SOURCE: Nanotech Security Corp.

Nanotech Security Corp.

December 19, 2016 16:01 ET

Nanotech Announces Fourth Quarter and Fiscal 2016 Year End Results

Established Customer Base and Positioned For Growth

VANCOUVER, BC--(Marketwired - December 19, 2016) - Nanotech Security Corp. (TSX VENTURE: NTS) (OTCQX: NTSFF), ("Nanotech" or the "Company") today released its financial results for the fourth quarter and year ended September 30, 2016.

Financial Highlights from 2016

  • Revenue for the full year amounted to $5.1 million, consistent with the prior year. The Optics business segment contributed revenues of $2.9 million compared to $3.1 million in the prior year. 2016 revenues were negatively impacted by the corporate focus on integrating a new outsourcing production partner.
  • Gross margin improved to 55% from 43% in the same period last year. The improvement reflects the increased mix of higher margin development contract revenue.
  • Cash used in operations increased to $3.9 million from $3.4 million in the prior year. The increase in cash used was to support sales and marketing activities in the banknote market.
  • Cash balance of $3.3 million compared to $3.0 million in the prior year. The Company raised $4.2 million in unsecured senior debentures convertible into common shares at a price of $1.25. The debentures bear interest at 12%, come due May 31, 2018 and will fund operations and working capital.

Strategic Highlights from 2016

  • To supply security feature for major new banknote. In May 2016, the Company completed the supplier acceptance process with an Asian issuing authority and had commenced production and delivery of colour-shifting optical thin film ("OTF") through its manufacturing partner Hueck Folien GmbH ("Hueck"). To date, the Company has continued to work with its Asian customer to finalize the product specifications and integrate the Company's OTF into the Asian customer's own production facility. The customer continues to scrutinize and review initial deliveries as they work to ensure the product is seamlessly integrated into their production facility. Continued progress has been made over the past few months and all parties are optimistic that volume production will commence in the near term. Although there have been unforeseen delays, Nanotech's management remains confident that once production resumes, the Company will be well positioned to deliver throughout the life of this banknote.
  • Paid development contracts are progressing well. The Company currently derives the vast majority of its Optics' segment revenue from development contracts with major issuing authorities. These contracts incorporate both nano-optic and OTF technologies and are focused on developing security features for future banknotes. All the projects in 2016 have progressed successfully, and management has already begun working with these issuing authorities to expand the scope of these activities as the Company moves closer to final selection for a future banknote.
  • Provided technology to authenticate tickets at UEFA EURO 2016® football championship. Nanotech's nano-optic technology was chosen for admission tickets due to its intense high definition (iHD) full colour imaging capabilities and anti-counterfeiting security features - replacing older hologram technology used at past events.

Doug Blakeway, Nanotech's Chairman and CEO, commented, "2016 has been another successful year for the Company. We have now secured customer relationships with several of the world's largest banknote issuing authorities and are well positioned to develop significant business with each of them in the years ahead. Although we did not anticipate the OTF production delays with our Asian customer, we continue to make progress. All parties remain confident we will be successful, and once the production resumes, the Company will be well positioned to deliver throughout the life of this banknote."

Selected Financial Information

All results are reported in Canadian dollars and are prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").

   Three months ended       Years ended      
   September 30,   $   %   September 30,   $   %  
   2016   2015   Change   Change   2016   2015   Change   Change  
Revenue  $
1,510,744
  $
728,322
  $
782,422
  
 107
% $
5,126,109
  $
5,152,762
  $
(26,653
) 
 (1
%)
Gross profit   
1,036,989
   
286,501
   
 750,488
  
 262
%  
 2,822,122
   
 2,231,075
   
591,047
  
 26
%
Gross profit %   69 %  39 %           55 %  43 %         
Net earnings (loss)   (1,676,026 )  (1,565,398 )  (110,628 ) 7 %  (7,992,602 )  (4,670,833 )  (3,321,769 ) 71 %
Net earnings (loss) per share                                       
 Basic   (0.03 )  (0.03 )      (0.1 %)  (0.15 )  (0.09 )      (55 %)
 Diluted   (0.03 )  (0.03 )      (0.1 %)  (0.15 )  (0.09 )      (55 %)
Weighted average number of common shares                                       
 Basic   53,686,940    51,392,145             53,524,646    49,404,777           
 Diluted   53,686,940    51,392,145             53,524,646    49,404,777           
Net cash used in operating activities   
 (880,305
)  
(581,917
)  
(298,388
) 
 (51
%)  
 (3,903,368
)  
 (3,392,453
)  
 (510,915
) 
 (15
%)
                
                
         $   %  
   September 30, 2016  September 30, 2015  Change   Change  
Total assets  $24,511,586  $27,783,859  $(3,272,273 ) (12 %)
Total long-term liabilities   3,693,935   3,126,363   567,572   18 %
 Total equity   16,422,083   22,924,873   (6,502,790 ) (28 %)
               

Revenue

Revenues for the year ended September 30, 2016 were $5.1 million, consistent with $5.2 million in the prior year. The Optics segment revenue was down $209,000 compared to last year primarily due to OTF production delays with a large Asian issuing authority. This revenue reduction was partially offset by increased customer development work performed during the year.

During the year, internal OTF productClion was negatively impacted as the Company focused its development team on integrating its colour-shifting OTF technology into an Austrian third-party manufacturer, Hueck, to enable Nanotech to deliver significant volume to a large Asian issuing authority. The Company has signed a supply and collaboration agreement with Hueck that licenses Hueck to manufacture one meter wide colour-shifting OTF exclusively for Nanotech.

This integration has continued to consume internal resources in bringing the new manufacturing facility online. In May 2016, the Company completed the supplier acceptance process with the Asian issuing authority and had commenced production and delivery of colour-shifting OTF through its manufacturing partner Hueck. To date, the Company continues to work with its Asian customer to finalize the product specifications and integrate the OTF into the Asian customer's own production facility. Initial deliveries continue to be scrutinized and reviewed by the customer as they work to ensure they are seamlessly integrated into their production facility. Continued progress has been made over the past few months and all parties are optimistic that volume production will commence in the near term. Although there have been unforeseen delays, management is still confident that once production resumes, the Company will be well positioned to deliver throughout the life of this banknote.

The Tactical segment's revenues were up $183,000 compared to last year which was primarily due to an increase in the foreign exchange rate in the current year. During the year, Tactical improved its revenue mix to include an increase in higher margin surveillance vans, which was offset by a reduction in lower margin product sales.

Gross Margin

Gross margin dollars for the year ended September 30, 2016 increased by $591,000 or 26% to $2.8 million compared to $2.2 million last year. Overall, gross margin percentage reached 55% for the year ended September 30, 2016, an improvement from 43% in the same period last year. The gross margins continue to reflect strong margins on the Optic division's development contracts.

Research and Development

Research and development expenditures increased by $1.2 million or 29% to $5.4 million compared to $4.2 million last year. This is primarily a result of an increase in depreciation of $800,000 reflecting a 2015 revision of the Company's depreciation policy. Research and development activity for the current year continued to focus on bringing the new Hueck production facility online as well as developing new security features targeted for the banknote market.

General and Administration

General and administration expenditures for the year ended September 30, 2016 were $2.7 million, an increase of $200,000 compared to $2.5 million last year which reflected higher office rent, property tax, salaries, and overheads.

Sales and Marketing

Sales and marketing expenditures for the year ended September 30, 2016 were $2.4 million, an increase of $485,000 compared to $1.9 million last year due to increased sales and marketing activity relating to the Optics business unit including increased salaries, stock-based compensation, and international travel.

Net Loss

The net loss for the year was $7.8 million compared to $4.7 million during the same period last year. The increase largely reflects higher depreciation and amortization expense of $750,000, increased financing costs, sales and marketing costs, foreign exchange loss in the current year, and a gain on the revaluation and settlement of contingent shares of $1.5 million during the previous year.

The Company ended the year with approximately $3.3 million in cash and cash equivalents, up from $3.0 million at September 30, 2015. Management has reviewed its projected funding requirements and expects that through the generation and collection of revenues and/or being able to raise additional financing, that the Company will maintain sufficient liquidity.

Outlook

Nanotech is a leader in next-generation anti-counterfeiting products. These products have brand protection and enhancement applications across a wide range of markets including banknotes, secure government documents, commercial branding, and the pharmaceutical industry. Nanotech is initially focusing its efforts on the banknote market due to its high margins and as its established customer base. Management continues to believe that the Company is well positioned to supply its Asian customer, however the additional time required for product acceptance and integration into their production processes has taken longer than anticipated. Once production resumes, it is expected to ramp to supply this customer with significant colour-shifting OTF through the life of the banknote. The Company is focusing on further developing business with its established customer base and as a result, is well positioned to expand its development contract revenue in the years ahead.

Entering 2017, management has established a goal to double its revenue and make significant progress towards becoming cash flow positive. Achieving these results is not certain and involves known and unknown risks that may cause actual results to differ materially from this goal. These risks and uncertainties include, among other things, risks related to: uncertainty of amount and timing of purchase orders, the ability of Hueck to successfully deliver to our Asian customer, our ability to expand our Optics development revenue and our ability to maintain sufficient liquidity through September 30, 2017 to facilitate any business ramp-up. These and other risk factors are further discussed under the "Business Risks and Uncertainties" segment of the September 30, 2016 MD&A.

  
Nanotech Security Corp.  
Consolidated Statements of Operations and Comprehensive Loss  
(In Canadian dollars)  
   Three months ended   Years ended  
   September 30,   September 30,  
   2016   2015   2016   2015  
                  
Revenue  $1,510,744   $ 728,322   $ 5,126,109   $ 5,152,762  
Cost of sales  473,755   441,821   2,303,987   2,921,687  
Gross profit  1,036,989   286,501   2,822,122   2,231,075  
Expenses             
 Research and development  1,300,463   735,558   5,350,280   4,158,108  
 General and administration  642,433   724,109   2,655,457   2,455,131  
 Sales and marketing  569,546   473,716   2,369,258   1,884,113  
   2,512,442   1,933,383   10,374,995   8,497,352  
Loss before other expenses (income) and income taxes  (1,475,453 ) (1,646,882 ) (7,552,873 ) (6,266,277 )
Other expenses (income)             
 Foreign exchange loss (gain)  (24,490 ) (114,347 ) 78,793   (274,539 )
 Finance expense  225,063   32,863   360,936   129,095  
 Gain on revaluation of contingent shares  -   -   -   (1,450,000 )
   200,573   (81,484 ) 439,729   (1,595,444 )
Loss before income taxes  (1,676,026 ) (1,565,398 ) (7,992,602 ) (4,670,833 )
                  
Deferred income tax recovery  -   -   162,797   -  
Net loss  (1,676,026 ) (1,565,398 ) (7,829,805 ) (4,670,833 )
                  
Other comprehensive income (loss):             
 Items that may be subsequently reclassified to earnings:             
  Unrealized foreign exchange gain (loss)             
  on translation of foreign operation  (14,258 ) (48,376 ) 24,654   (124,615 )
Total comprehensive loss for the period  $(1,690,284 ) $(1,613,774 ) $(7,805,151 ) $(4,795,448 )
              
Loss per share                 
 Basic and diluted  $ (0.03 ) $ (0.03 ) $ (0.15 ) $ (0.09 )
Weighted average number of common shares             
 Basic and diluted  53,686,940   51,392,145   53,524,646   49,404,777  
  
  
  
Nanotech Security Corp.  
Consolidated Statements of Financial Position  
as at September 30, 2016 and 2015  
(In Canadian dollars)  
          
   2016   2015  
Assets         
Current assets:         
 Cash and cash equivalents  $3,312,691   $3,021,928  
 Accounts receivable   597,414    879,266  
 Inventory   385,753    770,342  
 Prepaid expenses and other assets   127,719    76,840  
    4,423,577    4,748,376  
 Property, plant and equipment   17,338,312    18,921,396  
 Intangible assets   1,361,239    2,725,629  
 Goodwill   1,388,458    1,388,458  
   $24,511,586   $27,783,859  
Liabilities and Shareholders' Equity         
Current liabilities:         
 Accounts payable and accrued liabilities  $1,395,568   $1,732,623  
 Note payable   3,000,000    -  
    4,395,568    1,732,623  
Non-current liabilities:         
 Convertible debentures   3,595,142    -  
 Note payable   -    3,000,000  
 Tenant inducement   98,793    126,363  
    8,089,503    4,858,986  
Shareholders' equity         
 Share capital   45,210,507    44,666,497  
 Share based payment reserve   2,041,956    1,726,780  
 Equity component of convertible debentures   443,175    -  
 Deficit   (31,119,045 )  (23,289,240 )
 Accumulated other comprehensive loss   (154,510 )  (179,164 )
    16,422,083    22,924,873  
   $24,511,586   $27,783,859  
  
  
  
Nanotech Security Corp.  
Consolidated Statements of Cash Flows  
Years ended September 30, 2016 and 2015  
(In Canadian dollars)  
   Three months ended   Years ended  
   September 30,   September 30,  
   2016   2015   2016   2015  
Cash flows provided by (used in):                 
Operating activities:                 
 Net loss  $(1,676,026 ) $(1,565,398 ) $(7,829,805 ) $(4,670,833 )
 Items not involving cash:                 
  Depreciation and amortization   775,253    594,470    3,095,686    2,348,716  
  Share based compensation   153,553    140,481    661,786    693,354  
  Deferred income taxes   -    -    (162,797 )  -  
  Amortization of tenant inducement   (6,892 )  (6,892 )  (27,570 )  (11,487 )
  Accretion of convertible debentures   71,969    -    80,825    -  
  Gain on revaluation of contingent shares   -    -    -    (1,450,000 )
 Non-cash working capital changes   (198,162 )  255,422    278,507    (302,203 )
Cash used in operating activities   (880,305 )  (581,917 )  (3,903,368 )  (3,392,453 )
Investing activities:                 
 Purchase of property and equipment, net of tax credits   17,453    (246,146 )  (148,752 )  (912,493 )
Cash provided by (used in) investing activities   17,453    (246,146 )  (148,752 )  (912,493 )
Financing activities:                 
 Issuance of shares for options exercised   17,400    -    197,400    -  
 Proceeds on issuance of convertible debentures, net of costs   -    -    4,120,289    -  
 Proceeds of private placement, net of share issuance costs   -    2,613,312    -    2,613,312  
 Issuance of shares for warrants exercised   -    -    -    735,975  
 Tenant inducement   -    -    -    137,850  
Cash provided by financing activities   17,400    2,613,312    4,317,689    3,487,137  
Effect of foreign exchange on cash and cash equivalents   (14,765 )  (44,236 )  25,194    (124,908 )
Increase (decrease) in cash and cash equivalents   (860,217 )  1,741,013    290,763    (942,717 )
Cash and cash equivalents, beginning of period   4,172,908    1,280,915    3,021,928    3,964,645  
Cash and cash equivalents, end of period  $
3,312,691
  $
3,021,928
  $
3,312,691
  $
3,021,928
 
                 
                 
                 

Conference Call Details:

DATE:  Monday December 19, 2016  Time: 5:00 PM Eastern Standard Time
DIAL IN NUMBER:  Toll free (Canada and US): 1-877-397-0292 Conference ID: 5876803  Alternate number: 1-719-325-4785
TAPED REPLAY:  Toll free (Canada and US): 1-844-512-2921  Alternate number: 1-412-317-6671
   Replay available until January 19, 2017 Replay pin number: 5876803  Replay pin number: 5876803
WEBCAST:  http://public.viavid.com/index.php?id=122266   
     

FORWARD-LOOKING STATEMENTS

The discussion and analysis in this news release contains forward-looking statements concerning anticipated developments in the Company's operations in future periods, the adequacy of Nanotech's financial resources, and the events or conditions that may occur in the future. Forward-looking statements are frequently, but not always, identified by words such as "expects", "anticipates", "believes", "intends", "estimates", "predicts", "potential", "targeted" "plans", "possible" and similar expressions, or statements that events, conditions, or results "will", "may", "could" or "should" occur or be achieved.

These forward-looking statements include, without limitation, statements about the Company's market opportunities, strategies, competition, and the Company's views that its optics based technologies will continue to show promise for large scale production. Other forward-looking statements imply that the Company will remain capable of being financed and/or will be able to partner development until profitability is eventually realized. The principal risks related to these forward-looking statements are that the Company's products receive market acceptance, that its intellectual property claims will be sufficiently broad or enforceable to provide the necessary protection or attract the necessary capital.

These forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made. Consequently, all forward-looking statements made in the discussion and analysis of the financial conditions and results of operations or the documents incorporated by reference, are qualified by this cautionary statement and there can be no certainty that actual results or developments the Company anticipates will be realized. For additional information with respect to certain of these risks or factors reference should be made to the "Business Risks and Uncertainties" section of the Management Discussion and Analysis and Notes to the Consolidated Financial Statements, as well as with the Company's continuous disclosure materials filed from time to time with Canadian securities regulatory authorities, which are available online at www.sedar.com. Nanotech disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law. Caution needs to be used when taking forward-looking statements into account when evaluating the Company.

About Nanotech Security

Nanotech designs, manufactures and markets nano-optic OVDs and OTF products. These products have brand protection and enhancement applications across a wide range of markets including banknotes, secure government documents, commercial branding, and the pharmaceutical industry. The Company is initially focusing its efforts on the banknote market due to its high margins and its established customer base.

The Company's nano-optic technology employs arrays of billions of nano-indentations that are impressed or embossed onto a substrate material such as polymer, paper, metal, or fabric. By using sophisticated algorithms to direct an electron beam, the Company creates visual images with colour shifting effects such as 3D, perceived movement, and can also display high-definition colours including skin tones, and whites and blacks, which are not possible using holographic technology.

Additional information about Nanotech can be found at the Company's website www.nanosecurity.ca, the Canadian disclosure filings website www.sedar.com or the OTCMarkets disclosure filings website www.otcmarkets.com.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information