FZRO CS Diagnostics Corporation (PK)

MICROMEM TECHNOLOGIES INC.

Form 52-109F1 Certification of Annual Filings - CFO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Micromem Technologies Inc.:

Reporting Entity and Nature of Business

Going Concern

Basis of Presentation

Summary of Significant Accounting Policies

New Standards and Interpretations Issued but not yet Adopted

Fair Value Disclosures

Capital Risk Management

Deposits and Other Receivables

Property and Equipment

Deferred Development Costs

Intangible Assets and Patents

Share Capital, Stock Options and Loss per Share

Private Placements, Derivative Warrant Liability and Common Share Purchase Warrants

Bridge Loans

Contributed Surplus

Income Taxes

Expenses

Management Compensation and Related Party Transactions

Commitments

Contingencies

Financial Risk Management

Segmented Information

Subsequent Events

 Costs and expenses :

   Administration (Note 17)

   Professional, other fees and salaries (Note 17)

   Stock based compensation (Note 12)

   Research and development (Note 17)

   Forgiveness of debt

   Travel and entertainment

   Amortization of property and equipment (Note 9)

   Amortization of intangible assets (Note 11)

   Foreign exchange loss

   Recovery of promissory note receivable (Note 8)

 Loss from operations

 Other Expenses

 Gain on revaluation of embedded derivatives (Note 14)

 Warrants issued on debt settlement (Note 14)

 Loss (gain) on revaluation of derivative warrants liability (Note 13)

Net loss before income taxes

   Income taxes (Note 16)

 Net loss and comprehensive loss

Loss per share - basic and diluted (Note 12)

Weighted average number of shares (Note 12)

For the years ended October 31,

 Cash flows from operating activities:

       Net loss

       Adjustments to reconcile loss for the period to net cash used in operating activities:

               Amortization of intangible assets

               Amortization of property and equipment

               Research and development

               Accretion expense

               Stock based compensation

               Forgiveness of debt

               (Increase) in deposits and other receivables

               Increase (decrease) in accounts payable and accrued liabilities

               Loss (gain) on revaluation of derivative warrant liability

               (Gain) on revaluation of embedded derivatives

               Warrants issued on settlement of debt

 Net cash used in operating activities

 Cash flows from investing activities:

       Purchase of property and equipment

       Patents

       Deferred development costs

       Recovery of deferred development costs

 Net cash used in investing activities

 Cash flows from financing activities:

         Issue of common shares

         Bridge loans advances

         Bridge loan repayments

       Advances to related parties

       Repayments from related parties

 Net cash provided by financing activities

 Increase in cash

 Cash, beginning of year

 Cash, end of year

 Supplemental cash flow information:

       Interest paid (classified in operating activities)

       Income taxes paid

Balance as at November 01, 2011

Private placement of units for cash

Financing costs

Stock based compensation

Warrants issued on private placements

Warrants extended

Warrants exercised

Fair value of warrants exercised

Equity portion of bridge loan

Shares issued on conversion of bridge loan

Net loss and comprehensive loss

Balance at October 31, 2012

Private placement of units for cash (Note 13)

Financing costs

Stock based compensation (Note 12)

Warrants issued on private placements (Note 13)

Warrants extended (note 13)

Warrants exercised (Note 13)

Fair value of warrants exercised

Warrants modified (Note 13)

Net loss and comprehensive loss

Balance at October 31, 2013

Stock based compensation (Note 12)

Warrants extended (note 13)

Warrants exercised (Note 13)

Fair value of warrants exercised

Bridge loan converted (Note 14)

Warrants issued on conversion of bridge loan (Note 14)

Shares issued on settlement of accounts payable

Net loss and comprehensive loss

Balance at October 31, 2014

REPORTING ENTITY AND NATURE OF BUSINESS

Micromem Technologies Inc. (“Micromem” or the “Company”) is incorporated under the laws of the Province of Ontario, Canada. The principal business address of the Company is 121 Richmond Street West, Suite 304, Toronto, Ontario, Canada.

The Company develops, based upon proprietary technology, customized magnetic sensor applications for companies (referred to as “development partners”) operating internationally in various industry segments. The Company has not generated commercial revenues through October 31, 2014 and is devoting substantially all its efforts to securing commercial revenue opportunities.

These consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries:

Micromem Applied Sensors Technology, Inc. (“MAST”) incorporated in November 2007 and domiciled in Delaware, United States. MAST has the primary responsibility for the exploitation of the Company’s technologies in conjunction with various strategic partners and customers.

7070179 Canada Inc., incorporated in October 2008 under the Canada Business Corporations Act in Ontario, Canada. The Company has assigned to this entity its rights, title and interests in certain patents which it previously held, directly in exchange for common shares of this entity.

Memtech International Inc., Bahamas; Memtech International (USA) Inc., Delaware, United States; Pageant Technologies (USA) Inc., United States; Pageant Technologies Inc., Barbados; and Micromem Holdings (Barbados) Inc., Barbados. All of these entities are inactive.

GOING CONCERN

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

There are material uncertainties related to conditions and events that cast significant doubt about the Company’s ability to continue as a going concern for a reasonable period of time in future. During the year ended October 31, 2014, the Company reported a net loss and comprehensive loss of $4,164,871 (2013 - $5,933,928; 2012 - $1,775,065) and negative cash flow from operations of $2,883,079 (2013-$2,515,315; 2012 $2,573,982). The Company’s working capital position as at October 31, 2014 is $1,034,921 (2013 – $425,888).

The Company’s success depends on the profitable commercialization of its proprietary magnetic sensor technology. There is no assurance that the Company will be successful in the profitable commercialization of its technology. Based upon its current operating and financial plans, management of the Company believes that it will have sufficient access to financial resources to fund the Company’s planned operations through fiscal 2015; however, the ability of the Company to continue as a going concern is dependent upon its ability to secure additional financing and/or profitably commercialize its technology. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

If the “going concern” assumption were not appropriate for these consolidated financial statements then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used; in such cases, these adjustments could be material.

BASIS OF PRESENTATION

Statement of compliance:

These consolidated financial statements have been prepared in accordance with IFRS and its interpretations adopted by International Accounting Standards Board (“IASB”).

Basis of measurement:

The consolidated financial statements have been prepared on the historical cost basis, except for financial instruments designated at fair value through profit and loss, which are stated at their fair value.

Functional and presentation currency:

These consolidated financial statements are presented in United States dollars (“U.S. dollars”), which is also the Company’s functional currency.

Use of estimates and judgments:

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment are as follows:

The Company makes estimates and utilizes assumptions in determining the fair value for stock based compensation expense, warrants, the (gain) loss on the revaluation of the derivative warrant liability, the (gain) loss on the revaluation of the embedded derivatives relating to bridge loans and the bifurcation of convertible debt.

BASIS OF PRESENTATION (Cont’d)

Use of estimates and judgments: (Cont’d)

The Company makes estimates related to the recovery of deferred development costs based on the expectation and assumption of realizing revenues from future commercial agreements that it anticipates will develop with the companies for whom these projects have been undertaken. Changes in these expectations and assumptions could result in a change in the recoverable amount calculated.

The Company applies judgement when establishing whether the capitalization criteria under IAS 38, Intangible Assets, for internally developed intangible assets.

The Company makes estimates related to the useful lives of property and equipment, patents and intangible assets and the related amortization. The Company also periodically assesses the recoverability of long-lived assets. The recoverability analysis requires the Company to make assumptions about future operations. Changes to one or more assumptions would result in a change in the recoverable amount calculated and/or amortization expensed.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and carry-forward of unused tax assets and unused tax losses can be utilized. At October 31, 2014, the Company has assessed that it is not probable that sufficient taxable profit will be available to use deferred income tax assets based on operating losses in prior years, therefore, there are no balances carried in the consolidated statements of financial position for such assets.

The Company applies judgment in assessing whether material uncertainties exist that would cause doubt as to the whether the Company could continue as a going concern.

The Company applies judgment in assessing the functional currency of each entity consolidated in these financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation:

Subsidiaries are legal entities controlled by the Company. Control exists when the Company is exposed, or has rights to variable returns from an investee and has the ability to affect those returns through its power over the investee. The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting policies have been consistently applied by the Company’s subsidiaries.

Foreign currency translation:

IFRS requires that the functional currency of each entity in the consolidated entity be determined separately in accordance with specific indicators and should be measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). As a result of an assessment of the primary indicators, management assessed the functional currency of the Company and its subsidiaries to be U.S. dollar (“USD”). The consolidated financial statements of the Company are prepared and presented using the USD.

Foreign currency transactions denominated in other than U.S. dollars are translated into the functional currency on the following basis:

Monetary assets and liabilities are translated at the rates of exchange prevailing at the statement of financial position date.

Non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

Income and expenses for each income statement line item presented are translated at average exchange rates during the quarter in which they are recognized.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial Instruments: Recognition, Measurement, Disclosure and Presentation:

The Company initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets including assets designated at fair value through profit or loss (FVTPL) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position only when the Company has the legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Company’s financial assets consist of cash and deposits and other receivables and the Company’s financial liabilities consist of accounts payable and accrued liabilities, bridge loans, derivative warrant liability and embedded derivatives in bridge loans.

All financial assets and financial liabilities, including derivatives, are initially measured in the statement of financial position at fair value, except for loans and receivables, investments held-to maturity and other financial liabilities, which are measured at amortized cost. Measurement in subsequent periods depends on whether the financial instrument had been classified as FVTPL, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.

FVTPL financial assets are measured at fair value and all gains and losses are included in the statement of loss and comprehensive loss in the period in which they arise. Available- for-sale financial assets are measured at fair value with revaluation gains and losses included in other comprehensive income until the assets are removed from the statement of financial position.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial Instruments: Recognition, Measurement, Disclosure and Presentation: (Cont’d)

The Company classifies cash as FVTPL. Deposits and other receivables are classified as loans and receivables, and are initially measured at fair value and subsequently at amortized cost using the effective interest rate method. Accounts payable and accrued liabilities and bridge loans are classified as other liabilities, and initially measured at fair value and subsequently at amortized cost using the effective interest rate method. The derivative warrant liability and embedded derivatives in bridge loans are classified at FVTPL and are measured at fair value with unrealized gains or losses reported in the consolidated statement of loss and comprehensive loss.

Compound Financial Instruments

Compound financial instruments issued by the Company comprise convertible notes that can be converted to share capital at the option of the holder and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option.

The equity component, if the conversion feature of the convertible note is in US dollars, is recognized initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest rate method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition.

Interest, dividends, losses and gains relating to the financial liability are recognized in profit or loss except for borrowing costs on qualifying assets which are added to asset cost. Distributions to the equity holders are recognized in equity, net of any tax effect.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Hybrid Financial Instruments:

Financial instruments with embedded derivative liabilities are accounted for as hybrid financial instruments. The Company has hybrid financial instruments when the embedded derivative conversion option right of the convertible notes gives the right to the holder to convert into common shares in Canadian dollars (“CDN”).

An embedded derivative is a feature within a contract, such that the cash flows associated with that feature behave in a similar fashion to a stand-alone derivative. An embedded derivative is separated from its host contract and accounted for as a derivative only when three criteria are satisfied:

When the economic risks and characteristics of the embedded derivatives are not closely related to those of the host contract;

A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

The entire instrument is not measured at fair value with changes in fair value recognized in the income statement.

Subsequent to initial recognition, the embedded derivative component is re-measured each reporting period using the Black Scholes option-pricing model with the change in fair value recognized in statement of loss and comprehensive loss.

Derivative Liability

The Company’s derivative financial instruments consist of derivative liabilities in relation to its share purchase warrants.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Derivative Liability (Cont’d)

Derivative Warrant Liability:

The Company has issued share purchase warrants in conjunction with private placements for the purchase of common shares of the Company. Until October 2013 (Note 13(b)), a number of these share purchase warrants were issued with an exercise price in CDN, rather than USD (the reporting and functional currency of the Company). Such share purchase warrants are considered to be derivative instruments and the Company is required to re-measure the fair value of these at each reporting date. The fair value of these CDN share purchase warrants are re-measured at each financial position date using the Black Scholes option-pricing model using the exchange rates at the financial position date and measured over their remaining life. Adjustments to the fair value of the derivative warrant liability as at the financial position date are recorded in the statement of loss and comprehensive loss as (gain) loss on revaluation of derivative warrant liability. Share purchase warrants that have expired or have been forfeited are adjusted to the statement of loss and comprehensive loss as (gain) loss on revaluation of derivative warrant liability.

Consideration received upon the exercise of warrants is credited to share capital and the related amount is transferred from contributed surplus (USD warrants) or derivative warrant liability (CDN warrants) to share capital.

Conversion Feature of Bridge Loans

The conversion feature on the bridge loans allows the holder of the option to convert the outstanding principal and interest from time to time to common equity. The Company, using the Black Scholes option-pricing model, accounts for bridge loans as follows:

At date of origination, the bifurcation of the total balance of the loan as debt and equity is calculated. If the conversion feature of the bridge loan is in CDN there is no equity component, resulting in an embedded derivative. Accretion expense is recorded over the term of the loan.

The total loan proceeds are allocated between the bridge loans and the related embedded derivative based on their relative fair value. The embedded derivative conversion feature is included under the bridge loans in the statement of financial position.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Derivative Liability (Cont’d)

Conversion Feature of Bridge Loans (Cont’d)

(ii.3)

The conversion feature is revalued at the end of the reporting period and any adjustment is reflected in the statement of loss and comprehensive loss if the conversion feature is in CDN.

Loan Impairment:

Impaired loans are accounted for at their face amount net of the allowance for loan impairment. When a loan is deemed to be impaired, its carrying amount is reduced to its estimated realizable amount which is measured by discounting the expected future cash flows at the effective interest rate inherent in the loan. The amount initially recognized as an impairment loan, together with any subsequent change, is charged to the allowance as an adjustment. A write-off of the loan will occur when the loan is believed to have no reasonable expectation of collectability.

Intangible Assets

Costs for the general development of the Company’s sensor technology are expensed unless they meet the criteria for deferral. Expenditures are capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the intangible asset so that it will be available for use or sale, (ii) its intention to complete the intangible asset and use or sell it, (iii) its ability to use or sell the intangible asset, (iv) how the intangible asset will generate probable future economic benefits, (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development; otherwise, they are expensed as incurred. Commencing in 2011, the Company determined that these costs met the criteria and, accordingly, these costs have been capitalized and are tested in each reporting period for impairment. Amortization is provided on a 7 year straight-line basis. Commencing in 2014 amortization expense of intangible assets is capitalized as deferred development costs as these charges are directly related to development.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Property and Equipment:

Property and equipment are recorded at cost and are amortized over their estimated useful lives at the following annual rates and methods:

Impairment of Long-lived Assets:

Long-lived assets consist of property and equipment, patents, intangible assets, and deferred development costs.

The carrying amounts of property and equipment, patents, intangible assets and deferred development costs, are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable When the carrying amount exceeds the estimated recoverable amount, the assets are written down to their recoverable amount.

The recoverable amount of long-lived assets is the greater of fair value less costs of disposal and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statements of loss and comprehensive loss.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of loss and comprehensive loss. Following the recognition or reversal of an impairment loss, the amortization charge applicable to the asset is adjusted prospectively in order to systematically allocate the revised carrying amount, net of any residual value, over the estimated useful life.

Gains or losses on the disposal of property and equipment, patents and intangible assets represent the difference between the net proceeds and the carrying value at the date of sale.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Research and Development Costs:

Research costs are expensed in the period incurred. Development costs are expensed as incurred unless they meet the criteria for deferral. Expenditures during the development phase are capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the asset so that it will be available for use or sale, (ii) its intention to complete the asset and use or sell it, (iii) its ability to use or sell the asset, (iv) how the asset will generate probable future economic benefits, (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the asset, and (vi) its ability to measure reliably the expenditure attributable to the asset during its development; otherwise, these costs are expensed as incurred. Commencing in 2009, the Company determined that its continuing activities related to the application of its sensor technology to projects met the deferral criteria and, accordingly, these costs have been capitalized and are tested in each reporting period for recoverability. Development costs will be amortized on an appropriate basis at the time each of the developed assets is available for use.

Payments received from development partners on projects are recorded to deferred development costs as a recovery of cost incurred.

Patents:

Patents are recorded at cost and are amortized on a straight line basis over their estimated useful lives of 5 years. Patents are recorded net of accumulated amortization with amortization expense capitalized as deferred development costs since the patents are directly related to development.

Unit Private Placements:

The Company uses the relative fair value approach in accounting for the value assigned to the common shares and the common share purchase warrants which it had made available in the unit private placement financings that it secured, calculated in accordance with the Black Scholes option-pricing model.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Stock based Compensation and Other Stock based Payments:

The Company applies the fair value based method of accounting for all stock based payments to employees and non-employees and all direct awards of stock. Where share based payments are issued to non-employees, they are recorded at the fair value of the goods or services received in the statement of loss and comprehensive loss. If the fair value is not readily determinable the amount is based on the fair value of the equity instrument granted. Stock based compensation is charged to operations over the vesting period and the offset is credited to contributed surplus.

Consideration received upon the exercise of stock options is credited to share capital and the related amount is transferred from contributed surplus.

The fair value of stock options and warrants is determined by the Black Scholes option- pricing model with assumptions for risk free interest rates, dividend yields, volatility factors of the expected market price of the Company’s common shares and an expected life of the option or warrant issued. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. In the event that vested stock options expire, previously recognized stock based compensation is not reversed. In the event that stock options are forfeited, previously recognized stock based compensation associated with the unvested portion of the stock options forfeited is reversed. The fair value of direct awards of stock is determined by the quoted market price of the Company’s stock.

Income Taxes:

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Income Taxes: (Cont’d)

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 income or loss 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 rates that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is 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.

Earnings or Loss Per Share:

Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by adjusting the weighted average number of number of common shares outstanding for the effects of all dilutive potential common shares, which are comprised of outstanding warrants, conversion options and vested stock options. Diluted earnings (loss) per common share assumes that any proceeds received for in-the-money warrants and options would be used to buy common shares at the average market price for the period.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Changes in Accounting Standards:

On November 1, 2013, the Company adopted the following new standards, amendments to standards and interpretations which are effective for periods beginning on or after January 1, 2013:

NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED

Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or the IFRS Interpretations Committee that are mandatory for future accounting periods. The standards impacted that are applicable to the Company are as follows:

IFRS 2 Share-based Payments, the amendments to IFRS 2, issued in December 2013 clarifies the definition of “vesting conditions”, and separately defines a “performance condition” and a “service condition”. A performance condition requires the counterparty to complete a specified period of service and to meet a specified performance target during the service period. A service condition solely requires the counterparty to complete a specified period of service. The amendments are effective for share-based payment transactions for which the grant date is on or after July 1, 2014.

NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED (Cont’d)

IFRS 15 – Revenue from Contracts with Customers, which will replace IAS 11 – Construction Contracts, IAS 18 – Revenue, IFRIC 13 – Customer Loyalty Programmes, IFRIC 15 – Agreements for the Construction of Real Estate, IFRIC 18 – Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services. The new standard will be mandatorily effective for fiscal years beginning on or after January 1, 2017, and interim periods within that year. Earlier application is permitted.

The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple deliverable arrangements. The Corporation is assessing the new standard to determine its impact of the Corporation’s financial statements.

IAS 32 – Financial instruments – presentation (“IAS 32”) was amended to clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set off in respect of its financial instruments. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014 with retrospective application required.

IFRS 9 – Financial Instruments, was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments – Recognition and Measurement, for debt instruments with a new mixed measurement model having only two categories:

NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET ADOPTED (Cont’d)

(Cont’d)

Requirements for financial liabilities were added in October 2010 and largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss would generally be recorded in other comprehensive income.

The effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018.

FAIR VALUE DISCLOSURES

The following summarizes the methods and assumptions used in estimating the fair value of the Company's financial instruments where measurement is required. The fair value of financial instruments consisting of cash, deposits and other receivables, promissory note receivable, accounts payable and accrued liabilities and bridge loans approximate their carrying amounts due to the relatively short period to maturity. Fair value amounts represent point-in-time estimates and may not reflect fair value in the future. The measurements are subjective in nature, involve uncertainties and are a matter of significant judgment. The methods and assumptions used to develop fair value measurements, for those financial instruments where fair value is recognized in the statement of financial position, have been prioritized into three levels of the fair value hierarchy as follows:

Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.

Level 3: Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

The Company's financial instruments measured at fair value on the statement of financial position date consist of cash, derivative warrant liability and the conversion feature on bridge loans. Cash is measured at Level 1 of the fair value hierarchy. Derivative warrant liability and the conversion feature on bridge loans are measured at Level 2 of the fair value hierarchy.

CAPITAL RISK MANAGEMENT

The Company’s objective when managing capital is to maintain its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. The Company includes equity, comprised of issued share capital, equity component of bridge loans, contributed surplus and deficit, in the definition of capital. The Company’s primary objective with respect to its capital management is to ensure that it has sufficient cash resources to further develop and market its technologies and to maintain its ongoing operations. To secure the additional capital necessary to pursue these plans, the Company may attempt to raise additional funds through the issuance of equity and warrants or by securing strategic partners. The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the year ended October 31, 2014.

DEPOSITS AND OTHER RECEIVABLES

The balance reported as Deposits and Other Receivables consists of:

Amounts receivable (a)

Advances to Officers, Directors and Employees (b)

Prepaid Insurance and other

Promissory note receivable (c)

(a)

Amounts receivable relate to milestones met at October 31, 2014 per development contracts. These amounts are recorded as recoveries of deferred development costs.

(b)

At October 31, 2014 Advances to Officers, Directors and Employees consisted of:

(i)

Advances to the Chairman of $38,084 and to a senior employee of $80,916. These advances were repaid subsequent to October 31, 2014 (Note 23).

(ii)

An advance to the Controller of $22,957.

DEPOSITS AND OTHER RECEIVABLES (Cont’d)

At October 31, 2014 Advances to Officers, Directors and Employees consisted of: (Cont’d)

(iii)

An advance of $244,074 to the President of MAST (Refer to Note 18 for the terms of this advance and to Note 23 for settlement).

In April 2009, the Company advanced $200,000 to a private company incorporated in New Jersey, which, at that time, was also a strategic development partner of the Company. The Company and the private Company executed a promissory note with respect to the $200,000 advance stipulating the following terms and conditions:

Maturity date of September 30, 2010.

Interest payable on a quarterly basis in arrears calculated from August 1, 2009 at a rate of 10%. In July 2011, the interest rate on the promissory note increased to 18%.

Secured by a first priority security interest over all of the assets of the private company.

Balance outstanding at November 01, 2011

Interest accrued

Reserved

Repayment

Balance outstanding at October 31, 2012

Interest accrued

Reserved

Repayment

Balance outstanding at October 31, 2013

Interest accrued

Reserved

Repayment

Balance outstanding at October 31, 2014

PROPERTY AND EQUIPMENT

Cost

At November 1, 2011

Additions

Year ended October 31, 2012

At November 1, 2012

Additions

Disposals

Year ended October 31, 2013

At November 1, 2013

Additions

Disposals

Year ended October 31, 2014

Accumulated amortization

At November 1, 2011

Amortization for the year

Year ended October 31, 2012

At November 1, 2011

Amortization for the year

Adjustment for disposals

Year ended October 31, 2013

At November 1, 2013

Amortization for the year

Adjustment for disposals

Year ended October 31, 2014

Net book value at November 1, 2012

Net book value at October 31, 2013

Net book value at October 31, 2014

DEFERRED DEVELOPMENT COSTS

The breakdown of development costs that have been capitalized is as follows:

Opening balance

Additional project costs incurred

Recovery of deferred development costs

Writedown of project costs

Closing balance

Additions to deferred development costs includes patent amortization of $44,472 (2013 - $22,354; 2012 - $15,204), and also includes intangible asset amortization of $19,352 (2013 and 2012 - $nil).

To date, the Company has recovered from its development partners a portion of the costs it has incurred as deferred development costs coincident with meeting milestones as stipulated in development contracts.

In 2014, the Company provided a reserve against cumulative development costs incurred on one development project in that it completed the staged development phases for that contract and there was no formal commitment as of October 31, 2014 from the development partner to move forward with this project. In total, the Company recovered $300,000 from the development partner on this project, $125,000 of which was received in 2014; the net writedown in 2014 was $645,528 on this project, to reduce the carrying value to a nominal amount.

In 2013, the Company provided a reserve against deferred development costs previously incurred with respect to three development projects, reducing the carrying value in each case to a nominal amount. In each case, the Company had decided not to pursue these development projects.

INTANGIBLE ASSETS AND PATENTS

Intangible assets comprise the costs which the Company has capitalized relating to the technical expertise and know-how that the Company has developed with respect to the commercialization efforts relating to its sensor technology. In 2011, the Company determined that it had sufficiently advanced its expertise and product knowledge relating to the general commercialization efforts for its sensor technology in multiple industry vertical applications.

INTANGIBLE ASSETS AND PATENTS (Cont’d)

It anticipates that it will realize commercial economic benefits from the exploitation of these intangible assets in the future.

At November 01, 2011

Additions

Year ended October 31, 2012

At November 01, 2012

Additions

Year ended October 31, 2013

At November 01, 2013

Additions

Year ended October 31, 2014

Accumulated amortization

At November 01, 2011

Amortization for the year

Year ended October 31, 2012

At November 01, 2012

Amortization for the year

Year ended October 31, 2013

At November 01, 2013

Amortization for the year

Year ended October 31, 2014

Net book value at October 31, 2012

Net book value at October 31, 2013

Net book value at October 31, 2014

INTANGIBLE ASSETS AND PATENTS (cont’d)

Amortization of intangible assets for the year ended October 31, 2014 was capitalized to deferred development costs.

At November 1, 2011

Additions

Year ended October 31, 2012

At November 1, 2012

Additions

Year ended October 31, 2014

At November 1, 2013

Additions

Year ended October 31, 2014

Amortization

At November 1, 2011

Amortization for the year

Year ended October 31, 2012

At November 1, 2012

Amortization for the year

Year ended October 31, 2013

At November 1, 2013

Amortization for the year

Year ended October 31, 2014

Net book value at October 31, 2012

Net book value at October 31, 2013

Net book value at October 31, 2014

SHARE CAPITAL, STOCK OPTIONS AND LOSS PER SHARE

Share Capital

Authorized and outstanding:

The Company has two classes of shares as follows:

Special redeemable voting preference shares, 2,000,000 authorized, none are issued and outstanding.

Common shares without par value – an unlimited number authorized.

Balance at November 1, 2012

Private placement of units for cash (Note 13)

Warrants exercised (Note 13)

Warrants issued on private placements (Note 13)

Fair value of warrants exercised

Financing costs

Balance at October 31, 2013

Warrants exercised (Note 13)

Fair value of warrants exercised

Shares issued on conversion of bridge loans (Note 14)

Warrants issued on conversion of bridge loan (Note 14)

Shares issued on settlement of accounts payable

Balance at October 31, 2014

SHARE CAPITAL, STOCK OPTIONS AND LOSS PER SHARE (Cont’d)

Stock Options

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 15,600,000 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. Stock options are fully vested upon issuance by the Company unless the Board of Directors stipulates otherwise by Directors’ resolution.

A summary of the status of the Company’s fixed stock option plan through October 31, 2014 and changes during the periods is as follows:

Outstanding, November 01, 2012

Granted

Expired

Forfeited

Outstanding, November 01, 2013

Granted

Outstanding, October 31, 2014

SHARE CAPITAL, STOCK OPTIONS AND LOSS PER SHARE (Cont’d)

Stock Options (Cont’d)

During the year ended October 31, 2014 the Company issued a total of 630,000 stock options (2013 – 2,170,000). All options vest immediately upon issuance. This total consisted of 520,000 stock options issued to directors and officers (2013 – 1,120,000), 110,000 stock options issued to employees (2013 – 750,000) and no stock options to outside consultants (2013 – 300,000). The Company has the following stock options outstanding at October 31, 2014:

Share price

Volatility factor (based on historical volality)

Risk free interest rate

Expected life

Dividend yield

Forfeiture rate

SHARE CAPITAL, STOCK OPTIONS AND LOSS PER SHARE (Cont’d)

Loss Per Share

The calculation of basic and diluted loss per share for the year ended October 31, 2014 was based on the loss attributable to common shareholders of $4,164,871 (2013 - $5,933,928; 2012 - $1,775,065) divided by the weighted average number of common shares outstanding of 171,534,969 (2013 – 146,814,466; 2012 - 123,375,510).

Diluted loss per share did not include the effect of 12,105,000 stock options and 4,485,463 warrants outstanding (Note 13(c)) as they are anti-dilutive.

PRIVATE PLACEMENTS, DERIVATIVE WARRANT LIABILITY AND COMMON SHARE PURCHASE WARRANTS

Private Placements

In 2013 the Company completed a series of private placement financings with investors pursuant to prospectus and registration exemptions set forth in applicable securities law. The Company received gross proceeds $2,910,532 and issued a total of 16,106,957 (10,200,743 CDN; 5,906,214 US) common shares. 16,106,957 common share purchase warrants with an average strike price of $0.22 CDN; $0.27 USD were attached to the private placement completed during 2013. All warrants issued in 2013 have a 12 month term from issue date.

In 2013 the Company extended the expiry dates on a total of 11,829,029 (7,315,808 CDN; 4,513,221 US) common share purchase warrants which would have otherwise expired in 2013. These warrants were extended for a period of 12 months in each case. The Company changed the strike price of 3,673,032 CDN of these warrants from $0.205 CDN to $0.215 CDN and the strike price remained unchanged for the balance of these warrants. The strike price remained unchanged for all other warrants ranging from $0.20 CDN to $0.80 CDN, $0.24 USD to $0.80 USD per warrant.

In 2013 the Company calculated the relative fair value of the share purchase warrants issued in connection with private placements in accordance with the Black Scholes option-pricing model. The Company reported a total charge to share capital of $863,863 and an offsetting charge to contributed surplus of $377,234 for US dollar share purchase warrants issued and $486,629 to derivative warrants liability for CDN share purchase warrants issued.

PRIVATE PLACEMENTS, DERIVATIVE WARRANT LIABILITY AND COMMON SHARE PURCHASE WARRANTS (Cont’d)

Private Placements (Cont’d)

The relative fair value of these share purchase warrants was estimated using the Black Scholes option-pricing model with the following assumptions:

2013

Share price

$0.17 - $0.58

Volatility factor (based on historical volality)

75 - 136%

Risk free interest rate

0.97 - 1.09%

Dividend yield

0%

Expected life

1 year

The Company did not complete any private placements in 2014.

In 2014 the Company extended the expiry date on a total of 1,405,026 common share purchase warrants which would have otherwise expired in the period. These warrants were extended for a period of three to six months in each case. The strike price of 1,105,026 of these warrants was changed from $0.41 and $0.45 per warrant to $0.50 per warrant. The strike price remained unchanged for the balance of the warrants at $0.55 per warrant.

The Company calculated the charge associated with the extension of warrants in accordance with the Black Scholes option-pricing model. The Company reported a total charge to deficit of $168,632 (2013 - $841,247; 2012 - $1,322,879) and an offsetting charge to contributed surplus of $168,632 (2013 - $264,938; 2012 - $358,983) for US dollar warrants extended and $nil (2013 - $576,309; 2012 – $963,896) to derivative warrant liability for Canadian warrants extended.

The incremental fair value of these warrants extended was estimated using the Black Scholes option-pricing model with the following assumptions:

Share price

Volatility factor (based on historical volality)

Risk free interest rate

Dividend yield

Expected life

PRIVATE PLACEMENTS, DERIVATIVE WARRANT LIABILITY AND COMMON SHARE PURCHASE WARRANTS (Cont’d)

Derivative Warrant Liability

The following summarizes the change in derivative warrant liability:

Balance, beginning of year

Fair value assigned in warrants in units issuances

Fair value assigned in warrants extended

Fair value assigned to warrants issued on settlements of debt (Note 14)

Fair value transferred to share capital for warrants exercised

CDN warrants converted to USD

Loss (Gain) on revaluation of warrants

PRIVATE PLACEMENTS, DERIVATIVE WARRANT LIABILITY AND COMMON SHARE PURCHASE WARRANTS (Cont’d)

Share Purchase Warrants

Balance outstanding at October 31,2012

Exercised

Expired

Granted

Balance outstanding at October 31, 2013

Exercised

Expired

Granted

Balance at October 31, 2014

BRIDGE LOANS

On December 2, 2011, the Company secured $285,000 CDN of bridge (“Loan 1”) from a group of arm’s length investors with maturities of six months. The loans were unsecured, bearing interest at a rate of 2% per month (effective interest rate – 26%) and convertible at the holders’ option at $0.12 USD per unit. Each unit upon conversion included one common share and one common share purchase warrant with a one year expiry and an exercise price of $0.12 USD. The term of the loans were extended on a month to month basis in July 2012. In January 2014 these loans was converted to equity by the issuance of 2,517,501 common shares and 2,517,501 common share purchase warrants. The common share purchase warrants have a one year term and an exercise price of $0.12 USD per warrant (Note 23).

On September 4, 2012, the Company secured $125,000 CDN of bridge loans (“Loan 2”) from a group of arm’s length investors with maturities of six months. The loans were unsecured, bearing interest at a rate of 2% per month (effective interest rate – 32%) and convertible at the holders’ option at $0.18 CDN per unit. Each unit, upon conversion, included one common share and one common share purchase warrant with a one year expiry and an exercise price of $0.22 CDN. This loan was repaid in the quarter ended April 30, 2013.