
Land
Building and
leasehold
improvement
Manufacturing
equipment
Laboratory,
software, and
office equipment
Total
Cost
Balance as at
October 1, 2017
Additions
Balance as at
September 30, 2018
Additions
Balance as at
September 30, 2019
Accumulated
depreciation
Balance as at
October 1, 2017
Depreciation expense
Balance as at
September 30, 2018
Depreciation expense
Balance as at
September 30, 2019
Net book value
September 30, 2019
September 30, 2018
$ 141,700 $ 3,871,578 $ 15,922,956
2,083,180
487,549
-
$ 245,055 $ 20,181,289
2,719,750
149,021
141,700
-
4,359,127
194,030
18,006,136
21,761
394,076
77,596
22,901,039
293,387
$
141,700
$ 4,553,157 $ 18,027,897
$ 471,672 $ 23,194,426
$
-
-
-
-
$
493,462 $
203,203
3,669,053
1,329,549
$ 161,776 $
79,139
4,324,291
1,611,891
696,665
176,239
4,998,602
1,301,842
240,915
95,318
5,936,182
1,573,399
$
-
$
872,904 $
6,300,444
$ 336,233 $
7,509,581
141,700
$
$ 141,700
$ 3,680,253 $ 11,727,453
$ 3,662,462 $ 13,007,534
$ 135,439 $ 15,684,845
$ 153,161 $ 16,964,857
Additions, disposals, and depreciation for the years ended September 30, 2019 and 2018 are for continuing
operations.
Included in amortization for the year ended September 30, 2018 is an impairment charge of $29,872 recorded
against certain assets in order to bring them down to their recoverable values.
9. Goodwill
The Company performs a goodwill impairment test 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 recoverable amount of the CGU is measured as its value in use, estimated using discounted cash flows.
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 ten year forecast period, with a terminal value extrapolated into the future over
the estimated useful life of the CGU.
18
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
9. Goodwill (continued)
The key assumptions used in performing impairment tests are as follows:
• Discount rate:
Management applied a discount rate of 12% (2018 – 12%) in calculating the recoverable amount. 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.
• Terminal growth rate:
Management has assumed a terminal growth rate of nil (2018 – nil) beyond the ten year term, which
management deems appropriate given the early stages of the Company’s commercialization.
• Forecast period:
Management used a ten year forecast period as this was deemed more appropriate for a company
commercializing a new technology and entering new markets.
Management performs sensitivity analysis on the key assumptions. Sensitivity analysis indicates reasonable
changes to key assumptions will not result in an impairment loss.
10. Finance (income) expense
Interest income from cash and cash
equivalents and short-term investments
Other interest expenses
11. 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, 2017
RSUs vested
Balance as at September 30, 2018
RSUs vested
Balance as at September 30, 2019
There are no preferred shares issued and outstanding.
2019
2018
$ (201,332)
8,580
$ (192,752)
$ (132,774)
10,896
$ (121,878)
Number of shares
68,395,825
375,676
68,771,501
428,624
69,200,125
Amount
61,426,483
465,912
61,892,395
463,084
62,355,479
$
$
$
19
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
11. Share capital (continued)
(b) Share-based payment plans
(i) Stock option plan
Under the Company’s stock option plan, the maximum number of shares that may be reserved for grant
of options at any point in time is 10% of the outstanding shares, less any shares reserved for issuance
under the RSU plan. The following stock options were outstanding as at September 30, 2019:
Balance as at October 1, 2017
Granted
Balance as at September 30, 2018
Granted
Expired
Balance as at September 30, 2019
Number
of options
2,040,000
567,500
2,607,500
1,677,500
(750,000)
3,535,000
Weighted average
exercise price
1.35
1.35
$
$
$
1.35
0.61
0.82
0.95
The following table summarizes information pertaining to the Company’s stock options outstanding as
at September 30, 2019:
Options outstanding
Options exercisable
Range of
exercise
prices
$0.00 - $1.00
$1.01 - $1.25
$1.26 - $1.65
Number of
options
outstanding
1,677,500
1,126,500
731,000
3,535,000
Weighted
average
remaining
contractual
life (years)
3.99
1.44
2.51
2.87
Weighted
average
exercise
price
0.61
1.14
1.42
0.95
$
$
Number of
options
exercisable
821,250
1,076,500
731,000
2,628,750
Weighted
average
exercise
price
0.61
1.13
1.42
1.05
$
$
The Company calculates the fair value of 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, 2019 and 2018:
Risk free interest rate
Expected life
Expected volatility
Expected dividends
Average fair value
2019
2.0%
4.7 years
45%
Nil
$ 0.23
2018
1.9%
4.6 years
43%
Nil
$ 0.52
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
2019
$ 362,583
2018
$ 264,627
20
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
11. Share capital (continued)
(b) Share-based payment plans (continued)
(ii) Restricted share unit plan
Under the Company’s RSU plan, the maximum number of shares that may be reserved for issuance is
fixed at 2,700,000. As at September 30, 2019, 905,927 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, 2019:
Balance as at October 1, 2017
Forfeited
Granted
Vested
Balance as at September 30, 2018
Forfeited
Granted
Vested
Balance as at September 30, 2019
Number
of RSUs
529,560
(22,060)
238,782
(375,676)
370,606
(15,120)
298,640
(428,624)
225,502
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% vested
on September 1, 2019, and the remaining 40% will vest on September 1, 2020.
During the year ended September 30, 2019 the Company granted 298,640 RSUs. The weighted
average fair value was $0.56 per share. 25% of these RSUs vested on September 1, 2019, 35% will
vest on September 1, 2020, and the remaining 40% will vest on September 1, 2021.
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
12. Capital risk management
2019
$ 208,189
2018
$ 417,112
The Company’s objectives and policies for managing capital are to maintain a strong capital base to maintain
investor, creditor and market confidence, sustain future development of the business, and 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.
21
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
13. 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 financial
assets at amortized cost. Financial assets at amortized cost are initially recognized at fair value and
subsequently carried at amortized cost less any impairment. 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.
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, 2019 and September 30, 2018, the balance of the allowance account for credit losses was
$nil.
Pursuant to their respective terms, accounts receivable was aged as at September 30, 2019 and 2018:
0 – 30 days
31 – 60 days
61 – 90 days
Greater than 90 days
Total accounts receivable*
2019
380,092
48,918
7,735
22,584
459,329
2018
1,123,809
553,536
-
282,432
1,959,777
$
$
$
$
*Certain balances included within accounts receivable such as GST, QST and PST receivables are not financial
instruments and as such, are excluded from the note disclosure.
There is a possibility of increased customer credit risk due to the ongoing global recessionary trends. As at
September 30, 2019, the Company’s accounts receivable are made up of approximately 46% (2018 - 46%)
government trade receivables and the balance of the outstanding accounts receivable are spread over
several other customers.
During the year ended September 30, 2019, the Company had two customers who represented greater
than 10% of total revenues. They represented approximately 80% and 14% respectively of total revenues.
(2018 – one customer represented approximately 81% of total revenues).
22
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
13. Financial instruments and risk exposures (continued)
(b) Credit risk (continued)
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, 2019 totaled $2,752,002 (2018 - $2,014,764), short-
term investments of $7,537,262 (2018 - $7,598,857) and accounts receivables of $459,329 (2018 -
$1,959,777), representing the maximum exposure to credit risk of these financial assets.
(c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company has in place a planning and budgeting process which helps determine the funds required to
ensure the Company has the appropriate liquidity to meet its operating and growth objectives.
As at September 30, 2019, the Company had cash and cash equivalents of $2,752,002 (2018 - $2,014,764),
short-term investments of $7,537,262 (2018 - $7,598,857), and accounts receivable of $459,329 (2018 -
$1,959,777) for a total of $10,748,593 (2018 - $11,573,398). 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 of 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.
23
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
14. 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 (loss) 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
Change in unrecognized deferred tax assets
Income tax recovery
2019
$ (2,835,254)
26.86%
$
(761,549)
(9,935)
182,719
(279,553)
-
868,318
-
$
$
2018
77,056
26.73%
20,597
(381,819)
171,849
(139,148)
(469,263)
797,784
-
(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
Net deferred tax asset
(c) Deferred income tax assets and liabilities
2019
2018
$ 2,746,799
$ 2,790,683
(2,746,799)
-
$
(2,790,683)
-
$
The Company did not recognize deferred tax assets for the following deductible temporary differences:
Non-capital loss carry forwards
Capital loss carry forwards
Non-refundable investment tax credits
Other temporary differences
Unrecognized deductible temporary differences
(d) Loss carry forwards
$
2019
9,904,837
5,732,539
1,053,322
7,722,972
$ 24,413,670
$
2018
8,520,026
5,732,539
668,251
7,345,635
$ 22,266,451
As at September 30, 2019, the Company has tax loss carry forwards of approximately $20,147,513 (2018
- $18,948,528). The Company’s tax loss carry forwards will expire, if not utilized, commencing in 2030. The
Company recognizes the benefit of tax losses only to the extent of anticipated future taxable income. As at
September 30, 2019, the Company has capital losses of approximately $5,732,539 (2018 - $5,732,539)
that may be carried forward indefinitely to apply against future years’ capital gains.
24
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
14. Income taxes (continued)
(e) R&D and tax credit attributes
As at September 30, 2019, the Company had unclaimed tax deductions of scientific research and
experimental development expenditures of $3,548,000 (2018 - $2,322,000) that are available to reduce
taxable income in future years and may be carried forward indefinitely. As at September 30, 2019, the
Company has federal investment tax credits of $836,000 (2018 - $555,000) and provincial investment tax
credits of $217,000 (2018 - $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.
15. Related party transactions
(a) The remuneration of key management personnel
Salaries, accrued bonuses, employee benefits and
director fees
Share-based payments
Restructuring costs (note 20)
2019
2018
$
712,298
255,476
787,575
$ 1,755,349
$ 1,330,306
493,881
-
$ 1,824,187
(b) As at September 30, 2019, amounts owing to a company controlled by a director of the Company included
in accounts payable and accrued liabilities were $90,938 (2018 - $191,433). These payables represent
amounts owing under the terms of an executive services consulting agreement, including payments owing
upon early termination of this agreement (note 20).
(c) Legal and professional fees, taxes and disbursements totaling $42,485 for the year ended September 30,
2019 (2018 - $81,776) were incurred with a law firm of which a director of the Company is a partner. As at
September 30, 2019, amounts owing to this company included in accounts payable and accrued liabilities
were $nil (2018 - $50,780). During the year ended September 30, 2019, the Company retained new legal
counsel and moved its registered and records office.
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.
16. 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 16(d))
Deposit
2019
$ 1,460,592
(56,352)
(295,475)
(73,628)
543,368
$ 1,578,505
2018
$ (588,527)
(21,928)
62,360
(184,114)
(157,171)
$ (889,380)
(b) Income taxes
The Company did not pay any income taxes during the years ended September 30, 2019 and 2018.
25
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
16. Supplementary cash flow information (continued)
(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
$
2019
752,911
1,999,091
$ 2,752,002
$
2018
292,688
1,722,076
$ 2,014,764
(d) Supplemental disclosure of non-cash financing activities
As at September 30, 2019, property, plant and equipment included in accounts payable was $61,849 (2018
- $17,930).
17. Revenue and segmented information
The Company’s continuing operations currently consist of one operating segment. Within this operating
segment revenue is disaggregated by type as follows:
Development contracts
Products and services
2019
$ 5,113,764
1,288,938
$ 6,402,702
2018
$ 7,234,895
1,012,519
$ 8,247,414
For the year ended September 30, 2019, sales within Canada were $354,518 (2018 - $160,881) and sales
outside Canada were $6,048,184 (2018 - $8,086,533).
During the year ended September 30, 2019, the Company had two customers who represented greater than
10% of total revenues. They represented approximately 80% and 14% respectively of total revenues (2018 –
one customer represented approximately 81% of total revenues).
18. Nature of expenses
The expenses presented below represent total cost of sales, research and development, sales and marketing,
general and administration expenses, depreciation and amortization and restructuring costs.
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
Restructuring costs (note 20)
2019
$ 3,302,635
570,772
1,566,122
323,996
974,924
387,533
725,709
379,193
708,114
787,575
$ 9,726,573
2018
$ 3,464,740
681,739
1,613,491
332,586
858,417
573,305
645,560
234,917
548,011
-
$ 8,952,766
26
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
19. Commitments
(a) As at September 30, 2019, the Company is committed to operating leases, in respect of office space, and
to contracted equipment maintenance for the following amounts:
2020
2021
2022
2023
$
$
365,523
246,102
240,183
145,924
997,732
(b) Certain nano-optic products are subject to a 3% sales royalty in favour of Simon Fraser University where
certain elements of the nano-optic technology originated. Royalties were $828 during the year ended
September 30, 2019 (2018 - $nil).
Subsequent to September 30, 2019, the Company renewed office leases for a 5-year term ending in 2025.
20. Restructuring costs
On December 21, 2018, the Board of Directors implemented an executive transition plan, under which Mr. Doug
Blakeway, the former CEO, transitioned his responsibilities to Mr. Troy Bullock. Under the terms of this transition
plan, Mr. Blakeway’s executive services consulting agreement was terminated, triggering the following early
termination benefits as laid out in the agreement: two years base salary, a pro-rated performance bonus, and
vesting of all outstanding share-based awards. The Company incurred restructuring costs of $787,575 as at
September 30, 2019 (September 30, 2018 - $nil), of which $92,200 represented share-based compensation
related to the accelerated vesting of Mr. Blakeway’s RSUs.
In January 2019, termination benefits were paid and 187,500 shares were issued to Mr. Blakeway upon vesting
of his RSUs. Restructuring costs of $84,375 remain accrued as at September 30, 2019 (September 30, 2018 -
$nil).
21. Discontinued operations
On September 21, 2017, the Board of Directors made the determination that the Company 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
dissolved and struck from the corporate register.
(a) Assets and liabilities of Tactical classified as held for sale
Accounts payable and accrued liabilities
Liabilities directly associated with assets held for sale
(b) Net cash flows provided by (used in) discontinued operations
Net loss from discontinued operations
Foreign exchange reclassified upon disposal
of foreign operation
Non-cash working capital changes
2019
-
-
2019
-
-
(16,204)
(16,204)
$
$
$
$
2018
16,204
16,204
2018
(123,322)
167,813
32,203
76,694
$
$
$
$
27
Nanotech Security Corp.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended September 30, 2019 and 2018
21. Discontinued operations (continued)
(c) Net loss from discontinued operations, net of income taxes
Revenue
Cost of sales
Gross Profit
Expenses
General and administration
Sales and marketing
Income before other expenses
Other (income) expense
Finance expense
Gain on disposal of foreign operation (note 21(d))
Foreign exchange reclassified on disposal of foreign
operation
Net loss from discontinued operations
Other comprehensive loss
Unrealized foreign exchange loss on translation of
foreign operation
Net comprehensive loss from discontinued operations
$
$
2019
-
-
-
$
2018
827,256
454,573
372,683
311,217
14,994
326,211
46,472
3,419
(1,438)
167,813
169,794
(123,322)
(98,908)
$
(222,230)
-
-
-
-
-
-
-
-
-
-
-
(d) The effect of the disposal of Tactical on the financial position of the Company on June 29, 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)
28