EX-99.5 6 ex99_5.htm EXIBIT 99.5 Exibit 99.5















MICROMEM TECHNOLOGIES INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT APRIL 30, 2005
AND FOR THE THREE MONTHS THEN ENDED

(Unaudited - See Notice to Reader)


MICROMEM TECHNOLOGIES INC. (“the Company”)
 



Notice to Reader

The management of Micromem Technologies Inc. is responsible for the preparation of the accompanying interim financial statements. The interim financial statements as at April 30, 2005 and for the quarter then ended have been prepared in accordance with accounting principles generally accepted in Canada and are considered by management to represent fairly the financial position, operating results and cash flow of the Company.

These interim financial statements have not been reviewed by an auditor. These interim financial statements are unaudited and include all adjustments, consisting of normal and recurring items, that management considers necessary for a fair presentation of the consolidated financial position, results of operations and cash flows.




“Joseph Fuda”
(signed) Joseph Fuda, President and CEO




“Dan Amadori”  
(signed) Dan Amadori, Chief Financial Officer  


June 29, 2005


 

MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheet
(Expressed in United States Dollars)
(See Note2 - Going Concern)
(Unaudited)


 
    
April 30, 2005 (Unaudited)
    
January 31, 2005 (Unaudited
)
  
October 31, 2004 (Audited
)
                     
Assets
                    
Current assets
                    
Cash and cash equivalents
  
$
1,127,046
  
$
734,346
  
$
350,504
  
Term deposits
    
86,547
    
87,547
    
87,243
  
Deposits and other receivables (Note 5)
    
106,241
    
72,174
    
33,562
  
     
1,319,600
    
894,067
    
471,309
  
Capital assets (note6)
    
2,469
    
2,697
    
2,925
  
Patents and trademark (Note7)
    
-
    
-
    
-
  
Royalty rights (Note 4 and Note 10)
    
-
    
-
    
-
  
     
1,322,069
    
896,764
    
474,234
  
                     
Liabilities and Shareholders’ Equity
                    
Current liabilities:
                    
Accounts payable and accrued liabilities
   
456,006
    
449,474
    
436,624
  
                     
Shareholders’ equity”
                    
Share capital: (Note 8)
                    
Authorized:
                    
2,000,000 special preference shares, redeemable, voting
 
 
 
 
 
 
 
 
 
 
Unlimited common shares without per value
                    
Issued and outstanding:
                    
62,212,021 common shares
    
33,657,787
    
32,764,787
    
32,103,787
  
Contributed surplus (Note 8 (b) and 9)
    
18,620,573
    
18,620,573
    
18,418,370
  
Deficit accumulated during the development stages
    
(51,412,297
)
  
(50,938,070
)
  
(50,484,547
)
     
866,063
    
447,290
    
37,610
  
                     
 ____  
$
1,322,069
  
$
896,764
  
$
474,234
  

Commitments (Note 13)
Commitments (Note 14)

“Joseph Fuda” (sign)
Joseph Fuda, Director

“David Sharpless” (sing)
David Sharpless, Director

See accompanying notes to the consolidated financial statements




 

 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheet
(Expressed in United States Dollars)
(For the Three months ended April 30, 2005 (with comparative data))
(Unaudited)


 
    
Apr .30, 2005
    
Apr .30, 2005
    
Apr .30, 2004
    
Apr .30, 2004
    
Period from September 03, 1997 to April 30, 2005
  
 
    
(3 mos)
    
(6 mos
)
  
(3 mos
)
  
(6 mos
)
      
Cash flow from operating activities:
                               
Net loss for the period
  
$
(474,227)
  
$
(927,750)
  
$
(70,876)
  
$
(263,170)
  
$
(33,582,838)
  
Adjust to reconcile loss for the period to net cash used in operating activities
                                
Amortization of parents and trademarks
     -      -      -      -     
67,596
  
Amortization of capital assets
    
228
    
456
    
92
    
3,860
    
527,217
  
Loss on sales of investment
     -      -      -      -     
49,810
  
Write down of investment
     -      -      -      -     
61,020
  
Loss on disposal of capital assets
     -      -      -      -     
65,460
  
Write-down of royalty rights
     -      -      -      -     
10,000,000
  
Write-down of patents and trademarks
     -      -      -      -     
299,820
  
Stock option expense
     -     
202,203
     -      -     
212,223
  
Share compensation expense
     -      -      -      -     
7,285,696
  
Non-cash wage and salaries
     -      -      -      -     
34,000
  
Decreas (increase)in deposits and other receivables
    
(34,067)
    
(72,179)
    
(62,910)
    
(62,601)
    
(94,644)
  
Increase (decrease) in accounts payable and accured ilabilities
    
6,532
    
19,382
    
91,447
    
48,730
    
349,962
  
Net cash used in operating activities
    
(501,534)
    
(777,888)
    
(99,321)
    
(370,641)
    
(14,727,678)
  
                               
Cash flows from investing activities:
     -      -      -      -         
Capital assets, net
     -      -     
(1,109)
    
(1,109)
    
(729,604)
  
Proceed on disposal of capital assets
     -      -      -      -     
134,458
  
Patents and trademarks
     -      -      -      -     
(367,416)
  
Sale of available-for-sale Investment
     -      -      -      -     
260,641
  
Royalty rights
     -      -      -      -     
(2,000,000)
  
Term Deposit
    
1,234
    
930
    
-905
    
143,028
    
(86,313)
  
Net cash provided by (used in)investing activities
    
1,234
    
930
    
-2,014
    
141,919
    
(2,788,234)
  
                                 
 Cash flows from financing activities:                                
 Issue of common shares
     893,000      1,553,500      205,000      278,000      18,062,233   
 Net proceeds from shareholders' Loan
                             544,891   
 Loan proceeds from Avanticorp International Inc.
                             112,031   
 Rights issue Costs
                             (76,197)   
Net cash provided by (used in)investing activities     893,000       1,553,500       205,000       278,000      18,788,234   
                                 
Increase (decrease) in cash and sach equivalents
    
392,700
    
776,542
    
103,665
    
49,278
    
1,127,046
  
                                 
Cash and cash equivelents, beginning of period
    
734,346
    
350,504
    
24,846
    
79,233
     -   
                                 
Cash and cash equivelents, end of period
  
$
1,127,046
  
$
1,127,046
  
$
128,511
  
$
128,511
    
1,127,046
  
                                 
Supplemental sach flowinformation:
                                
Interest paid
     -      -      -      -     
76,987
  
Income taxes paid
     -      -      -      -     
66,722
  
 
See accompanying notes to the consolidated financial statements




MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheet
(Expressed in United States Dollars)
(For the Three months ended April 30, 2005 (with comparative data))
(Unaudited)

 
    
Apr .30, 2005
    
Apr .30, 2005
    
Apr .30, 2004
    
Apr .30, 2004
    
Period from September 03, 1997 to April 30, 2005
  
 
    
(3 mos)
    
(6 mos
)
  
(3 mos
)
  
(6 mos
)
      
Revenue:
                                
Interest and other income
  
$
301
  
$
590
  
$
3,658
  
$
7,316
  
$
531,974
  
Cost and expences (income):
                                
Adm inistration
     43,240      91,840      19,404     38,808    
2,241,879
  
Professional fees (Notes 8 (b) and 12 (c))
    
253,653
    
384,727
    
(9,838)
    
(19,676)
    
3,549,693
  
Wages and salaries (Note 12 (b))
     19,996      31,230      10,194     20,388    
9,400,404
  
Research and development (Notes 6 and 13)
     116,869     122,511     40,568     81,136    
6,517,203
  
Travel and rntertainment
    37,936      71,067      6,080     12,160    
1,138,649
  
Amortization of patents and treadmarks
     -      -      -      -     
67,596
  
Amortization of capital assets (Note 6)
     228      456      92      184     
341,997
  
Operating leases
     -     
202,203
     -      -     
109,412
  
Loses on sale of investment
     -      -      -      -     
54,606
  
Write-down of investment
     -      -      -      -     
61,020
  
Wrire-down of royalty rights (Note 10)
    
- 
    
- 
    
- 
     -     
10,000,000
  
Wrire-down of patents and trademarks (Note 7)
     -      -      -      -     
299,820
  
  Stock compersation expense (Note 8b)
           202,203                  202,203  
Interst expence
     -       -       -       -       75,027  
 Loss on sale of capital assets
     -                         65,460  
 Unrealized foreign exchange loss (gain)
     2,606      24,306      8,034      16,068      (29,834)  
Stock compersation expense
    
-  
    
- 
    
- 
    
- 
    
-  
  
   
474,528
    
928,340
    
74,534
    
149,068
    
34,095,135
  
                               
Loss before income taxes
  
$
 (474,227)      (927,750)      (70,876)     (141,752)     (33,563,16)  
                                 
Provision for (recovery of) income tax (Note 11)
     -      -     
- 
    
- 
    
19,677
  
                                 
Net loss for the period
   $ (474,227)     (927,750)      (70,876)      (141,752)    
33,582,838
  
                     
Deflict accumulated during the development stage, beginning of period   $ (50,938,070)   $ (50,484,574)   $ (31,903,034)   $ (31,710,740)  
-
 
Restatement for stock     -      -      -      -     
(2,000,000)
  
comensation expense (Note 8b)    
 
    
 
    
(16,459,509)
    
 
    
(17,829,459)
  
Deflict accumulated during the developement stage, end of period
   $
(51,412,297)
   $
(51,412,297)
    
(48,433,419)
    
(31,852,492)
    
(51,412,297)
  
                                 
Lose per share -basic and diluted
     (0.01)     (0.02)      (0.001)      (0.00)      (0.74)   
                               
Weighted average number of shares     61,281,015     59,491,771     49,271,317     50,295,374    
45,371,735
  
 
See accompanying notes to the consolidated financial statements





MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Expressed in United States dollars)

April 30, 2005

   
Number of Shares
  
Share Capital
  
Contributed
Surplus
  
Deferred Share Compensation
  
Deficit
Accumulated
During Development Stage
  
Micromem share capital, October 31, 1998
Exercise of director’s stock options
Pageant share capital, October 31, 1998
Net loss for the year
Common shares of Pageant, December 4, 1998
Assigned fair value of net assets (Note 3(b) (iv))
    
3,490,643
490,000
-
-
-
32,000,000
  
$
 
 
 
 
-
-
1
-
4,999
549,140
  
$
 
 
 
 
-
-
-
-
-
-
  
$
 
 
 
 
-
-
-
-
-
-
  
$
 
 
 
 
-
-
-
(500,992)
-
-
  
Micromem share capital, September 11, 1999
Exercise of common share purchase warrants for cash
Private placement of common shares for cash, May 17, 1999
Shareholder loan forgiven (Note 9)
Exercise of stock options for cash
Net loss for the year
    
35,980,643
120,676
350,000
-
100,000
-
    
554,140
164,053
1,050,000
-
300,000
-
    
-
-
-
544,891
-
-
    
-
-
-
-
-
-
    
(500,992
-
-
-
-
(5,207,787
)
)
Balance, October 31, 1999
Exercise of common share purchase warrants for cash
Exercise of stock options for cash
Deferred share compensation (Note 12 (a))
Private placement of common shares for cash, February 10, 2000
Common shares issued pursuant to compensation agreements, March 15, 2000
Net loss for the year
    
36,551,319
182,087
100,000
-
2,000,000
901,110
-
    
2,068,193
274,717
300,000
-
5,000,000
4,206,447
-
    
544,891
-
-
2,711,881
-
-
-
    
-
-
-
(453,219)
-
-
-
    
(5,708,779
-
-
-
-
-
(7,259,356
)
)
Balance, October 31, 2000
Exercise of common share purchase warrants for cash
Common shares issued under rights offering November 20, 2000
Exercise of stock options for cash
Deferred share compensation (Note 12 (a))
Stock-based compensation (Note 8(b))
Exercise of director’s stock options for cash, January 17, 2001
Common shares issued pursuant to compensatory stock options, at January 17, 2001 (Note 12 (a))
Adjustment-share compensation Expenses (Note 12(a))
Common shares issued pursuant to compensation agreement, January 23, 2001(Note 12 (a))
Private placement of common shares for cash, March 21, 2001
Common shares issued under asset purchase agreement to Estancia Limited, March 14, 2001
Compensation shares due but not issued (Note 12 (a))
Net loss for the year
    
39,734,516
362,450
304,674
800,000
-
-
714,686
-
-
11,192
2,000,000
2,007,831
-
-
    
11,849,357
554,655
1,119,058
2,400,000
-
-
71,469
1,581,242
-
66,461
4,000,000
8,000,00
-
-
    
3,256,772
-
-
-
(453,219)
34,000
-
(1,581,242)
(677,420)
-
-
-
1,431,545
-
    
(453,219)
-
-
-
453,219
-
-
-
-
-
-
-
-
    
(12,968,135
-
-
-
-
-
-
-
-
-
-
-
(4,559,625
)
)
Balance, October 31, 2001
    
45,935,349
  
$
29,642,242
  
$
2,010,436
  
$
-
  
$
(17,527,760
)



 
 
 


MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Expressed in United States dollars)

April 30, 2005


   
Number of Shares
  
Share Capital
  
Contributed
Surplus
  
Deferred Share Compensation
  
Deficit
Accumulated
During Development Stage
  
Balance, October 31, 2001
Shares issued pursuant to compensatory agreement, March 26, 2002 (Note 12 (a))
Net loss for the year
    
45,935,349
765,588
-
  
$
 
 
29,642,242
1,431,545
-
  
$
 
 
2,010,436
(1,431,545)
-
  
$
 
 
-
-
-
  
$
 
 
(17,527,760
-
(12,733,015
)
)
Balance, October 31, 2002
Private placement of common shares for cash, August 13, 2003 (Note 8(d))
Net loss for the year
    
46,700,937
2,031,250
-
    
31,073,787
162,500
-
    
578,891
-
-
    
-
-
-
    
(30,260,775
-
(1,449,965
)
)
Balance, October 31, 2003
    
48,732,187
    
31,236,287
    
578,891
    
-
    
(31,710,740
)

Private Placement of common shares for cash, December 2003 (Note 8 (e) ii)
    
500,000
    
40,000
    
-
    
-
    
-
  
Private Placement of common shares for cash, December 2003 (Note 8 (e) i)
   
300,000
    
33,000
    
-
    
-
    
-
  
Exercise of common share purchase warrants for cash (Note 8(d), August 2004
    
2,031,250
    
162,500
    
-
    
-
    
-
  
Exercise of common share purchase warrants for cash (Note 8 (e) ii), June-September 2004
   
1,000,000
    
80,000
    
-
    
-
    
-
  
Exercise of common share purchase warrants for cash (Note 8 (e) i), October 2004
   
200,000
    
22,000
    
-
    
-
    
-
  
Exercise of options for cash
    
5,300,000
    
530,000
    
-
    
-
    
-
  
Stock options issued to consultant (Note 8 (b))
                
10,020
              
Net loss for the year
    
-
    
-
    
-
    
-
    
(944,348
)
Balance, October 31, 2004
    
58,063,437
    
32,103,787
    
588,911
    
-
    
(32,655,088
)
                                 
Restatement of Deficit arising on change to fair value accounting for stock compensation expense
                
17,829,459
    
-
    
(17,829,459
)
Restated balance at October, 2004
    
58,063,437
    
32,103,787
    
18,418,370
    
-
    
(50,484,547
)
                                 
Exercise of common share purchase warrants for cash (Note 8(e)), December - January 2005
    
400,000
    
44,000
    
-
    
-
    
-
  
Private placement of common shares for cash
    
1,028,334
    
617,000
    
-
    
-
    
-
  
Net loss for the quarter
                            
(453,523
)
Stock options issued to consultants/employers
                
202,203
    
-
        
Balance at January 31, 2005
 
Exercise of common shares purchase warrants for cash (Note 8(d)), February, 2005
Private Placement of common shares for cash, March, 2005
Private Placement of common shares for cash, February, 2005
Legal expenses relating to private placements
Completed since October 2004
Net loss for the quarter
    
59,491,771
1,406,250
1,300,000
14,000
    
32,764,787
112,500
845,000
10,500
(75,000
)
  
18,620,573
    
-
    
(50,938,070
(474,227
)
)
Balance at April 30, 2005
    
62,212,021
  
$
33,657,787
  
$
18,620,573
  
$
-
  
$
(51,412,297
)



 
 
 



MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

1.  
Nature of business:

Micromem Technologies Inc. (“Micromem” or the “Company”) is a corporation incorporated under the laws of the Province of Ontario, Canada. By Articles of Amendment dated January 14, 1999, the Company changed its name from Avanticorp International Inc. to Micromem Technologies Inc. On January 11, 1999, the Company acquired all of the outstanding shares of Pageant Technologies Inc. (“Pageant”), a company subsisting under the laws of Barbados. This acquisition, as described in Note 3(b), was recorded as a reverse takeover under Canadian generally accepted accounting principles (“Canadian GAAP”).

The Company currently operates in a single segment as a developer of non-volatile magnetic memory technology. To April 30, 2005 the Company has not generated significant revenue and is devoting substantially all of its efforts to the development of its technology. Accordingly, for financial reporting purposes, the Company is a development stage enterprise.

2.  
Going concern:

These consolidated financial statements have been prepared on the “going concern” basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

The Company has incurred substantial losses to date. It will be necessary to raise additional funds for the continuing development, testing and commercial exploitation of its technology. The sources of these funds have not yet been identified and there can be no certainty that sources will be available in the future.

The Company continues to pursue its research initiatives as outlined in Note 13 in order to develop its technology for commercial applications and continues to raise financing for operations as outlined in Note 8(e).

The Company’s ability to continue as a going concern is in substantial doubt and it is dependent upon completing the development of its technology for a particular application, achieving profitable operations, obtaining additional financing and successfully bringing its technology to the market. The outcome of these matters
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

cannot be predicted at this time. The consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts
and classifications of the assets and liabilities that might be necessary should the Company be unable to continue in business. If the “going concern” assumption were not appropriate for these consolidated financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

3.  
Summary of significant account policies:

These consolidated financial statements have been prepared in accordance with Canadian GAAP and are stated in United States dollars. These principles are also in conformity in all material respects with United States generally accepted accounting principles (“U.S. GAAP”) as described in Note 16 to the consolidated financial statements. The most significant accounting policies are as follows:

a.  
Financial reporting:
 
The Company has adopted Section 1100 of the Canadian Institute of Chartered Accountants (“CICA”) Handbook, “Generally Accepted Accounting Principles” (“GAAP”). This section establishes standards for financial reporting in accordance with GAAP and provides guidance on sources to consult with when selecting accounting policies and determining the appropriate disclosures when an item is not explicitly dealt with in the primary sources of GAAP. The Company also adopted Section 1400 of the CICA Handbook, “General Standards of Financial Statement Presentation”. This section clarifies what constitutes “fair presentation in accordance with GAAP”. The Company also adopted Section 3063 of the CICA Handbook, “Impairment of Long Lived Assets”. This section requires the Company to measure and disclose impairments of long-lived assets. Adoption of these sections did not have a material impact on the Company’s financial statements.
 
b.  
Principles of consolidation:

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Memtech International Inc., Memtech International (U.S.A.) Inc., Pageant Technologies Inc. and Pageant Technologies (U.S.A.) Inc.


 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
 
During the fiscal year ending October 31, 2003, two of the Company’s subsidiaries, Micromem Technologies B.V. and Micromem Technologies S.p.A.
were wound up. All significant intercompany balances and transactions have been eliminated upon consolidation.

c.  
Basis of presentation:

On January 11, 1999, the Company issued 32,000,000 common shares and 1,000,000 warrants to acquire all of the issued and outstanding shares of Pageant. On that date, the total number of the Company shares outstanding was 35,980,643 shares. As a result of this transaction, the shareholders of Pageant owned 88.9% of the outstanding common shares of the Company and, accordingly, the purchase of Pageant was accounted for as a reverse takeover transaction.

Application of reverse takeover accounting results in the following:

i.  
the consolidated financial statements of the combined entity are issued under the name of the legal parent, Micromem, but are considered a continuation of the financial statements of Pageant, the legal subsidiary;

ii.  
as Pageant is deemed to be the acquirer for accounting purposes, its assets and liabilities are included in the consolidated financial statements at their historical carrying values;

iii.  
the operating results for the period from September 3, 1997 to January 11, 1999, which are included in the cumulative operating results through April 30, 2005, are those of Pageant;

iv.  
control of the assets and operations of the Company is deemed to be acquired by Pageant effective January 11, 1999. For purposes of this transaction, the deemed consideration is $549,140 ascribed to the net assets of the Company outstanding immediately prior to the business combination; and

v.  
Pageant became a wholly-owned subsidiary of the Company. For accounting purposes, at January 11, 1999, the outstanding shares of the Company, the continuing consolidated entity, consisted of the number of

 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005


Micromem shares issued to that date with an assigned value equal to the share capital of the continuing consolidated entity at that date as computed below.

The transaction was accounted for by the purchase method with the results of operations included in the consolidated financial statements from the date of acquisition. Details of the Company’s net assets acquired and the assigned fair value of net assets at acquisition are as follows:


Cash
Non-cash current assets
Investments
  
$
 
 
168,084
115,629
371,471
  
 
Less current liabilities
    
655,184
106,044
  
Assigned fair value of net assets
  
$
549,140
  

d.  
Use of estimates:

The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

e.  
Cash and cash equivalents:

Cash and cash equivalents consist of all bank accounts and all highly liquid investments with original maturities of three months or less at the date of purchase.

f.  
Capital Assets:

Capital assets are recorded at cost less accumulated amortization. Amortization is provided on capital assets on a straight-line basis for a period of up to three years. Capital assets are reviewed for impairment whenever

 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

events or changes in circumstances indicate that the carrying amount may not be recoverable. When circumstances dictate, an impairment loss is calculated as equal to the excess of the carrying value of the assets over their undiscounted estimated future net cash flow.

g.  
Patents and trademarks:

Effective November 1, 2001, the Company changed its accounting policy for patents and trademarks to be recorded at cost less accumulated amortization which is provided on a straight-line basis over ten years. In prior years the Company accounted for its patents and trademarks at cost and amortization was to commence on an appropriate basis to charge off the cost over the future benefit period, not exceeding the legal life, when sales commence. There was no material impact on prior years’ consolidated financial statements and accordingly, the comparative consolidated financial statements have not been restated.

For the year ended October 31, 2002, the change in accounting policy resulted in an increase in amortization expense and net loss of $31,338 and there was no material impact on net loss per share.

Patents and trademarks are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When circumstances dictate, an impairment loss is calculated as equal to the excess of the carrying value of the assets over their undiscounted estimated future net cash flow (Note 7).
 
h.  
Research and development expenses:

Research costs are expensed in the period incurred. Development expenses are expensed as incurred unless they meet the criteria for deferral and amortization under Canadian GAAP. The Company has determined that no development costs have met these criteria at the financial reporting date.



 
 
 


MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

i.  
Stock-based compensation:

The Company has a stock-based compensation plan, which is described in Note 8. Stock-based compensation is recognized by the fair value method, whereby compensation is recorded to the extent that the exercise price is not based on the market value of the Company’s common shares at the date of grant. Any compensatory benefit recorded is recognized initially as deferred share compensation in the consolidated statements of shareholders’ equity and then charged against income over the contractual or vesting period.

Until October 31, 2004 for all awards of employee stock-based compensation granted after January 1, 2002, the Company recognized employee stock-based compensation costs under the intrinsic value-based method and provided pro forma disclosure of net income and earnings per share as if the fair value-based method has been applied.

Effective November 1, 2004 the Company has adopted the fair value method of accounting for employee stock-based compensation costs. Accordingly the cumulative deficit at October 31, 2004 has been restated for the cumulative effect of the stock-based compensation costs that the Company has incurred to that date which expense previously was disclosed on a proforma basis.

The stock-based compensation expense for options granted during the six month period ending April 30, 2005 has been reflected as an expense in the consolidated statement of operations for the period then ended.

j.  
Income taxes:

The Company accounts for income taxes by the liability method. Under the liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates and laws that are expected to apply when the asset is realized or the liability settled. To the extent that it is not considered to be more likely than not that a future income tax asset will be realized, a valuation allowance is provided.


 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

k.  
Impairment of long-term assets:

The Company records the value of the long-term assets acquired at cost. Such rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When circumstances dictate an impairment loss is calculated as equal to the excess of the carrying value of the assets over their undiscounted estimated future net cash flows.

l.  
Foreign currency translation:

The functional currency of the Company is the United States dollar. The Company’s wholly-owned subsidiaries are integrated foreign operations and therefore, the Company uses the temporal method whereby monetary assets and liabilities are translated into United States (U.S.) dollars at the rate of exchange in effect at the consolidated balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Revenue and expenses are translated using the average monthly rate of exchange, which rate approximates the rate of exchange prevailing at the transaction dates. Gains or losses resulting from translation are included in the determination of net loss for the period.

4.  
Acquisition of royalty rights and remaining interest in technology from Estancia Limited:

On December 9, 2000, the Company and its subsidiary, Pageant, entered into an Asset Purchase Agreement (the “Agreement”) with Estancia Limited (“Estancia”) and Richard Lienau (“Lienau”) to purchase the remaining 50% interests in the patents which the Company did not own and a 40% gross profit royalty (“Estancia Royalty”),
in respect of certain ferromagnetic memory technology known as VEMRAM (previously known as MAGRAM) and covered by U.S. Patent #5,295,097 and the related patent applications (the “Vemram Patents”) described in the Agreement and all rights (the “Technology”) held by Estancia and Lienau under the Joint Ownership and Licensing Agreement dated September 17, 1997 among Estancia, Lienau and Pageant. Under the terms of the Agreement, the Company was required to pay a maximum purchase price of $50,000,000 to Estancia as follows:


 
 
 

MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

a.  
$10,000,000 was paid on closing (after receipt of regulatory approvals), in the form of $8,000,000 in common shares of the Company (“Micromem Shares”) (based on the price on the closing date) and $2,000,000 in cash;

b.  
$20,000,000 if and when either (i) certification is received from Honeywell Federal Manufacturing & Technologies (“Honeywell”) that fully integrated, randomly addressable memory matrices of the Technology have met certain stipulated performance standards, or (ii) the Company or any of its affiliates executes a definitive agreement for the sale or licensing of the Technology to
an arm’s length third party for any commercial purposes other than testing or evaluation of the Technology; payable in the form of cash and Micromem Shares to be determined by Pageant provided that a minimum of 50% of the $20,000,000 shall be paid in Micromem Shares valued at the close of trading on the date of receipt of such certification, sale or licensing; and

c.  
$20,000,000 if and when the Company or any of its affiliates executes a definitive agreement for the sale or licensing with respect to any technology (including the Technology) owned by the Company to an arm’s length third party for any commercial purposes other than testing or evaluation of the technology, payable in the form of cash and Micromem Shares to be determined by Pageant provided that a minimum of 50% of the $20,000,000 shall be paid in Micromem Shares valued at the close of trading on the date of execution of such sale or licensing.

During fiscal 2001, the Company paid $2,000,000 in cash and issued 2,007,831 shares, being the equivalent of $8,000,000, the first installment payable under the terms described above, on approval by its shareholders in the annual shareholder meeting held on March 14, 2001. The $10,000,000 paid was initially recorded as royalty rights in fiscal 2001 and was written-down to nil in fiscal 2002 (Note 10).

 
 
 
 
 


MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

On March 9, 2004 the third anniversary of the closing date, the requirements set out in terms (b) and (c) above were not met and, in accordance with the terms of the Agreement, the Company’s obligations to pay these amounts terminated. The Company thus has had to revert to Estancia:

1.  
a 40% interest in the Vemram Patents;

2.  
a 32% interest in the gross profit, less expenses agreed to by the parties, for each license of the Vemram Patents sold or otherwise transferred by Pageant; and

3.  
a 32% interest of any unit royalties received by Pageant as a result of the license or sale of the Vemram Patents less reasonable expenses directly related to the obtaining of said royalties.

5.  
Deposits and other receivables:


   
4/30/05
  
01/31/05
  
10/31/04
  
Sales tax recoverable
Deposits
Receivables from companies under common control
Prepaid insurance
  
$
 
17,328
15,000
59,539
14,374
  
$
 
 
4,102
15,000
31,127
21,945
  
$
 
2,429
15,000
16,133
-
  
   
$
106,241
  
$
72,174
  
$
33,562
  



 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
 
6.  
Capital assets:

   
1/31/05
  
Additions
  
04/30/05
  
Cost:
Computers and equipment
 
$
41,348
    
-
  
$
41,348
  
   
$
41,348
    
-
  
$
41,348
  

1/31/05
          
Amortization
Expense
    
04/30/05
  
Accumulated amortization:
Computers and equipment
 
$
38,651
  
$
228
  
$
38,879
  
   
$
38,651
  
$
228
  
$
38,879
  

4/30/05
          
1/31/05
  
Net book value:
Computers and equipment
 
$
2,469
  
$
2,697
  
   
$
2,469
  
$
2,697
  


During fiscal 2003, the Company contributed equipment and supplies with a net book value of $58,302 under the “Equipment Transfer Agreement” to the University of Toronto (“U of T”) (Note 13a(4)). The net book value of the contributed equipment has been charged to the period as a research and development expense.


7.  
Patents and trademarks:

The Company and its subsidiaries have pending patent applications relating to its memory technologies and the costs relating to legal and filing fees are capitalized as patents.

In 2003 the Company discontinued a number of patent and trademark applications primarily outside the United States and the net book value of $130,839 relating to these applications was written off in 2003. The Company has also assessed the remaining amounts for patents and trademark applications registered in Canada and


 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

United States and has expensed the residual net book value of $168,981 in 2003 to reflect the uncertain nature of future events.

The Company continues to actively pursue and protect its patents and trademarks registered in Canada and the United States.

8.  
Share Capital:

a.  
Authorized:

2,000,000 special preference shares, redeemable, voting, none of which are issued and outstanding
Unlimited common shares without par value.

b.  
Stock option plan:

The Company has a fixed stock option plan. Under the Company’s Stock Option Plan (the “Plan”), the Company may grant options for up to 13,000,000 shares of common stock to directors, officers, employees or consultants of the Company and its subsidiaries. The exercise price of each option is equal to or greater than the market price of the Company’s shares on the date of grant unless otherwise permitted by applicable securities regulations. An option’s maximum term under the Plan is 10 years.

A summary of the status of the Company’s fixed stock option plan as at April 30, 2005 and 2004 and changes during the periods ended on those dates is as follows:

6 Months ended April 30, 2005
  
Year ended October 31, 2004
  
                   
   
Shares in Thousands
  
Weighted Average exercise price
  
Shares in Thousands
  
Weighted Average exercise price
  
Outstanding, beginning of period
Granted
Cancelled
Exercised
    
7,270
400
-
-
    
.31
.83
-
-
    
5,300
7,270
-
(5,300
)
$
 
 
.10
.31
-
.10
  
Outstanding end of period
    
7,670
    
.34
    
7,270
  
$
.31
  
 
Options exercisable at end of period
    
7,670
          
7,270
        
Weighted average price of
options granted during the period
          
.83
    
___________________
  
$
.31
  
 
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

In June 2004, 5,300,000 options were exercised resulting in $530,000 of cash proceeds to the Company.

The following table summarizes information about fixed options outstanding as at April 30, 2005:

Options Outstanding
          
Options exercisable
  
 
 
Actual exercise price
    
Number outstanding
    
Weighted average remaining contractual life (in years
)
  
Weighted
Average exercise price
    
Number
exercisable
    
Weighted
Average exercise price
  
$ 0.30
    
7,150,000
    
4.67 years
  
$
0.30
    
7,150,000
  
$
0.30
  
0.68
    
120,000
    
1.16 years
    
0.68
    
120,000
    
0.68
  
0.80
    
300,000
    
2.2 years
    
0.80
    
300,000
    
0.80
  
0.91
    
100,000
    
4.75 years
    
0.91
    
100,000
    
0.91
  


At October 31, 2004 the cumulative stock compensation expense for stock options granted to employees has been calculated using the Black Scholes option-price model as $17,829,459 which expense has previously not been reflected in the consolidated statement of operations and deficit. Effective November 1, 2004, the Company has adopted the fair value method of accounting for stock compensation expense and accordingly has restated the cumulative deficit by $17,829,459 at October 31, 2004. Contributed surplus has been adjusted for an equivalent amount.

In the quarter ending January 31, 2005 the Company granted 300,000 options to the newly hired Chief Technology Officer (Note 13(d)) at an exercise price of $.80 per share. These options expire in February 2007 if unexercised. The Company also granted 100,000 options to an officer and employee of the Company at an exercised price of $.91 per share. These options expire in January 2010 if unexercised.

For the 3 months ended January 31, 2005 the fair value of all options granted was calculated as of the date of grant using the Black Scholes option-pricing model with the following assumptions:


 
 
 

MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
Dividend yield
-
Expected volatility
142%
Risk free interest rate
3.25%
Expected option life
1.5 years

On this basis, the current expense for the three months ended January 31, 2005 has been calculated as $202,203 and this expense has been recorded in the consolidated statement of operations for the three months then ended with an equivalent charge to contributed surplus.

No options were granted during the 3 months ended April 30, 2005.

Subsequent to April 30, 2005 the company revised its stock option plan and issued additional stock options. Additionally certain options were exercised subsequent to April 30, 2005 (Note 17).

c.  
Loss per share

Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the dilution that would occur if outstanding stock options and share purchase warrants were exercised or converted into common shares using the treasury stock method and is calculated by dividing net loss applicable to common shares by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.

The inclusion of the Company’s stock options and share purchase warrants in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and they are therefore excluded from the computation. Consequently, there is no difference between basic loss per share and diluted loss per share.

d.  
Warrants

On August 13, 2003, the Company issued 2,031,250 First Units at $0.08 each. Each First Unit provides the holder with one common share and a warrant for one Second Unit at $0.08 each, exercisable for one year. Each Second Unit provides
the holder with one common share and a warrant for one common share at $0.08 each, exercisable for one year.
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
 
In accordance with the CICA’s recommendations, a portion of the First Unit should be allocated into separate elements within shareholders’ equity as the First
Units contain two equity elements arising from the common share and warrants attached. The Company has allocated the closing trading value of its shares as at August 13, 2003 to the common shares. Since the net proceeds received from the issuance of the common shares attached to the First Units equaled the closing trading value at the date authorized by the Board of Directors, the warrants were allocated a nil value.

Between August - October 2004, the holders of the First Units exercised the First Unit warrants and the Company thus issued 2,031,250 common shares and the warrants for the Second Units and realized proceeds of $162,500.

In February 2005, the holders of the Second Units exercised 1,406,250 Second Unit warrants and the Company thus issued 1,406,250 common shares and realized proceeds of $112,500.

Subsequent to April 30, 2005 the Company issued 800,000 warrants to a financial advisory firm (Note 17).

e.  
Private Placements

i)  
In December 2003, the Company completed Unit private placements to two Canadian private investors pursuant to prospectus and registration exemptions set forth in applicable securities laws. Under the private placements, the Company received $33,000 as subscription proceeds for the sale and issue of 300,000 Units. Each Unit consists of one Common Share and one Series A Warrant. Each Series A Warrant entitles the holder to purchase one Common Share and one Series B Warrant for $0.11 until expiry 12 months from the date of issue. Each Series B Warrant entitles the holder to purchase one additional Common Share for $0.11 until expiry 12 months from the date of issue.

In October 2004 the private investors exercised 200,000 Series A warrants and the Company thus issued 200,000 common shares and 200,000 Series B warrants and realized proceeds of $22,000.

In the quarter ended January 31, 2005 the private investors exercised the remaining Series A warrants and the Company thus issued 100,000 additional common shares and 100,000 Series B warrants and realized proceeds of $11,000.
 
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
The investors then exercised 300,000 Series B warrants and the Company thus issued 300,000 common shares and realized proceeds of $33,000.

ii)  
In December 2003, the Company completed a Unit private placement to one Canadian private investor pursuant to prospectus and registration exemptions set forth in applicable securities laws. Under the private placement, the Company received $40,000 as subscription proceeds for the sale and issue of 500,000 Units.
Each unit consists of one Common Share and one Series A. Warrant. Each Series A Warrant entitles the holder to purchase one Common Share and one Series B Warrant for $0.08 until expiry 12 months from the date of issue. Each Series B Warrant entitles the holder to purchase one additional Common Share for $0.08 until expiry 12 months from the date of issue.

In June 2004, the private investor exercised the Series A warrants and the Company thus issued 500,000 common shares and 500,000 Series B warrants and realized proceeds of $40,000.

In September 2004, the private investor exercised the Series B warrants and the Company thus issued 500,000 common shares and realized proceeds of $40,000.
iii)  
In December 2004 the Company completed a Unit private placement to several U.S. investors pursuant to prospectus and registrations exemptions set forth in applicable securities laws. Under the private placement, the Company has received $617,000 as subscription proceeds for the sale and issue of 1,028,344 Units. Each Unit consists of one Common Share and one Series A Warrant. Each series A Warrant entitles the holder to purchase one Common Share and one Series B warrant for $.60 until expiry 12 months from the date of issue. Each Series B Warrant entitles the holder to purchase one additional Common Share for $.60 until expiry 12 months from the date of issue.
 
iv)  
In February 2005, the Company arranged a Unit private placement to several investors pursuant to prospectus and registration exemptions set forth in applicable securities laws. Under this private placement the Company received $845,000 as of April 30, 2005 as subscription proceeds for the sale of 1,300,000 Units. Each unit consists of one Common Share and one Series A Warrant. Each Series A Warrant entitles the holder to purchase one Common Share and one Series B Warrant for $.65 until expiry 12 months from the issue date. Each Series B warrant entitles the holder to purchase one Common Share for $.65 until expiry 12 months from the issue date.
 

 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005
 
v)  
In February 2005, the Company completed a Unit private placement to two Canadian investors pursuant to prospectus and registration exemptions set forth in applicable securities laws. Under the private placement, the Company received $10,500 as subscription proceeds for the sale and issue of 14,000 Units. Each Unit consists of one Common Share and one Series A Warrant. Each Series A Warrant entitles the investor to purchase one Common Share and one Series B Warrant for $.75 until expiry 12 months from the date of issue. Each Series B Warrant entitles the holder to purchase one additional common share for $.75 until expiry 12 months from the date of issue.

f.  
Outstanding warrants

The outstanding warrants to acquire common shares are summarized as below:


August 13, 2003 financing (Note 8 (d)):
       
Series A warrants outstanding at October 31, 2003
    
2,031,250
  
Series A warrants exercised in fiscal 2004
    
( 2,031,250
)
Series B warrants resulting from exercise of Series A warrants
    
2,031,250
  
Outstanding at January 31, 2005
    
2,031,250
  
Series B warrants exercised in February 2005
    
(1,406,250
)
Outstanding at April 30, 2005
    
625,000
  
         
December 2003 financing (Note 8 (e) (i)):
       
         
Series A warrants issued
    
300,000
  
Series A warrants exercised
    
(200,000
)
Series B warrants resulting from exercise of Series A warrants
Outstanding at October 31, 2004
    
200,000
300,000
  
Series A warrants exercised
    
(100,000
)
Series B warrants resulting from exercise of Series A warrants
    
100,000
  
Series B warrants exercised
Outstanding at January 31, 2005
    
(300,000)
___-____
  
         
December 2003 financing (Note 8 (e) (ii))
       
Series A warrants issued
    
500,000
  
Series A warrants exercised
    
(500,000
)
 

 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005


Series B warrants resulting from exercise of Series A warrants
    
500,000
  
Series B warrants exercised
Outstanding at October 31, 2004
    
(500,000)
-
  
         
December 2004 financing (Note 8(e) (iii))
        
Series A warrants issued and outstanding
    
1,028,344
  
         
February 2005 financing (Note 8(e) (iv)
        
Series A warrants issued and outstanding
    
1,300,000
  
         
February 2005 financing (Note 8(e)(v)
        
Series A warrants issued and outstanding
    
14,000
  


9.  
Contributed surplus:

Included in contributed surplus of $18,620,573 at April 30, 2005 is an amount of $544,891 representing forgiveness of Pageant indebtedness during fiscal 1999 by Ataraxia Corp, the former parent company of Pageant. This forgiven debt was treated as contributed surplus, a separate component of shareholders’ equity, as this balance was between related parties.

10.  
Restructuring and write-down of royalty rights:

On July 29, 2002, the Company restructured its operations by closing its research and development facility and adopted a plan to focus its current resources to outsource its research and development activities as described in Note 13(a). No major costs were associated with this restructuring.

As a result of the restructuring, the Company determined that there was significant uncertainty that any amounts would be payable to Estancia in the foreseeable future in respect of the Estancia Royalty as described in Note 4, and accordingly, the Estancia Royalty rights acquired in the amount of $10,000,000 were written off in fiscal 2002.


 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

11.  
Income Taxes:

The Company has non-capital losses of approximately $6,779,000 available to reduce future taxable income, the benefit of which has not been recognized in these consolidated financial statements. As at April 30, 2005, the tax losses expire as follows:

   
Canada
  
Other Foreign
  
Total
  
2006
  
$
268,000
  
$
-
  
$
268,000
  
2007
    
1,632,000
    
-
   
1,632,000
  
2008
    
1,363,000
    
-
    
1,363,000
  
2009
    
1,062,000
    
-
    
1,062,000
  
2010
    
932,000
    
265,000
    
1,197,000
  
2011
    
-
    
207,000
    
207,000
  
2014
    
727,000
    
-
    
727,000
  
2015
    
221,000
          
221,000
  
2023
    
-
    
73,000
    
73,000
  
2024
    
-
    
22,000
    
22,000
  
2025
          
7,000
    
7,000
  
Total losses
  
$
6,205,000
  
$
574,000
  
$
6,779,000
  

The reconciliation of income tax attributable to continuing operations computed at the statutory tax rates to income tax expense is as follows:

 
    
4/30/05
(3 mos)
    
4/30/05
(6 mos
)
  
10/31/04
(12 mos
)
Consolidated accounting loss before income taxes
Less nondeductible items - stock compensation expense (Note 8(b))
Loss for tax purposes
  
$
 
 
(474,227
________-
(474,227
)
)
$
 
 
(927,750
202,203
(725,547
)
)
$
 
 
(944,348
_______-
(944,348
)
)
Statutory rates
    
36
%
  
36
%
  
36
%
                     
Expected income tax recovery
    
170,000
    
(261,196
)
  
(339,965
)
Tax benefit not recognized
    
(170,000
)
  
(261,196
)
  
339,965
 
 
  
$
   
$
-
  
$
-
  

 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

Future income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s future tax assets and liabilities as at April 30, 2005 are as follows:


 
    
4-30
2005
    
1-31
2005
    
10-31
2004
  
                     
Unused capital losses
  
$
47,566
  
$
47,566
  
$
47,566
  
Unused non-capital losses
    
2,327,658
    
2,327,658
    
2,244,996
  
Alternative minimum tax credit
    
142,091
    
142,091
    
142,091
  
Research and development credit
    
118,720
    
118,720
    
118,720
  
Tax basis of capital assets in excess of carrying value
    
13,680
    
13,680
    
13,680
  
Total future tax assets
  
$
2,649,715
  
$
2,649,715
  
$
2,567,053
  
Valuation allowance
    
(2,649,715
)
  
(2,649,715
)
  
(2,567,053
)
Net future tax assets
  
$
-
  
$
-
  
$
-
  


12.  
Management compensation and related party transactions:


a.  
The Company has previously entered into the following stock-based management compensation arrangements:

i.  
Effective November 1, 2001, the Company terminated the Chairman’s compensation agreement described in Note 12(a) (ii) below and the Chairman’s compensation was reduced to $1.00 per year.

ii.  
On January 1, 2001, the Company entered into a new employment agreement with the Chairman for a period of five years. Under the terms of this agreement, the Chairman has been retained to provide certain



 
 
 

MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

management services to the Company and its subsidiaries. The Company has agreed to issue, under the agreement, a number of fully paid and non-assessable common shares of the Company equal to 0.5% per quarter of the number of common shares of the Company outstanding on the last day of March, June, September and December of each year throughout the term of the agreement. An amount of $1,431,545 had been accrued for the value of the shares that had been earned but not issued as compensation expense for the year ended October 31, 2001 and treated as contributed surplus within shareholders’ equity. On March 26, 2002, the Company issued 765,589 shares relating to compensation for the period ended October 31, 2001, valued at $1,431,545.

iii.  
On January 2, 2000, the Company entered into an Employee and Option Agreement with the Chairman of Micromem which was approved by the shareholders at a meeting held on June 29, 2000.

As remuneration for the services to be rendered by the Chairman during the period from January 2, 2000 to January 2, 2001, the Company granted the Chairman an irrevocable option to acquire from the Company a number of fully paid and non-assessable common shares of the Company equal to 1.75% of the number of common shares of the Company that would be outstanding on the close of business on January 2, 2001, at a price of $0.10 per incentive share.

Pursuant to this agreement, deferred share compensation for the Chairman for the period from January 2, 2000 to January 2, 2001 in the amount of $2,711,811, representing an estimate of the intrinsic value of the options to be granted on January 2, 2001, was recorded as contributed surplus within shareholders’ equity. Of this amount, $2,258,592 was recorded as compensation expense in the year-ended October 31, 2000. On January 17, 2001, the Chairman exercised his options and 714,686 common shares of the Company were issued with an aggregate value of $1,581,242 which was recorded as share capital. The difference between the actual value of the shares and the estimate recorded in 2000 of $677,420 was recorded as a recovery of compensation expense in the year ended October 31, 2001.

iv.  
On January 29, 1999 and March 10, 1999, the Company entered into two consulting agreements with the Chairman and a company controlled by
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

the former President, respectively. Consideration for services rendered by the Chairman and the former President were settled by issue of common shares. The Company issued 454,292 shares to the Chairman and 448,452 shares to a company controlled by the former President during fiscal 2000. The balance of 11,192 shares ($66,461) due to a company controlled by the former President were issued in fiscal 2001.

b.  
In the normal course of business, the Company has entered into transactions with other companies under common control. These transactions relate to salaries, rent and other expenses which are shared amongst the companies. For the six months ending April 30, 2005, Micromen paid a total of approximately $23,000 in rent, $29,000 in salaries and recovered a total of $36,000 of these costs from other companies under common control.

c.  
Included in professional fees as reported are management and consulting fee payments made to various companies whose shareholders serve as officers and directors of the Company. Such payments totaled approximately $129,000 for the quarter ended April 30, 2005.

13.  
Commitments:

a.  
Research Collaboration and Infrastructure Agreements:

1.  
Materials and Manufacturing Ontario:

On October 24, 2002, Micromem entered into a two year Research Collaboration Agreement with Material and Manufacturing Ontario (“MMO”), a not-for-profit organization funded by the provincial government, the University of Toronto (“U of T”) and a researcher employed by U of T to fund the research on Magnetic Structure development for Hall effect memory devices.

Under the terms of the agreement, the Company has committed to contribute $87,432 (Cdn $136,175) and $18,000 (Cdn $28,000) in cash and in-kind contribution, respectively, per year to fund the research. As at October 31, 2004, the Company has met all of its obligations under this agreement.

 
 
 

MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

On November 12, 2003, Micromem entered into a second research collaboration agreement with MMO and the U of T for research and development associated with magnetic memory devices. Under the second agreement, in the first year and upon renewal in the second year, MMO will grant $58,900 (equivalent to Cdn. $85,000) in cash funding and Micromem

will contribute $56,130 (equivalent to Cdn. $81,000 in cash funding and additionally will make $30,770 (equivalent to Cdn. $44,400) of in-kind contributions, all towards the research collaboration, each year. At October 31, 2004, the Company has met all of its obligations under the agreement. Micromem will have sublicensing rights for the use of any new technology developed (“Technology Developed”) under this research with an annual royalty payable in perpetuity to MMO based on a percentage of revenues from the sale of products incorporating the Technology Developed.

2.  
University of Toronto:

On November 1, 2002, the Company entered into an Infrastructure Agreement with U of T to fund the assembly of a magnetic memory facility (“MMF”) for research, development and fabrication of magnetic memory. U of T has agreed to use the MMF in connection with, among other things, research to be conducted pursuant to collaborations between Micromem and U of T.

The terms of the agreement provide that Micromem is to contribute $249,463 (equivalent to Cdn. $360,000) in cash to fund the direct costs of the MMF. The contribution has been included as a research and development expense in the consolidated statements of operations and deficit.

3.  
Communications and Information Technology Ontario:

On December 10, 2002, Micromem entered into a two year Collaborative Research Agreement with Communications and Information Technology Ontario (“CITO”) U of T and Dr. Harry Ruda. For the first year, CITO provided funding of $106,715 (equivalent to Cdn. $154,000) and Micromem contributed $31,875 (equivalent to Cdn. $46,000). For the second year, CITO provide funding of a further $107,715 (equivalent to Cdn. $154,000) and Micromem provided funding of a further $31,875 (equivalent to Cdn.

 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

$46,000). Micromem has further provided $67,632 (equivalent to Cdn $97,600) of in-kind contributions to the research collaboration.

4.  
Equipment Transfer Agreement:

On March 1, 2003, Micromem entered into an agreement with U of T whereby Micromem has contributed equipment and supplies with an estimated value of $200,000 (Note 6). The equipment was previously used by
Pageant Technologies (U.S.A.) Inc., at Pageant’s former Kansas City, Missouri lab facility until its closure in August 2002.

b.  
Technology development agreement:

On March 14, 2001, the Company’s subsidiary, Pageant, entered into a three-year technology development agreement with Estancia and Lienau to continue the development of the Technology. Under the terms of the agreement, Pageant committed to pay Estancia $215,000 per year, payable on a monthly basis in arrears, and committed to incur expenditures in connection with the development expenses of up to a maximum of $500,000 per agreement year.

On April 23, 2002, the technology development agreement was amended to extend its term for an additional eight-month period through November 2004. The go-forward payments were renegotiated as $62,707 between May - October 2002, $197,086 during fiscal 2003 and $143,330 during fiscal 2004.

The development efforts under this agreement ceased in July 2002. The Company reports approximately $287,000 in accounts payable and accrued liabilities with respect to this agreement as of October 31, 2004 and at April 30, 2005 (at October 31, 2003: $143,000).

c.  
Operating leases:

The Company has operating lease commitments which expire in 2006 in respect of its head office. The future minimum annual lease payments are approximately as follows:


 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

         
2005
    
93,500
  
2006
    
15,500
  
   
$
109,000
  

d.  
Consulting contract:

In January 2005 the Company entered into a consulting contract with an arm’s length individual for her services as Chief Technology Officer of the Company. The agreement extends for 2 years with a cancellation clause which can be executed by the Company at any time with 4 months notice provided. The base remuneration stipulated in the contract is $260,000 per year. The Company also granted the Chief Technology Officer 300,000 in options exercisable at $0.80 per share, expiring 45 days after the end of the above noted employment agreement.

14.  
Contingencies:

Pageant Technologies (U.S.A.) Inc. has been named as a defendant in legal actions relating to tenant improvements on a leased property, including an action claiming damages of approximately $887,000 alleging breach of contract under a construction contract entered into by Clear Blue Laboratories, Inc. (“Clear Blue”). The landlord of the leased property is also claiming damages from Pageant Technologies (U.S.A.) Inc. Pageant Technologies (U.S.A.) Inc. assigned its rights under the lease to Clear Blue, however, Pageant Technologies (U.S.A.) Inc. is allegedly obligated to pay the lease payments should the assignee default under the contract. The landlord is claiming damages of approximately $887,000.

The outcome of these actions is uncertain and Pageant Technologies (U.S.A.) Inc. is vigorously defending all actions in which it is named as a defendant. It is, therefore, not possible to provide an estimate of the financial effects, if any, of the actions. No losses related to these actions have been accrued in these consolidated financial statements. It is possible that the outcome of these claims could represent a material amount.

In the normal course of business, the Company and its subsidiaries are involved in various legal actions. In management’s opinion, the ultimate disposition of these actions, individually or in aggregate, will not have a material adverse effect on the financial condition of the Company.

 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

The Company has agreed to indemnify its directors and officers and certain of its employees in accordance with the Company’s by-laws. The Company maintains insurance policies that may provide coverage against certain claims.

Under the terms of the Research Collaboration and Infrastructure Agreements with MMO (Note 13 (1)) the University of Toronto (Note 13 (2)) and Communications and Information Technology Ontario (Note 13 (3)), the Company is committed to potential royalty payments in each case when a license agreement is finalized with respect to the technology relating to such agreements. As and when the research work is completed the Company will enter into a license agreement whereby:

a.  
The collaboration partner in each case shall retain a non-exclusive royalty free worldwide perpetual license to use the Intellectual Property for its research, teaching and administrative purposes only.

b.  
The collaboration partner shall receive an annual royalty payment calculated as:

i.  
4% of the revenues generated by the Company from the manufacture and sale of products to the extent that such products directly and specifically pertain to the related Intellectual Property.

ii.  
A maximum of 20% of the revenues generated by the Company from the sublicensing of the related Intellectual Property,

subject to an overall total payment of $500,000. Once the overall payments equal $500,000, then the future royalty rate is reduced to 1% in each of case (i) and (ii) above.

As outlined in Note 4, certain interests under the Agreement with Estancia reverted to Estancia on March 9, 2004. On this basis, to the extent that revenues are generated by the Company relating directly and specifically to the Vemram Patents, the Company is obligated to pay Estancia 32% of the gross profit realized less expenses agreed to by the parties and 32% of any unit royalties realized less direct expenses.


 
 
 

 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

15.  
Financial instruments:

a.  
Fair values

The fair values for all financial assets and liabilities are considered to approximate their carrying values due to their short-term nature.

b.  
Foreign items

The consolidated financial statements include balances/transactions that are denominated in Canadian dollars as follows:


4/30/05
     4     
10/31/04
  
Assets
  
$
303,672
  
$
270,999
  
Liabilities
    
149,971
    
122,561
  
Revenue
    
370
    
6,241
  
Expenses
    
349,064
    
973,615
  

16.  
Reconciliation between Canadian GAAP and U.S. GAAP:

The Company’s consolidated financial statements have been prepared in accordance with Canadian GAAP which, in the case of the Company, conform in all material respects with U.S. GAAP.

a.  
Stock-Based compensation:

Until October 31, 2004 the Company chose to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, compensation expense is recorded if the market value exceeds the exercise price at the date of grant. The compensation expense, if any, is recognized at the date of option grants or when the option shares are earned, when future performance is required, in the consolidated statements of operations and deficit.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payments”. SFAS No. 123(R) would require the Company to measure all employee stock-based compensation awards using a fair-
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

value method and record such expense in its consolidated financial statements. SFAS No. 123(R) is effective beginning in the quarter ending January 31, 2005.

The Company has adopted the fair value method to measure all employee stock-based compensation effective November 1, 2004 and accordingly has restated cumulative deficit as of October 31, 2004 to reflect this change, as outlined in Note 8(b).


b.  
Consolidated statement of comprehensive income (loss):

Comprehensive income (loss) includes all changes in equity during the periods presented except shareholder transactions. For the purpose of reporting under U.S. GAAP, the components of comprehensive income and total comprehensive income are reported in the consolidated statements of changes in shareholders’ equity, below net loss in the consolidated statements of operations and deficit and in a separate consolidated statement of comprehensive income. For the periods presented, accumulated other comprehensive loss equals net loss.


17.  
Subsequent events:

The following significant subsequent events are noted:

a.  
The Company revised its stock option plan and awarded options as follows:

i.  
300,000 options to a director of the Company at an exercise price of $.72 per share.

ii.  
400,000 options to an officer of the Company at an exercise price of $.72 per share

iii.  
1,800,000 options to the President of the Company at an exercise price of $.72 per share.

These options expire in May 2010 if unexercised.

b.  
The Company realized proceeds on the exercise of certain stock options as follows:
 
 
 
 
 
 
MICROMEM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)

April 30, 2005

i.  
20,000 options were exercised by a consultant to the Company at an exercise price of $.68 per share. Accordingly the company realized proceeds of $13,600.

ii.  
1,800,000 options were exercised by the President of the Company at an exercise price of $.30 per share. Accordingly the Company realized proceeds of $540,000.

c.  
The Company entered into a financial advisory services agreement with an arms length entity and issued as consideration 800,000 purchase warrants. Each warrant entitles the holder to purchase and subscribe for one common share at $.70 per share on or before December 31, 2006.

18.  
Comparative consolidated financial statements:

Comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2005 financial statements.